Where Does Your Money Work For You?

[alex.wilsonii]

My wife and I are both 24 years old. We're fairly new to the Mustachian-lifestyle, having just started reading the blog consistently a couple of months ago, but I've really become passionate about early retirement since then. Right now, we're only going further into debt because, despite how much we save, we can't save enough to pay for my wife's grad school, so she's developing student loans for that. We expect that to last another couple of years before we're be able to make BIG headway in paying off that debt. Right now, that's our only debt.

Anyway, this blog focuses a lot on getting your money to work for you and making a passive income. I've been investing in the stock market for quite some time now, but I really don't know much about investments in general. I do find the dividend growth investment strategy to be quite fascinating, but also one which may be harder to implement than I'd originally thought.  I'm a complete newbie when it comes to making my money work for me...

My question is this: where do you, fellow Mustachians, have your money stashed in order to keep it working or to earn a passive income? I'm learning more and more every day about various retirement accounts such as Roth IRAs and I feel that opening one by rolling over my current 401k (I'm about to change jobs) would be a good idea, however, I also feel like most Mustachians probably don't have their primary stash in retirement accounts they won't be able to touch until later in life -- hence my question. Where do you invest you money? Just in the general stock market? In Treasury bonds? Something else altogether?

Also, one last question -- I don't understand how one could earn a passive income from investments unless they're being paid dividends. However, you wouldn't earn that on bonds, right? Or even on some stocks if you've not invested 'well', right?

Thanks a lot for taking the time for this,
-Alex

P.S. Just as I was posting this, I saw today's post on the blog. I'll definitely be picking up the Intelligent Asset Allocator as well!

[arebelspy]

To jump to the crux of your question..

Also, one last question -- I don't understand how one could earn a passive income from investments unless they're being paid dividends. However, you wouldn't earn that on bonds, right? Or even on some stocks if you've not invested 'well', right?

Dividends are the popular way right now, but due to chasing yield they may be overbought.  Opinions vary.

There are other ways, such as rental property (though not 100% passive), but ultimately if you're in equities/bonds/etc. and you want passive income and not using dividends you... sell some!

Each year, the idea is your portfolio grows, and you rebalance your AA, get living expenses, while having an SWR that is sustainable.  It's passive in that you basically look at it once/yr to do that.

[salmp01]

Right now I strongly recommend getting into the rental property business.  In the last few years I sold most of my stock holdings and purchased rental properties.  I even used my 401k and Roth IRA to purchase properties and essentially hold these properties in my retirement fund.  To get started I'd recommend getting your real estate license and find a low cost broker in your area to hold your license.  Then start looking in your area for good deals.  If you run this business right it won't take that much time.  I currently have a full time job (in corporate america) and manage all 17 of my properties (and I still have some free time).

[arebelspy]

To get started I'd recommend getting your real estate license and find a low cost broker in your area to hold your license.

I'm curious why you recommend this step as a "getting started" step. 

[MEJG]

Hi Alex!

I'm not very far on my investment journey (just finished grad school myself).  I would strongly encourage you to take out the minimum in student loans possible.  The only ones I would ever suggest you take out are subsidized staffords, and then I would take whatever money you can save by taking them out and sitting them in a *safe investment for the term of the graduate program and repaying as much as you can right before they start repayment.

This may sound harsh but unless you are only taking out subsidized staffords, IMHO, you should NOT be investing in anything other than an employer 401k and only to the match.  You will get a better return on investment by not taking out those loans and accruing interest on them.

I know!  I just got out with $140,000 in student loans from grad school.  Mr. MEJG  worked while I was in school, I worked during part of school, and we were frugal, by most standards, I got out with approximately 1/2 the loans that most of my classmates did.  I completely regret the "little luxuries**" we allowed ourselves.  I totally HATED not contributing to my Roth IRA while I was in school, but every penny you don't take out is money in your pocket.

If I were you I would seriously look at the numbers and consider cashing in any investments I had outside tax sheltered accounts and using that to reduce you loan burden. 

My Roth is at vanguard and I am approximating this portfolio http://www.marketwatch.com/lazyportfolio/portfolio/yale-u-portfolio  I plan on rebalancing quarterly and sticking to the asset allocation.  I'm learning more about DRIPs and will probably go this route with a taxable account when we get there. 

BUT, I won't be investing anymore other than 401k to the match until my student loans are payed way way down at least, and probably not till they are payed off.

As to how it is passive income.  If your investments increase by 7% a year then ~4% (3% assume inflation) then you can sell that 4% and live on it.  In the case of dividends, you stop reinvesting the dividends and have them deposited in a bank account and spend those.  So instead of putting money in, you are taking money out of your investments.

Sorry for the length, and the preachyness, this is what I wish someone had said to me instead of "you're doing great, you'll have a good income, and school debt is good debt"

*Safe meaning a savings account, CD or Bond - with a return that is worth it, so at inflation or HIGHER, so unless you have an AU savings account you're kinda SOL right now.

** A dog and cat we wanted desperately and love!, buying lunch as often as we did (not often), dinner out together and with friends, a kitchen gadget here and there, a new bed when we moved internationally, icecream and emergency chocolate, using the car when we could have biked etc.  All things that were justifiable at the time.

[salmp01]

The best way to know the real estate market is to get your real estate license and start going through houses.  I live in MN and it only takes 90 hrs of online classes and the cost is fairly minimal.   All it takes is one purchase (for yourself or a friend) to pay off all the expenses.  If you know an experienced real estate investor I would also recommend working with them.  When I first started I talked with several real estate agents and it seemed they wanted me to buy anything just so they could make their commission. 

[arebelspy]

The best way to know the real estate market is to get your real estate license and start going through houses.  I live in MN and it only takes 90 hrs of online classes and the cost is fairly minimal.   All it takes is one purchase (for yourself or a friend) to pay off all the expenses.  If you know an experienced real estate investor I would also recommend working with them.  When I first started I talked with several real estate agents and it seemed they wanted me to buy anything just so they could make their commission.

I agree, there's no substitution for boots on the ground, and you have to know your market.  If getting your license made you more comfortable so you started investing then it was a good way for you to go!

A good real estate agent is worth finding. As you note, some just want you to buy anything.  Others will listen to your criteria and be a strong member of your team.

[Mike Key]

Someone has been reading some books on real estate. This is an avenue I have been personally very interested in, and heavily considering. However.... I'm anti-debt. And I'm hesitant to get started in rentals by going into further debt at the moment.

I'm all for secured debt, buying our home, using equity to purchase a rental, going LLC and bla bla bla more properties.

I actually feel real estate makes for the best retirement.

I'm just at the great, I have some good ideas, and I know some great methods, but which one do I do first stage.

I don't see why you'd need a license though. Seems pointless. More so would be finding a good real estate broker and learning how to identify rental properties for their rental potential. Investors look at property in a different way than home owners who want to buy a home. BTW there is a difference between a broker and an agent. And you should ask if they own any rental properties. If they dont' ask how many other investors they work with.

What to do, what to do.

good luck man. and watch out for those student loans!

[arebelspy]

Someone has been reading some books on real estate. This is an avenue I have been personally very interested in, and heavily considering. However.... I'm anti-debt. And I'm hesitant to get started in rentals by going into further debt at the moment.

Man, I love debt*.  Especially the cheap debt we have right now in the real estate market!

To me, being Mustachian means doing things the mathematically best way.

Many others apparently don't agree though, as I was shocked at how many posted they have paid off or are paying off their homes early.

If somehow my house got paid off right now, the first thing I'd do is take out a mortgage.  Cheap debt I can leverage into assets earning more?  Hell yeah.

When interest rates rise I may consider paying off some of my rentals, but for now, buying another rental is a MUCH better ROI (double digit, easy) over paying off a 4-5% mortgage.

My goal is to owe a million, to be $1MM in debt.  Different methods and routes for different people.

*Disclaimer: "Good" debt.  I have no credit card debt besides a 0% balance transfer that will be paid in full when it comes due, no car debt, student loans are at about 4K total and only not paid off cause the interest rate is at about 3%, and mortgage debts at various low rates.

[Physics]

Hey Alex, definitely pick up Intelligent Asset Allocator.

However, I would recommend you read "Four Pillars of Investing" (by the same author) first.  Even though he wrote IAA first, I think 4Pillars is a better historical introduction, that let's you appreciate IAA more. 

They should both be available at your local library.

[Mike Key]

Man, I love debt*.  Especially the cheap debt we have right now in the real estate market!

To me, being Mustachian means doing things the mathematically best way.

Many others apparently don't agree though, as I was shocked at how many posted they have paid off or are paying off their homes early.

If somehow my house got paid off right now, the first thing I'd do is take out a mortgage.  Cheap debt I can leverage into assets earning more?  Hell yeah.

When interest rates rise I may consider paying off some of my rentals, but for now, buying another rental is a MUCH better ROI (double digit, easy) over paying off a 4-5% mortgage.

My goal is to owe a million, to be $1MM in debt.  Different methods and routes for different people.

*Disclaimer: "Good" debt.  I have no credit card debt besides a 0% balance transfer that will be paid in full when it comes due, no car debt, student loans are at about 4K total and only not paid off cause the interest rate is at about 3%, and mortgage debts at various low rates.

Yeah but that's all secured, and I'm all for leveraged. I just don't like having what equates to two rental properties in unsecured student loans looming over my head. You can't even go into bankruptcy to get rid of those chains.

At least with the rental properties, there is a physical asset to reclaim.

So for me, the dilemma is, do I go into all that debt to leverage my way to wealth, with existing unsecured debt, or not? My nature is inclined to say NO.

[arebelspy]

Intelligent Asset Allocator ... Four Pillars of Investing

Yeah, sorry, we sort of got off track with the real estate stuff.  Back on topic, both of these are excellent suggestions.

In addition, the whole Bogleheads' recommended reading list is great (which does include a book by Bernstein):
http://www.bogleheads.org/readbooks.htm

If I had to pick two from that list, I might say A Random Walk Down Wall Street and The Bogleheads' Guide to Investing.

[arebelspy]

So for me, the dilemma is, do I go into all that debt to leverage my way to wealth, with existing unsecured debt, or not? My nature is inclined to say NO.

Ah, I gotcha.  From the part I had quoted, I was thinking you wanted no debt - i.e. buying rentals with all cash, never using leverage, etc.  Works for some, not my strategy.

In your case, it's all about the numbers.  If the student loan debt is a low enough interest rate (regardless of balance), and you can qualify for a reasonable loan despite it, I may still go for the secured debt in rentals, simply because it could really accelerate paying down that unsecured debt.

[alex.wilsonii]

Thanks for all the tips guys! At this young stage in my life, I don't want to get into real estate just yet. My wife and I are actually still renting as we have no intentions of staying where we currently live once she graduates in two years, so for now I don't even own a house of my own. I'll definitely check into the recommended reading though.

[bahbay]

Hi everybody,

I'm the newest of noobs here.
I'm a licensed plumbing contractor, general contractor, and realtor. I took the real estate license course in 1982 but never took a license til 2005 because I was just buying and selling for myself until then.

I started buying and selling properties in the 80's while working as a plumber. I figured we'd never really get ahead by working for wages only. I bought into the idea of putting money to work for me while I was at work.

At the time we lived in San Francisco - very pricy and difficult to get a foothold into the real estate market, but I managed to get into a property that an older plumber in my shop was selling. I got in for 5% down at 14% (those were the rates then) on a $100K property in a sketchy part of town in 1983.

That property appreciated to the point where I refinanced 5 years later for $200k and used the $100k to buy 2 unit fixer in a much better part of the city for $275k that the owner financed at 10% interest only. After 18 months interest rates started falling and I renegotiated my rate with him down to 7% which lowered the payment by 600bux a month.

I remodeled the upper unit while we lived in the first house while keeping the lower tenant and then borrowed hard money against the like new upper unit to remodel the lower. then refinanced both units to pay off the $100k new note on the first house.

Then we moved into the upper unit and rented the first house - I had made an inlaw in the first house so we could rent it as 2 units. So we were now paying 2 notes totalling $175K but the first house was generating enough cover the note plus.

My wife was commuting 35 miles each way to her office so we decided to find a home in Pleasanton, CA where she worked. We found a place for $205k and borrowed $25k on the 2 units in SF for the down payment.  Our rentals in SF were generating $1000 a month over expenses so we could easily afford the pleasanton house. We lived there 5 years and sold it for $405k and moved back to our upper unit in SF. 

It was 2001 and the realestate market was getting really hot - so we sold the first house for $375k and lived in the upper and rented the lower for 1500bux a month and purchased a home in the Central Valley with enough down so that the rent covered the note.

I started selling real estate for other people in 06 and then the market started fading so we sold our 2 units in SF for $925K, paid off the mortgage on our central valley home, remodeled it, and moved into it.

I dolled it out with solid maple floors, granite and stainless steel, killed the rear lawns and built 7 raised beds for growing, and installed a 450sq ft photo voltaic solar array so the utility company now pays us for power.

We drive a 1996 lexus LS400 that has 165,000 miles on it that we got for $10k in 2006 and a Tundra pickup that pretty much sits in the driveway ( insured for the lowest mileage bracket) and have a honda ST 1300A sport touring motorcycle for trips around town longer than we want to walk or bicycle.

Our monthly housing costs consist of taxes, house and vehicle insurance, and utilities and are around 500bux a month.

So there you go. Just one guy's story of how money can work for you while you work. I feel I can build anything, fix anything and BS about anything as needed as a result of practicing a lot of the principles I see being espoused on this forum.

I will never be accused of being overly brilliant. But hard work and hard play with a good partner and some luck here and there is, in my experience, pretty much a recipe for steady movement forward.

I apologize for the lenght of this posting and hope it doesn't violate any terms of service.

I believe young applies to those of us who are not done growing so I intend to keep snooping around this forum for more of the nuggets I have already come across.

I send thanks and best wishes to all who participate here in whatever capacity.

Bob A
(bahbay) 

[catalana]

I tried the property investment route and hated it!  To make a decent return, I had to manage the property, and even though I was lucky and had decent tenants, I really didn't like dealing with the general public  ;-)

Nowadays my money is in a variety of cash savings (because I want to buy a house) and stocks / shares.  The shares are in a mixture of dividend paying large corporates and some smaller companies.  I started out purely with a growth strategy, and just buying shares in smaller companies.  However the higher risk proved true, and I got my fingers burnt on a couple.  This made me look at larger companies, and buying whenever they go "on sale" which is working much better for me as a strategy.  I still just want to concentrate on growth, so am not taking dividends at the moment - everything gets ploughed back into more share purchases.

[arebelspy]

Fantastic story bahbay, thanks for sharing!

[zinnie]

If you want a quick read to get started I recommend The Investor's Manifesto by William Bernstein. You can get through it in a day or two and it's a good primer. Then move on to The Intelligent Allocator which is more complicated  (although the first has a "stone simple" portfolio that is just fine for getting started.)

As far as dividends, they won't necessarily make you any more money than stocks that don't pay dividends, the money just gets paid to you instead of being reinvested in the company (therefore raising the share price, which benefits you too.) And while you're preparing for retirement, you shouldn't be taking dividends as income, you should be having them automatically reinvested to grow your stache, of course. You want a stache big enough that you can cover your expenses by withdrawing 2% to 4% a year (I assume). So on a basic level it doesn't matter whether you have dividend companies or not, what you want is good investments that grow. Whether that is in the form of dividends or not is your choice.

We have a simple portfolio of about 50% domestic stock index, 25% international index, and 25% short-term bond funds through Vanguard. We rebalance to keep those percentages constant. We always put the max toward both of our Roths every year, and contribute the max employer match per year to our 401ks (which all mimic the above allocation in different funds). After that, everything goes into taxable to get us from age 40 to 60. I really see no reason to not max out retirement accounts every year, even for early retirement, because I plan to have a lot of years left after 60 to 65 still.