Month: March 2017

Four income streams that young professionals should develop

“According the IRS, the average millionaire in the United States has at least five different sources of income.” –James Altucher

Whether you’re making minimum wage or pulling down $250K per year, if your day job is your only source of income, you should start working on developing additional income sources. The biggest reason to do so is to start transitioning from working for your money, to making your money work for you: you need passive income sources which build wealth with minimal effort.

While you might never want to retire, financial security (not being financially stressed by losing your job) is something you can achieve in your 20’s, and financial independence (not needing to work a regular job at all ) is possible in your 30’s or 40’s.

Here are the four income streams you need to build:

1: Your day job. This seems obvious, but keep in mind that you don’t need to quit your day job to pursue your passion – you can use it to fund your passion if/until it becomes your day job.

2: Your investment portfolio. Even if you make minimum wage, you can save $25 every month and invest it in Stash Invest. If you invest $500 per month, you can be millionaire in under 30 years. If you invest $1666, you can do it in 15 years (at 10% return).  Build an aggressive but diversified portfolio with minimal fees by using a robo-trader. 

3: Your side gig. You may love your job and make great money, but it’s always smart to find something to do on the side. Side projects in your current field often allow you to be in charge of a small project and use the latest technology or techniques that are too risky or difficult to approve with your boss. I’ve used this trick to qualify for jobs that I couldn’t dream of otherwise. If you don’t like your job — here is your chance to develop a new skill! If you can’t think of anything else, try driving for Uber, put up a room on AirBnB or sell something on Etsy. If you can’t think of anything, volunteer for a cause to help you develop useful skills.  Most people find that their lifestyle grows with their income, so it is difficult to achieve a high savings rate from your day job – side gigs are a great way to generate income that goes directly into your savings.

4: Asset-derived income. This is money you earn from buying things that grow in value or generate money. For most people, this is real estate, including their own home (don’t buy one until you read this), or better yet, properties they can rent out. However, you should also consider diversifying into gold, cryptocurrency (such as Bitcoin), or other assets which you believe will appreciate in value. You should choose assets that you will hold for years if not decades because you believe in their fundamental value, and not because you’re betting on short-term trends.  For entrepreneurs, this also includes ownership in businesses which produces income from dividends.

 

The myth of rising house prices

One the biggest myths about buying a home is that it is an investment. An investment is an asset which tends to go up in market value over time. But consider what would happen if this were actually true: if home values increased faster than inflation, pretty soon no one could afford a home! In fact, home values for the most part barely keep up with inflation.

The math is complicated by a number of factors: the size of homes keeps getting larger, so comparing the average home price now versus 30 years ago does not mean that any specific home will be worth more. We pay a greater portion of our income for homes than before because we pay for more home — this is a change in personal tastes, not home values.

According to the Case-Schiller Index, the price of existing homes increased by 3.4% annually from 1987 to 2009, on average. The general rate of inflation during this time was 2.9%. The increase in cost of housing slightly outpaces income growth – mostly because of government policies intended to increase home ownership!

Of course some markets are hotter than others — but if gambling is your thing, you would get lower overhead from the stock market, or even the horse races! The CAGR adjusted yearly return of the stock market for the same period is 6.27% – versus .5% for the average home.

Here’s why buying a home is a terrible idea for young professionals

Here’s the main reason why I don’t think young professionals should buy a home:

If I get fired or quit my job tomorrow, it won’t be a big deal. I’m confident that of the seven billion people on this planet, there is a person or group somewhere who will find my skills valuable enough to pay me enough to support my family. It may take me some days, months or years, and take me to Kentucky, Seattle, Shanghai, or Kathmandu, but I have no loans, debts, or any other ongoing financial commitments, so my savings will last long enough until I find the best opportunity for me.

Knowing this is very powerful: it means I can take risks and opportunities that others can’t. I can propose a risky new project to my boss, even if there is a big risk that it will blow up in my face and I’ll be laughed out in disgrace. I can propose a big new role for me, even if I’m not sure whether I’ll be able to do it. I can browse open jobs on LinkedIn and seriously consider taking them even if it means dropping everything and flying across the world. I can really negotiate my rates knowing that there are plenty of other options for me.

Now consider Kathy: a 30 something with a mortgage and auto loan. In between her mortgage, insurance, taxes, HOA fees, cable contract, etc, most of Kathy’s after-tax income goes to pay for fixed costs. She can’t get out of these commitments without months of effort and a big loss.

Will Kathy make that risky proposal to her boss? Will she surf around for better jobs in Seattle? Will she be able to tell her boss that his idea stinks or drive a hard bargain when negotiating a raise? How can she, when losing her job risks not being able to pay off her house and car? She would have to scramble to find a new job before her savings run out — and she will be limited to an area within commuting distance of her house. Besides, she has her children to think about — she has to be a responsible caregiver.

Besides mortgage worries, there is the constant risk of repairs — if her roof leaks or her fridge breaks — can she pay for unexpected emergencies? Can she take time off work for the plumber or kitchen remodel during a critical project launch at the office?

A mortgage can be paralyzing for anyone who still has their prime career years ahead of them. You may as well admit “this is as far as I will go up in the world.”

Even if you have the cash to purchase a home outright, there are still many costs to consider. First, there are the ongoing costs: property taxes, HOA fees, lawn maintenance contracts, repairs and more to worry about. More importantly, paying a large fraction of your net worth to purchase a home outright is a poor financial decision: it invests a huge portion of your net work in an illiquid and risky asset. Historically, a diversified stock portfolio is both safer and gives a higher return than a home. Even if you have cash to spare, it’s still wiser to pay the minimum downpayment and invest the rest.

When we rent, it is clear that the money is a cost spent on a service. What’s not clear is that paying a mortgage is also a form of paying rent on a service — with the addition of a high-risk, highly-leveraged real estate investment, huge transaction costs, and major restrictions on your lifestyle and career options.

The myth of America as a “Judeo-Christian” nation

The term “Judeo-Christian” was invented in the 1940’s as a response to the rise of Nazism and anti-Semitism in America.
As a historical fact, the idea that America is a Judeo-Christian nation is nonsense. In many ways, America represents a rejection of Judeo-Christian values.

At the time of the United States’ founding, the vast majority of Christians and Jews lived in outside America – and they held very different moral values than Americans. Everything that defines America – the belief in the inalienable rights of the individual, the importance of property rights and free markets, equality before the law, and the separation of religion and state was unheard of in both Christendom, and the pre-modern Jewish communities. The United States were formed as a rejection of both incessant religious conflict and economic meddling in the European kingdoms.

The ironic reason that most Americans today believe that Judeo-Christian values represent some kind of universal Western ideal is that Americans (inspired by European philosophers) exported anti-Christian enlightenment liberalism to the rest of the world, and converted Christians, Jews, and everyone else to their worldview.