It's Bigger Than Math

The Four Key Metrics to Look for When Hunting for Dividends

A popular but somewhat complicated concept is dividend investing. Too often, investors chase dividends for the mere fact they have a high yield, and they forget there is an actual company behind that dividend. This can be a portfolio killer. It is usually something more novice investors tend to do. It is similar to trying to time the market. It rarely works out well for the investor. I will give you the reasons why this is dangerous and some things you can do instead of chasing high yield dividends.

The first thing to keep in mind is that if a company has a high yield dividend, it may be a warning sign. It could be okay, but you need to consider why the dividend yield is so high and “appealing.”

When hunting for dividends, here are four key considerations you should assess with every company:

Excessively High Yield
Excessive Company Debt
Dividends to Earning Ratio
Fundamental Business Concerns

Let’s break each of those down to give you more information, so you can make an intelligent decision about your investments.

Excessively High Yield: Companies that have extremely or excessively high yields often are red flags. This is probably a dividend trap; one that I would recommend staying away from until you have looked at all of the other factors and have really done your research. There are some legitimate stocks that pay high yields around two to five percent sustainability, but those with 12 percent yield should raise some questions.

The following is a list of stocks and their dividend yields that you may want to consider:

Home Depot ($HD) – 2.51% with a Year to Date of 25.83% – This American company is noted as being the largest home improvement retailer in the country.
Altria Group, Inc. ($MO) – 6.59% – This is an American company that is one of the leading producers and marketers of tobacco and tobacco related products.
Procter & Gamble Co. -($PG) – 2.49% – This American company is a multinational company that produces consumer goods.
AbbVie Inc. ($ABBV) – 3.71% – This biopharmaceutical company is an American company that is a spin-off of Abbott Laboratories.

You can find more information about quality dividend paying stocks from the Dividend Aristocrats list at: https://dividendvaluebuilder.com/dividend-aristocrats-list/ or the Dividend King list.

Excessive Company Debt: Dividends come from the profits of a company and are at the discretion of the company management. Things that can impact dividends are company debt and the economy. Some things to keep in mind are the debt-to-equity ratio and the current ratio. Quite simply they are as follows:

Debt-to-equity formula: This is the total liabilities divided by the shareholder’s equity. The ratio to target is anything lower than 1.0 for a good debt-to-equity ratio. Ratios of 2.0 or higher are considered risky.

Current ratio: When I talk about the current ratio, I am thinking in terms of the current assets divided by the current liabilities. Anything greater than 1.5 or higher is considered a good ratio. A ratio below 1 could indicate that the company may not be able to meet their short term obligations. On the other hand, too high of a current ratio could indicate several things including that the company is not using its current assets effectively, securing proper financing, or properly managing their working capital. You will want to be diligent about looking at these ratios in conjunction with previous periods and juxtapose those figures with other companies from similar industries.

Dividends to Earnings: The payout ratio is my favorite metric for dividend investing. This enables an investor to understand the sustainability of the company’s dividend.

Annual dividend payout ratio to earnings formula: In general, you will want to use the following percentages within the context of the company’s performance.

Good: 0% to 35%

Healthy: 35% to 55%

High: 55% to 75%

Very High: 75% to 95%

Unsustainable: over 95%

Traditionally, the healthy range is the most favorable to see as this is the sweet spot where companies tend to see the most sustainability long term. They are able to reward investors while also not leveraging all of their profits to do so. However, every company is at a different stage of growth, and that may certainly impact this number.

Fundamental Business Concerns: This is fundamentally a timely situation and assessment. However, there are a few things you will need to keep in mind in order to make sound decisions.

Stock Price Movement: It is prudent to check the stock price performance for the last couple of years. The stock price is the denominator and the key in determining the value of the purchase of the individual stock. If the high dividend yield is a result of a rapid drop in the stock’s price, you need to fully understand the reasons behind it.

Cash Flow Statement: Earnings can be deceiving and difficult to deconstruct because things such as one-time accounting items can come into play. I have been behind the scenes as a CPA auditing companies, so I understand how this can be complicated. That is why it is imperative to compare it to the Cash Flow Statement. This statement provides the real picture and is sometimes more useful in evaluating stocks and dividends than simply looking at the earnings as noted on the Income Statement. Further, pay attention if there is a decline in earnings or even if you notice a slowing growth in earnings.

All of this information is available by using the financial statements which include the Balance Sheet, Income Statement, and Cash Flow Statement that you will find in the 10-K/10-Q. You can obtain this information for public companies by checking out that Company’s Investor Relations page or by going to http://sec.gov.

The last caveat is to understand what type of investor you are and to understand your comfort level with investing. If you are one who is a dividend investor, you need to hone in on all of the nuances associated with that. Hopefully, this information will provide you with some of the tools you need to make wise investment decisions.

Note that I receive my dividends via my index funds and am not a Dividend Investor per se, but you can always reach out to me at Budgetdog for help.

Whole Life Insurance Vs. Term Life Insurance : Which Fits My Needs?

When you are thinking about life insurance, which is something you should have built into your financial plan if your income is important to others, it is necessary to know the difference between the two most common types of life insurance: whole life and term life. They are similar in some ways but very different in others. Following are the basics between the two that may help you decide which is best for your needs.

Again, life insurance is a must if there are other people who depend on you for your income.

Whole life insurance is a lasting type of life insurance. This type of insurance accumulates a cash value that you can borrow against, and the benefits accrue tax deferred. Whole life insurance policies on average cost from five percent to as much as fifteen percent more than term life insurance for the same amount of death benefit. The premiums are set by accuraiests based on a chart that includes your age as well as your health and risk factors, but they are set and usually are guaranteed never to increase. But keep in mind the reason for life insurance. It is not meant to be a savings account but rather to provide for your family upon your death. You don’t want to put your loved ones in a stressed financial situation, wondering and worrying about how they will pay the bills and cover expenses. Whole life insurance policies pay out a guaranteed death benefit to the beneficiary that is usually tax free.

Term insurance, on the other hand, is written for a “term” and only lasts for a certain number of years for which the policy is written. Term life insurance policies do NOT accrue a case value amount, so you can never borrow against them. They are typically cheaper than whole life policies to purchase for the same amount of death benefit which is an added incentive over whole life insurance policies. The policy amount works like whole life policies in that the cost of the policy is based on your age, health, risk factors, and term of the policy. They are also like whole life insurance policies in the budgeting aspect with the premiums usually being able to be paid monthly, quarterly, semi-yearly, or yearly. Also like whole life insurance policies, term life insurance policies guarantee the beneficiary of the policy a death benefit that is commonly tax-free.

The amount of insurance, whether whole life or term life, should be about ten times your yearly income.

Again, think about the purpose of life insurance. You want to make sure you have enough insurance, so your family could live relatively worry-free without your income. Having a policy about ten times your yearly income is a good estimate, only IF the money is invested wisely and bills are paid properly, so you will need a good budget as a foundation.

When considering whole life versus term life, I am not a proponent of whole life insurance policiesfor several reasons. One is that they are typically more expensive for the same death benefit as term life policies, and I am not a fan of paying more money for the same product or outcome. Also, they go against the reason for having life insurance. If you are going to have a life insurance policy, I think that is what you should have. It is not a good savings investment. I have term life insurance for my wife and for me. I want to make sure that if tragedy strikes or when one of us dies, the beneficiary is able to live the same lifestyle without the income from the deceased.

Regardless of the type of policy people choose, I think it is unwise and actually foolish not to have life insurance unless you are wealthy enough that the income from the deceased is inconsequential.

Moreover, buying a life insurance policy is not a precursor to tragedy or death. It is like writing and having a will. Just because you have a will, it doesn’t mean something terrible is going to immediately happen. All it means is that you love your family enough to make sure they are taken care of when something does happen.

For help walking through the decision of what type of policy is best for you as well as the amount you should have, reach out to me. I am happy to help you through this process to ensure that your loved ones are well cared for financially.

Credit Cards -the Good, the Bad, and the Truth

When it comes to credit cards, everyone has them. Right? You need them. How else can you book a flight, get a hotel room, or rent a car? They help you establish credit, and you can earn money by using them. They are fine!

Well, yes and no!

Credit cards can be okay when used correctly and managed properly. However, most people do not do that, so they are not fine or good! Credit cards are one of the easiest ways to get into a financial situation that spirals out of control really fast.

According to the latest statistics from the Federal Reserve Bank of New York for the fourth quarter of 2021, the total credit card balance in America was $856 billion. That figure is an increase of $52 billion from the third quarter of 2021. Moreover, according to LendingTree, the national average of credit card debt, including both retail credit cards and bank credit cards, was $6,569.00. While that is not an exorbitant amount, couple that with all of your other bills as well as student loans, and the amount becomes increasingly unmanageable.

So let’s take a look at the types of credit cards and the practicality of actually having one. First, I am not talking about retail credit cards that you get at every place where you shop. Don’t get those! They are a trap. They lure you into opening one, saying you will save a certain amount on your first purchase, etc. Before you know it, you have five or six or ten different credit cards from all of these places, now with various amounts on them. This is going to do nothing but lower your credit score and cause you to pay more in the long run for that pair of pants than if you had paid cash. If you don’t carry cash, which I get since I don’t either, use your debit card. Then you know it is paid for and there will not be an additional cost when you forget to pay that credit card bill, or, worse, you don’t have the money to pay the credit card bill. What I am talking about is bank credit cards.

Annual Fees: Most bank credit cards do not have an annual fee. Some, such as the Blue Cash Preferred Card from American Express, the Capital One Venture Rewards Credit Card, and the Chase Sapphire Preferred Card, do, so you will want to make sure you know if the one you are applying for has an annual fee or not. The Blue Cash Preferred Card from American Express actually does not have a fee the first year, but after the first year, there is a $95.00 annual fee. I do not use a card that has an annual fee. My wife and I have the Chase Freedom card. I typically recommend this card if you are looking for a card with no fees. Feel free to check out the Chase Freedom card here, to see if it fits your needs.

Interest Rates: Be mindful of the interest rate that your bank credit card has on the balance of the amount charged. Some credit cards have incredibly high interest rates. In fact, according to LendingTree which obtains its information from the Federal Reserve, for the first quarter in 2022, the average APR was 14.56%, for interest accruing credit cards the average was 16.17%, and it was 19.68% for new credit card offers. Exactly what does this mean? Information from Forbes shows a great example. If you had a $7,500 balance on your credit card, paying $150.00 per month, at an APR of 15% compared to 20%, the difference is striking. To make this easier, look at the chart below from Forbes:

Credit Card Balance	Monthly Payment	Interest Rate (APR)	Months to Pay Off the Debt	Total Amount of Interest Paid
$7500.00	$150.00	15%	78	$4,145.00
$7500.00	$150.00	20%	106	$8,254.00

Wow! Try adding that to your debt! No thanks! This is the Bad part of credit cards. Too quickly you are snowed under with credit card debt IF you do not manage credit cards correctly.

Types of Credit Cards: There are many different types of credit cards you can get if you decide you need to have a credit card. I would suggest that if you are going to get a credit card, you think about your buying habits in order to best utilize what the credit card has to offer. For example, if you are hoping to rack up reward points for hotels or airlines, you want to do your research and find those best suited for you. Some people want rewards for everyday spending such as groceries or gas. Those credit cards are also available. So whether you want a dining rewards credit card or a cash back rewards credit card, there are credit cards to fit your need. Just be deliberate in your choice. Ultimately, to make the credit card work for you, you want to make sure you do NOT carry a balance. As long as you build your spending into your budget, stay within your budget, and pay the balance off each month, credit cards can be good to have. If you are not that disciplined, I would recommend a debit card instead.

Interest Rates and Credit Scores: The last thing to keep in mind is that often you will get a better credit card interest rate IF you have a good credit score. Not paying the balance in a timely manner and being late on paying your bills will wreck your credit score. The higher your credit score, ultimately, the lower the interest rate in general. According to The Consumer Credit Card Market Report, as of September 2021, The Bureau of Consumer Financial Protection noted that for people with credit scores of 740 and above, called Superprime, the average credit card interest rates were 16% to 18%. However, for those with credit scores of 579 or below, called Deep Subprime, the average credit card interest rates were 24% and above. There are varying degrees between Superprime and Deep Subprime, but they were all in the 20s. Obviously, cleaning up and/or maintaining a good credit score is key. I will address ways to help do this in a future blog.

The Truth: The good and the bad about credit cards as noted above is obvious. Like I always recommend, having a budget and sticking to it is key to your financial success. Not getting into debt is fundamental. Credit cards can be beneficial if you utilize them effectively. I don’t recommend getting more than one, nor do I advocate getting retail credit cards. If you are going to get a credit card, make sure you research the best card for your spending and desired rewards and that you always carry a zero balance, so the card works for you. As always, I am here to help you on your financial road to success. Contact me for help getting out of debt, making credit card decision choices, or setting up your budget.

Have Fun Without Wrecking Your Budget!

Spring has Sprung!

Yes, it is finally spring, and most of us are ready to get outside and enjoy going places and doing things. It is also a time for many celebrations such as weddings. BUT – and it is always the proverbial BUT – we also just went through tax season. So, you either owe taxes, broke even, or are getting money back. Regardless, it is always a time to reflect and maybe reevaluate your budget.

For many, this time of year is also a time to begin that austerity program again – especially if you did not like what you saw when filing your taxes. Often it is a wake-up call to assess where all of your money is actually going.

I like pie charts to help me visualize where my money is going. It is a quick and easy way to see if you are spending too much money dining out and not enough on saving and paying off debt.

So… what does this have to do with spring and getting out of the house or weddings?

Plenty! Everything, really, if you want to enjoy life and keep to a budget that will help you pay off debt, so you can REALLY live and enjoy yourself without worrying about bills and debt for the rest of your life.

So, how do you find that balance? How can you stick to a budget and pay off debt while still enjoying yourself and going out?

Those of you who follow me, know I am all about planning. There are things that come up in life that you can plan for. These are the incidental things that you can put into your budget ahead of time, so they are not quite so expensive and/or unexpected. For example, weddings and all of the things that go with being invited to them such as shower gifts and wedding gifts are easy to add to the budget. You get plenty of notification about these events so plan accordingly. Put them into your budget and stick to the allotted amount, but you can also shift things around. Perhaps you can’t dine out as often, but you can still get the gift and go to the wedding which is an evening out. Planning is key.

Also, be frugal about entertainment. There are so many ways to get out and do things that won’t wreck your budget. Many are free. You just need to make yourself aware of the things your local community has to offer.

Here are some things to check out that won’t wreck your budget :

Libraries – Local libraries organize a variety of different activities for all ages and abilities, and they are all free. Some of these are educational and some are purely for entertainment. Our local library, for example, has things like scavenger hunts, movie days and nights, science and STEM learning adventures, and contests. These change each month, so there is always something free to do. That is in addition to the normal things they do like lending out books in print and on tape as well as movies and music. In addition, they also offer services such as transferring old records to current platforms such as DVDs.
Cities – Many cities do amazing jobs organizing a variety of activities year round. They try to appeal to a variety of interests and age groups. Most of these are free and open to the public, but others cost a nominal fee and are restricted to citizens only. Some of the common free events include free concerts, flower swaps, festivals, camping nights, and plays. Along with these free events are events that cost a small amount and/or are discounted such as mini marathons, yoga and other athletic instructions, farmers markets, garage sales, and city discount days at professional sport events and amusement parks. It makes sense to check with your city as well as cities around you for monthly listings of the events they offer.
Local Parks – Obviously most parks are free in and of themselves. But in addition to all of the amenities that the parks offer, they also often host a variety of activities geared for different age levels and interests. Of course, you can just enjoy the parks for what they offer. Each park has its own appeal such as climbing ropes, bike trails, skateboarding, etc. But beyond searching out different parks for their individual aspects, you can make it a fun and cheap day by packing your lunch or dinner, food that you already have, and turning the day or evening into a picnic.
Workshops and Crafts for Kids at Stores – Home Depot, Lowes, and JCPenney are a few of the stores that offer creative hands-on activities for kids. You can purchase kits for kids from Home Depot for a nominal fee to take home and create. Lowes hosts free events at their stores on select Saturdays from 9:00 a.m. to noon. You need to register at their website in order to participate. They provide all of the materials that you need to build things like birdhouses or a miniature putting green which is great for your little one to give to Dad on Father’s Day. If you prefer to make the kits at home, you can pick up the free kits on the day of the events at the Customer Service Counter from noon until 8:00 p.m. In addition to the workshops, they also have craft kits available for a relatively low price. JCPenney has their “Kid Zone” on the second Saturday of each month from 11:00 a.m. to noon. You do not need to register for these, just drop by and enjoy the crafts. In addition to the craft, adults accompanying the children get a 10% coupon that can be used at JCPenney. Children participating at Lowes and JCPenney must have a legal adult with them.
Free Bowling for Kids – During the summer, at participating bowling alleys, kids can bowl up to two games a day free. You can find out what bowling alleys are participating in your area by going to the following link: https://www.kidsbowlfree.com/all_centers.php. You need to register, but the age restriction is up to age 15 at most bowling alleys.
Outdoor Activities – Now that the weather is breaking, it is a great time to get outside and enjoy nature. For little to no cost at all, there are so many options including walking (check out local walking clubs including those sponsored by libraries that also often offer light refreshments after the walks), hiking, bike riding, and fishing to name a few.

The sky’s the limit, but you definitely don’t need to wreck your budget to have fun and enjoy yourself. Planning is always key whether it is preparing for showers and weddings or finding things to do for entertainment. Always remember to stick to your budget. For more budgeting advice or help with creating a budget, contact me.

4 Tips to Avoid The Consumerism Trap

We are consumed with and by STUFF. Most of the stuff we have, we don’t need. But advertisers tell us we do, and we buy into their ads and gimmicks. All too quickly we are spending money, often money we don’t REALLY have, on the latest and greatest of whatever new item they are selling. They are smart; we are fools! The advertisers are doing EXACTLY what they are supposed to do which is to get us to believe that we really do need another _______________. You can fill in the blank with the plethora of things that we buy and then, too quickly, grow out of or grow tired of or replace with the next latest and greatest item.

By definition, according to Oxford Dictionary, “consumerism is the preoccupation of society with the acquisition of consumer goods.” And a preoccupation it definitely is.

So why and how are we so easily enticed to buy things that we don’t really need or have to have, or better yet, that we, in essence, already have? For example, how many pairs of shoes or jeans does one person really need? And actually, is that new “whatever” going to make us happier? Oh, it will for a brief time. We know that psychologically, we release endorphins and dopamine when we buy something. This is much the same experience we get when we exercise, for example. The sad reality is that this is only temporary. Then all we have is another thing that we probably really do not HAVE to have plus the debt from the purchase.

So what do we do about this and how can we stand strong against the very beguiling advertisement companies that trick us into believing that the latest and greatest item will make us younger, stronger, thinner, sexier, or better on whatever level they are peddling?

Personally I find my life to be a little easier to manage with less things and stuff. I have purged a lot of items, owning more of just the basics. When I was doing this, I took as much as I could to consignment shops. I used any money I got from the sale of these items to throw onto our debt. It was cathartic. Streamlining things helps me better manage my money, my time, and my space. My life is not filled with unnecessary clutter. So, first, and probably the hardest tip is resist the ads. For me this is pretty easy because I love because I know I don’t want more stuff around to complicate and clutter things. Any time my wife or I make a purchase we are careful to be sure it is on our own accord not because we see a commercial or ad that tells us we NEED something

Secondly, we are very deliberate with our purchases by planning them out in our monthly budget. This makes our shopping deliberate and not a spur of the moment irrational decision. In this vein, we then are able to research the best price, budget for the item, and purchase it without going into debt.

Another tool to use when making a purchase is the twenty-four hour rule. This prevents spur of the moment, compulsive spending/buying decisions that many all too often make. The idea is that when you see something that you THINK you want to buy, you wait a day before making the purchase. This gives you time to reflect on whether you really, really want the item or not. Often it is not all that appealing after waiting.

Another tool to use and one that my wife’s parents used with her is the time calculator. For this, you need to calculate the amount of time spent working that it will take to pay for the item. Is that item really worth four, six, or a whole day’s amount of work? If it is, then fine. But after thinking about the amount of time it will take working to pay for the item, if it is worth it or you really need it, then at least you have made a rational decision.

The bottomline is that the advertisers are doing what they are supposed to do, and they are good at it. Look around. See all of the THINGS that you have bought that were great for a little bit of time but now are hanging in the closet or are shoved on a shelf just collecting dust. Did those things make you younger, stronger, thinner, sexier, or better? My advice is to be deliberate in your spending. Take the time to plan and budget and don’t fall prey to the marketing ploys – again. In the long run, I think you will find that more money, financial freedom and security, and less things will actually make you more satisfied. I know it has for me.

As always, if you need help budgeting, reach out to me. I am here to help you on your financial journey.

Prepare Your Financial Moat

Life happens – right! As much as you think you can prepare and plan for situations and problems, there is no way to cover every crisis that might occur. Obviously insurance helps financially buffer against some medical situations, car accidents, and home catastrophes, but you can never be fully covered and protected through insurance alone.

In order to help protect yourself from financial ruin, you need to prepare your moat.

Remember, a moat is a deep, wide trench typically filled with water that surrounds a castle or other structure, used as a method of defense against attacks. By having a deep enough moat, layers of financial protection, you can hopefully change the situation from a crisis or catastrophe to an inconvenient but manageable situation.

When you are dealing with these crises such as a sudden illness or accident, it is overwhelming enough to deal with the emotional aspect without having to agonize over the financial aspect as well.

I readily understand the anguish of a crisis. My wife and I are like everyone else. We go about our lives thinking things will stay pretty normal and routine. It is funny how we all get lulled into a false sense of security. Like so many others, as we were going about our normal pleasantly mundane lives, an emergency did happen.

Shockingly our baby daughter suffered from a seizure. We were horrified. Of course, like any parent, we would have gladly traded places with her, taking the medical problem on ourselves rather than having to stand by panic-stricken as our baby endured the seizure.

Logan’s seizure resulted in a visit to the emergency room, then another emergency room visit arriving this time by ambulance from Logan having a subsequent seizure along with a four-day hospital stay, follow-up visits with specialists, and prescriptions that are, as of now, ongoing for the foreseeable future.

We don’t know the medical outcome of our daughter’s epileptic seizures, but we do know that we are in a position that alleviates the financial stress of this situation.

Luckily my wife and I only have to deal with the emotional turmoil rather than the emotional AND the financial aspects associated with Logan’s medical condition.

So how do you financially brace yourself against life? You need to prepare your moat.

I can tell you that the bills come in quickly. Leaving nothing to chance, we had already set ourselves up to be able to handle pretty much anything that comes our way from out of the blue – financially speaking.

So far we are looking at about $6,000.00 in medical expenses from the emergency room visits, hospital stay, visit to the specialist, and prescriptions. We expect more medical expenses since her current prognosis is that the epilepsy will be ongoing. Of course, her condition weighs heavily on us emotionally, just as it does any parent. But financially, we were prepared since we play offense and defense with our personal finances. Let me explain.

Simplistically, we keep to a budget, making sure we have low fixed expenses, an invested emergency fund, investment flexibility, and a high monthly cash flow. We don’t deviate from this plan. This strategy of playing defense against life, has helped tremendously to offset the medical bills that have already come in for Logan’s seizures.

Let’s break these down in more detail to give you a better sense of our strategies to see if they can help you as well.

Since we don’t have a mortgage, it is easy to maintain low fixed expenses. This gives us a high monthly cash flow. We budget so if either of us stopped working today, for whatever reason, we could still pay our bills and live as we currently do. Our lifestyle would not change. This is intentional. We can afford to live more extravagantly, but we don’t value that type of lifestyle compared to having a sense of security and peace of mind.

Our second strategy is that we have an emergency fund that is fully invested in a brokerage account. This strategy has changed a bit over the years due to different levels of risk. Mostly we have changed the way our emergency fund is allocated. Presently we invest 100 percent of the money which has accrued to a considerable Taxable Brokerage Account.

Again, preparing for the unexpected, if there was a significant recession or financial collapse and the Taxable Brokerage Account fell sixty percent, we would have more than enough money to cover unexpected emergencies. This is the end game for this type of fund, so we are comfortable with investing in this manner.

Not everyone would agree, feel comfortable with this strategy, or be able to do this based on their other bills and debts. This is just what works for us.

Along with the emergency fund, for the last five years, we have been investing into an HSA which is our third layer of protection, our third strategy. This now has built up to a sizable amount. Additionally, we maximize the triple tax savings benefit by paying every medical expense “out of pocket.” We save all receipts for the “out of pocket” expenses and are able to withdraw up to that amount for any reason whenever. This qualifies as a medical expense which is the third tax saving benefit. HSAs are worth looking into since they provide so many benefits and are one of the most tax-advantaged accounts recognized by the IRS. I’ll provide more information about all of the benefits of HSAs in a future blog.

As noted earlier, we have a budget and stick to the budget. As part of our monthly budget, we have allocated a significant amount to automatically go into our Taxable Brokerage Account. This is our fourth strategy and last layer of protection. The ultimate purpose of this account is “early retirement.” This is automated and is flexible. If necessary for any reason, we can make changes and can pull back here.

Our strategy is to focus on keeping our expenses low, our cash flow high, and calculate the amount owed.

Obviously we want to keep our investments as close to our standard preset allocations as possible. However, we can pull from these various accounts, IF, but only IF, necessary. Our plan is to always pull from our monthly cash flow first and then see what is needed after utilizing this account. From there, if necessary, we would pull money from the Taxable Brokerage Account, our fourth layer of defense. If possible, we prefer not to touch the Taxable Brokerage Account or the HSA.

The benefit of good financing ensures that we should not have to touch these investment accounts since we have created a deep financial moat. Of course, life happens as we have experienced with Logan. Nobody ever knows when tragedy will strike or when accidents will happen. Having a plan though helps turn those emergencies into financial inconveniences rather than catastrophic tragedies. Being prepared for these events gives us the luxury of security.

Logan Lee having fun during her hospital stay.

One or more of these strategies may help alleviate some of the financial stress you have for the real events that happen in life. My advice is to educate yourself and be prepared. Let me help set you up for that security; I can help you create your moat.

Why We Paid Off Our Mortgage Early, and Why it Might be Right for You

When it comes to debt, especially paying off a home mortgage, there are several schools of thought. Interestingly, because there is controversy which often happens when talking about money, people can sometimes become defensive.

This has been, to date, the most controversial topic I have discussed.

Quite simply, debt – not getting into it – but getting out of it, can be reduced to simple math.

It is hard to argue with logic and facts. Numbers don’t lie. However, it is not that simple when it comes to paying off a mortgage IF you are weighing that against delaying investing. If it was as simple as whether to pay off a mortgage early, to throw everything at the debt, it would be a simple answer.

The decision to pay off our mortgage as vigorously as we did, actually “cost” us $42,00.00, but it is a decision we do not regret. It is by far the best financial decision my wife and I have made. It was right for us, and it may be right for you. Let me explain why.

The basic schools of thoughts on debt are as follows:

Everyone has a mortgage, Right?! – Some contend that everyone has a home mortgage, so they are fine making the minimum payment required until the end of the mortgage. For me, paying on something for 25 or 30 years AND paying tons more than I borrowed was unfathomable. This does not make any financial sense and one I never entertained.

I make more in the Stock Market! -Still others argue not to pay off a home mortgage because they think investing their money gives them a higher rate of return compared to what they would make paying off the mortgage.

I get this concept and understand the math. I am a CPA and crunch numbers, so it does make sense – mathematically.

Many people in this category ensure they have the lowest interest rate for their mortgage and will refinance accordingly to keep their rate low which is a good thing. Having an interest rate below three percent and getting a rate of return on your investments of six percent or higher is logical.

BUT, this is NOT guaranteed and does not take into account your appetite for risk.

There are many variables; it is contingent on the interest rate, the term of the loan, and the market/economy. It is a feasible concept in terms of numbers, but there is more than numbers involved.

I value the piece of mind that comes for knowing I OWN my home! – The last thought process is where I fall. People in this camp still want to ensure they have the lowest possible interest rate since paying off the home mortgage takes center stage.

People throw large sums at the principal to get their houses paid off as quickly as possible in order to save money in the long run on their mortgages in the form of interest and eliminate a large month expense.

Many in this camp will then turn their focus to invest money in the market or will invest more vigorously after accomplishing their mortgage payoff.

Investing, putting money into investments, is always advisable due to the wonder of compound interest. However, it may not be possible or you might not be able to be as aggressive as you may like when you are in the throes of paying off your home mortgage.

Mathematically, as noted above, some will contend this route does not make sense.

But for my wife and me, the luxury and sense of security of having our house paid off, of money not going out but staying in our account, and having peace of mind, was totally logical, so it was the path we took.

So, looking at the math and the above reasons, again numbers don’t lie, you may wonder why we were fixated on paying off our mortgage, especially with me being a CPA who is trained to look at the logic of numbers. There were three basic reasons why we decided to pay off the mortgage early, in just five years, despite the fact that the math didn’t outweigh the personal reasons of security and opportunities.

As I mentioned earlier, paying off our mortgage early on paper cost us about $42,000.00, but we were also looking at reasons that were more intangible.

Our reasons may not make any sense for you and where you are financially. I will explain our reasons, so you can decide if they make any sense for you and your family.

By paying off our mortgage early, we were able to lower our monthly expenses by 40 percent. Since we lowered our monthly expenses and had a lower financial risk, we freed up cash and were, therefore, able to invest more heavily. This was always our plan.

Based on our age, we knew that forestalling for the short term in order to pay off our mortgage would not hurt our investing compared to our financial peace of mind.

In addition, since we had reduced our financial risk, we had the confidence that enabled me to leave my “regular job” working long hours away from home as a CPA to pursue Budgetdog, my dream and my passion, full-time. Here is where the numbers get dicey. Since I was able to devote all of my time to Budgetdog, I have been able to grow my business considerably. My prospects are indicating that this growth should continue.

Therefore, I contend that the $42,000.00 that we “lost” by paying off our mortgage early will be recouped, and, ultimately, I will be able to make even more money since we had the flexibility and security to make that leap.

My final and most important reason for paying off the mortgage early is time. While this goes hand-in-hand with the above reasons, time is something that does not have a price. Having a mortgage hanging over our heads created the feeling that we were so tied to our jobs in order to make that payment. The payment was always looming, and the house was not ours. There was something unnerving to us about that feeling.

There were too many “what ifs.”

Now the house is ours.

So the financial freedom, the knowledge that we own our home, allows us the luxury of time. This afforded us the opportunity for me to grow Budgetdog. Along with that, I also now have more time to spend with my wife and my infant daughter. I can never get time back. There is no price tag that can be attached to that.

Overall, some voice the desire to be rich right now, almost instantaneously. I understand the desire to want the financial security that money can bring. Keep in mind that being strategic can help bring you to this end, but you don’t really just need stockpiles of money to be financially free.

For us, making a plan and staying with that plan, enabled us to pay off our mortgage early, change careers to better suit our aspirations, and have a sense of security and independence that was desirable to us rather than following a more traditional mindset or numbers on paper kind of logic. But just because it worked for us, does not mean it is the best route for everyone. You will need to make that decision.

But here is one thing I know for certain that you may really want to consider. Projecting out the math equation twenty years from now instead of the pace at which we paid off our mortgage, the amount our decision cost us is actually more around $400,00.00 if all things remained the same. That is staggering, but it does not change our decision because, as previously mentioned, to us, there is no trade-off, no amount of money, for our sense of security, time, and true happiness.

Truly, once you are able to own your time, to have a real sense of well-being, you will understand wealth. For us, freedom was our goal.

If you decide to pay your mortgage off early to gain time and security as well as the luxuries that go with that, remember to make a plan and stay with it. I am happy to help you on your path to reaching your goals – whatever path you choose.

Teaching Children Financial Literacy – Give Your Child a Head Start

As parents, we are entrusted with the responsibility of teaching our child or children in preparation for life. This is a daunting task. We feed them, guide them, and watch them as they take each step and go through every phase. For the most part, we, in general, do a good job. However, while we make sure they learn how to read, to write, to do math, to deal with relationships, and to navigate life in general, we often fall short in teaching financial literacy to them.

For some reason, financial literacy is taboo. Why? Perhaps there are many reasons including our own misgivings and lack of knowledge. Regardless of why, teaching financial literacy is important. Maybe it is even more important than ever before.

Nevertheless, giving our child or children the tools to be financially independent and successful is as important as all of the other things we teach them.

Sure we can invest money for our child or children to help them with college expenses and other expenditures in the future, but teaching financial literacy is different from investing money for them.

Financial literacy means teaching them how to make good financial decisions for themselves. It means teaching them all aspects of money along with an understanding and appreciation of it, so they can set themselves up for financial success in their futures.

While this is an ongoing conversation and lesson that will change as they grow and mature, teaching an understanding of money, an abstract idea, is key.

Like teaching children anything, it has to be an open, honest conversation as well as one that is also modeled. For example, teaching children to be frugal while being a spendthrift is hypocritical. Children see through hypocrisy.

Instead:

having conversations along with your own modeling of these concepts about saving and spending money
helping them save money that they earn through ways your family establishes
even learning how to spend money judiciously will help set them up for financial success.

This should all begin at a young age. Too often children think that money almost does grow on trees. If they see parents constantly buying, especially simply using a plastic card without any thought or restraint or even any discussion using words such as budget and saving, they will get a false sense of money, and money will become an even more abstract idea. In addition, totally preventing children from ever spending any money at all, also sets them up with unrealistic and incorrect information and expectations.

Ways to teach children about money, again an ongoing and ever-changing conversation, need to be those in which money becomes real in order to make saving and investing money understandable and more tangible. This also helps foster the idea of saving and investing, so it becomes a habit established at an early age. It engrains in them the idea of being fiscally responsible. What a wonderful and invaluable lesson to teach them.

Ways of teaching children about money must include the child in the actual process.

Both my wife’s parents and my parents taught us how to deposit money into a savings account from money that we “earned.” This is an easy and exciting way to involve them in the process, encouraging them to save more and more money and empowering them in the process.

Equally important is the concept of earning money. Actually working and understanding the value of work and how it is tied to money is essential and further drives this idea of money being a tangible thing. There are many ways for children to earn money. But this is a topic for another blog. Nonetheless, when children acquire their own money and are empowered with saving it, investing it, and spending it, they are able to learn important life lessons about money and being fiscally responsible.

Along with these lessons, it is also important to teach the pitfalls of credit. Obviously this has to come at an age when they are able to understand percentages. Ideas about credit cards and credit in general are invaluable.

My wife had a credit card when she was in high school, but her parents were also on the card. It was used to teach financial literacy, to establish credit, and to give her financial independence. She already understood the importance of working for her own money and making wise decisions about saving, investing, and spending money.

Her parents often reminded her that when she wanted to buy something, she needed to compute the amount of time she had to work to make that purchase. This helped her tie the intangible to the tangible in an understandable way.

It also taught her not to make rash decisions or to spend money on a whim. So when it came to buying something on credit, she knew that it had to be something she really wanted to spend money on, that it needed to be a worthwhile investment or purchase, and that it needed to be something she could pay off without having to pay interest.

It was ingrained in her that she had to take the money to the bank almost immediately to pay for the purchased item. To this day, she carries this with her, making sure purchases are meaningful, prudent, and can be paid for in full.

We don’t carry credit card balances, and we want to instill this idea in Logan. When it is appropriate, we will add Logan as an authorized user to our credit card which will allow her to establish credit at an early age.

Since she will be on our credit card, we will ensure that her credit is good, so she is able to have a credit rating as close to 850 as possible. Credit card companies typically don’t give credit scores until an individual is eighteen, but some will start reporting at 14 to 16 years of age. You will want to check with different credit card companies to see what their individual rules are for credit cards and secured accounts for building credit.

In addition to credit, another important lesson to teach as soon as children are able to understand the concept is about compound interest and investments. This should be normal conversation in a family.

Showing children the way money can grow and the different types of investments that are available to them is important and empowering. Why wait?

Teach them and guide them along this path to take full advantage of the wonder of compound interest.

We are investing now for Logan, and we will have conversations with her when she is able to understand the concept of the growth due to compounding, so she is able to continue to invest, grow her money, and set herself up for financial success. We have set up several types of accounts for Logan which I will in an upcoming blog about investments for your children

Like I said earlier, talking about money – all aspects of it – should be natural rather than something that we shy away from.

Empower your children and help them grow financially just as they grow personally and intellectually. It is our responsibility to give them all of the tools to be successful adults. Giving them a head start is part of parenting. Don’t wait.

I Lost $42,000 Dollars By Making This Financial Decision and I Would Do It Again Tomorrow!

There is not one definitive reason why I decided to pay off our mortgage early. I am a double major in accounting and finance and a CPA with several years of experience working for one of the largest four accounting firms in the world, so I knew the math was NOT in my favor. Several things came into play that made this the right decision for me and my family, however. Leading up to this decision, there were some pivotal moments that caused me to pause and think – really think – about my situation and that of others in general. I didn’t like the picture or the outcome that I saw in my future if I continued on the path I was on, so many others are on, and that is the norm. For me, struggles lead to success; success that is changing and will continue to change my life, the life of my family, and our future.

So what drove me to break away from the norm? What kept me on the path when others dismissed what I was doing and thought I was crazy? That is easy – DETERMINATION, MOTIVATION, and DESIRE.

But before I get to that, let me backup a bit to where I was, which may be very similar to where you find yourself today.

I was like so many other people. I graduated from college during which time I had incurred some student loan debt, had landed a career job, was ready to get married, was planning on moving into our first house, and was doing all of the “normal things” that people do. But for me, something was wrong with the picture. I was blown away by some of the numbers – college loans, a house payment, INTEREST!

For me, doing what everyone says is “normal” did not add up to quality of life and was not something I was buying into. In addition, my future wife was debt-free. She came out of college without debt, didn’t owe on a car, had a career job, had no credit card debt, and had saved money. WHAT? That sets up two totally different situations.

In addition to that, I had experienced what can happen when people are in debt. I’m not just talking about the money aspect, but the fact that it can rob you of a sense of freedom and peace of mind.

The math didn’t add up, and I was not buying into the culture of consumerism.

Looking at a mortgage calculator, thinking about how much we would actually spend paying off the house IF we paid the minimum payments was something we were not willing to do. It was black and white.

Now that sounds easy in some ways. Make a plan, set a budget, make the payments, and pay things off. And in some ways, it was. Each month, we made a budget and stuck to it. We kept our goal in mind to pay the house off and be debt-free before the time my wife turned thirty. (She is three months older than me.)

We knew that money not going out was like money coming in. We were able to lower our monthly expenses by 40% by paying off our mortgage.

Now for those that want to jump to investing, ask yourself what 40% more expendable income would mean for your investment accounts?

But, for us it was even bigger than that. It was the WHY. I was DETERMINED to pay off all debt and to have a paid-for house, but what kept me on the path to success was the WHY. The WHY gave us the MOTIVATION to be successful.

The WHY was that we wanted a different kind of life.

We wanted freedom and peace-of-mind. We wanted to be afforded TIME to live – to really live fully.

Not having a mortgage, credit card debt, car payments, and student loans, gives us the luxury of TIME. It allowed me the ability to leave the career job that I got out of college, so I could create my own career on my time and build my own wealth. I had the DESIRE to be home with our daughter, so I could watch her grow up and not miss any of the milestones.

I did not want to be shackled to a job for a paycheck that we HAD to have, so we could make minimum payments and pay more for a house than the amount we borrowed.

Paying off the mortgage early saved us all of those years of interest, saving us well over $129,00. Remember, money not going out is like money coming in. After cutting our monthly expenses almost in half, this enabled us to invest more heavily, setting us up for even more financial stability.

Financial stability is important to us. It is worth the sacrifice of not buying into the culture of consumerism. There will always be the latest model and more things. But being debt free, and using the money we would have wasted paying off the mortgage if we would not have paid it off early, has afforded us the ability to reap the benefits of compounded interest. That is a discussion for another blog!

Right after writing our last mortgage payment , which we decided was NECESSARY to do in person! August 2021

Bottomline, the banks and mortgage companies want you to pay the minimum. They literally bank on the masses doing just that to fill their pockets.

I promise you this is not that difficult. I did not do something revolutionary. You can do this, too. You can be just as strategic and can gain your financial freedom. I can help set up your budget, so you can gain your own peace of mind and live life without the worry of debt.

If you are ready to get started or want to learn more, check out my Budget to Financial Freedom Course. Take the first step to freedom today.

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