10 Steps to Positive Personal Cash Flow

The key to being able to save and invest is having positive personal cash flow.  The best approach is to have multiple sources of positive cash flow, not just your paycheck.  This is often called "making money while you sleep" and it really is possible!  You just have to start small, be disciplined and patient and don't get discouraged!  Each one source individually might not amount to much - maybe only $50 to $100 per month, but when you add them all up it can be a lot of money and can help supplement what you bring home on your paycheck.  If you're really successful, it can ultimately replace your paycheck and you can become Financially Independent and Retire Early (FIRE).  What is the best way to accomplish this?  Here are several simple steps that you can take to help get to that goal.

1. Start with a household budget - when budgeting your expenses, make sure to "pay yourself first" and set aside money for savings
2. Make sure you have a plan to pay off high interest credit cards, then car loans, then student loans
3. Ensure you have an emergency fund of 3 to 6 months of living expenses set aside
4. First focus on retirement planning and maximize your 401(k) contributions, then make sure you are fully funding a Roth IRA
5. Invest in residential real estate that generates a positive monthly cash flow (at least $100-$200 per month)
6. Put cash in high interest yielding savings accounts (at least 2%)
7. Invest in music royalties that yield at least 10%
8. Invest in consistent dividend paying stocks (target a 3% to 6% yield) - these also have great tax advantages since qualified dividends are taxed at a lower rate than ordinary income
9. Develop other passive income sources that require you to invest some personal time up front but then minimal time thereafter in areas where you have a passion and expertise, such as writing and self-publishing books and online courses, blogging, starting a YouTube channel, etc.
10. As the cash flow builds, continue to invest the extra cash in the same areas to compound growth

Remember the rule of 72 (if you divide 72 by the interest rate you receive, you'll know how much time it will take for your investment to double in value).  I was just reminded of the power of compounding recently when I cashed in a EE US Savings bond that I received as a gift for my son when he was born (he's now 18 and ready for college); it was purchased for $500 and is now worth a little over $1,000!  Best part is if I use the money for college I don't have to pay tax on the interest!

If you are interested in other investing ideas, please check out my books here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

Emergency Fund or Pay off Credit Cards?

Should I pay off my credit cards or build an emergency fund?  How much of an emergency fund should I have?  What should I invest my emergency fund in?  These are very common questions, especially for people who are early in their careers, just out of college or starting out fresh after a major life event.  The general rule is that because credit card interest is very high (much higher than what you can earn on a savings account), it's better to pay off credit cards than to save.  However, if an emergency does arise (car breaks down, an unexpected home repair, or medical payment), you will need to use the credit card to cover the emergency expense, which can put you back in the same place.  Also, your home equity is not an emergency fund, as I have written about before - see my related post.  As soon as credit cards are paid off, then it's a good idea to build an emergency fund.  The amount of your emergency fund should be at least three months of living expenses and ideally six to nine months of living expenses.  So, for example, if your monthly living expenses (including rent, car payment, food, utilities, etc.) are $5,000 then you should start to build a $15,000 emergency fund and then increase it to $30,000 and then $45,000.  Emergency funds should be invested very safely, preferably in an FDIC insured bank account or my favorite, which is US Treasury Bills that you can buy directly from the US government with a TreasuryDirect account.  There are many savings account options to choose from - see this post on best savings account rates for some ideas.  Once you have built your emergency fund, the next steps would be to fully-fund your retirement accounts (401(k) at work or Individual Retirement Account, preferably a Roth), then build your taxable accounts.  If you're interested in investing ideas for your taxable accounts, check out my books on Amazon.  Then you are well on your way to Building a Financial Fortress!   

Saving For College

Many people recommend you save for college using 529 Plans.  Here's some information on these programs and my own experience with them.

Among the biggest advantages of 529 plans over other college savings options are the tax advantages they offer. Earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses.

Although the IRS typically allows you to give no more than $15,000 a year (for tax year 2019) to another person without a federal gift tax, you can contribute up to $75,000 to a 529 plan in one year. A special tax law allows you to aggregate five years of the allowable $15,000 annual gift-tax exclusion to jump-start a 529 plan. While you will be precluded from making any further gifts for five years, compounding will make your earnings grow faster than if you invested $15,000 in each of the five years. 

Also, anyone can contribute to a 529 plan. Unlike education savings accounts (ESAs) and saving bonds, there are no income limitations. For most wealthy families, 529 plans are one of the few available tax-advantaged college savings options.

The assets of one 529 plan can be transferred tax-free to another 529 plan of another beneficiary, as long as the new beneficiary is a "family member" of the beneficiary of the 529 plan from which the transfer was made. "Family members" include, among others, the beneficiary's spouse, son, daughter, grandchild, niece, nephew and first cousin.

If your child decides not to go to college or you over-fund a 529 plan, you may pay a penalty in addition to any taxes you owe on earnings. If you withdraw money from a 529 plan that is not used for qualified education expenses, you are generally required to pay income tax and an additional 10-percent penalty on earnings.

There are a number of exceptions to this penalty. The penalty may be waived if your child gets a scholarship or is disabled. You also can avoid the taxes and penalties by transferring the 529 plan to another beneficiary who will use the funds for qualified education expenses. 

My own experience with 529 plans is that the investment options in these state-sponsored plans are not very good.  We setup one plan initially for my son and it lost money, then we moved the funds to another plan and it didn't do much better.  Also, since you can only use the money for educational expenses, this limits the flexibility if for some reason you don't need the money for education. 

For these reasons, I decided a few years ago to close the 529 and move the money into a Uniform Transfers to Minors Act (UTMA) account for my son.  I also set up similar accounts for my other children.  You have more flexibility over investment choices, which is great and you also have flexibility in the use of the money for just about anything as long as your child who owns the account is the beneficiary of the funds.  A portion of the child's income earned by the investments is tax free and a portion is taxable at the child's rate or parent's rate, depending on age.   If not needed for college, your child will have the money to help them get started living on their own after they graduate (they get access to the money at age 18 or 21, depending on the state).  We invested in some growth stocks for early years and then as each child gets closer to college age, we move the money into safe money market investments, while continuing monthly contributions.  So far, this has worked out well.

If you're interested in other investing ideas, you may want to check out one of my books, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.  

Lyft IPO Summary

It's been a long time since I have seen a financial statement like the one I am going to discuss in this post.  

It was Groupon (GRPN), which closed at $20 on its first day as a public company on October 1, 2011 and now trades around $3.  Over the past five years, Groupon has lost money every year except 2017 when it earned a whopping $16 million.  I wrote a post about Groupon just prior to the IPO in 2011, noting the huge losses.  I compared this to the kind of companies that you would see around the year 2000, just before the Dot.Com bust hit these companies and many of them went out of business, weighted down by huge losses, negative cash flow and a collapsing stock market that shut off the source of new funds (more investor money).  

Now there's a series of new money-losing IPO's coming out.  It's like deja-vu all over again.

Here's a summary of Lyft's financials:

Lyft - Consolidated Statement of Operations Data

		Year Ended December 31,
		2016				2017				2018
		(in thousands, except for per share amounts)
Revenue		$	343,298			$	1,059,881			$	2,156,616
Costs and expenses(1)
Cost of revenue			279,011				659,533				1,243,400
Operations and support			97,880				183,513				338,402
Research and development			64,704				136,646				300,836
Sales and marketing			434,344				567,015				803,751
General and administrative			159,962				221,446				447,938
Total costs and expenses			1,035,901				1,768,153				3,134,327
Loss from operations			(692,603	)			(708,272	)			(977,711	)
Interest income, net			6,964				20,243				66,462
Other income, net			3,246				284				652
Loss before income taxes			(682,393	)			(687,745	)			(910,597	)
Provision for income taxes			401				556				738
Net loss		$	(682,794	)		$	(688,301	)		$	(911,335	)
Net loss per share attributable to common stockholders, basic and diluted(2)		$	(37.08	)		$	(35.53	)		$	(43.04	)

While Lyft is showing impressive revenue growth, expenses are very high and are driving huge losses.  In 2018, the company spent 21% of its revenue on General and Administrative expenses, which is a red flag for me as is the 37% of revenue spent on Sales and Marketing.  

The risk factors in the registration statement include most notably competition, including the much larger Uber as well as a host of other startups.  The development of autonomous driving technology and how Lyft is able to leverage that in their business is also a fairly significant risk.  They also face risks associated with insurance of their drivers' vehicles.  This is an interesting read.  My concern here is that reinsurance is a complicated business and is not really core to a ride sharing platform.  

From the time a driver becomes available to accept rides in the Lyft Driver app until the rider is dropped off at their destination, we, through our wholly-owned insurance subsidiary and deductibles, bear substantially all of the financial risk with respect to auto-related incidents, including bodily injury, property damage and uninsured and underinsured motorist liability. To comply with certain state insurance regulatory requirements for auto-related risks, we procure a number of third-party insurance policies which provide the required coverage in such states. Our insurance subsidiary reinsures the auto-related risk from such third-party insurance providers. In connection with our reinsurance and deductible arrangements, we deposit funds into trust accounts with a third-party financial institution from which such third-party insurance providers are reimbursed for claims payments. Our restricted reinsurance trust investments as of December 31, 2016, 2017 and 2018 were $118.3 million, $360.9 million and $863.7 million, respectively.

The Company also has two classes of stock and the founders will continue to control the majority of the voting through the shares they own (not being sold in the IPO).  This raises corporate governance issues in my mind.

Lyft may indeed some day be a very successful company or it could end up like Groupon.  Either way, it's best to proceed with caution and if you do decide to buy shares in the IPO, keep it small.

If you're interested in other investing ideas, you may want to check out one of my books, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

7 Tax Season 2019 FAQ's

It will be April before you know it and soon it will be time to file your taxes.  I put together this FAQ that might be helpful as you decide whether and how you should file, what to do with your refund or if you have to pay, what to do about that.

1) Do I need to file a Federal tax return?

• If you made more than $12,000 in 2018 and are single ($24,000 if married) and under age 65, you have to file a tax return with the IRS

2) When is the deadline to file taxes for 2018?

• April 15, 2019

3) How should I file?

• You can either complete your taxes by yourself and file on your own or use a service.  That will normally depend on the complexity of your tax situation and whether you are comfortable doing the work, which can be tedious and involve a lot of math.

4) What is a "simple" tax return?

• A simple tax return typically includes wage income (your employer sends you a W2 form), simple investments like bank interest and some stock dividends (you receive 1099INT and 1099DIV forms) and basic deductions like mortgage interest, state and local taxes, charitable contributions and maybe an IRA contribution

• If you have a simple tax return, you can file it yourself for free at one of these sites:

• TurboTax Federal Free Filing Option (Absolute Zero)  

• TaxSlayer.com Free Federal (Simply Free) 

• eSmart Tax Free Plan

• H&R Block Online Free Edition (More Free)

• TaxAct Free Edition

• FreeTaxUSA Free Edition

• Free File Fillable Forms

5) What is a "complicated" tax return?

• A complicated tax return would include investments like real estate, cryptocurrency, alternative investments such as purchased music royalties or peer to peer loans, lots of taxable purchases and sales of stock/bond/other investments, small business or businesses, partnerships or trust investments in which you receive a K-1, etc.

• If you have a complicated tax return, you may want to use a paid service like a Certified Public Accountant, H&R Block or a similar type of service - I have a complicated tax situation and I'm very happy using a CPA to do my taxes and help me with my estimated tax payments so I can avoid a big payment (and potential penalties/interest) in April.

6) What do I do with my refund?

• Apply to your estimated taxes for 2019 (I like this option since I have to pay estimated taxes and I can avoid writing a check for the first quarter payment)

• Pay off high interest rate credit cards

• Use the money to fund your IRA contribution for 2019 - here's a retirement planning checklist for 2019 I recently blogged about

• Save the money and earn some interest - here's a list of great interest rates I recently blogged about

7) What if I owe money and I don't have it?

• Ask a tax professional to help you negotiate a payment plan with the IRS, although you may have to pay interest and penalties (some of which could be waived, depending on how the negotiation goes)

• Take out a personal loan to pay the balance in full.  Here are some options:

• Prosper - a peer to peer lending network that I have used a few; highly recommended
• ICashLoans - online lender
• GotLoans - online lender
• ThriveFinance - online lender
• Kabbage - online lender for small businesses

If you're interest in investing your tax refund in other ways, you may want to check out one of my books, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.

HSA's and FSA's to Stretch Your Budget!

If you have access to a Healthcare Spending Account or a Flexible Spending Account at your work and aren't taking advantage of these accounts, you are missing out on an opportunity to use pretax dollars to pay for your medical, prescription drug, dental and vision co-payments.  That can make a big difference, depending on your tax bracket.  For example, if you are in the 24% tax bracket and contribute $2,000 to an HSA, you would need $2,631 to get the same after tax amount (after deducting $631 in taxes).  

A Healthcare Spending Account (HSA) currently has a maximum annual contribution of $3,500 for individuals and $7,000 for families.  Many employers also kick in a little extra if you do some wellness activities, such as flu shots, health screenings, etc.  The nice thing about an HSA is that the unused account balance can carry forward indefinitely to future years and can be used at any time in the future to pay for medical expenses.  Most of these accounts allow you to use a linked debit/credit card to pay your bills (or you can enter payments online similar to a bank's online bill payment service).  Many HSA's also offer the ability to invest excess funds in a variety of mutual fund-type investments with different risk profiles.  All income and withdrawals are tax free as long as they are used for qualified medical expenses.  

A Flexible Spending Account (FSA) currently has a maximum annual contribution of $2,700 and can normally be used for medical, prescription drug, vision and dental payments.  When you have both an HSA and an FSA, the FSA becomes "limited purpose" and can only be used for vision and dental copayments.  You must use the HSA for medical and prescription drug payments.  The downside of the FSA is that any unused balance at the end of the calendar year over $500 is forfeited, although you have until March 15 of the following year to file a reimbursement claim.  The $500 balance can roll-over to the following year but must be used that year.  If you have kids with braces, it's pretty difficult not to use the entire FSA balance, but it's good to plan ahead at annual enrollment time just to make sure.

If you missed out on this during annual enrollment at the end of 2018, you can always enroll in 2019.

For investing ideas, click here.

Disclaimer:  I use affiliate links where I get paid a small amount if you buy the service or product. This helps support my blog.