Keep tracking your net worth with a spreadsheet

I’ve written in the past about the virtues of tracking your net worth with a spreadsheet. If you take one thing away from reading this blog, it’s that you need to track your net worth with some frequency.

And to this ode, I have fallen short. I got off my routine back in May. In the past hour, I got back on the horse and caught up. Big four month gap there.

It came with a surprising revelation: my real estate cash account has gone low. There’s still quite a bit, but it is TOO low for my purposes. What happened? I have put out a bit of money to support my wife’s launching career as an author amidst other things.

What to do?!?! With every account in front of me, I reviewed all the monthly cash flows coming in and out and applied a handful of adjustments.

  • Dialed back the bonus principal payments on the smallest investment mortgage.
  • Slightly lowered the monthly payments on the HELOC.
  • Pulled back the monthly amount being routed into  prime checking.
  • A recent stock option exercise recently settled, so I scheduled it to move to this account.

With all these adjustments, the cash balance on my real estate checking account should start to climb. And this is why its important to take a pulse once a month by writing down every asset and every liability.

I also reviewed the state of things now compared to two years ago. My total in liabilities has shrunk by over $60,000 while assets have increased by over $100,000. Net worth has grown by 29% total over that time frame.

Cash, cash, and more CASH

Trying to save money for retirement? Got a plan in place? Does it include slips, bumps, and unplanned things popping up? Well, as my father has often said, “expect the unexpected.”

To do that, you need to have piles of cash lying around. Stacks of cash, ready to handle situations, is a must. Here’s one way to think about it.

Scrape together $1000 for an immediate emergency fund

This may hard. Tough. Seemingly impossible. Look at your paycheck. How much do you bring home each week? $500? $750? More? Try to set aside $50 or $100 each week, each paycheck. (Adjust based on your payout if you must). But get in the habit of setting aside money. Able to set aside $50/week? In 20 weeks (less than six months), you’ll have scraped together $1000. This is handy when your car’s radiators springs a leak and sets you back $500.

Now shoot for $10,000

Got an IRS refund coming next year? This is the perfect time to make plans to use it as seed money for a bigger savings account. Not invested. Not put in the stock market. Not stuffed into a mutual fund or real estate. Pure cash in a handy savings account you can reach should the need arise. Did you automated $50/week going into that first account? See if you can cut another $50 of spending out of your budget and pipe that into this account. Get a chunk of cash from the IRS, from a recently deceased loved one? Or perhaps you have stock options and ESPP plans? Those are all good opportunities to stock it up. Say no to that new furniture set, or a new TV. Put it off for a year. Start this first.

Automate all the things!

That was the title from a fellow software dev. I once had to wait on a colleague for a meeting. He happened to have “The Automatic Millionaire” sitting on his desk. I glimpsed at about four pages before he arrived. The message was to put as much of your wealth building plan on automatic as possible. Slow and steady is the ticket to success.

If you can get comfortable missing those deductions from your paycheck that are routed into savings, it becomes easier next year, to increase from $50 -> $60. Or from $100 -> $125. Get a raise next year? Increase your savings amount at the same time. Sometimes this is called “paying yourself first.”

Got direct deposit for your paychecks? Maybe it will cost you 1-2 hours to contact payroll, sit on the phone, configure a password, or lookup bank routing numbers. But learn how to automatically have your paycheck split up between your checkbook and your cash savings accounts. It will be worth it. Never put the onus on your to remember to set aside savings. Automate, automate, automate. Then, once a year, spend that hour of effort to get back into payroll and bump things up. Up, up, up. Get a 10% raise? Cut something out? Pay yourself by increasing your savings rate.

Don’t have direct deposit? It may be harder, but make it a habit to stop by the bank of payday. Make it a ritual. Glory in socking away that money. Not everything is going out the window. It can also help you focus on what’s REALLY important. Did you need to buy that DVD? That was $15 you could have saved. What about that dinner out? Another opportunity. I’m not suggested you turn into Scrooge, but cutting back a little here and there makes it possible to sock away bits of cash. And if you start small, you can grow tall in your savings rates.

Cash is what makes the rich

When you have piles of cash sitting around, opportunities become available. Options are on the menu. You car breaks down, and now you can fix it without digging the hole of debt. Your mortgage payment doesn’t line up with a paycheck snafu, but you’re covered.

It doesn’t stop there. An opportunity to buy a discounted note for $20,000 pops up. Now it’s in reach because you have the cash on hand. That’s why if you can reach $1000 and $25,000, you can then think about pushing that pile up higher and higher.

The rich keenly have plenty of cash on hand to plug into opportunities. We can too. (I have!)

Happy wealth building.

What is happening to the stock market?

graph_up2The stock market lately has gone CRAZY! So what’s happening? Well, I don’t have all the answers, but let’s look at some of what’s going on, and see what we can figure out.

At the beginning of this latest market crash, news reports came out about the price of oil dropping drastically. In case you didn’t know, oil is a key piece of the economy. Whose economy? Well, I know the most about the US economy, but oil is an international commodity, so it affects everybody. In essence, we all use oil to drive cars, fuel shipping trucks/planes/trains, and deliver most other goods of the economy. When oil prices fall, other parts of the economy rally. And when oil prices shoot up, other parts of the economy suffer.

So why is the whole market sliding down? One word: panic. Back in the 1970s, OPEC tried to control the oil market at an extreme level, and they actually contributed to a worldwide recession by pushing the oil market too hard. I’m not saying that is what’s happening, but when the price of oil moves a LOT, MANY investors panic.

All the oil stocks dropped off quite a bit. Strangely enough, stocks like VNR, which is 85% natural gas and has little to do with oil, has dropped 50% in the past 2-3 weeks. That is probably because many of the people that bought VNR are panicking that for some reason, VNR is next. In general ALL energy stocks will typically suffer a hit or a rally when stuff like this happens. A nice side effect for people like me that have a more long term aim at things is that I just reinvested a monthly dividend and picked up twice the usual shares.

But what about other things? VMW is a stock I pay attention to, because I still have a sliver of stock option. It has dropped to $77/share. It has nothing to do with the oil market. But many investors freak out and simply want to get their money out of the market when “shaky” situations like this occur.

This is known as systemic risk. Financial planners push mutual funds hard by selling the story of risk avoidance. They make it sound like during rough patches, mutual funds help you avoid such situations by spreading your risk across the whole market. The trick is, in these types of situations, emotions run high and people will pull their money out of everything. Hence, mutual funds will suffer losses just like other things. The trick is, when people cash out, they want their money. Mutual fund managers are forced to actually sell to dispense cash, and thus lock in losses. The time to get back to where you were takes too long and hence we all suffer.

The thing is, I have little money now invested in mutual funds. Instead, I have real estate, an EIUL, and other vehicles (one which I’ll post about soon!) My net worth has hardly dropped at all. And the yield on my investments is just as strong, meaning I’m not waiting for the market to recover nor am I waiting to “get back to where I started”. This saves me from having the proverbial “201K”.

I don’t have all the answers. I can’t tell you what the market is going to do next. But I can point out the risks that exist, and how mutual funds don’t provide the answers their salespeople claim. Everything comes with risk, and I have that nicely managed by having a super sized bank account filled with cash.

Happy investing!

habit-saving-money

Financial Math III: Diagramming Cash Flows

This post will wrap up my series on Financial Math. I’ve previously written about:

In this article, I want to go over a fundamental mechanism any investor should at least be aware of: Cash Flow Diagrams. If you look to the right, you’ll see a common example.

The first line, that goes upwards, represents a burst of positive money you receive. The following payments, or negative cash flows, are essentially used to payback the initial cash flow. Do you recognize what common financial structure it is where you get a big chunk of cash up front, and then make small payments over a certain time period? That’s right, a loan.

For another cash flow, check out this one. It is the opposite. It shows a big chunk of cash being put out, followed by several small cash flows coming back. Can you think of any examples that match this? Buying a rental property and receiving monthly rent checks. Buying a big chunk of stock and then receiving dividend payouts.

At the heart of any financial transaction, investment, or purchase, you can probably see one of these two diagrams. When you are trying to make a choice on whether to buy a big chunk of stock OR put the money into a rental property, its useful to sit down and chart all the cash flows. Then, you can compare the two. The ratio between the the periodic payments and the invested cash is known as the cap rate, and it’s important to understand the cap rate for each usage of your money. When one opportunity yields less than the other, we refer to it as opportunity cost.

When you are about to pick a certain investment vehicle, it’s good to also make a list of the risks involved. Real estate has certain risks. Stocks have another. And paying off your mortgage early may carry fewer risks, but also consider the loss of opportunity if you don’t build up any positive cash flows in the future. Are you painting yourself into a corner of being house rich/cash poor?

Ever see those commercials where you can “get your cash now?” They are all about taking over your tiny positive cash flows, and swapping them with a big one right now. Believe me, those people make money. They simply calculate your cap rate, plug in a profit factor on top, and essentially calculate a smaller amount of cash to hand you than if you had kept the cash flows for yourself.

Hopefully, this series will have alerted you to the benefit in understanding some financial basics. Happy investing!

Is defeating the beast of debt the best way to reach retirement wealth?

wealthI’m back! I’m been on a hiatus for the past 4-5 months, nose to the grindstone writing Learning Spring Boot. But I turned in my last rewrite about two weeks ago, and after a bit of decompression, am more stoked than ever to write!

I was spurred to comment about cash and cash flow based on what I heard on the radio. I listened as someone talked about how to get out of debt and move forward with reducing costs. The person calling in was stuck with student loan debt. They had already tackled some other things like credit card and auto loan debt.

As I listened, I kept hearing the same things. Get rid of debt, get rid of debt, and more git rid of debt. On the face of it, it make sense. But I kept thinking, what happens when they get past all this debt? What then?

Consumer debt is a menace. Many people take on too much. They don’t budget well. Translation: we all make more than enough to get by. Because we don’t manage our money well, we end up spending too much on things we don’t need. Get it under control, and you can go far. But at that stage, people start stuffing their spare change into 401K plans and IRAs. They don’t realize how much they are shooting themselves in the foot.

401k funds have shown a 20-year history of performing at or below 4% annualized growth. How bad is that? Inflation is slated to be around 3%. This means that if you get the average (and don’t tell yourself you’ll beat the average), you are barely ahead of inflation. How good is that?

When you consult a financial advisor, they will talk to you about how this fund and that fund are performing. That may be true, but there are some innate biases built in that aren’t obvious. First of all, the funds that exist today aren’t the same funds that existed ten years ago. When funds perform poorly and people dump their holdings, brokerages houses end up closing things out. Those that are left, get transferred into another. And the next year, if you were to ask for the brokerage house’s average performance, the closed out fund isn’t part of that picture.

Another factor not mentioned is that funds don’t invest; people do! People buy funds. People buy stocks. People buy real estate. Hence, the question you should ask an investment advisor is how has his clients performed? What is his client’s average annualized growth rate? What is the average/minimum/maximum life he has held clients? A good investment advisor that is making his people wealthy should have long standing clients. Their annualized growth rates should be high. Measuring the performance via a prospectus is the wrong focus and won’t reflect how clients are doing. In other words, it won’t show how YOU will do.

So if you realize that 401K funds aren’t the answer, the next question is: what DOES work? What are you willing to do to get there? I invest in real estate, stocks, and EIULs. And being cash flow positive with no consumer debt, I am willing to take on debt. The caller on this radio show sounded unready for anything like that. I fear they will clear out all this debt and then be unready to entertain borrowing money to invest in real estate. Instead, they are going to go with the host’s plan of buying up mutual funds. Things will really sizzle, because they won’t be hampered by car payments, student loan payments, and credit card payments. And they will make it to retirement, perhaps saving up $1MM.

And that is when they will discover that it’s not enough. Their financial advisor will tell him or her that they can start withdrawing NO MORE THAN 4%, i.e. $40,000. Then Uncle Sam will ask that they submit $4000 in taxes. (I’m being gracious and assuming that landing in a lower tax bracket results in an effective tax rate of 10%). At the end of the day, this person that tackled small bits of debt thirty years earlier, is now raking in $36,000/year. That maps to $3000/month.

Can you comprehend living on that tiny amount of money? Do you see cruise trips or spending a month in France on that kind of cash? Was slaughtering the beast of debt and not considering future loans to buy cash flowing real estate worth it? Not for me. I plan to reach retirement with MUCH more than $1MM, because it takes much more than that.

Stay tuned for more discussions about building retirement wealth.

Buying a car with cash

toyota_highlanderI just recently bought a new car with cash. The feeling was great!

Let me fill in some details. My wife and I have been looking into another car for at least a year. We had looked at many models and had a list of features we wanted. We were also open to buying used, perhaps up to 2-3 years old, if it was in good shape and didn’t have gobs of mileage. But the key part of it was: it would be a 100% cash purchase.

Unfortunately (or fortunately), we couldn’t find anything used that didn’t have high mileage. It only cost a few thousand more to buy a 2014 new car with less than 200 miles than a used car with 70,000+ miles. (Some of these used cars, in fact, cost more than what we got). To top it, the features they include with the baseline model were WAY more than we needed. Given we have smart phones and our own DVD player, the upgrades were frankly unnecessary.

Car payments can really drag you down

Top priority: I didn’t want to take on a car payment. I’ve heard statistics say most cars you see driving down the road are dragging along a $400+ monthly car payment. If you’re reading my blog site, then I can bet you have already heard the pitch to save up and buy a car with cash instead of financing it with debt. I heartily agree with this practice.

The other piece of advice I often read but doesn’t seem to get stressed as much, is to try and make your car last a long time. Don’t get caught up with “car fever” and think about new one three years from now. That’s already burned into me. My wife’s car is eleven years old, and our minivan is seven.

Here’s some good news from the industry according to Kelley Blue Book,

“Americans are now holding onto their new vehicles for a record 71.4 months. On the used vehicle side, that interval has risen to 49.9 months, a figure that also represents a new high mark. Collectively, the ownership period currently stands at 57 months, up from about 38 months back in 2002.” — Kelly Blue Book, 2012

57 months equates to about five years. That’s good to hear! But better yet, if you can keep your car for ten years, you will be way ahead of the curve. Cars require a significant outlay of capital. The last car I bought was seven years ago, and I’m still driving it.

What if you can’t buy a car with cash?

I can certainly empathize with those that want to pay cash but simply can’t. I don’t want to get preachy. There are radio shows and forums that talk about how you CAN in fact buy a car all cash. You just have to lower your expectations, save, etc. Everyone reading this has probably heard all about it. I’m not hear to sway you in that regards.

What I want to write about is how my ability to pay all cash represented a more deep seated realization. My net worth and money making efforts have grown to the point that I CAN pay all cash for a car.

Given the current performance of my rental properties, EIUL and dividend paying stocks, I feel like the next time we buy a car, we will be even BETTER off than now.

I don’t have the data on hand to back this up, but I’m speculating that those that don’t have a solid wealth building plan in action probably tends to wards buying cars more often and using financing. Cars are nice and shiny. We all like to have them. I’ve driven through neighborhoods where things don’t look very wealthy, but people still seem able to have a couple nice, new cars. It’s probably the biggest “toy” people can buy and get it financed through the bank.

As my father told me the last time I went car shopping, “your goal is to beat the average.” That applies to building wealth, buying cars, and anything else money related.

 

Cash flow vs. net worth

Cash flow is what we need to operate. Cash flow pays for food, rent/mortgage, gas, and everything else we need. As one person commented, “you can’t eat net worth”. And he’s right. In fact, his corollary point was that net worth can flutter around based on the state of Mr. Market. Many people will happily point out “cash is king”.

All of these things are quite true. But it’s actually a balancing act. As Jeff Brown has pointed out in many articles, if you focus on growing cash flow, it retards the growth of net worth. Focus on growing net worth, and cash flow will suffer. They are two sides of the same coin.

Both cash flow and net worth need to viewed in their proper light.

  • Cash flow is the money you can tap. 
  • Net worth measures how much cash flow you can generate. The bigger your net worth, the bigger a cash flow you can generate.

To buy Disney stock (or not)

Let me give you an example. Since I took on dividend growth stock investments (not mutual funds) as one of my baskets of passive income, I have been reading a lot of websites with differing viewpoints on stocks. One site I read repeatedly mentions Disney (DIS) as a company that knows how to adapt very well to changes in technology. They have a strong grasp on how to roll out the same top notch movies every time a new way form of technology comes out. Remember buying them on VHS? Then came DVD followed by Blu-Ray. Every time a new way to consume media appears, Disney has their A-game on, and is ready to re-sell you the same movie you’ve been watching for twenty years.

I have a strong attachment to Disney. I love their movies. But that is not all. My wife works part time for Disney. We travel periodically to our vacation home outside of Orlando and take the kids to Disney World. We even took them to trick-or-treat earlier this month. You want to talk about a place that appears to have suffered no recession in the past five years? Disney World is it. I’ve been there for the past five years, and everyday, the place is packed. So I have a strong desire to buy their stock.

But I won’t. Know why? Their dividend rate is 1.1% and they only pay once-a-year. Compare that with Vanguard Natural Resources (VNR), the company you probably have never heard of outside this blog. They’re dividend rate is 9% and they pay on a monthly basis with a tax deferred basis.

How you can beat a 9% paying stock with one that pays 1.1%

On the surface, it would appear that Vanguard beats the pants off Disney, but guess what. If you focus on cash flow you can make Disney beat Vanguard every time. You simply buy ten times as much Disney stock, and your cash flow will exceed that of Vanguard! Disney is solid. I’m sure they’ll continue to stay in business for decades to come. That $10 billion company certainly isn’t “mickey mouse” when it comes to making money.

I’m sure you realize my suggestion at buying 10x DIS is ridiculous. But why? Because if Vanguard is doing that well, why not simply buy ten times more Vanguard? I hope this scenario seems simple to you. The trick is, people don’t recognize that it appears in many other places.

For example, people will buy real estate deals in California and put down high amounts of capital to make it “cash flow positive”. That is the same thing as buying lots of low yielding stock to make it flow lots of cash. They don’t realize they are killing their potential to grow their net worth because they are focused on one thing: cash flow!

If you take your capital to other places, like Texas, you can find real estate deals where you might get the same amount of rent for much less capital input. In essence, if you seek the right market, you can get a better yield.

So always look at both and make sure your total net worth is growing at a suitable level with tolerable risk.

Analyzing cash flows against invested capital

Back in college, I took a course in engineering economics. I still have the textbook upstairs. I remember learning how to draw cash flow diagrams to solve problems.

Essentially, you draw one large arrow anytime you are either investing a big chunk of change or cashing on a big sale. The arrow stems downwards if its an investment, because you are effectively losing the money in present.

This is followed by a series of short arrows usually on a yearly basis, to represent the return on your investment. If you made an investment, you would have a big negative arrow. The tiny positive arrows represent your payback, i.e. yield. Essentially, at some point in the future, the small positives add up and exceed the big negative.

And that’s the thing. Everything you do with money is essentially either plunking down a fistful of cash for small paybacks, or doing the opposite by making lots of small payments to receive something of big value later on. Anything you do must be weighed on whether the rate of payback is in your favor.

Case study – cost analysis of solar power cells

Something that I was always interested in was installing an array of solar cells on the roof of my house in order to offset the monthly electric bill. People all over the internet are eager to share their story of how they installed a solar array and knocked their bill to but a fraction or even to zero.

I wanted to do the same. But before I moved a penny, I started researching what it would cost me. And I wanted to know when I would have saved enough to pay it all off. The answer shocked me and caused me to scrap the whole idea.

Solar power cells essentially go at the rate of $4 per Watt. Spend $4000, and you get an array that will yield 1kW of power. I looked at my current power bill at the time and noticed that the rate about about $0.10 per kW-hour. Another nugget of knowledge is that back then, I lived in Florida. I visited a web site and figured that in Florida, you get an effective five hours of sunlight each day.

The calculation is quite simple.

  1. A 1kW solar array at $4000/kW divided by $0.01/kW-hour at existing rates = 40,000 hours to break even
  2. 40,000 hours divided 5 hours/day = 8000 days
  3. 8000 days / 365 days/year = 21.9 years

To break even with existing cost of electricity, I need almost 22 years. This is where a big negative arrow of $4000 needs 22 tiny arrows of about $182 in cost savings. I have read that panels are insured for up to 25 years, but that is cutting it close. What if the panel lives up to its 25 year lifespan? Will it have been worth it to have invested $4000 in today’s dollars to have netted $547? Over 25 years, that renders an annualized growth of 0.5%. That is way less than the inflation’s 3% rate.

It would be more cost effective to take $4000, buy some shares of VNR stock, and use the monthly dividends to pay the power bill. The solar cell would save me $0.50/day or $15/month. $4000 of VNR stock would yield about $28/month and probably grow in value and increased dividend payments down the road.

That is when I shelved the whole idea of buying solar power cells as the means to save on power bills. If you want to do it to help reduce pollution, but all means pursue it. But don’t take it on as a great money saver. It isn’t.

FYI: This doesn’t include installation costs which sometimes doubles the entire procedure. And even if you factor in a 30% credit on the entire installation, it still comes out costing more than $4000/kW.

Bottom line

This article isn’t about the cost of solar power cells. It is how everything you do with money needs to investigated on whether it produces the yield you think it does. It’s critical you find the break even point. Some things, like loans, break even when you have paid it all off. In that case, the emphasis is on the rate you are paying. Is there some other way you could invest the money and come up with a better rate, i.e. usage of your money.

I have a HELOC costing me 4%. I also have an investment that yields almost 9%. When it has completely paid off the HELOC, the yield will continue all the way into retirement, and hopefully, as a legacy to my wife and children. In the end, I will end up with more harvested money than if I had simply taken all that cash and paid off the HELOC immediately. I might have paid interest along the way, but eventually my stock will produce enough cash to have even paid for all that interest and still be producing money.

Diminishing returns

I’ve previously written about how I took the proceeds from the sale of our old home and used it to buy a big position in VNR, an MLP stock that is yielding almost 9% spread out in monthly payments. I am using the monthly distributions to payoff my interest-only 4% HELOC and pocketing the difference.

So what do you do when the stock goes on sale? I bought my position at a relatively cheap price of $27.85/share. It’s a good deal, considering the stock has fluctuated all the way up to $30 in the past year. But in the past month, due to an SEC investigation of one of their competitors (not VNR itself), the entire MLP sector has shed lots of investors. I have seen it hit bottom $24.23. Buy more? After all, buying companies with solid business but suffering from some emotional panic on Wall Street is a key strategy employed by Warren Buffet.

Well…that depends. While that’s a great price, I have to look at it through the lens of my entire wealth building plan. Let’s see what we can figure out.

Is this too much exposure?

My plan (not necessarily your plan) is to have rental property as my #1 investment with quality, cash flowing stocks as #2, and liquid capital as #3 to hedge my plays. I have already built up a very nice position in VNR, so if I had the cash to buy a similarly sized increase, I have to ask myself if that cash would be better spent knocking out a rental loan.

Knocking out a rental loan doesn’t have the same immediate cash yielding benefit as buying more stock. But the sooner you pay down a loan, the sooner you can sell and releverage that property into more real estate. Using prudent leverage, that same amount of cash can probably produce a higher yield over the years in real estate than buying more VNR. Hence, buying too much VNR could hamper my real estate growth.

What about the other parts of my wealth building plan?

Any good real estate portfolio needs cash to hedge things. At certain times, it’s best to put extra cash into your cash reserves. Instead of investing in other things, it’s best to stuff it in the proverbial mattress. That’s why when new money comes along, we need to see where it fits best.

From time to time, our cash reserves can get depleted and we need to shore things up before taking on new investments.

What will be my net yield?

If it’s not a big chunk of cash, but instead something smaller like $100, $1000, or even $5000, then it’s probably not worth it. The rule of thumb is that I get $7/month for every $1000 of VNR I buy. Even $5000 more of VNR would only yield $35/month more. That’s not even a 10% increase in my current monthly yield, so I doubt this is the right place.

Conclusion

Bottom line, I have a good position in VNR that should provide a nice monthly cash for many years to come. I don’t need anymore. Instead, I’m going to check the other parts of my wealth building plan and decide where to apply the next chunk of change.

Always be prepared if you receive chunks of money

It’s good to always be thinking, “what would I do if I had a bunch of money?” I was reflecting on a previous article I had written, and really observed how the people that get a lump of cash often call a radio show because they DON’T know what to do. It’s important that we aren’t caught off guard and panic, but instead are prepared with a plan in mind.

The reason is, opportunities occur. We need to be prepped and ready to go with putting that money in action. For a long time, many years in fact, I had developed an approach that any big chunks of money I received would be sent into a spare bank account. I would “park” the money there, and let it collect. That way is was a little out-of-sight/out-of-mind. Every few months, I would examine the bank statements, and think about what to do with it.

Back in 1999-2000, before banking went online, I worked a particular assignment that paid me double my usual salary. I also had huge reimbursements for food and lodging. So I called up my local bank and asked if I could set up an automated deposit to another bank. My checkbook was filling up too fast! They said sure, not a problem. Apparently, they’ve been doing this type of stuff for decades!

Suffice it to say, working this way for over a year allowed me to sock away plenty of cash. At the time, I bought mutual funds and also kept enough cash to put a down payment on a house a couple years later. I didn’t just spend the money on things, I saved for the future.

What about today?

My wealth building plans of today are very different than back then. At one time, a few years ago, my plans had shifted to the point that if I came in contact with a big sum of cash, I would focus on paying off our primary mortgage. Much to my benefit, the money didn’t materialize before I learned to NOT DO THAT.

Here is my current mental process for dealing with big sums of cash:

  • Can this money be used to buy cash flowing assets (real estate or VNR)?
  • Would the cash flow be enough to pay any carrying costs and still profit?
  • If not enough for real estate or VNR, what about a solid growth stock like BRK-B?
  • Have all costs, risks, and rewards been considered?
That is how I was able to take the sale of my previous home and quickly figure out that it would be better to buy a big position in VNR instead of paying off the HELOC. When the HELOC costs me 4% and VNR pays 8.6%, then the profit margin is clear.

I am also looking at cashing in my next stock option to buy even more VNR in order to pay off the HELOC faster.

Finally, when I withdraw the remains of my 401k, I’ll probably buy another chunk of BRK-B. There are no carrying costs involved with that chunk of money, so I think it would be good to “park it” in BRK-B. Should pay much better than a money market fund let alone some index fund.

What do these options provide?
I’m now at the point where if one part of my wealth building plan needs help, another part can assist. For example, if BRK-B grows really fast, it’s always an option to sell a piece of it and pay off a real estate loan. Or if I build up enough VNR and pay off the HELOC, I can target the monthly dividend towards the rental loans or buying more BRK-B. Or I can sell one of my rentals and buy another EIUL in four years and a day to lock in the wealth.
Options beget options. The more active I make my role in my investment plan, the better I seem to do. It also pays to get out of investment vehicles that offer little if any choices and have a bad history of performance (401k and mutual funds anyone?) By being ready with plans in place, we are more likely to spot these opportunities and not get steered into destroying our wealth building vehicles like mortgages out of panic from some radio host.