How Less Consumption Leads to Early Retirement

From Yahoo Finance:

Do you want to retire early? Then spend less and save more. You’ve probably heard this advice preached countless times and completely agree with it in principle. But you know how it goes. Saving money makes perfect sense, until you actually see something you want, and then every urge you’ve learned to control goes swiftly down the drain.

In the heat of the moment, you don’t think too much about the impact of a seemingly small purchase. But how much are you really giving up when you give in to small purchases? Here are a few reasons daily spending lengthens the amount of time you will spend in the 9-to-5 grind:

Your expenses are directly tied to how many years you need to work. The fewer dollars each paycheck that go to spending, the more you have left over to invest. No surprises there. But a smaller monthly outlay also lessens the load your nest egg will need to pay for in retirement. Spending just $5 per day on a coffee fix or other convenience food will cost you $1,825 per year or $54,750 over a 30-year career. For people who earn around a $50,000 salary, that’s an entire extra year of work just to pay for $5 worth of daily discretionary spending. If that worker spends close to 9 hours a day at work or commuting and works 20 days per month, that’s 2,160 extra hours of dealing with work, boring meetings, incompetent bosses and the commute, just to finance a daily $5 purchase.

Avoiding discretionary purchases could help you retire sooner. If you instead saved that $5 per day, you could not only retire a year earlier, but perhaps much earlier than that due to the compound interest on that $1,825 you tuck away each year. Saving just $5 per day in a 401(k) will grow to $178,856 over 30 years, assuming 7 percent annual returns. That’s about three and a half fewer years you would need to work if you earn $50,000 per year. And if you also get an employer match of 50 cents per dollar contributed on that money, you will have $268,284 after 30 years, which is 5 and a half years’ pay for the same worker.

You don’t need to save up as much. When your expenses are less each year, you can live well with a smaller nest egg in retirement. If you learn to live on $40,000 a year, even if you earn much more than that, you only need to save up enough to cover the $40,000 per year in retirement, not enough to replace your current salary. In fact, living on $40,000 per year, working hard to earn more than that and saving the difference is one of the fastest ways to retire early.

It’s much easier to come up with income to replace the smaller lifestyle. A smaller monthly budget can also add to your peace of mind in retirement. When your standard of living is entirely dependent on what the markets do, it’s hard to not be nervous whenever valuations gyrate. But what if your spending is so low you can easily come up with the difference by working part time? Obviously you can still aim big and try to get a large salary back. But if an easier to find and less stressful job can fulfill a possible income shortfall, then you don’t have to worry so much about investment performance and can concentrate on enjoying retirement.

For some people, spending less is extremely hard. We all live in the same modern society that celebrates consumption. But think about what you are giving up whenever you click the “buy” button. Is years of working worth the extras that you will forget about after owning them for a while?

Visit for more personal finance discussions. This site also helps readers decide whether a 0 percent balance transfer card is worth signing up for and keeps a good list of helpful promotion codes.

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Don’t buy that Business!

Frown face

Sorry for the long absence from this blog; got married over the summer and I’ve been a little busy :-)

My job requires a LOT of travel, and with a new wife, I have been looking around. As I contemplate walking away from my job I have been diligently searching for other opportunities. The idea of opening my own business is very appealing: no boss to answer to, set my own hours and know that as hard as I work, I will reap the benefits.

One colleague at work (he is also considering starting his own business) told me that he was going to buy a Subway sandwich store and yet another colleague has(d) plans to buy  a UPS store. I listened to what they had to say and I was intrigued. I got online and did a little research.

What I read about the UPS stores didn’t impress me.

It seems that more than 1 our of 4 stores goes out of business and the majority of the remaining stores barely break even. I contacted the UPS Store and a nice lady called with the sales pitch. I asked her about all of the bad things that I had read on the internet and she didn’t have any reply. She thanked me for my time.

It seems that UPS is squeezing the stores and the owners are making less and less money. Some stores are bought and resold several times – it seems that new investors come in and then get wiped out. I read horror stories of people who sank in their entire 401(k) funds, worked night jobs at WalMart & they still lost their stores.

What is most amazing to me is that in a single afternoon I read all I needed to know that buying a UPS Store is a losing proposition. Yet there are stores sold every week. Don’t these buyers do their due diligence & check out the viability of a business before they buy?

I think not.

There is one truth I have seen again and again in business and in finance. Easy money comes, easy money goes.

The problem is that, to most people, a 401(k) is “easy money” because it was accumulated slowly, painlessly and out of site. When someone is given access to an account with six figures $, it is easy to spend that money quickly.

Whenever you look at your savings account, you need to look at the time requirement to build that account. If you make $50,000 a year and you have a $100,000 401(k) account, it is easy to think of your retirement savings as two years pay.

But it isn’t.

Maybe you only save $300 per month towards your 401(k). After company match, you might only put away $5,000 per year. In actuality, your $100,000 401(k) is 20 YEARS worth of savings. If you blow up that account (buying something silly), it may take 20 years to replace it.

Anytime you spend money, think to yourself, “How many months (or years) will it take me to replace this money?” When you do this, money seems more valuable and you’ll be more likely to save it.

Back to the UPS Store. Whenever you buy a business or any other financial investment (stocks, rental property, etc) you should do a simple financial calculation. Divide the investment amount by the total profit (net, not gross) that will take from the investment and determine how long it will take you to get your money back. If you buy a $150,000 rental property, assume a monthly mortgage payment after a down payment of $50,000, taxes and insurance of $700 per month and a rental price of $1,100 per month, you will net (assuming a 100% rental rate) $400 per month. Almost $5,000 per year. It will take you 10 years to get your initial investment back.

That’s not bad. Microsoft stock is paying about a 3.4% dividend right now. Assuming the stock price never changes, it will take you 21 years to get your initial investment back through dividends.

And so, if you make a comparison of different investments, you can see the amount of time it will take the investment to pay for itself. If two investments that have equal risk have payoff times of 10 years and 20 years, clearly the 10 year payoff is the way to go.

It seems that to purchase a UPS Store is an investment of anywhere between $100,000 – $300,000. Most of the stores are making about $20,000 per year after expenses. But here is the rub: most of the owner/franchisees reported working 70-80 hours per week or more.

Unlike owning Microsoft stock where the board of directors and management run the company, if you buy a franchise, you have to run it. If you dropped $300,000 into Microsoft stock, you could collect about close to $10,000 a year in dividends. This is only about $850 per month less than running the UPS Store. How many jobs can you find that pay at least $850 a month? In reality, you would be much better off buying the Microsoft stock and taking a job at Home Depot than starting your own UPS Store.

I’ve known a lot of people who started their own businesses. Back in 2004, one lady started a coffee shop. Her initial investment was $35,000 and she did very little homework about the business. She had a bad location, not enough $ in reserves and the store went bust in 3 months. Had she bought $35,000 worth of Starbucks stock, she would have collected a monthly dividend check every 4 months and would have been able to participate in any stock appreciation. Starbucks was $10 a share back then (today its over $79) and pays over a 1% dividend. If we assume she reinvested her dividends, her $35,000 investment would have grown to $298,231!

I bet that she wishes she had invested that money differently.

Back then, it was a loan. Free money. The money wasn’t respected. The business plan was poor.

Before you jump feet first into buying a new business, or starting your own, study & ask around to find how much profit you will net (after expenses) each month and compare that figure to the amount you’re investing. If it isn’t a good return on your money, you may consider something else.

The use of copyrighted material in this website is protected by the Fair Use Clause of the U.S. Copyright Act of 1976, which allows for the sharing of copyrighted materials for the purposes of commentary, criticism and education.  All shared material will be attributed to its owner and a link provided when available.  All other comment on this site may be reproduced with the author’s consent.  Please source any references or quotes of this website to:

Don’t buy junk


On average, women outperform men in stock market investments.  The reason for this is quite simple: women tend to buy and hold whereas men trade stocks more often.  The average investor (probably 90% or more of small investors) sell when the market is down and buy when the market is up.  I remember in 2008 as most of my colleagues freaked out and bailed out of the market.  Most women held their stocks through the market sell-off and continued to dollar cost average through 401(k) investments and had positive returns by 2010.  Many of the men who tried to “market time” the market sold at the bottom and then returned to buy at the top.

I count myself among the “guilty” when it came to second guessing the market – and eventually missing great market gains and suffering stock market drops after buying too high.  I’ve sought knowledge, read and studied and only in the last few years have I begun to enjoy strong market gains, whether the market advances or declines.

In this article we will cover the first of the big mistakes that investors make.  If you avoid these pitfalls, you will GREATLY improve the returns on your investments.

1.  Don’t buy junk.  This sounds obvious, but the vast majority of stock investors own “junk” investments.  I’m not talking about junk bonds, those can have a place in a well diversified investment portfolio, I’m talking about bad investments.  Before you know what a “bad” investment is, you need to know first what a good investment is.

To understand what a good stock investment is, you need to stop thinking about investments as buying stocks.  Instead, you need to focus on buying businesses.  Imagine for a moment that you just won the lottery for $8 million dollars.  After taxes you take home $5 million.  You decide that you want to buy some businesses in town.  Let’s say that the “average” business in your town sells for a million dollars.  Let’s say that you decide to buy 1 bar, 1 retail store, 1 restaurant, 1 auto repair garage, and an apartment building.

We will start with the restaurant: you have a choice of a “popular” bar that has a flamboyant owner who is often in the news.  He regularly drives around in his convertible and has several girlfriends.  This guy is well known in town and very popular.  His bar is “the place to be” on Friday nights and often has a line formed up outside on weekend evenings.  Everyone wants to get into this bar on the weekends, it is popular and there is a lot of “buzz” about this place.  Most investors would love to be a part of this business; it is exciting, it is sexy.

And so, you begin to look at the books of this business.  You see that it has a strong cash flow on the weekends but during the week, it draws significantly less in revenue.  You see that the rent on the building is VERY high, the wages paid to the staff are quite expensive and the liability insurance for this “popular” watering hole eat up most of the profits.  Despite the “colorful” lifestyle of the owner, you see that he barely turns a profit.  Moreover, because of several fights at the bar in past weekends, some lawsuits are pending.  This business “looks good” from the outside, but in reality, it does not return much money to the owner.

Take a look at many stocks that are “popular.”  Many pay low dividends, have weak earnings and are priced very high.  I am regularly astounded that stocks with no earnings and high P/E (price to earnings ratios) sell at such high premiums.  And why?  Because  idiots like “Kramer” on CNBC and silly online companies like Motley Fool recommend them.  As I talk to more and more small investors I find that most people are buying stocks based on what’s in trend, what’s en vogue and what is “popular” on CNBC.  Over time, these investments return very little to the owner.

We look at another bar.  The local Irish pub.  It has a steady and loyal customer base, it is “busy” 7 days a week, has low overhead and expenses and returns a cash flow to the owner.  The current owner (who is now retiring) draws $8,000 per month in owners’ equity (salary) and leaves several thousand in the bar for improvements and to grow equity.  You realize that if you draw $8,000 per month, each year you will “take out” $96,000 per year.  In about 11 years you will return your initial $1,000,000 investment.  Starting in year 12, you have a “free bar” and the income that comes in is all profit.  Imagine now that the intrinsic value of the bar has grown in these last 12 years so that now you can sell it for $1.5 million.  Now, not only have you taken all of your money back, but you’ve made a 50% return on your basic capital.  Meanwhile, the “popular” bar had its business slow and after a year or two, it went out of business.

I ask people, “Why did you buy that stock.”  What I hear astounds me.  They ALWAYS have a “story.”  Something someone told them, something their broker told them, something they saw on CNBC or read in Fortune Magazine.  I ask them about the stock’s earnings or its dividend and they have a blank stare on their face.  These people – and I might be talking about you – aren’t investing, they’re gambling.

When you buy a stock you should look for a company with strong earnings, little competition, a strong return of capital (strong dividend) and good future business prospects.  I’ve had this conversation at work a dozen times and every time, I’m asked the question, “Well then, what stocks fit this description?”  And when I answer, I see eyes roll over, sighs of sarcasm and chuckles as though I don’t know what I’m talking about.  To most investors, these investments are “boring” and they don’t have the patience for them.  But good stocks are considered by most to be boring.

Let’s take a look at some “good stocks.”  These are stocks that pay ever increasing dividends, have little competition and increase owner equity through the practice of paying a strong dividend and share buy-backs:


Coca Cola





Procter & Gamble

I’m sure you get the idea – fat companies with thick profit margins.  If you buy the stock of one of these companies and reinvest the dividends into more shares, you’ll average about 15% return.  And considering that much of the gains will be long-term capital gains, you’ll never pay tax on the growth of the price of the shares until you sell.  Warren Buffet bought 5 or 6% of Coke back in the 80’s and has reinvested his dividends ever since.  His dividends now pay back the entire cost of his investment EVERY SIX MONTHS!  Think about that for a minute, lets say he invested $10 million, he’s getting back $20 million every year just in dividends!  That initial Coke purchase paid for itself and now pays dividends year after year while the base value of the stock continues to grow.

And yet, I hear of other “investors” buying this or that stock because of some crazy idea they heard on TV.  Example, one of my clients bought Remington (the firearms manufacturer) because Obama’s plans for more gun controls = increased sales.  Maybe.  But does Remington have the fat profit margins and increasing dividends each year like McDonalds has?  No.  Not even close.  When I suggested that he sell his Remington and buy Coke or Walmart or McDonalds, he looked at me as if I had a bullet hole in my forehead.  Again and again, I share the “logic” of buying good companies and people nod in agreement and then tell me how they’re buying Ford or GM because, once upon a time, it traded for 3x what it trades for today.  How silly.  You want a company that pays you to own it, not the company that is popular or has a good story.

The BULK of your portfolio should be boring Blue Chip stocks that are fat with profits, insurance companies, oil & energy transport and some real estate investments that pay you regular rents.  The way to win in the market is slow and steady gains without taking massive losses.  If you can earn 12% year in and year out, you’ll beat all of your co-workers who are chasing Apple to $600 a share.

More on this idea later – but if you own a bunch of junk – stocks that don’t earn (and pay) rich profits, you should consider shifting the bulk of your portfolio to some boring stocks that pay you and pay you year after year.

Good luck.  Good investing!

The use of copyrighted material in this website is protected by the Fair Use Clause of the U.S. Copyright Act of 1976, which allows for the sharing of copyrighted materials for the purposes of commentary, criticism and education.  All shared material will be attributed to its owner and a link provided when available.  All other comment on this site may be reproduced with the author’s consent.  Please source any references or quotes of this website to:

7 percent

7 percent

I recently read an article explaining the benefits of long-term compound interest.  In the article, a situation similar to the one that I used in my post Compound Interest was used, but in the example in the article, an interest rate of 7% was quoted.  As I often do, I read some of the comments at the bottom of the screen and I saw over and over again that people were “complaining” that it was impossible to earn 7% interest today.  I am sure that most of these people only know of two places to invest their money, one is under their mattress at home and the other is at an FDIC insured bank.  After taxes and inflation, both offer negative rates of return.

I thought to myself, “It isn’t so hard to earn 7%” interest.  And so, here are a few places where I’ve invested in the last year and the interest rates that I have experienced:

Symbol / Name / Interest Rate / Description

TWO / Two Harbors Investment Corp. / currently pays 18.10% dividend / This is an Interest Rate REIT (Real Estate Investment Trust) that borrows short term money (low interest rate) and then buys long-term treasury backed securities.  As long as Bernacke keeps rates low, this stock will continue to pay fat dividends. / The Lending Club / I am currently earning about 16% return on my investment / Allows investors to lend directly to borrowers – most loans are used to consolidate credit cards.

NLY / Annaly Capital Management / currently yields 12.2% / same as TWO.

ETP / Energy Transfer Partners / 7.8% dividend yield / Natural Gas and Oil pipeline company – this company charges big oil to move their product and collects a steady and dependable income.

(no symbol) / Selling uncovered puts and covered calls / I have earned an annualized yield of 19% writing options contracts on stocks, gold, silver and the Australian Dollar / More about this strategy later – but it is one of the safest and highest yielding investments I know of.

EXC / Excelon Corporation / 7.2% dividend yield / United States electricity utility, is a large nuclear power producer.

DPM / Midstream Partners / 6.6% dividend yield / Same as ETP.

TGP / Teekay LNG Parnters / 6.7% dividend yield / Owner-operators of large ships that transport liquified natural gas.  With cheap natural gas prices, the demand to move it around the world is booming; TGP has good prospects for future work & stock appreciation.  I also write covered calls on this stock boosting my yield into the 10%+ range.

These are just some ideas for you to check out.  Remember to always do your own homework; I don’t know your financial situation and you shouldn’t take my recommendation as your only source of income.  I do not guarantee any return nor do I take any risk for your investments, it is up to you to do your own due diligence.  Having said that, there is always risk and return and the two (sometimes) correspond, sometimes they do not.  Most think of an FDIC insured bank as a “safe bet,” but considering a 4% inflation rate, taxes and the .25% interest the bank pays, you’re losing about 4% each year in purchasing power.  Doesn’t sound like much?  Consider that if you put $100,000 in the bank today, in ten years, that $100k will be worth $60,000.  4% isn’t much this year, but over time it will eat up your investments.

Also consider some of the “safe” Blue Chip Stocks like Walmart, Coca Cola, McDonalds and Microsoft.  If you reinvest your dividends into additional shares of stock, most of these stocks have returned upwards of 10% each year in combined dividends and capital gains.

If you want to be a millionaire, you can’t look at life through a set of FDIC insured glasses – you have to look outside the “normal” arena for investments that will provide a  return that will propel you to the next level.

Good luck and good investing!

The use of copyrighted material in this website is protected by the Fair Use Clause of the U.S. Copyright Act of 1976, which allows for the sharing of copyrighted materials for the purposes of commentary, criticism and education.  All shared material will be attributed to its owner and a link provided when available.  All other comment on this site may be reproduced with the author’s consent.  Please source any references or quotes of this website to:

Compound Interest

Reading my weekly Stansberry investment newsletter I came across an article that I thought I would share.  This article is about compound interest and its importance.  Most people don’t realize how important compound interest can be; over time, money grows and as it grows and grows, eventually the growth becomes quite explosive.  Eventually, the money works for itself and grows exponentially.  Below, you’ll see a chart that gives an example of how compounding works.  But to give you another idea, lets talk about sheep:

Pretend that you are a shepard from the days of the bible.  You live in a tent with your wife and son and daughter and you have a flock of 8 sheep, 4 male and 4 female.  In the spring, your 4 female goats give birth and after the first year you now have 12 sheep.  The following year, your 6 female sheep give birth and you now have 18 sheep.  In the third year, the 9 female sheep have a baby sheep each and now you have 27 sheep.  4th year you have 13 more sheep and in year 5 20 baby sheep are born.  After 5 years, your 8 sheep have turned into 60.  Interest compounds a little slower than this but over time, as the money grows, you are compounding a larger and larger amount so that the amount of interest you receive each month becomes a substantial amount.

Imagine, some 20 or 30 years later, you have 1,000 sheep and in the spring, you have 500 new baby sheep.  Compound interest works like this.  Eventually, your “nest egg” is big enough so that the interest generated is more than your regular salary.  I am just totaling my dividends, interest and options premiums for December and my million dollar portfolio generated over $10,000 this month (combined interest, dividends and options premiums).  In the 3 months previous, my account has paid me  $6,456, $9,435 & $3,479.  I can remember back when my account had thirty or forty thousand dollars and my monthly dividends and interest might only be ten or twenty bucks.  One sheep born… years later, 500 sheep born.

From Stansberry:

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions – he’s finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, “It works.”

So you can see that the investor who stared earlier ended nearly the same even though he invested much less money.  Over time, compounding can have a dramatic effect on your investments.  Previously we talked about the Rule of 72.  If you can get a high rate of return on your investments and let that interest compound over time you can save a million dollars.

Eventually, the interest earned on your investments is more than your regular monthly contributions.  When that happens, it is a great feeling!

Save, invest and grow your wealth until you are a millionaire.

Good luck!

The use of copyrighted material in this website is protected by the Fair Use Clause of the U.S. Copyright Act of 1976, which allows for the sharing of copyrighted materials for the purposes of commentary, criticism and education.  All shared material will be attributed to its owner and a link provided when available.  All other comment on this site may be reproduced with the author’s consent.  Please source any references or quotes of this website to: