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Looking Back at My Roaring 20s

Years ago I was in my twenties, oh the memories. Reading this post reminded me of the stupid mistakes I made then, but also the progress we’ve made to get us to the “third stage”. I thought it might be fun to go through each item and discuss my experience.  Here goes…

  1. I was technically 30 when my wife and I took our honeymoon, so I can’t qualify here. The only other dream vacations I’ve had prior to that were to London and Keystone, CO….the former of which was paid mostly by my parents and the latter was put on credit cards.
  2. I had no student loans when I graduated college due to a combination of scholarships and my parents foresight. I realize now (when friends are still paying loans 10+ years later) how lucky I am, so thanks Mom & Dad.
  3. Check – probably around age 28.
  4. Check – paid off my credit cards and car loan at age 28.
  5. Maybe – can’t remember exactly what my emergency fund was when I turned 30, but I did have something saved.
  6. I made a few investing mistakes – tech bubble anyone? – but I’m not sure I’ve made my last.
  7. Check – I’m a dorky accountant, so calculating my net worth and cash flow is right up my alley.
  8. I’ve never maxed out a Roth, but…
  9. I’ve contributed enough to a 401(k) to get the maximum employer match since I was 23.
  10. I earned my CPA license at age 29. I’ve tripled my starting salary out of college since then.
  11. Nope.
  12. I definitely negotiated when I was in my 20s – from my car to my first house, I learned everything is negotiable and the value of being ready to walk away.
  13. Still working on earning my first grand on the side. I think 2011 will be the year.
  14. I never really liked the sub-account idea, preferring to keep all my cash in one account for simplicity and mentally keeping track of the funds. So call this one a “maybe.”
  15. I really didn’t think about retirement much in my twenties, and I regret that a little. I went with the default “plan” most Americans seem to follow of working until I was up for Social Security, with my 401(k) as a supplement. Only lately have I realized you don’t need millions of dollars to retire and that the idea of retirement in general is not well defined. I prefer to think in terms of financial independence – working if I want to, not because I have to. With this in mind, we’ve actually set goals to get us there. I only wish we had done it sooner!
  16. Check – no matter how sad it was back then.
  17. Probably, but don’t remember.
  18. I haven’t given large amounts because I’ve never really had a charity I’ve been that passionate about.
  19. I wish.
  20. I don’t even think these were around 5 years ago, so another No.

Some milestones I’d like to reach in my forties (35 now):

  1. Pay off our mortgage
  2. Cover 50% of our living expenses with investment or other “passive” income
  3. Start or buy a business (diversify our income)
  4. Pay cash for a car

Specifically #1 and 2 would be so liberating, we could almost do anything we want for work and cover our living expenses. That amount of freedom makes my spine tingle!


Where’s My Compounding?

One oft-touted benefit of long-term investing is the effect compounding has on money. We’re told to invest in mutual funds, rake in our 8-10% gains each year, let that grow for 30 years and you’ll be rich enough to hopefully retire.

I was looking at returns of the S&P 500 this morning and wondered what the market has done since I graduated college in the summer of 1998. It ain’t pretty.

  • In June 1998, the S&P 500 closed at 1,133.84.
  • It currently sits around 1,200, but at the beginning of 2010 was roughly at the same level as June 1998.

12 years of 8-10% gains I was supposed to get are gone.


Boredom in the Third Stage

Get Rich Slowly recently had 2 terrific articles on the challenge of staying motivated after paying off debt and getting on solid ground financially. Here’s the guest post about scoring points with your savings, and here is JD’s follow up post.

I commented on the first entry that when we are paying off debt, it is easy to see progress and compute a definite end point. It’s just a matter of plugging your balance, payment and interest rate into a financial calculator and looking at the amortization schedule it prints.

But when the additional funds are being used for savings, sometimes the goal is so long-term it is hard to see much progress. Perhaps this is one reason so few people save anything for retirement? In our case, the savings is so automated (including automatic transfers to 401(k) and Roth IRAs) and ingrained, if we fail to review and celebrate our progress monthly or even quarterly it is easy to forget.

In J.D.’s post, he gives a few good suggestions on what to do post-debt – set goals, increase income and find balance. My wife and I have set goals. Where we have failed, and what has caused the boredom in my opinion, is not reviewing those goals on a regular basis to track our progress.

Action Plan

To get motivated and excited about our progress again, I’ve come up with a list of goals.

  • Review our saving, spending, net worth and cash flow each quarter (each month if possible)
  • Develop a spreadsheet to track our dividend stocks investments (Roth IRAs) vs. the First Trust Dividend Leaders ETF (benchmark). I’d like to share the spreadsheet here if I can figure out how.
  • In 2011, fully fund our Health Savings Account to our deductible of $5,000
  • In 2011, contribute $10,000 total to our retirement accounts – $2,000 to my 401(k) to gain the full employer match and $4,000 to each Roth IRA.
  • Replenish our emergency fund we tapped to pay for our new HVAC system in September.

To boost our income, I am also setting these goals:

  • to build and sell at least one piece of furniture in 2011
  • to build my accounting/tax revenue to $10,000 (currently about $3,000)
  • Make $300 or more from selling some of our excess “stuff”

I’ll update this post as necessary and might even give it a separate page on the blog for quick reference.

Future Projects

Just a brief post today of some things I want to accomplish in the near future:

  1. Get in shape – my physical activity currently consists of a) taking the dog for a walk in the morning, b) running around the yard with my son and c) occasional yard work or other lightly taxing house work. Years ago I would get up before the crack of dawn, go to the gym and lift weights. It gave me a good feeling, energy that lasted all day compared to my caffeine induced jolt I currently get. I’m thinking about trying kettlebells, since they are a small investment (about $30 for a 20 lb) and I could purchase additional single weights as I improve. I don’t really want to lose weight, just get stronger and fitter. The hope is to run a 5k next spring or summer.
  2. Sell a piece of furniture I’ve built. Earlier this year I built a bench and a bookshelf from plans found on a website I read regularly. I have quite a few projects I need to complete at home – mostly painting – before I can devote a lot of time to this, but I think by next summer I should be able to accomplish this goal.
  3. Compile a recipe book/menu of things we currently like to cook. Sunday is traditionally our grocery shopping day and it seems every week we get stuck on what we are going to fix for dinner the following week. I’d like to have a simple list to refer back to and come up with a week’s menu in a few minutes. I think this would work best online, as I could hyper-link and tag each recipe by main ingredient.


More Thoughts on the Third Stage

It is a relief not to have to worry about money all the time. I remember when I was living paycheck to paycheck, it was stressful. Would an unexpected bill come in the mail that day? Would our electric or gas bill be higher than normal due to extreme weather? What if my car breaks down on the way home from work? Having a savings cushion for those little things that pop up really does make a difference.

I’ve also found my thoughts wandering to other topics now that it is not so occupied with that stress. It’s like is was in survival mode before, waiting for the next infusion of cash so I could get by. I thought that was just the way it was, after all that’s how the media portrays it. Earn and spend your way to a full life.

But that’s no way to live. Like I mentioned previously, it is not only stressful, but it also did not challenge me to think beyond myself and my own little problems the way I do now.

Once I got past the cycle of living for the next payday and began to get comfortable, I started to think about where my life was heading. I realized money and stuff weren’t making me happy, despite marketers that say otherwise. I started to look at what did make me happy.

Obviously family and friends are at the top of that list. But also high on the list is doing work that matters to me and challenges me, not just working for a paycheck.

It took a little while to figure that out, however. At first i was tempted just to try to find a job that paid the most money, save up as much as I could as fast as I could and retire early. But I realized, after a few meetings with clients of my own, that I do like the work I’m doing – most of the time. Sure there are times when I’d rather be doing something else, but even the most passionate of us has moments like that. Right?

So my attention turned to getting the most out of my current profession – Certified Public Accountant, while figuring out how to make it flexible enough to spend more time with my family if I so choose.

I really like sitting down talking to people and figuring out ways I can help them or their company – either by decreasing their taxes, planning for their future, or helping them run their business better.

Most people probably think accounting is all about number crunching, sitting in a room somewhere by yourself with a calculator and a pad of ledger paper. A computer does most of the number crunching these days. Accounting to me is one part knowledge and one part relationships.

My challenge is finding clients of my own that I can advise and grow with. As a natural introvert, it is hard for me to walk into a room and just start talking to people.

One part of my current position I don’t like is that during the slower time of year there is little to do some days. I’ve requested more time off in lieu of a raise, but so far the powers that be declined.

Adding it all up, it seems my best course of action is to build up my own client base with enough revenue that I will either a) have the pull within the firm to eventually work the schedule I NEED to rather than the schedule someone else WANTS me to or b) that revenue could eventually replace my salary, in the form of my own small accounting practice where I answer to no one but myself.

I’m giving myself 3 years to accomplish this goal. 3 years is a long time, but building up a reputation and enough connections to develop that level of business takes time. This will also coincide with my son going to Kindergarten, and for some reason I just think it would be cool to be around when he gets home from school.

Five years ago, I would have thought this was impossible. I was so dependent on someone else for my paycheck, the risk of even thinking about going out on my own was not on my radar. By getting rid of my debt, living frugally and learning about what really matters, I now have a new challenge I can work towards.

I’ll talk about my plans in more detail in future posts. I’d love to hear your input about what changes you’ve made in your life as a result of being on solid financial ground.


Picking My Next Investment

We should have enough saved up by the end of the year to invest another $1,000. In looking at our portfolio as it is constructed now, and using the list of sectors from Yahoo Finance, we have no stocks in either the “conglomerates” or “industrial goods” sectors. So I’m going to target those sectors to diversify our holdings.

I also want a reliable dividend payer, so I’m going to use the “dividend kings” as a filter. Dividend Kings have raised their dividend annually for at least 50 years. That’s a solid track record and lives little doubt, in my mind at least, of the companies’ stability.

The Candidates

Using those 2 criteria, there are 3 stocks that fit the bill – MMM (conglomerate) and DOV & EMR (industrial goods).

To further screen the stocks, I’m using the scorecard approach used by the Motley Fool, shown here. Basically, there are 10 categories, and for each one satisfied, the stock gets a point. For my purposes, I’m going with the most points for my next investment. For tiebreakers, I’ll use dividend payout ratio and price/book ratio.

And the Winner is….

3M Company (MMM) comes in with a total of 7 points, failing on both growth measurements (1 and 5-year revenue growth) and gross margin.

Dover (DOV) came in at 3, only satisfying the debt to equity, current ratio and 5-year dividend growth criteria.

Emerson Electric (EMR) scored 5, missing on the 1-year annual revenue growth, gross and net margins, debt to equity ratio and P/E ratio.

I have to say it was not as close as I originally thought. 3M also had the lowest payout ratio of all at 38% (DOV had 40%, EMR 53%) which tells me it has more room to raise dividends should the opportunity arise.

I also like this stock because it has a wide variety of products – everything from office supplies to healthcare to industrial goods. It has continued to raise (albeit slowly) its dividend payment despite the recession, but has a history of increasing the dividend by a greater percentage during booms. This, combined with the lower payout ratio, partially offsets the 2.4% yield, which is usually too low for my taste.

Unless something dramatic happens before we accumulated the $1,000 needed to invest, I will most likely buy this stock. I’ll continue to keep my eye out for a better fit in the 2 sectors mentioned until I pull the trigger.

What are your thoughts on the 3 companies mentioned? Is there something I should have considered that was not covered?

More on dividend investing…

Following up on what I said yesterday, I read this article that echoes much of what I said.

I really like the “owning a piece of America” line.

Not surprisingly (to me anyway), a lot of the companies he mentions are stocks that I own, including ADP, JNJ, KMB, KO, MO and T.

Here’s a second piece on a 94 year-old investor still going strong. Check out his investing criteria – very similar to mine. I’d be extremely happy making $2.5 million over my lifetime.

Investing vs. Trading

One of the main reasons I prefer dividend investing is the inherent long-term nature. Picking individual stocks is a more comprehensive process than buying the hot mutual fund or simple index investing. The time invested gives me a better idea where the companies are going and will help me identify any troubling trends, should one arise in the future. Of course no investor can be perfect, and I expect to make some mistakes. That is why I want to buy a basket of 25 or so stocks, so no one holding will derail my overall portfolio.

A dividend investor is less concerned with the daily or monthly variation in stock prices. My primary concern is the likelihood the dividend payment is maintained, secondary is the potential growth rate of the dividend. This long-term approach also helps keep costs down. I currently pay $8 per trade. My current strategy is to invest in blocks of $1,000, so my fees are under 1%, which is definitely less than what most mutual funds charge EACH YEAR. I pay the fee twice, when I buy and sell. A fund investor pays that much annually.

The fact that a company pays a dividend at all is a clue to its stability and thus more likely to survive a downturn in the overall economy. When I buy a stock, I hope to hold it forever. Instead of constantly trying to find the next Microsoft, Apple or Google and hitting the jackpot with quick price appreciation, I’d be happy with a boring stock like McDonald’s, which has consistently delivered steady growth and recently hit an all-time high. Did I mention it also pays a pretty nice dividend?

Taking that even further, following a list like the Dividend Aristocrats, further narrows the field of dividend stocks to the cream of the crop. These are companies that have increased dividends for at least 25 years in a row. Talk about stability!

Things can go wrong with any company however, so it is equally important to have selling criteria. A cut or elimination of dividends would be a huge red flag and make me seriously reconsider any investment. Other considerations would be: a sharp increase in costs or drop in revenue, increased competition or government regulation, or perhaps a questionable merger or acquisition.

Contrast my strategy with trading – trying to profit on short-term swings in price. I really believe this is a form of gambling. Like betting in a casino, it is a losing proposition. The odds (in this case also factor in your trading costs) are not in your favor.

Day-trading was huge during the late 90s/early 2000s, but today you basically hear nothing on the topic. The stock market is too unpredictable from day-to-day for anyone to be able to predict what happens. Conversely, long-term (I’m talking 10+ year timeframe) the stock market goes up.

What is your investing strategy? Do you have a long-term or short-term outlook.

My Investing Manifesto

I started investing in 1998, when I signed up for my firm’s 401(k) plan. Two  bubbles (.com and housing) later, I’m getting back to basics and questioning everything I read or hear about investing. First it was the mutual fund marketing machine, then the S&P 500 index/passive investing crowd, currently it is the flight to safety in bonds. It is hard for an individual investor to tune out all the noise and stay on course.

Here then, is my manifesto:

The Goal:  Invest my money so that it generates enough income to pay my expenses.

I call this financial independence, or an F-U fund. When my income from investments is capable of covering my expenses, I can choose to say F-U to work, bosses, or anything that requires me to trade my time for money, should I choose.

As much as I’d love to get lucky and find the next Microsoft or Google, it probably won’t happen. This will be a long-term project but then most things that are worthwhile take time and discipline.

The Plan:

  1. Purchase dividend paying stocks in blocks of $1,000.
  2. Rinse, repeat until I feel sufficiently diversified across different industries – perhaps 20-30 companies?
  3. Add to existing holdings or purchase additional companies’ stock.
  4. I will consider selling any position that cuts or reduces its dividend, or falls below my investing criteria listed below.

The Strategy: I’m shooting for a dividend yield of about 5% across our portfolio. My current mix is a group of higher yielding stocks (over 5%) plus a group of stocks with a higher dividend growth percentage. Ideally, I’d like to hit 10% yield on cost within 10 years, or 10 x 10 as described in this excellent post.

I’ll use traditional stock screens to find potential investments, as well as the Dividend Aristocrats list. I will look for stocks with an attractive valuation – probably no higher than a P/E ratio of 15 and a price/book value in the 1.0-1.5 range.

The Reasoning:

First, I realize this will take extra time, as opposed to just putting money into a mutual fund and letting the professional managers do their job. For something as important to me as my future financial security, I consider it time well spent. I’ll save my rant on the mutual fund industry for another post, but suffice it to say I believe an individual investor can beat the pros at their own game.

Second, while index funds may be a step-up from managed mutual funds, I still see one major flaw. Any index fund, by design is reactive, seeking to mimic the index it tracks. Therefore, when the index falls, the associated fund will fall. This is not to say that my investments will never decline, but I prefer a more pro-active approach to investing: finding good companies at a discount and holding them, while earning a return in the form of dividends.

Third, what most people consider investing – putting their money into the stock market and hoping for stock price appreciation – is akin to gambling or playing the lottery. While the stock market has traditionally appreciated over time, and we’re talking long periods here, there is no guarantee it will continue to do so. I prefer to take current value into consideration, thereby eliminating some of my risk.

Fourth, I realize there are other investment vehicles available that may produce a higher yield – MLPs, royalty trusts, etc – but for now I’m focusing on dividend paying stocks. As I become more comfortable with those, I may explore other investments in the future.

Fifth, I believe dividend investing provides a built-in hedge against inflation. Take Johnson & Johnson* for example, a company that has been able to on average, double it’s dividend payment every 5 years since 1974. With historical inflation running 3-4%, you can see JNJ has more than kept up with that.

Sixth, dividend paying stocks inherently have a long-term horizon. Since paying (and raising) dividends annually is a major commitment, I see companies that are confident in their operations as attractive investments. That’s not to say a company couldn’t cut or eliminate the dividend (as many banks were forced to recently), but if that happened, it would be easy enough to re-evaluate the company. If you invested in an index fund, you’d have to wait for the stock to be removed from the index, which would surely come long after the decline in stock price.

Finally, what about bonds/fixed income? This discussion is primarily related to our personal savings outside my 401(k) plan, which is sadly only allowed to invest in crappy mutual funds. Until I can convince the powers-that-be to change that, I will use my 401(k) to purchase the bond component of our portfolio. I have a separate strategy within my 401(k) that I will touch on in a later post.

*Full disclosure – I own shares of JNJ.

Where Do We Go From Here?

Great song by Filter. It also happens to be the question I’m asking myself more and more since entering the Third Stage. Like I mentioned in the Intro post, I feel more challenged now than ever before. And these challenges are bigger than ever before.

I don’t know if it’s just me, but a natural progression from reading personal finance-centric material has led me to reading self-help/self-improvement materials. Once I was able to sort out that piece (an important piece at that) of my life, I wanted to focus on how that integrates with my whole self.

I subscribe to a few blogs (see below) as well as reading a book or listening to a book-on-CD every couple months. I recently finished Po Bronson’s excellent book What Should I Do With My Life? and took about 3 pages of notes on it. I’m currently reading Chris Guillebeau’s new book Art of Non-Conformity. I was lucky enough to get it for free through a giveaway on his website. I’ve read Chris’ blog for probably a year now and he always has something important to say.

Maybe some of this soul-searching has to do with the fact that I’m in my mid-30s and after living through a consumption-driven economic boom and the resulting bust, I’m left thinking…”that can’t be all there is”. It took me awhile to realize “stuff” isn’t going to make me happy. It truly is the people and experiences in your life that make it great.

Confession: I used to be deathly afraid of talking to new people, especially girls. It turns out, I really like connecting one-on-one with people and am actually decent at carrying on a conversation. I thank my wonderful wife for opening me up to this. In my job, it is rare that I get to do this, but lately I’ve had the chance to have a couple really important conversations with clients that needed me and it felt terrific. (I still hate talking on the phone, and in large groups.)

After challenging ourselves to pay off debt and save enough for a down payment and emergency fund, we’re in search of a new challenge. The confidence we’ve achieved through that process has led me to this point – wanting, no, demanding more from myself. I am no longer content to float through my life depending on others to challenge me or playing it safe. I will actively seek out and challenge myself, confronting my fears and using them as motivation. When I get right down to it, the worst thing that can happen is that we’ll lose some “stuff”. And I’ve already deemed “stuff” as a non-starter when it comes to happiness.

On fear, Dale Carnegie said:

Do the thing you fear to do and keep on doing it… that is the quickest and surest way ever yet discovered to conquer fear.

I’ve lived a pretty safe life – good student, went to college, got a regular job, got married, bought a house, had 2 beautiful kids. I tend to stay away from things that scare me, and because of that I feel a little stuck. It is a good life, but I feel like something is missing, I feel like with a little more work I could make it great. I want to do something that will survive me, my legacy project. It will scare me and challenge me, but that is exactly what I want.

I have a good idea, I’ll be writing more about it soon.

Do you have any good blogs or books on personal development you’d like to recommend? How did those materials help you?