I Think I Have A Better/FASTER Way To Financial Independence! Fact or Fallacy?

I’ll get right to the point:  I think there’s a better and faster way to grow passive income in order to achieve financial independence! We are committed dividend stock investors looking to build wealth through stock market investments. But I’ve been learning/studying for the past two years and implementing a new investment strategy the past nine months and the results are promising. Let me run this income producing investment strategy by you and help me figure out if this is sustainable or just a short term phenomenon that can’t be maintained to and through retirement from full time employment.

Path To Financial Freedom

We’re not much different from your average FI enthusiasts. My wife and I live below our means, have eliminated all debt except the home mortgage, have a six month emergency fund and invest aggressively, including in retirement and taxable accounts,  to develop long term wealth. We have set aside money for our last child’s college fund (two are already out of the house) and we invest in our Health Savings Account for current and future medical expenses. In terms of investments, we are deeply invested in dividend producing stocks and our account is equally dividend between stable, high dividend yield stocks and faster growing dividend growth stocks. Our stocks produce an average 2.8% annual dividend yield, growing about 11.5% annually. All in all, our stock portfolio has averaged a total annual return of 18% including dividends and appreciation over the past eight years. Everything mentioned so far is pretty straightforward and consistent with most FI practices.

Unknown-1

Also consistent with standard FI practices, my wife and I have been planning to develop wealth that is 33 times our expenses (assuming a 3% annual drawdown in retirement to be conservative). While we are well on our way to meet that goal, a new (to us) passive income path presented itself a couple years ago that I have studied and now implemented for the past nine months with incredible (to me) results. The results have been so good that we are re-thinking our FI goals, amounts and timeframes. In addition, the new (fairly) passive income stream seems to be sustainable into retirement.

Unknown-4

Conservative Options Trading As A Significant Passive Income Source

Hear me out. Monthly dividends are and have been a consistent income source. If we didn’t invest another dollar in the stock market and retired in a couple years from now, dividends would produce one third of our income needs in retirement. But its not enough to be safe as the rest of our financial needs would need to come from asset (stock) appreciation and sales. So two years ago we started studying option trading, focusing on a fairly conservative approach to produce additional monthly income. Then, nine months ago, we implemented the following monthly options trading plan:

Unknown

  • Each month, we sell out of the money (OTM) puts on premiere dividend and dividend growth stocks to produce immediate income and give us the chance to buy well researched, desired stocks at a discount. If the option expires OTM, then we keep the premium. If the stock price falls and the option is in the money (ITM) then we get the premium and we “get to” purchase a dividend producing stock on sale. Both are wins to us. (In general, we target to earn 1% or more on the monthly option premium each month and use an OTM strike price that is at least 5% lower than the stock price.)
  • Each month, after much research and analysis, sell OTM covered call options on the dividend stocks we own at strike prices that meet or exceed our researched sell price target. If the option expires out of the money, we keep the premium as income. If the strike price is met, we get the premium AND a nice profit from the sale of the stock. All proceeds from the sale of stock are then reinvested in more dividend producing stocks. (In general, we target to earn .5% or more on the monthly option premium each month and use an OTM strike price that is at least 10% higher than the current stock price.)

That’s it. Each option has a one month duration. If the option expires OTM, the money is then reinvested in options for the next month. Some call that “Stock Option Rinse and Repeat”.

The Results, So Far

Unknown-3

Thus far, the options trading income nearly quadruples the monthly dividend income. Take a look at these results:

  • We are averaging a monthly return of 1.79% (or over 21% annually) on the sale of put options. We have made over 250 put option trades in the nine months, with 236 expiring out of the money and 14 put options being assigned. We have purchased great dividend champion and dividend growth stocks on sale, such as ABBV, LOW, QCOM and CSCO.
  • We are averaging a monthly return of .99% (almost 12% annually) on the premiums of covered call options! We have made over 100 covered call option trades in the nine months, with 94 expiring out of the money and 6 call options being assigned. We have sold some great dividend stocks but got a large premium for the sale, at least 10% higher than our target sales price. Usually these sales result because of a higher than normal run up of the stock price. So our covered calls allow us to cash in profits on unusual spikes in price. Then all proceeds from the sales of stocks are reinvested into other dividend stocks. Sales have included stock in CSCO, STX, SBUX and ETP.

Summing up the performance of this income strategy over the past nine months we find that the total income return by adding the monthly option trading premiums to the monthly dividends equals 18.15% on our entire stock portfolio not including stock appreciation. (The stock appreciation during that timeframe was 19.1%) After taxes, fees and other costs, the net return on trading and dividends, or net income, was slightly over 12%.

 

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

So, Working Backwards, Doesn’t That Mean…

images-1

Let’s take that 12% net annual income return and reduce it by a small safety factor to 10% to be conservative. And let’s assume we do not want to spend any of the stock assets nor any of the stock appreciation. Just keep letting that build. Let’s also ignore social security and any other side income. Where does that leave us? I think that leaves us needing an investment base of 10 times expenses to meet our total retirement needs. Let’s take a look at some actual numbers to this situation: If we need $7,000/month to live comfortably in retirement, or $84,000 a year, doesn’t that mean we will need $840,000 of investable assets to produce that income ($840,000 X 10% = $84,000)?

But let’s continue to make the case more conservatively. Let’s assume that you trade options on only a portion of your investments, say only half of your investments. So, for option and dividend income to cover $84,000 in annual expenses, you would need roughly $1.2M of investable assets (This assumes dividends from all of the investments but options trading on only half of the investments).

images

The net result: I don’t think we necessarily need an investment account that is 33 times expenses to retire comfortably. I think with conservative options trading in conjunction with a stock portfolio of dividend and dividend growth stocks, that a couple could retire with an investment account that is only 15 times expenses.

Fact or fallacy ? Set me straight…

 

Now for something different: A look into the life of the most polarizing president of our time:


Understanding Trump

And Then There Was One

 

//pagead2.googlesyndication.com/pagead/js/adsbygoogle.js

(adsbygoogle = window.adsbygoogle || []).push({
google_ad_client: “ca-pub-3913228547405325”,
enable_page_level_ads: true
});
On The Path To Financial Freedom

To this point, the path toward financial freedom has been straight forward. The budget is in place. All consumer debt has been paid off, including cars, student loans and credit cards. Emergency fund is all set. Same is true with college savings for our last child in the house. We are saving and investing 15% toward retirement and tithing 10% to our church. And any left over money gets invested in a taxed account that will be used for future purchases.  Last, everything is automated so it “just happens”. Now, time and compound interest should produce results that lead toward freedom freedom. So far, so good. Now there’s only one debt left to deal with, the home mortgage, so the big question is: Do we pay off the mortgage, our last debt,  or do we invest that money to meet future needs?

Two Choices, Is One Better?

I think the choice between paying off an existing mortgage on a primary residence or investing that money to growth wealth is a matter of priority between financial freedom and financial independence. They are the same thing, you might say? I don’t think they are. Financial freedom puts peace of mind at a priority, including freedom from money worries and anxiety. So that would favor paying off the mortgage, because a debt, any debt, is an obligation that presumes we know and can control the future. Unknown-3It presumes we can make all the payments, but that is not a sure thing. Because in a 30 year mortgage, (15 year mortgage if you are really savvy), a number of things can go wrong that are out of your control and could prevent you, or hinder you greatly, from paying the mortgage like job loss, physical injury or other family health related issues. Yes, an emergency fund certainly helps in these circumstances, but if peace of mind and total freedom from money worry is the top priority, you probably would pay off the mortgage as soon as possible to ensure you always have a place to live.

Want financial freedom but don’t know where to start? Start with Dave Ramsey’s Total Money Makeover, click and enjoy!


The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Financial independence, on the other hand, prioritizes choice over freedom. And it is quite possible that investing the money, instead of paying off the mortgage, can provide more choices. Choices like work (or not to work) choices, location choices and purchase choices. The assumption here is that the return on the money invested is greater than the savings in interest paid on the mortgage. And for the last ten years, including the financial recession of 2008-2009, that has clearly been the case. First, let’s look at the math.

Unknown-2

The Math – The Easy Part

Simply put, the cost savings by paying off the mortgage in the last ten years has been significantly less than the return on investment if that money was put into any S&P500 Index Fund for investment. This is how it works out for me: Mortgage interest rate of 3.875% minus the mortgage interest tax break (use a conservative tax rate of just 10%) gives you an effective cost of the mortgage money around 3.5%. Another way of saying this is that the financial benefit of paying off your mortgage is roughly a 3.5% return on your money. Compare that with investing that same money in a simple S&P500 Index Fund for the same time period, ten years, which according to Fidelity Investments, returned 7.5% annually, not including dividends. Minus out the taxes on that return and you have an after tax return of roughly 6.7%, or almost double the return when compared to paying off the mortgage!

Unknown-1

But There’s More

The math between our two choices is the easy part. Clearly, investing money instead of paying off the mortgage will generate more value. In my example, investing produces almost two times the return as paying off the mortgage. But there are several other factors to consider:

  • Peace of mind – Clearly paying off the mortgage will give you great peace of mind but it will cost you. In my ten year example, the investment difference of investing the money instead of paying down the mortgage is worth over $115,000! That is a high cost for peace of mind but for those that are truly risk adverse, it may be still worth it to pay off the mortgage.
  • Cost of the mortgage – If your mortgage interest rate is over 5%, the financial freedom of paying off the mortgage may be worth it, since the financial benefit of investing the money is much smaller. But, something else to consider, if your mortgage interest rate is that high, consider refinancing your mortgage. Today’s rates are much lower.

Unknown-2

It’s A Personal Decision, Possibly An Expensive One!

For me the decision is simple, because my investments actually did far better than average over the past ten years, (10% including reinvested dividends) and my mortgage rate is fixed at 3.875%, I choose to continue to invest our money instead of using that money to pay off the mortgage. Our six months of expenses emergency fund gives us peace of mind as far as making the mortgage payments, as does our long term disability insurance. Worst case, I can change my mind any time and pay off the mortgage with a portion of the investments. But the priority is to invest the money for a greater return. Assuming my wife and I live an average life span and we keep the money invested in the market, we can expect to earn about $400,000 more dollars by this decision than if we decided to pay off the mortgage. That certainly helps calm the nerves about having a mortgage!

What do you think? This is what I think: Financial freedom (or independence) is hard work, but it is worth it!

Hey, do you love a deal as much as I do? If so, you’ll want to check out this deal from Amazon. Click and enjoy!


The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Kissing Frogs & The Pursuit Of Financial Freedom

 

It’s Been A Long Time

It seems like I have been really busy working on our family’s financial freedom since the start of the new year, but you can’t tell by the number of posts I have made (three). We have now officially completed one quarter of the new year and as I looked at my progress toward financial freedom, I see my blog post productivity going down, but seemingly my effort going up. What gives? So I took an inventory of what I have been doing. This is what I found: I made a lot of progress in finding side hustles and passive income. By that I mean I found what works and doesn’t work for me and my family for side hustles to help us meet my financial freedom goals. I want to share both our side hustle successes and failures to help others finds their path to financial freedom!

Unknown-11

Kissing Frogs

At the start of the new year I made it a goal to find side hustles that could grow our passive income or side income. I found some great ones that I can see my wife and I doing for the rest of our lives. But not before trying a whole bunch that just did not work out with our lifestyle and priorities! Like the fairy tale says: Sometimes you have to kiss a lot of frogs before you find your prince! We kissed a lot of frogs and found a couple princes.

Best personal finance book going! Click on the image for great DEALS!
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Before we take a look at what works for us, let’s review the side hustles that I pursued that did not meet our goals. Note: This is not to say these side hustles are bad and you should never try these. These all worked to some degree over a three month period but were not what we were looking for. Take a look at what didn’t work for us: Our Frogs

Unknown-12

First, I tried to make money with the apps Ebates and Ibotta, getting rebates on household purchases but I found that our frugal lifestyle doesn’t gain much in the way of rebates. In fact, I found the opposite, I found the temptation strong to buy stuff I didn’t need in order to get the rebate (That’s probably the point). So I stopped those.

Second, I tried the apps, Swaybacks and Receipt Hog, where you scan and track your receipts and earn money doing so. But after three months I only made $10 bucks, so the payback was not there. What did I expect on only grocery store and gas station receipts?

Then I tried flexjobs.com doing data transcription, but that was a lot of work for just pennies an hour, literally. Not right, so I stopped.

As a budding photographer, I wanted to see if selling stock photography on iStockphoto.com could earn us some good money, but after 3 months I learned that I can only make about $2/hour selling my stock photography online. So it is not a good source of side income.

I learned a lot by trying these forms of side hustle, but they weren’t for me. The payback was too low and the impact on our lifestyle was too great to keep pursuing them. So I looked for other sources of side income, and found a couple that really worked, sort of:

images-6

Downsizing Pays Dividends

My family decided to downsize and de-clutter our home. We didn’t physically move, just simplified and changed our style to one of a clean, de-cluttered look. In the process of repainting, recarpeting and removing all the old knickknacks and decor, we developed a huge pile of stuff to get rid of! That pile was the “inventory” for a huge garage sale, quickly followed by online selling through Craigslist, Facebook and Ebay. The results were great! We sold almost everything, including old stereos, clothing, furniture, cameras, shoes, jewelry, toys, stuffed animals and anything else you can think of. It kind of stung at first, getting rid of all that stuff. Some of it sentimental. But once we got started we made over $1500! The good news is that we made good money for such a small amount of work. The bad news is, we ran out of stuff to sell! However, this selling spree did open the doors, and our eyes, for us to sell other stuff we find in our travels on Ebay and other online marketplaces. I would characterize this side hustle as a huge success but you need constant inventory to keep selling online. We would need to find a source if that were to become a regular part of our side hustle income stream.

images-4

From Frogs To Princes

One of our 2017 side hustle goals was to generate $2,500 a month in side hustle income. The online efforts listed above weren’t going to get us there and the reselling of stuff on Ebay helped a lot but would not be consistent because we ran out of inventory to sell. So the next thing we tried was dividend investing and options trading. Now these forms of side hustles are not for everyone, but I’m pretty sure they are perfect for us!

First, dividend investing. I have been an investor in stocks for a long time, but only recently adjusted my investing strategy to dividend investing. For many years I was simply a growth investor, investing in growing companies who, for the most part, reinvest all their earnings into the business. This type of investing had done well for us but it was not generating any side income. And the vicissitudes of the stock market were not letting me experience financial freedom. I was not free of worry and until I sold the stocks, there was no real profit. But dividend investing seems to be my thing! In November and December I researched everything I could about dividend investing and made a plan which I executed in January. I reorganized my investments to include many dividend champions and aristocrats that started paying dividends right away. For each of the last three months, our dividends have increased and the payback on the time invested to research and buy stocks is exceptional. Far better than the $2/hour I was getting woking on selling stock photography! Our goal of averaging $1000/month in dividends is well within reach and something I really enjoy.

A great source for everything about investing and building your financial future:    The Street

The other side hustle I really enjoy and have had some success with is options trading. Again, option trading is not for everyone, but it is for me, because I love the research and technical analysis. And with the help of some really smart mentors, I have come up with a simple and easy way to generate income, leveraging my stock investments that are already in place. My process is really pretty simple: Each weekend, do my homework and make a plan that I then execute the following week. The time commitments are not very taxing and so far, for the first three months of 2017, have been quite fruitful. So much so that I believe our $2,500/month in passive income is doable and sustainable.

Unknown-9

Lessons Learned From Kissing Frogs And Finding Princes

As you can see, I was really busy pursuing side hustles for financial freedom these last few months, but you can’t tell by the few blog posts I made, (now four). But the lesson learned is that it takes a while to find your financial freedom voice and pursuit. For us, financial freedom is in the form of frugal living, ample savings and some extra income through two side hustles: Dividend investing and options trading. It took us a long time, and a lot of effort to sift through a number of side hustle opportunities to find what works for us. And we are not done yet by any means. We will keep trying new things to build our passive income in pursuit of financial freedom. I hope I get back to sharing more financial freedom via this blog over time too. In the meantime, keep on hustling and never stop pursuing your financial freedom. It’s hard work but worth it!

Need help with your personal finances and don’t know where to start? Start here:

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness