Month: December 2019

Review Part I: The Automatic Millionaire – A Powerful One-Step Plan to Live and Finish Rich.

I recently received a book recommendation from @weatlhfromrentals so I dove right in. I got the book on Audible and knocked it out on my first day of traveling for work.

For this book review, I wanted to break it out into two different posts. In the first post I plan to talk about the things I agree with from the book. The second post will encompass things I didn’t agree with. Here we go with three main things from the book I completely agree with!

Automate Automate Automate!

Listening to the chapters speaking about the importance of automation was somewhat comical. This book was published in 2003. In 2003, the thought of automating things like investing and paying your bills was brand new. It was interesting hearing the author talk about different methods of automating investments. Living in the day and age of technology makes it easy to take for granted how easy things have become.

There are two key areas it is important to automate if you want to get to financial independence. The first area is in your monthly expenses. You should be setting up automatic payments for your rent, utilities, and credit card bill. This will help end any potential late payments for recurring bills. The only callout to watch out for here is ensuring you have money in your account you are withdrawing from. As long as you have money in this account, automate the payment of these bills! Make your life more simple!

Second, it is key to automate purchasing investments. For example, I am currently purchasing $1,200 every Thursday of VTSAX in my Vanguard account. I don’t question whether the market is up or down. My account will buy $1,200 every Thursday no matter what. This automation helps me not worry about or second guess things. You can think the market is set for a major correction which would keep you on the sidelines. This past year, 2019, was a great example of this. All big time investors were talking about how the market was set for a major correction. Instead of a correction, the market ended up increasing 15%+ (as of 12/20/19).

Moral of the story, automate paying your bills and investing in index funds in the stock market.

Pay Yourself First

The second thing I agree with from the book is the concept of paying yourself first. I remember the first time I read about this concept and I didn’t fully understand it. I liked an analogy the author used in the book to help explain what paying yourself first means.

At a certain point in the book the author talks about how the government takes money out of peoples paycheck. Notice when the government takes their “fair” cut. They take the money out of your paycheck prior to the money being in your bank account! Why? Because they realized this was the only way they would be able to get paid! This is exactly what paying yourself first means! Before you see the money in your bank account, it would go directly to an investment.

Let’s talk through an example to try and make it even more clear. For this example, let’s say you are a W2 employee who receives a paycheck bi-weekly on Thursdays. In this example, there are a few ways to pay yourself first. The first is by having auto deductions from your paycheck to invest in your 401k or HSA tax advantaged accounts. This would be an example of paying yourself first! Another way this can be accomplished is by setting up an automatic investment on payday. This money could would come out of your bank account on the same day of the deposit. If done properly, you would never see this money in your account!

Emergency Funds! What Not to Do!

The last thing I agree with from the book is the authors view on Emergency Funds. This discussion point isn’t around whether you agree with an Emergency Fund or not. The focus here is if you have an Emergency Fund, where it is.

Here are things you shouldn’t do with your Emergency Fund:

1. Having it in cash stuffed under your mattress in your home!
2. Having it in a Savings Account earning you 0.01% interest
3. Having it in an account costing you monthly maintenance fees

Here is what you should do with your Emergency Fund:

• Put your Emergency Fund in a High Yield Savings Account earning 1.5%+

This is something that is very simple and should end up saving and earning you money.

Key Takeaways:

1. Automate both paying your bills and investing!
2. Pay yourself first! Don’t let money hit your bank account.
3. If you want to keep an Emergency Fund, keep it in a High Yield Savings Account earning you earnest exceeding 1.5%

Stop!

Controversial post to follow.

Let me begin by saying there are a lot of people who will not agree with the context behind this post. I respect your viewpoint if you don’t agree. Everyone has their own opinions that I respect. So here are some of mine.

It is important for people to STOP worrying about the wrong types of expenses. Let me explain. Have you ever heard of the 80/20 principle? This principle is also known as the Pareto Principle.

The 80/20 rule states that, for many things, 80% of the effects come from 20% of the causes. I am a visual person so I have to see or hear with with concrete examples to better understand. So here is an example. A sports example.

Think of your good ol’ American football game. There are 53 players on a professional sports team. If we assume half of those players play for the offense, we would have roughly 27. Of these 27 players on offense there is a high likelihood of 80% of the points coming from 20% of the players. This would mean 80% of the teams points scored on offense comes from 5 players. Make sense?

Maybe you haven’t fully come around to the 80/20 principle yet so let’s apply the 80/20 principle to your expenses. Think about your monthly expenses and how they break down. Most in the Financial Independence community understand their expenses each month.

For the sake of this example, let’s assume you spend $3,000 per month ($36,000 per year). Of the $3,000 per month, your line level expenses from largest to smallest look like this:

1. Housing Mortgage: $1,400 + $250 utilities
2. Car Payment: $300 + $100 gas + $90 insurance
3. Food: $400
4. Entertainment: $250
5. Subscriptions: $100
6. Phone: $60
7. Gym Membership: $50

Again, the 80/20 principle states 80% of the effects come from 20% of the causes. This principle means 20% of your expense types account for 80% of your total expenses.

Now let’s see in this persons scenario if this is true. The chart below breaks out the total cost of each of these categories.

The top 2 expenses (home and car payment) account for 71% of this individuals monthly expenses! That is insane!

The Good News!!

The good news is if you can optimize your top 2-3 expense categories, you will be well on your way to crushing the game! This is a big reason why I house hack and will continue to house hack for the foreseeable future. Doing this one trick allows me to cut my largest expense to $0 a month. In fact, house hacking has allowed me to make $200-300 per month in income while living completely free!

Key Takeaways:

• Understand the Pareto’s 80/20 Principle as you can apply it to almost anything in life
• For expenses, focus on reducing your larger expenses
• House hacking is an incredible way to reduce or completely eliminate your housing expense

Most Airbnb hosts have one source of income through Airbnb. That source of income being the amount the guest pays at per night.

The amount the guest pays per night should be the main source of income, but don’t let that stop you from more! There are a few different ways I try to increase my income by a couple hundred dollars a month.

This is one of the awesome ways I am adding more income each month! The below screenshot shows an additional $40 of income generated for heating the pool! The Airbnb I purchased in Orlando has a very nice screened in pool. Along with the pool came a unit to heat the pool during the “colder” times of the year.

With this in mind, I now make sure my guests know that there is an option to turn on the heater to the pool if they would so like. For this, I charge an additional $20 per day!

I am still trying to better understand what the additional electricity costs will be. After speaking with my pool guy, he thinks it should be between $6-8 per day. This one trick alone has the potential to net an additional $15 per night. If you take my current price per night of $110-140, that is an extra 10%!