9/15/19

$50 Per Paycheck Dividend Portfolio Update 9/12/19


Another $50 was sent to M1 Finance to fund the $50 per paycheck dividend portfolio on Thursday 9/12/19. This time the transfer was automatic. Going forward I won't have to remember to send the money every two weeks. Hopefully I won't forget to post updates.

As of market close on 9/12/19, the account value was $514.39. This included $4.17 in cash. Per M1, the portfolio has earned $2.54 in dividends so far.








The financial news, like all news, is always hyping up some trivial event that supposedly foretells the end of life as we know it. In the past few days the talking heads and article writers took a break from freaking out about the inverted yield curve and trade wars to hyperventilate about how value stocks started outperforming their growth counterparts.

I don't know if it means anything or even if it's true, but I'll go with value stocks outperforming as the explanation for the dividend portfolio outperforming the Standard and Poor's 500 for the first time since it was started. (It is also showing a gain over the amount invested for the first time.) Is it a freak occurrence? A fluke? Or the beginning of a trend? Only time will tell.

Date
Additional Investment
Running Total Investment
Dividend Portfolio Account Value
Additional Benchmark SPY Shares
Running Total Benchmark SPY Shares
SPY Closing Share Price
Benchmark SPY Value
Dividend Portfolio VS Benchmark
6/24/19
$200.00
$200.00
$200.00
0.681107
0.681107
$293.64
$200.00
0.000%
7/3/19
$50.00
$250.00
$252.22
0.167336
0.848443
$298.80
$253.51
-0.511%
7/18/19
$50.00
$300.00
$299.10
0.167320
1.015763
$298.83
$303.54
-1.463%
8/2/19
$50.00
$350.00
$343.48
0.170870
1.186633
$294.62
$349.61
-1.752%
8/16/19
$50.00
$400.00
$385.57
0.173124
1.359757
$288.81
$392.71
-1.818%
8/30/19
$0.00
$400.00
$389.89
0.000000
1.359757
$292.45
$397.66
-1.954%
9/3/19
$50.00
$450.00
$439.89
0.171945
1.531702
$290.74
$445.33
-1.221%
9/12/19
$50.00
$500.00
$514.39
0.165915
1.697617
$301.36
$511.59
0.547%

9/7/19

Saving Money without a Budget


Having a budget is one of the best ways to save money because it is a plan for every dollar you have coming in and going out. But not many people enjoy budgeting. It can be time consuming, tedious, and boring. It can be stressful. And once a budget is set up it can be hard to follow through, which causes more stress and anxiety.

That's why most people don't budget. Instead, the most they do is check their bank balance before making a purchase.

What usually ends up happening is once a paycheck is deposited, the person starts making purchases and right before the next paycheck the bank account hovers near zero. The next paycheck comes in and the process repeats. Little to no money is ever saved, despite the best of intentions and self-promises to try to save more.

If that's a description of your situation, here's a simple way to pay yourself first.

  1. Open an online savings account* (must be a different bank from your regular spending account, so you don't check your savings balance as often) and have your paycheck direct deposited there instead of your checking account (regular spending account).
  2. Schedule an automatic transfer to your regular spending account that coincides with your paycheck deposit clearing date.
  3. Make the transfer amount 90% of your paycheck.
  4. Don't look at your savings account balance and proceed as you always did in your spending habits out of your spending account.
  5. Voila, you are saving 10% of your net pay with little extra effort.

It may feel like you have less money the first couple of paychecks. Pretend that there's a new tax that made your paycheck 10% smaller. In a month or two you'll get used to it. If you're like most people, you don't need or use half of the stuff you buy. So you won't really be giving up anything.

One might wonder, why not have the money deposited into the regular spending account and then transfer the savings to the savings account? Similarly, if the employer's direct deposit supports it, why not direct deposit into both the savings and regular checking account?

The answer is that we want the amount going into the spending account to always be the same. That way, any raises and bonuses that you get are automatically saved and you avoid lifestyle creep.

Lifestyle creep is an increase in one's spending that comes with an increase in salary. People live paycheck to paycheck when they make $50k a year. Even if they  get a bunch of raises and make $100k a year, they still live paycheck to paycheck. It's like their salary doesn't really matter. We always find ways to spend the entire paycheck, no matter how large it is.

If you're used to spending a certain amount per month, there's no reason to increase your spending if you get a raise. It won't make you any happier. Save the difference instead, pay yourself the entire raise. You deserve it.

* It's a personal preference, but I would recommend online savings banks from the more traditional financial institutions (Discover, American Express, Goldman Sachs, Ally, Capital One 360, etc) versus the new fintech ones (Wealthfront Cash, SoFi, Digit, Simple, etc) even though the new fintech banks offer higher interest rates and oftentimes more features. I've used Discover for a while and have had no problems. I use Wealthfront Cash as well, but this is for a part of my emergency fund (call it my emergency fund's emergency fund).

I would hesitate to implement the direct deposit scheme outlined above with a fintech bank because most of them aren't really banks. Institutions like SoFi and Wealthfront have agreements with real banks and act sort of as intermediaries. As a result there's a lot more moving parts and more chances of things going wrong. And if things do go wrong, there's less customer support people to help you. There have been numerous cases of people having their SoFi accounts frozen because of some algorithm being triggered with no help from the fintech institution's customer support.

That doesn't mean you'll have a bad experience with fintech or a good experience with a more traditional financial institution. I just think you're less likely to have a smooth process with a new company that has less support, more moving parts, and what is essentially a minimum viable product (that will improve over time). That said, fintech is a great place to earn higher interest on money you don't need immediately.

9/2/19

How I Get at Least 3% Cash Back on Almost Everything I Buy


I used to use the Chase Amazon, Freedom, and Freedom Unlimited exclusively. Now I only use the Freedom on occasion, when its quarterly 5% category is something that I buy.

That's because I've discovered six credit cards that give 3% or more cash back on pretty much every purchasing category. Five of them are from Bank of America, and one is from American Express.

3% Back on Online Purchases, Dining, Travel, and Gas

Bank of America has five cash back credit cards that have the same reward structure:
  • Bank of America Cash Rewards
  • Susan G. Komen Cash Rewards
  • MLB
  • World Wildlife Fund
  • US Pride

The cards earn 2% back on grocery store and wholesale club purchases and 3% back on one category of your choice from gas, online shopping, dining, travel, drug stores, and home improvement on your first $2,500 purchases each quarter. Purchases in other categories (and when you go over the $2,500 on groceries and your 3% category in the quarter) give you 1% cash back.

I have four of the cards, and for each one I've chosen a different category, so that I'm getting 3% back on gas, online shopping, dining, and travel. Note that the online shopping category applies to pretty much everything you buy online. So, for example, you don't need an Amazon card to get 3% back for shopping at Amazon.

None of these cards have an annual fee. At the time of writing, if you spend $1,000 with a Bank of America card within the first three months, you'll get $200 back.

3% Back on Groceries

The American Express Blue Cash Everyday gives 3% back on up to $6,000 in grocery purchases per year. It also earns 2% at US gas stations and some department stores, and 1% everywhere else.

At the time of writing, the American Express card has an account opening bonus of $150 or $200 (depending on which page you landed on--if the offer is $150, try a different browser or clear your cookies and refresh) after you spend $1,000 in the first three months. There is no annual fee.

5% back on Christmas Presents

The Discover  It Cash Back card and the Chase Freedom return 5% on categories that change every quarter. In the past few years one of them has had 5% at Amazon in the October through December quarter, where I end up doing all my Christmas shopping. This year, Discover is set to offer 5% back at Amazon, Walmart, and Target in the last quarter of the year.

5% Off at Target

I use the Target card at Target stores and at Target online. There is no cash back. Instead, 5% is taken off the total bill at check out. Using the Target card for online purchases also gives you free shipping.

5% of Ground Transportation and Miscellaneous

The US Bank Cash+ card provides 5% cash back on a lot of narrow categories, from which you must choose quarterly. These include TV and internet, fast food, cell phone providers, department stores, home utilities, some clothing stores, electronics stores, sporting goods stores, movie theaters, gyms, furniture store, and ground transportation.

How I Use the Cards

By default, I use the American Express card for groceries, and the Bank of America cards for each of the categories that I chose.

I use the Discover and the Chase Freedom instead of the American Express of Bank of America cards for whichever category gives the 5% back . I use the Target card at Target. Finally, I use the US Bank Card to pay the internet bill.

I've set up all of the cards to have the full balance paid automatically every statement period. I go over all the purchases in Personal Capital when I monitor my budget every two weeks.


8/31/19

$50 Per Paycheck Dividend Portfolio Update 8/31/19


I forgot to send the $50 to M1 Finance this week, so there have been no new investments in the $50 per paycheck dividend portfolio. I will initiate the transfer today (Saturday), and the next series of purchases will most likely occur on Tuesday, 9/3/19, when the US stock market opens after the long Labor Day weekend.

The lesson here is that automation always beats manually doing things, because automated things get done whether you remember to do them or not. This is of utmost importance for most people when it comes to saving. The best way to pay yourself first is to have the money taken directly out of your paycheck. If that option is not available, the second best way is to have it automatically debited from the account in which your paycheck is deposited. Otherwise, you run the risk of forgetting or being tempted to use the money for something else.

The $50 going into the dividend portfolio hasn't been automated up to this point because M1 didn't offer a biweekly funding option. However, there have been additional improvements to the platform since the last portfolio update, and now there is a biweekly option. I've signed up for it, so we'll see how that goes.





As of market close on 8/30/19, the account's value was $389.89. This includes $4.18 in cash. Per the M1 dashboard, the portfolio has earned $1.82 dividends since it was started in late June. The latest dividends have come from Simon Property Group, BOK Financial, Fastenal, Caterpillar, Westamerica Bancorporation, and Clorox. They are laughably small--in the pennies! But we'll see how they increase over time as more funds are added to the portfolio and (hopefully most of) the companies raise their dividends. That's the point of this project: to see what 50 dollars a paycheck can grow into over time and the income it can produce. Maybe it'll be a moderate success or a colossal failure. Either way we'll learn something.







The SPDR ETF SPY, which I chose as the benchmark, closed at $292.45 on 8/30/19. That makes an equivalent investment in the Standard and Poor's 500 over the same period worth $397.66. The next ex-dividend date for SPY is the third Friday in September, which this year will occur on 9/20/19. It'll be interesting to see how that payment will compare to the dividend portfolio's accumulated dividends during the same period.

Date
Additional Investment
Running Total Investment
Dividend Portfolio Account Value
Additional Benchmark SPY Shares
Running Total Benchmark SPY Shares
SPY Closing Share Price
Benchmark SPY Value
Dividend Portfolio VS Benchmark
6/24/19
$200.00
$200.00
$200.00
0.681107
0.681107
$293.64
$200.00
0.000%
7/3/19
$50.00
$250.00
$252.22
0.167336
0.848443
$298.80
$253.51
-0.511%
7/18/19
$50.00
$300.00
$299.10
0.167320
1.015763
$298.83
$303.54
-1.463%
8/2/19
$50.00
$350.00
$343.48
0.170870
1.186633
$294.62
$349.61
-1.752%
8/16/19
$50.00
$400.00
$385.57
0.173124
1.359757
$288.81
$392.71
-1.818%
8/30/19
$0.00
$400.00
$389.89
0.000000
1.359757
$292.45
$397.66
-1.954%


8/25/19

The End is Nigh? 2020 Recession?



There's a lot of talk lately about a recession in 2020. What's all the fuss about?

Reasons Why A Recession Might Happen in 2020

We're Overdue for a Recession

The United States has not had a recession in over 10 years, the last one having ended in June 2009. Since 1900, the average time between recessions has been just under four years. Since the end of World War II, the average time between recessions has been around five years. With the longest time between recessions having been 10 years (from March 1991 to March 2001, when the Dot Com bubble burst), it looks like we're overdue for a recession. Some experts even say we're already in one.

Consumers are Overleveraged

Before the last recession, aka The Great Recession or The Financial Crisis, there were luxury sedans, mostly BMWs and Mercedes Benzes, everywhere. I couldn't believe so many people could afford to drive those cars. There were also ads on TV by dubious loan providers where the actor would say how great his life was despite being in debt up to his eyeballs.

Fast forward to today, and I see Infinitis and Lexuses everywhere. While I stopped watching TV completely (one of the most positive changes in my life), I have been made aware of new consumer debt products. There are now payment plans for vacations. People who can't afford vacations and thus should not be going on any are borrowing from companies like Funjet, Bookit, and UpLift for their trips. I suppose that's better than putting the trip on the credit card, but it's easy to see how this spells doom in the future.

Credit card companies are also introducing lay away type options (but you get the thing you want immediately--where would we be without instant gratification?). For example, American Express has something called Plan It, where you can buy a bunch of stuff you don't really need and certainly can't afford, and then for a set fee, you make monthly payments on it. It's just another way of collecting interest (which might be worthwhile for people that carry credit card balances if the set fee is lower than the interest they would've paid).

The Yield Curve is Inverted

The Treasury bond yield curve is a chart of yields that are currently paid by Treasury bonds of various maturities.

In a normal yield curve, shorter term bonds have lower yields than longer term bonds, so the curve ascends from the shorter maturities on the bottom left to the longer maturities on the upper right. This is normal because there is less interest rate risk with shorter maturity bonds than with longer term ones, so bond investors usually demand less return for shorter maturity bonds than longer term ones.

In an inverted yield curve, on the other hand, shorter maturity bonds have higher yields than longer term bonds. This happens when there is greater demand for longer term maturities than shorter ones. It is an indication that bond investors anticipate bond yields will go down. Yield inversions have often preceded recessions by six to 24 months. Since 1955, an inverted yield curve predicted all nine US recessions.

Trump's Trade Wars

President Trump has been imposing tariffs on various foreign goods. Whether you agree with the policy or not, a tariff is a tax on the product on which it is levied. Taxes are pretty much never borne by the producer of the product that is taxed. The tax is usually passed off on the last seller or the end buyer. This raises the cost of the product (which is what a tariff is supposed to do--raise prices of foreign products to encourage people to buy from a domestic producer instead). With the cost of products going up, retailers will have smaller profit margins and/or consumers will ultimately have less to spend, which might decrease economic output and thus contribute to a recession.


Reasons Why A Recession Might Not Happen in 2020

Firstly, everyone's talking about it.

2020 Recession videos on Youtube are suddenly about as ubiquitous as those with people making stupid faces on the cover. Indeed, many of the 2020 recession videos have people making stupid faces. Traditional media is also hyping up the possibility of a 2020 recession, dragging out everyone and anyone who thinks there will be one. This is because doomsday news sells better and it makes Trump look bad.

Unless they make it into a self-fulfilling prophesy, all this hoopla may indicate that a recession won't happen. Regular people and the experts for whom the mainstream media provides a platform have a notoriously bad record at predicting the future, especially future economic events. When the regular people are discussing the economy and future, it's often profitable to do the opposite of what they're doing.

Second, there are no rules for how long it should be between recessions. Since the Great Depression, the time between recessions has ranged from as little as one year to the current 10 years and counting. The recession that started in July 1981 didn't care that it had only been one year since the recession that ended in July 1980. Likewise, the next recession doesn't care how long it's been since the last one.

Additionally, our data set is quite small and today's economy is not the same as that of the past. To say that we're overdue for a recession implies that the future will be like the past. It may very well be, but we can't know that until it happens.

The inverted yield curve predicting all nine recessions since 1955 may sound scary, but does it even mean anything? We know with near 100% certainty that there will be a recession in the future. There's a chance that the economy will continue growing in perpetuity, but that is unlikely. So, an inverted yield curve will always predict the next recession. Why? Because the yield curve is inverted and at some point in the future we will surely have a recession. That's like me predicting that you will die. I'm hardly a psychic, but my prediction will come true. The trick is to get the timing right.

So when, according to the inverted yield curve, is the next recession due? From six to 24 months. That's quite a range. I bet, if the next recession comes 36 months after the inversion, future financial news articles will be about how an inverted yield curve presages a recession by 6 to 36 months.

Conclusion

There may or may not be a recession in 2020. We might be in a recession already. No one knows. I repeat, no one knows.

The way you invest should not change according to the economic forecast. You have nothing to gain from trying to time the market. People have been waiting for the economy to collapse for years now. Let me repeat again, no one knows the future.

That said, always be prepared. Whether the economic outlook is rosy or grey, you should always have an emergency fund and you shouldn't be investing if you don't have one. You should always be updating your skills to stay competitive in the marketplace. You should never be buying things you don't need and can't afford. And you should never take risks with money you can't afford to lose.

Finally, never worry about things you can't control. As long as you're always prepared, you will always be as ready as you'll ever be, so why worry?