Utility bills left unattended can put a serious dent in your budget. There is good news. You can reduce your electric bill 80% or more in a few short steps. Heating, water, internet and other utility bills can also be reduced by massive amounts with a few tricks.
The old adage ‘A watched pot never boils” is an apt place to begin. Before you can reduce your utility bill you need to know how much energy you are consuming. I get invited to seminars periodically that promise massive energy savings. They offer a free meal and Mrs. Accountant and I are always up to learning something new when a free meal is involved. The seminars are all the same. They try to sell over-priced products, many of which will never work if you understand even a small amount of science.*
Back by the ‘watched pot’ we are beginning our journey to energy reduction. The first step is to record your energy usage. For some reason, when I ask clients to record their energy usage the amount they use seems to decline. Like the ‘watched pot’, energy is still consumed. The water will boil, it just seems to take forever when you are watching the darn thing. Scientists know when something is observed the results can be affected by the observer. In medicine it is called the placebo effect (if you think it will work, it sometimes does, even if it is a gelatin pill). By watching your energy consumption you become aware of how much you are using and start to take steps to stop waste.
You will all think I am crazy when I tell you this, but I know how much electricity I used on any day going back nearly three decades. My morning routine includes feeding the animals, feeding the fish, weighing myself, and checking the electric meter and recording the stats. When I am on vacation I check the meter when I return and prorate the daily usage. To prove I am as insane as I claim I have included a picture in this post showing the hand written pages of records I have going back years.
Not everyone is into the insanity routine. I get it. What I will ask you to do is record your usage on a daily basis for one month. One month only qualifies you for crazy, leave the insane to me. The goal here is to get you to feel your daily energy usage. At the same time I want you to pull out your utility bills for the last year. What we are looking for here is your energy consumption per month. To make an accurate comparison, we need to compare your energy consumption to the same month of the previous year. Recording your electric meter reading each day may actually affect your electric use. Just watching the darn thing can make a difference.
Bring Out the Ax
Now we can roll up our sleeves and start chopping that electric bill down to a nub. I will use examples I have used in my office, home, farm, and with clients. Some of my recommendations are available around the net, many procedures will be new. So you understand my home electric bill, I need to provide some background. I live in northeast Wisconsin. We get really cold in the winter; our summers are cool, but humid. My home does NOT have a furnace, air conditioner, or hot water heater. I have a geothermal heat pump to cover all heating, cooling, and hot water needs. My electric bill is much higher in the winter because the heat pump uses electricity. Since I live in the country and have my own well, I do not have a water bill. I do not have a heating oil or natural gas bill either because the heat pump handles that. Our electric use for cooling is near zero because we circulate cool basement air to cool our home.
The reason I record my electric use daily is because I will know instantly when something is consuming an abnormal amount of energy. The first steps to reducing energy use are easy. Most lighting needs to be LED. Some low use lighting areas can wait for an upgrade. I updated security lighting around the office and barn lighting when LEDs were really expensive. The math still made the transition worth the investment.
Example, per lighting unit:
Lighting 12 hours a day in the barn for the animals or security lighting around the office on a sensor:
100 watt incandescent: 12 hours a day (1.2 KW) x .14 per KW x 365 = $61.32 per year
24 W CFL: 12 (.288 KW) x .14 x 365 = $14.72 per year
7 W LED: 12 (.084 KW) x .14 x 365 = $4.29 per year
I found the wattages on lighting available at a local hardware store. An LED is more expensive upfront, but uses $10.43 less in energy per year than a CFL. LEDs have come down in price significantly and are frequently the better deal. I always compare lifetime cost of a product before buying. The estimated fuel and maintenance costs of a car can take an original purchase price and increase it many times over. Light bulbs are the same.
Once lighting costs were under control I moved to other energy offenders. For me, the farm takes a lot of electricity. The steers require an electric fence, lighting, and heat during the dead of winter for water pipes and water feeders. In the barn I refuse to use a fire source to heat the utility room so only electric heating tapes on pipes and electric space heaters would do. I sealed and insulated the barn utility room and created an insulated box where the water works entered the barn. This simple move eliminated all use of electric heating tapes, a major savings. Today, only one space heater in the barn is needed. It runs on low and only a short time in January and February.
My personal experience is different from yours. Without a farm or barn to keep warm your electric needs require a different strategy to reduce your utility costs. The geothermal heat pump in the house is a low cost way to reduce home heating costs, but most people either don’t have a geothermal or live in a warmer climate where it is not needed.
Where the Tire Meets the Pavement
Because we each have different issues to resolve in lowering our electric bill, I will share a few tricks you can tailor to your personal situation for maximum savings. Simple ideas like lowering the temperature in the winter or closing off (and not heating) unused rooms is something you should already have implemented. What I refer to is eliminating energy vampires and wasted electric use.
There are two important steps you must take to reduce your electrical usage by the maximum amount without sacrificing lifestyle. The first is to record usage. In this instance I am not talking about recording your daily or monthly usage. What I refer to is the usage of specific appliances. To do this you will need a Kill-a- Watt monitor. They are fairly cheap, but I went to my library and borrowed theirs. The monitor is plugged into the wall and the appliance is plugged into the monitor. What you are specifically looking for is how much electricity the device is using when turned off. You might be surprised by how much money you are throwing out the window even when appliances and TVs are not on. A quality power strip (invest in a quality power strip, cheap power strips do not always work well or for very long) will resolve the problem. You can turn off the appliance at the power strip and stop the energy vampire. You will also want to test other appliances for usage. A refrigerator may suck more current than your think. A newer appliance with lower energy use might pay for itself in short order.
The second step sounds a bit weird at first. I assure you this really works. Almost all devices, including lighting, make noise when consuming electricity. I perform a regular energy audit of my office, farm and home by getting rid of all noise and listening. As you identify each energy use by sound, unplug it. You will be surprised by how many things are running. A large part of your electric bill goes to devices you didn’t even know were consuming your money, ah, electricity.
One final example before we call it a day. Seven or eight years ago a business client in the office wanted me to help him identify electric use in his commercial building. I explained how I used sound to identify electric use. When I finished my energy audit his electric bill dropped 73%. The guy just shook his head and told me I spoke with demons. I found over 100 items in his building sucking electricity he had no idea were running. We swapped out some lighting, installed timers on some devices and turned off unnecessary equipment.
I guess I could have given you a standard ten point list of stuff to turn off, but my way works better and adjusts to fit most needs. For the most part we are not talking about heating costs here; we are focused on electrical usage. Heating and cooling bills are the topic of another post.
Excluding the farm and geothermal heat pump, my home uses 7 – 10 kilowatts per day. This number does include the hot water produced by the geothermal. The winter months bring larger electric bills, but the weather determines usage. The farm is also weather dependent. There are ways to reduce those farm costs and I would be happy to write about them if enough of you would benefit from the dialog; let me know in the comments. I suspect most readers have a home or apartment and maybe a business. You can also apply this knowledge to rental properties, especially if you are paying the utilities.
There is more to the ‘cut your utility bill’ discussion, but. I have flapped my lips enough for one day. In the near future we will dig deeper into this topic. Until then, check your library for a Kill-a-Watt monitor and listen for the sound of money leaking from your home.
* High quality aluminum foil in the attic will cut your heating/cooling bill a bit, but not worth a $3,000 investment. You can do it yourself for around $100 here. You do not pay $80 for an LED lightbulb; you do know you can buy LEDs from Amazon at a reasonable price. A capacitor pack does provide some surge protection for your home, but will not lower your electric bill much. My research indicates the energy savings with one of these devices is limited. Some people claim they really make a difference in lowering your electric bill. You can save $100 or more at Amazon if you want to do it yourself.
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Life is more complicated than it has to be. More moving parts do not mean better. Electric cars have one moving the part, the motor; whereas gasoline powered vehicles have several hundred moving parts. More moving parts mean more things can go wrong. When all things are equal, the machine with fewest moving parts that still gets the job done is usually the best choice. Electric cars will outperform old-fashioned gasoline engine vehicles on every front as electric vehicles are improved. Lots of explanations will be given as to why electric cars blow gasoline engines off the road, but the simplicity of an electric vehicle will be a significant reason for the lower costs and higher performance.
Enter William of Ockham, a friar from the fourteenth century. Way back then he told us why electric vehicles, with fewer moving parts, would be a better choice once the technology was worked out. William of Ockham gave scientists a tool we now call Occam ’s razor. What William taught us is that the simplest answer tends to be the correct one. Scientists use Occam’s razor as a tool to break down theories into their simplest components. Therefore, by breaking down the theory into small (simple) testable parts, fewer excuses can be made when the results are falsified. When there are too many moving parts it is too easy to make excuses as to why the experiment failed. With fewer moving parts the test results are more reliable because there are fewer opportunities to give explanations for the test failure due to other circumstances. The same applies to the world of FI (financial independence).
Giv’em Hell William
Humans like to make things more complicated than they have to be. Sometimes it is an honest attempt to make things better; it is also a great way to cover up a bullshit story. Less than a decade ago a financial animal used to collateralize mortgages were made massively complex. Nobody understood how they really worked. Some say the creators of these new financial beasts did not understand what they built. The excessive complexity of these structures made it easy to peddle the securities to unwitting fools, ah, investors. Very intelligent (and wealthy) investors had their heads handed to them in October of 2008 when the wheels fell off the financial cart with a million and eighteen moving parts. We are still digging out.
Out entire society can suffer the consequences of fools. AIG, the giant insurance company required a massive government bailout due to all the complex failed securities they held. Banks and other financial institutions were in deep doo-doo because they owned stuff they did not fully understand. They got creative in their investments and lost it all. Only the taxpayers kept many of these companies afloat.
If financial institutions followed Occam’s razor and invested in boring, but understandable investments, we may not have had the decade we just went through. But before we kick the daylight out of the banks, brokerage firms, and insurance companies, let us take a close look in the mirror.
From my side of the desk I see some really crazy stuff. I am the guy who accounts for all the wild investments people make. For some reason there are people who can’t stay away from the most exotic and complex investments. Most people reading this blog will not fall into that camp. The majority of readers here save a massive percentage of their income and invest a fraction of their savings into alternative investments like Lending Club or individual stocks, with the bulk going into index mutual funds.
Smart people do stupid things from time to time. We know index funds have lower fees and outperform actively managed funds over time. Yet I still see people throwing money into actively managed funds, timing the market, and chasing hot stocks. In my portfolio I keep $100,000 in a mad money account. This is money I can afford to lose and it allows me to test investment ideas. Lending Club and similar investments are not considered a part of the mad money account. Alternative investments, like Prosper and Lending Club, make up less than 10% of my portfolio. Most of my money is in index funds at Vanguard. In my mad money account I generally buy individual stocks.
It does not take long for complexity to settle into the mad money account. As long as I own a stock, I should probably sell cover calls against the stock. Maybe I can juice my return by selling naked puts to collect premiums until I end up assigned the underlying stock due to a price decline. It all looks good on paper. By the time I am done thinking it through I realize all the moving parts are a recipe for disaster. As a result, my mad money account tends to be a portfolio of stocks I think are good investments (they have a high return on invested capital). The mad money performs well when I invest in quality companies and let them ride. When I start to play with my money (get too smart for my own good) I end up wasting my time and lose money. Good thing I have a low threshold for pain and am a fast learner.
Retirement creates plenty of angst in my clients. (I am far from innocent myself.) Too many people worry if they will have enough. There is a simple formula call the 4% Rule. The rule simply states that when you have liquid investments equal to or greater than 25 times your spending you are able to retire. Once your investments reach 25 times your spending, taking 4% each year from the account will cover all your spending needs without ever depleting the account. The 4% Rule has been historically tested and it stands the test of time if you invest in a broad basket of stocks, otherwise known as an index fund.
You do not need to check around the internet much to see complexity added to the 4% Rule. People are never satisfied when things work; best to throw a wrench into the works and muck it up. This time could be different, but it will not be. Simple is better and it works. William, once again, was right. Keep it simple.
The other crazy thing people do is save a pittance of their income (like 10% or so when they should save 50% of their gross) and then invest in ‘shoot the moon’ ideas to make up for the shortfall in their savings rate. When you save 10% or less of your income you will wait a long time to accumulate enough to afford retirement. You need to save 30%, 40%, and yes, even 50% of your gross income. Max out all your retirement accounts, fund your health savings account if available, and then start pounding the non-qualified accounts. You can start at zero and reach retirement in less than fifteen years. Most people don’t get serious about retirement until they hit age 50. Then they go, “Holy shit! I only have fifteen years to get my finances in order if I want to retire by 65!” They get it done. My response, “Why not get serious at 20 and be done with it by age 35?” Ah, but what would a wealthy accountant know?
Financial advisors are the greatest risk to your portfolio. (Financial advisors can send their hate mail to me at: firstname.lastname@example.org) Many financial advisors mean well, others are intentionally belligerent. In my opinion, the only thing a financial advisor needs to do to be a superstar is keep you invested when everyone else is panicking. They should also encourage you to stop chasing a rising stock market. Invest in index funds when you have money and don’t touch it until you retire. (In retirement you can spend the dividends, around 2% on the S&P right now, plus another 2% of the capital.)
All those complex investment vehicles (they sound like gasoline powered cars with all the moving parts and breakdowns) are sold by investment professionals. They sit around all day in the brokerage firms thinking of ways to package products with massive profits to the firms. On paper it all looks good with protections in place. What you really have is a gasoline powered investment portfolio with so many parts bumping and grinding it is only a matter of time before the wheels go their own way.
Back in the early 1980s a salesman came around selling diamonds. “Diamonds have never gone down in value,” he proudly proclaimed. Give my dad credit for passing on the idea. Within a year diamonds were down . . . a lot. The complex maneuver proposed by the salesman to guarantee a profit in diamonds was too good to be true. The investment was not simple by any means. Companies bring me all kinds of ideas to peddle to my clients. I would be a liar if I say I never fell for it. I passed on most, but sometimes it looks really good. Experts get fooled on crappy investments, too. Remember, connivers, I mean, smart people put these things together. Most sales pitches show how it can never go wrong. It does.
You will get to financial independence faster by avoiding the crazy, complex investments. I know index funds are simple and so boring. They also outperform just about any other investment you can make. It works! No moving parts. It is so simple to invest in a broad basket of stocks covering the majority of the economy. Remember Occam’s razor before doing anything and you will save yourself a lot of pain. Or, you can always try to outsmart the system. It is always nice to have a tax write-off.
Financial independence means you can indulge your dreams. By 1995 I had reached a level of net worth where I could realize many of my dreams. Coming from an agricultural background I wanted to move back to the country and have a small farm. Ten acres with a house and barn came up for sale a mile from where I grew up. My dream was now owned.
In 1982 the family farm went through a wrenching bankruptcy. I was eighteen and had no future. Everything I knew related to farming. The pain etched a deep wound in my psyche that never went away. My desire to live in the country was not the whole dream. I had to own a small farm. In my mind I had to understand why the family farm died when I was at such an impressionable age.
With ten aches to my name I started my side farming business. The tax office was humming along at full speed and my hired staff was nothing short of awesome. Back on the farm I began the process of healing childhood losses. First I bought steers, then chickens. At one point I had 48 steers and 400 chickens on the farmstead.
Raising 48 steers and 400 chickens is a lot of work when you are doing it Amish style. I used a limited amount of automation; the rest was manpower. The work was great exercise. My goal was to keep costs as low as possible. I had to make the farm profitable, proving to myself it was possible. The only way to bury the demons was to create a consistently profitable farm.
I managed my mini farming empire with an intensity only an accountant can bring to bear on the finances. Soon the farm was earning a tidy profit; sometimes the profits were excessively tidy. I had proven to my inner self farming was possible as a way of life. Year after year I added to my net worth from the proceeds of my farming efforts.
Falling in Love
The quiet rural lifestyle always appealed to me. I lived in the city for a few years, but was never really happy there. My gaze always wandered to the countryside. It is true what they say: You can take the boy from the country, but you can’t take the country from the boy. My farmette is my greatest pleasure outside family.
The animals are the part of farming I love the most. It still brings tears to my eyes as I recall memories of Christmas Eve looking down on the steers quietly tucked into the warm straw, chewing their cuds. Steam rose from their muzzles as they made lowing sounds. A humid warmth rose from their bodies with the clean smell of well tended Holstein steers.
The chickens were more fun than nostalgic. We butchered chickens to sell for a few years, but the work was more than I was willing to do so we cut back to personal use only. The hens produced enough eggs to put adequate cash in the till to make it worth the while.
Losing What I Love
The steers are gone now. I actually have to stop to wipe a tear as I write these words. For twenty years they were a major part of my life. I fed them twice a day and cleaned them regularly. My animals were so tame I could snuggle right in with them and I did. Last summer the last steers were loaded on the cattle truck headed for the stockyards. There were no new calves to replace them.
Beef prices were sky high last summer so selling steers was kind to the checkbook. However, calf prices were so high I could not see any way to make a profit buying replacement stock. It was my excuse to be steer-free. Prices have changed a bit since then. I could re-enter the beef business, but have chosen not to. The direction my life is taking will not include farming. I did not even buy replacement chickens this year. As the hens age and die, the chicken part of the enterprise will also cease to exist.
My heart and soul are in that farm. The only reason I stuck around was because of those animals. The tax office filled in the blank spaces of time. The first thing each morning and the last thing each evening I tended my animals. I looked forward to it. I spent many hours working around the barn and just watching the animals go about their carefree lives.
My interests are all encompassing. I want to do everything, experience everything. Of course, it is not possible to experience everything. We have to pick and choose what we want to focus on. At best we can handle a few projects at once. Any more than a few projects and we lose the flavor of any experience at all as we become overwhelmed. I can run a farm and a tax office. When the farm entered my life the rental properties started to get sold until only one commercial property and one land contract remained.
There are only so many hours in a day. Time for relaxation and reading are necessary for good physical and mental health. Too much focus on structured projects (sounds like work) quickly diminishes the pleasure they bring.
With the exception of this year, I spend only a small amount of time in the office outside tax season. My practice will eventually merge with another firm or be sold outright. (Don’t worry clients. I will still be around for a long time. Tax accounting is who I am and what I do. I will only cut back to my normal schedule from years past.) My dislike of travel is well documented. However, my varied interests can only be satiated by travel. I enjoy being places. The getting there is the pain in the ass for me.
The steers are gone. I will always remember those days with fondness. Soon the chickens and perhaps even the farm itself will be gone. Maybe I’ll live in the city again. I doubt it. The country calls too loud. It may sound crazy with the way I talk about travelling, but I think I would enjoy a six or eight month road trip around the U.S. There are so many historical places I would like to see. Our national parks also call loudly to me. I think I would enjoy a road trip when the car is my home and I can spend extended periods of time in wilderness areas.
We pick and choose the experiences we will have in life. I have done a lot of things in my 52 years. There are so many stories and adventures to share. My children are nearly grown. Mrs. Accountant and I have plans. The future we see is so different from the life we have lived. We tended to stay home and enjoy our rural life. It will feel strange when we finally make the move. Our mornings will not start with the animals, nor end with them. If we discover we do not enjoy the new path we will make adjustments until we find what makes us happiest.
Mrs. Accountant and I talk about selling the farm. We will probably defer that decision for a while. If all else fails and we are not happy with our new life choices we can always go back to what gave us pleasure in the past. That will not happen. I am a ‘looking forward’ type of guy. My farming days are approaching their end. I will miss my animals and even shed a few tears. The first half of my life is over. It was an awesome adventure. Now it is time to enjoy the second half of our lives. It will be different. I think it will involve more of you, kind readers, than it has in the past. I think I will wander your way now and again in the real world. We can lift a cold brew to memories and the future when our paths cross. All that matters are the friends we meet along the way.
Regular readers around here know Friday night is card night in the Wealthy Accountant neighborhood. Scheduling issues forced us to move card night to Saturday this weekend. As always, we catch up on news and solve all the world’s problems as we enjoy the game. This week was no different.
Roger lives across the road from me. He plays sheepshead, but we never invited him to our game, an oversight we need to rectify. Roger is a low-key man. He is quiet, but quick to help a neighbor in need. I don’t remember how Roger came up as a topic around the card table. We started to sing Roger’s praises when Pete said, “Roger would be unstoppable if he didn’t have so many medical problems.”
We all nodded. Roger is hard working and it is understood his medical condition is not good. I said, “Bob told me a few years ago Roger nearly died it was so bad.”
“It wasn’t good,” Pete said. “He was having a kidney replaced when he had a heart attack on the table. They had to do two surgeries in one.”
“Unreal,” I said, humbled.
“He can’t feel his feet either,” Pete continued. “His diabetes is so bad he hasn’t felt is feet in decades.”
I put my cards down. Silence fell over the card table. Finally I said, “I have no problems. I have life so good I have nothing to complain about.”
Everyone agreed. Truth is I was ashamed at my periodic whining, crying, and complaining over all the perceived injustices in the world. It is so easy to think I have it bad. I don’t. I have life so damn good I have nothing to complain about, ever. Roger has real problems; I have minor inconveniences.
Most of you, me included, are healthy. If you have your health you are already massively wealthy. I have an awesome family, a home with every convenience known to man, a business with the best employees and clients on the planet, and financial wealth less than 1% have. Yeah, I’m one of those hated one-percenters.
It wasn’t always that way. I was born to a poor farming family. Many of the values I hold dear today came from my poverty-stricken youth, working countless hours milking cows, feeding calves, cleaning the barn, baling hay, and hauling crops from the field. I knew the value of saving early on. Money was tight in those days and my grandparents spoke often of life during the Great Depression. We ate three meals a day, every day; I knew we had it good.
We all need a reminder on how good we really have it in our modern world. Food is cheap; medicine is advanced; computers and machines do most drudge work; and we can cover our basic needs with only a few hours of work per week (the rest is only to satisfy wants).
There are so many things we take for granted. Here are a few things making our lives massively rich that we all get for free:
- Roads: We can drive, bike, walk, or jog millions of miles of roads without paying a fee to do so. A few toll roads are out there and gas has a tax, but there is no charge to travel these highways and roads.
- Libraries: Practically any book, magazine, newspaper, audio book, movie, and internet are all for the taking. Just bring it back in three or four weeks when you are done. Libraries, the best deal ever devised.
- Internet: Most stuff on the internet is free.
- Parks: Many parks are free to enjoy. National and state parks may have a modest fee. Local and county parks are free with rare exception.
- Rivers: You can boat down many rivers in this country with your family at no cost.
- Advice: Has it ever been easier to realize your financial goals and dreams? The internet is filled with free, well-written personal finance blogs. Your library has books and other resources on the subject. Living well on less is easy with all the help available.
- Tax preparation: Lower income people can use tax preparation software for free and even e-file without cost. (Should I be sharing this information?)
- Beaches: There are numerous free beaches to take the family for a day trip.
- Parties: You can have a BYOB block party. Free entertainment for the whole community.
Look around your life and see how good things really are. Remember Roger. Things can always be worse. Roger never complains about his medical issues; they are what they are. I am sure he can find someone worse off than he is. The truth is we all have it good. We can count our blessings or cry bitterly. You can surrender to the disease or rise above it like Stephen Hawking; you can whine about an unfortunate accident or make a difference like Christopher Reeve.
When you cry, people want to avoid you. People are attracted to those who rise above adversity. Of course the weather is too hot, cold, humid, dry, windy, blah, blah, blah. Sure your ass aches. It is called age. And let us not forget all the bitching we can do about politicians, government and taxes. Whine, whine, whine. Sometimes we are so caught up in what we don’t have while failing to appreciate the fact we are alive.
Our lives are great and getting better due to advancing technology. In the near future we will not have to even drive our cars; they will drive themselves. Life is so good we forget how good it is. I think we are all scared shitless about the world we live in. Most people do not think they deserve such a luxurious lifestyle and self sabotage. If you fall into this category: STOP IT! I watch employees and clients suffering because life is too good for them to handle. Sit back, take a deep breath, smile and enjoy the great fortune you have by being born in the modern age, and accept the gift life has granted you.
When it comes to passive income I have an edgy side as the title indicates. Multiple streams of income showing up in your account regardless what you are doing is a powerful force to have on your side. Losing your job is only an issue if your job is the bulk of your income. Business owners know the loss of one client out of hundreds is no more than an annoyance. You can harness the same force in your finances.
Before I list the sources of passive income I have, let me share a short story that happened to me recently. Certain sources of passive income are offered to small groups only. I was fortunate enough in my business to have one of these sources. Mr. Money Mustache, a personal finance blogger named Pete, gave me a plug, including a plug for this new source of passive income. I did not expect a lot. When the numbers were finally tallied I was surprised. The revenue was much higher than I calculated. I shared the info with Pete along with traffic data. He responded with an email saying, “Welcome to the world of passive income.” It started me thinking about all the sources of passive income I have and how passive income cements my finances regardless of the economy or my business.
You can harness the same passive income empire. Below I will outline many of my sources of passive income with a few ideas I don’t use. With a small amount of effort you can build $4,000 of passive income per month; more than enough for a luxurious lifestyle. Keep in mind what I call passive income is different from what the IRS calls passive income. Some of my sources of passive income are classified as earned income for tax purposes. My definition of passive income is something you do today that generates a steady stream of income with almost no effort for those future payments.
A Passive Income List
- Bank interest: In today’s interest rate environment I do not consider the small amount earned from bank interest consequential.
- Prosper and Lending Club: P2P lending offers high rates of returns, as much as 12% consistently. Once you open an account you can set up automatic reinvestment of income. A true “set it and forget it” investment. The whole process self sustains. (I’ve stopped recommending Prosper and Lending Club and stopped investing there myself over multiple concerns. As of this update note I use PeerSreet, link listed below.)
- Dividends: Dividends are easy to get addicted to. You can reinvest your dividends in more shares (easy to do with a dividend reinvestment plan and mutual funds). Reinvested dividends mean you have more shares every quarter. It is like a pay increase four times a year. Index funds are great for reinvesting dividends or living off the income stream. I also receive dividends from my S corporation.
- Rent income: I no longer own residential rental real estate, but receive $30,000 per year in commercial rental income. Residential rental properties are more forgiving, yet the right commercial property will generate a significant amount more than residential compared to the value of the underlying property. It is common for good commercial real estate to throw off enough rent income every seven years to pay for the property in cash. My property receives enough rent every six year to buy the building, cash.
- Speaking: Speaking engagements are earning income for tax purposes and is not completely passive in nature. My attitude is anytime I get paid to talk, something I do whether I am paid or not, is free money. I am always amazed when I speak for an hour or two and they hand me a check for several thousand dollars. If you are interested in speaking for profit check local speakers bureaus. Focus on one area you are well versed in. As you can guess, I talk taxes and financial planning a lot.
- Land contract: Once upon a time I owned well over 100 residential rental properties. Like so many things I do, I burnt out from overdoing it. I still have a land contract. Here is how it works. I bought a repossessed home from Veteran’s Affairs twenty years ago, fixed it up, and sold it for a tidy profit: 10% down, 10% interest, 30 year term, no balloon. They never refinanced and I pray to whatever god will listen that they don’t either. Ten percent is a nice income stream secured by a piece of real estate with only 20% loan to equity at this time.
- Personal lending: I have been known to lend money to businesses and people I know and trust. The loans are always secured and short-term in nature. Funding the transaction can come from cash flow or I can create a wrap-around loan. Wrap-around loans are where I borrow the money at a cheaper rate than the interest rate I am receiving. The nice thing about the wrap-around is no capital investment is needed; it is all free money.
- Blogs: I write two flash fiction blogs which bring in about $22,000 per year (don’t tell me you can’t make money writing fiction online), a variety of tax and personal finance writings around the web which brings in small amounts, a content farm I no longer write much for (HubPages; Google: KeithTax) with several thousand in revenue trickling in, and this blog. The Google and Amazon affiliate programs are a monthly source of passive income. Other third party affiliates pay more, but can be seasonal in nature. Blogs are a fast growing segment of my passive income portfolio.
Passive Income I Don’t Use, but Could
- Airbnb: I could always rent my home when I am away, take in roommates, or remodel a guest house for additional income. I don’t, but I could.
- Turo: I could always rent my car when not in use on Turo for extra income.
There are many more passive income opportunities if you keep your eyes open. In business and in the blogs there are literally thousands of affiliate programs that offer massive payouts. A small number of sales from these affiliate programs are more than enough to fund a luxuriant lifestyle. If you are like me and can’t help yourself, you can work a part-time or seasonal job, run a bed and breakfast, or start a business. There are so many ways to earn enough to cover your daily living needs for a few hours time per week. You then have plenty of time to follow your bliss or dreams and live the life you want to live.
Why Passive Income is so Important
Even if you listen to the news poorly you cannot miss the raging debate on income inequality. Blah! Yes, there is income inequality and it is worse now than 50 years ago. The truth is where the income inequality is coming from. Fifty years ago people saved more and invested their money. A large part of people’s income in the past came from passive income: interest, dividends, capital gains, and rental income mostly. Today people spend every dime they have and invest nothing. Income inequality is explained in large part by the lack of passive income compared to the past. It does not take much to start a passive income machine, but it does take something. The 1% is doing so much better because they kept investing in passive income: primarily dividends and capital gains (also taxed at a lower rate than wages and other earned income). If you want to stick it to the 1%, save and invest. Keep the stock in your portfolio where you get the dividends. Then the rich can’t have those shares and the accompanying dividends; they belong to you.
Passive income is also important to get comfortable with. Your retirement years will be funded in large part by passive income; get used to it. Whether you retire early or work until you can’t, passive income will play a larger role in your life the older you get. Your body will not cash the check your mind demands as the years add up. Since passive income will play such a major role in your later life, why not start early?
For some passive income you will need seed money. Seed money comes from savings: either spend less or earn more to build your war chest. Passive income from blogs requires almost no seed money. Blogs do take time to build a following, however. The nice thing about many blogs is the income keeps coming in after you generate enough content. As I write this blog post, an article I wrote in January 2010 on HubPages, is flying high. I wrote about Tony Robbins back then and Tony is back in the news today so my traffic is out of this world, along with the income; looks like a bonus passive income month for your favorite accountant. It seems there is always something doing well these days with all the content I’ve written over the years.
Passive income opportunities are everywhere in today’s society. The government’s distress at the low labor participation rate could be a renewed lifestyle by the middle class breaking away from low paying jobs to a passive income lifestyle. The world will not end if we all get our share of passive income. Machines and technology will produce more and more goods and services cheaper and cheaper. We really have it made. The labor participation rate was significantly lower in the 1950s and the 50s were considered an economically great time. Let’s go back to the days where we lived within our means, survived fine on one income, enjoyed plenty of passive income, and enjoyed life with family and friends. What an awesome opportunity and way to live our lives.
Be sure to share your favorite passive income source in the comments below and subscribe.
More Wealth Building Resources
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant for a bonus. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!
They seem so small and harmless: words. Yet words can create great beauty and wonderful works while at the same time destroy relationships, ruin happiness, disrupt wealth, even bring down empires. Words are a means to communicate. The accuracy of our words makes the difference between building great things and fantastic disasters. NASA’s Mars Climate Orbiter failed in 1999 because engineers did not convert English measurements to metric. A word left unsaid wasted $125 million and countless hours of work.
Words are just as important in your personal and business life. A miscommunicated word with an investment advisor or when setting up an investment account can have catastrophic consequences. Imagine forgetting to add a beneficiary. A miscommunication could have dire consequences for your heirs. An awesome passive income opportunity is lost when the wrong words are used.
I am writing this after the Father’s Day weekend. My interest in ‘everything’ caused me to take on too many projects recently so I was tired from the long hours. Saturday night my oldest daughter mentioned she needed help replacing her bike tire. It sat with me wrong. I was so tired I heard something totally different. I took it as an accusation I was not working enough when I was wore out from work. I was grumpy the whole weekend. Only on Monday did I start talking out my feelings and join the family again.
Successful relationships survive because they know when to back off when the wrong button is pushed. Saturday night the wrong button was pushed at the wrong time and it changed my mood. It seems little things like that can do the greatest damage. Instead of backing away from the comment, Mrs. Accountant defended our daughter. It was not meant as an insult by any means. She only pointed out it was not an insinuation I was not working enough.
Sometimes words have a minor effect. Other times a simple misunderstood word can cause great pain. Wars start over a wrong or misunderstood word. My Father’s Day weekend was not happy for me. I felt disrespected. Words do that. A wrong or unsaid word can destroy a space craft or injure a relationship. Only decades of deposits to the emotional savings bank of our marriage allowed us to put the events behind us relatively unscathed.
Relationships grow stronger with the right words. Physical acts, enjoyable as they are, do not create a better relationship. The consistent reminder of “I love you” goes much further. A hug and a kiss with the words enhance the power of the words. How many relationships have died because all parties involved assumed the other person knew they loved them? Even if you love, you need to express it in words.
Back in the 1990s I had a securities license. The stock market was on a holy terror. Investor expectations were sky high. A young man set an appointment with me. When he arrived we talked in the conference room so I could ‘know my client’ before making any recommendations.
One of the first things the young man said to me was that he expected a return well above 20%. He said 20% is a gimmie any idiot can achieve. He wanted to know if I was the guy who could provide returns greater than 20%. I shook his hand and showed him the door. It was not long before the stock market reverted to the mean. His words ended a relationship before it began, a relationship that would have preserved massive amounts of his wealth.
The right words can build a team atmosphere. The young man above never allowed the relationship to begin. His expectations were unrealistic. The words he used in his self-talk created a false confidence in his mind. He was unwilling to listen to reality. Missed words can lead to painful results. An intelligent plan for his investment portfolio would have allowed him reasonable returns even in a difficult investing climate.
Business transactions frequently involve legal counsel. A landlord rents to a tenant with a lease, spelling out the terms and expectations. Attorneys are careful with the words they use for good reason. A misspoken or written word can cause years of pain in a legal dispute.
Buying or selling a business also requires careful choice of words. I find my greatest challenges when I can’t find the right words to communicate what I am thinking to my team of employees. Over the years clients and employees have been lost because of words. An employee expecting a certain level of compensation may quit after all the training is completed because words were not used effectively. A client may feel unsatisfied when the wrong words are used.
Words unsaid are as important and what is said. The silence between the words are the most powerful of all. I speak at about 268 words a minute with wind gusts up to 904. It is easy for me to forget the most powerful part of verbal communication. The silence between words can enhance and amplify the meaning. We all know someone who talks in an endless drone. They cannot convey their thoughts effectively because they forget to include the silence as part of their communication.
Working with clients, spending time with family, enjoying the company of friends are all acts requiring effective words. By listening we improve the value of our own words. I know how hard this is to do. All too often we anticipate rather than listen. We are planning our next words rather than listening to those speaking to and around us. It is okay for a brief period of silence to exist between the exchanges of conversation.
Investing, Early Retirement, and Financial Independence
Can you imagine the bedlam if you invested based upon faulty information? Learning the value of words and the nomenclature of the industry are required before you make investing decisions. The word ‘option’ means something different in investing than it does in a grocery store. The word ‘index’ as meant by the list of names, places, etcetera in alphabetical order at the back of a book as opposed to an index mutual fund are important distinctions.
Many investment advisors try to dazzle their clients with fancy words. I think this is bad practice. When I work with clients I take a complex subject, tax law, and try to make it understandable by normal people. (Tax professionals are not normal people. The code is not normal either.) If you do not understand an investment you should walk away. Better to miss an opportunity than have your head handed to you. Losses happen easy enough the way it is. Why encourage disaster?
Early retirement (or retirement at any age) and financial independence requires understanding the words in multiple investments over time. You will need to understand your 401(k) (or similar retirement plan) at work. IRAs and bank accounts require understanding before opening the account. Mutual funds, index funds, money markets, individual stocks, bonds, and on and on the list goes. Understanding the words will determine your success.
When money is involved there are always people trying to separate you from yours. It is easy to lie while telling the truth. Vague words are meant to confuse or lead you to a false conclusion on an investment. I am not an annuity fan, but over the years I have recommended them a few times. Annuities are not bad in and of themselves. Annuities are usually used incorrectly. Too many people own annuities as an investment vehicle when other better options exist. The words used to sell annuities are a prime example of how words are used to confuse the facts. When the sales guy tells you the guaranteed rate of return on an annuity, go to the back of the policy and run the numbers through a financial calculator. Now you know why I don’t recommend annuities that often. The numbers don’t add up. If you dig deep enough you can figure out why the numbers are different. I think an annuity should give a straight answer to what the rate of return will be. But you sell more annuities when you dazzle them with your bullshit. Your net worth will not be as impressed, however.
Words are more powerful than we expect. The wrong word can turn Father’s Day a bit gloomy; words can get a landlord sued; words can cause a businessman to buy a bad product or service; words can help you reach retirement at an early age or turn retirement into a nightmare. Choose those sounds that come out of your mouth or from your pen wisely. The spaces between the words on this page are as important as the silence between the words in your speech. Be mindful. Words can hurt; they can also heal. When you use a wrong word, back-peddle fast. Regroup. Find the right word. How you view the world and your relationship to it will be enhanced by your mindful choice of words.
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Persons attempting to find a motive in this narrative will be prosecuted; persons attempting to find a moral in it will be banished; persons attempting to find a plot in it will be shot. — Mark Twain
Have you ever wondered what people were like when they were younger? What were people who attained financial independence early life like when they were growing up? Is there anything special about early retirees?
A week ago I proposed life is one big joke and then it is over. My original intentions were to add more humorous material. What concerned me were two things. One, writing humor is no easy feat. All too often when writing a joke, crickets fill the room after the punch line. The only fallback for the comedian is, “Well, I guess ya had ta be there.” Two, not everyone thinks the same thing is funny.
Several people emailed and said they would prefer more humor. Most emails indicated the reader enjoyed my periodic poke at candor in earlier posts and look forward to more of the same. When I speak I always add these asides many find comical. When I speak it is natural and for the most part, uncontrollable; it just comes out. Now I am asked to be funny on purpose. Oh, shit!
All the stories here are true as I remember them with a small amount of literary license applied to smooth the story. I would never lie, fib, or adlib to you. You have my word. This is the little shit, ah, kid I was growing up and into early adulthood. Less than a decade later my net worth crossed the seven figure mark. What is surprising is I lived at all.
Things we Did
Biking: Growing up on a farm has its advantages. The wide open spaces offer opportunities to explore. Even in our rural setting we had neighbors. Not too far from the farm a family moved into a rental. The single family home had a few landscaped acres, but more important, they had kids! My uncle, Kev, brother, Dean, and I used to ride our bikes around the fields of the farm playing cops and robbers. We chased each other down as cops complete with a screamed “rrrrrrrraaaahhhhh, rrrrrrrraaaahhhhhh,” or biked like hell to keep ahead of the coppers.
Our new neighbors had two sons (our age roughly) and a daughter. The oldest boy was Len. He was a big dude and funny as hell. He had a habit of doing before thinking. He saw our clan playing cops and robbers around the farm and joined us on his bike.
Len played a bit rough. Bigger, he could chase us down easier and would sometimes push us over. Dick! It was all in good fun, however.
Behind the barn we had a manure pile. (Don’t get ahead of me here.) This is not an ordinary manure pile with hay and straw mixed. This was slurry from the free stall barn. The manure was push on a pile and later hauled to the fields for fertilizer. Our particular manure pile was about three to four feet high with maybe an inch of firm crust. Growing up on the farm we knew the manure pile was there. You had to. The manure pile was impossible to see if you biked around the edge of the barn fast until it was too late.
Well, Len was having one of those days. He was biking at warp speed and getting a bit rough so I cut him off and he starts to chase. I gave it everything I had, blowing past mach 4. It was going to be close as I raced along the west side of the barn and around to the free stall barn. I stood off my seat as I pressed the pedals with all my legs had. As I approached the edge of the free stall barn I made a sharp left at the corner. Len anticipated my move and cut left at the edge of the barn with me. What Len did not see is that I immediately cut hard right as soon as I cleared the corner missing the manure pile.
It was too late for poor Len. He hit the spread out manure pile square. When his front tire hit the edge it stopped cold, sending Len face first into the soft landing of slurry. When he stood up he looked like the swamp monster leaving the pond. Dean, Kev, and I laughed so hard as he walked from the manure pile dripping with manure we almost peed out pants. Almost.
We were not worried about retaliation. Len needed to get washed up. Instead of washing off at the front of the barn he ran home where his mother kicked his ass.
I do not know whatever happened to Len. His brother was a bit on the heavy side so we nicknamed him Mini Clause. He also gave us kids a recipe we enjoyed for years: Joel’s chocolate cookies. We lost the recipe years ago, but I still hanker for them. Joel, if you read this, send me an email with your recipe. Len, if you are reading this, Kev lives in San Diego; my address is confidential.
Summer Water Fights: Northeast Wisconsin can get warm and muggy in July. After the cows were milked at night there was always the risk of an unprovoked water fight on a hot day. The long summer days were not conducive to higher levels of thinking. An unprovoked five-gallon pail of well water would end with everyone dripping wet.
I had a brainy idea one summer evening and received help from my uncle, Daryl. I figure the best way to have a water fight, and not get wet, is to use some creative warfare tactics. I decided we should fill a five-gallon pail with water and tie it above the milk house doorway with just the bottom of the pail reaching into the doorway. The idea was that when the door was opened the bottom of the pail would push out, spilling the water on the victim.
The victim was supposed to be my dad. I always wanted to get dear ‘ol dad good in a water fight. Daryl helped me tie the pail above the milk house door. My dad always had the same routine after milking. It was a lock. He would walk out the milk house door and end up with a bucket of cold water on his head.
Unfortunately, the gods did not love us. Before my dad could be victimized, my grandfather, whom we affectionately call Doc because he knew so many home remedies, came walking toward the milk house door. Before my dad finished his rounds, Doc walked through the door. The water bucket idea worked perfectly! For some reason Doc was not wet. It might have had something to do with the steam coming off him from the heat on his forehead.
Boy, did we catch hell. None of us caught hell like we did that night, except for my dad. Damn it! We laugh about it now, but back then we were concerned we might not make it through the night.
Farm Dog 1: Every farm needs a dog. We had a dog named King. He would run with the tractor down the road a mile before giving up; he would chase the farm truck halfway to town before calling it a day. One day we were headed to town to pick up supplies and did not want King to come along so we did not allow him to ride in the back of the truck. True to form, King chased the truck as we started out. This time I put on my Tony Robbins hat before Tony Robbins was a tingle in his daddy’s shorts. I rolled down the window and started chanting, “Go, King, go; go, King, go.”
Wouldn’t you know it? The friggin dog chased all the way to town, seven miles. Of course, we felt bad for King and let him ride in the back of the truck on the way home.
Farm Dog 2: A few years earlier we had a mutt named Tipper. Back in those days farmers kept the cows out in the field during the day. A dog would help herd the ladies back to the barn for milking. On this particular day Tipper was very motivated to get the cows up and moving to the barn. Some cows as they got older got an ‘I don’t give a fuck’ attitude. Number 37 was one such cow. She was lying in the grass at the edge of the field next to the road. Tipper was having none of this. With a “sic ’em” Tipper was off at full throttle. For some reason Tipper did not put on the brakes that day as he closed ranks with Number 37. Number 37 decided she was not interested in getting up all that fast. Poor Tipper ran, full-speed, into the forehead of Number 37, bounced off, hit a fence post, and ended up in the ditch. It is all fun and games until someone pokes an eye out. I confess we laughed until we saw Tipper twitching in the ditch.
The good news is Tipper was only temporarily dazed by the collision. He was a lot smarter after that. He approached cows with an added layer of caution. Experience is such a good teacher. Like Tipper, never run full-speed into a situation or you might end up in the ditch twitching, too.
Ghost in the Machine: Dean and I get along like brothers, which is surprising considering the circumstances. You see, when Dean was about seven or eight, Kev and I came up with a brilliant idea to scare the shit out of him. I am five years older than Dean and Kev is two years older than me; Kev is my uncle (dad’s youngest brother).
Our idea was to create a recording of ghost sounds. Kev had a cassette recorder and I helped his record about twenty minutes of scary sounds. We started out softly at first, “wooooooo, woooooooooooo.” Then we ramped it up to, “wwwwoooOOOOOO, AAAAAHHHHHHHH!” (Hey, we thought it was scary.)
In the old farm house we lived in the cold air duct in the basement had an access panel. We placed the recorder in the duct and closed it up. The tape had ten or so minutes of silence before the sounds began. Kev and I found Dean outside and invited him into the house to play a board game. As we sat and played the voices and sounds started slowly. At first Dean had a strange look on his face. How we kept a straight face is beyond me. As the sounds got louder Dean asked if we heard it. With an innocent face we shook our heads ‘no’. As the sounds got louder, Dean got more paranoid. It was too much. He ran from the house screaming. Kev and I busted up laughing.
All good jokes have a fatal flaw. Dean ran outside and told our dad. Dean refused to go back in the house. My dad walked in before we could retrieve the recorder. My dad heard out Oscar performance, “WWWWWOOOOO!!!” in stereo from the furnace vents. Needless to say, we got our asses kicked and kicked good. Dean almost had to sleep outside that night. It took until ten o’clock to convince him the house was okay. After all these years we still laugh.
Polish Canon: Do y’all know what a polish canon is? A polish canon as we constructed them utilized tin cans. Back then Campbell’s Soup cans were made of tin with a seam on both ends. We would take five or six can, cut off both ends with a can opener, and duct tape them together. We would add one last can to the end where we would punch several holes with a nail on the flat end panel and on the opposite end of the can put one small hole on the edge just above the seam. Tomato soup cans worked best for blowing out the contents. The final can was attached to the canon. We then placed a tennis ball into the canon, added lighter fluid to the working end, rolled it back and forth in our hands until the lighter fluid was all vapor, and then put a match to the single hole at the back of the canon.
Polish canons are more powerful than you think. They fire with a lot of noise. The tennis ball can fly as much as a quarter mile. We experimented with the mixture until we were able to get the tennis ball flying a third of a mile.
Never satisfied, we decided it was time to build a bigger cannon with coffee cans. (C’mon, guys! You are getting ahead of me again.) The concept was sound. We built the bigger canon with the same design. By now we had discovered gasoline worked better when sending a tennis ball half way to the creek. Good thing we did not have anything the right size to put in the advanced canon or we would have died that day. A bigger cannon needed a foundation so we place the back of the canon into a depression in the ground toward the front of the house. We loaded her up with gasoline. Then we lit the match.
They say the loudest noise ever heard by man was the sound of Krakatoa erupting in 1883. Not true. When that canon let loose we lost our hearing for a day or so. The coffee cans were warped and twisted. By divine intervention, the cans held together and did not shred into shrapnel. There was no doubt it was a single use canon.
My grandfather, Kev’s dad, was enjoying an afternoon nap when the Germans opened the artillery. He flew out of the house and chewed us a new one. The great news, however, is we did not hear a word he said. By reading his lips he was mentioning the Lord a lot, however.
Some Damn Fool is Shooting at Me: It still amazes me my grandfather made it to 90. He certainly played a good game of cards, not that we helped any. A couple of years after the polish canon incident, we concocted an idea where we would throw a box of firecrackers into the fireplace. (It sounded like a good idea at the time.) Thanksgiving was approaching and the cool autumn day caused us to move inside for our entertainment. Granddad was once again enjoying a short afternoon nap. (As farmers we almost always took an afternoon nap. We started milking cows at four in the morning so a nap was needed.) In my defense, Kev was the one who threw the firecrackers into the fire. I admit I might have provided some encouragement. Okay, I egged him on.
The firecrackers did all we had hoped for. The rapid fire BANG! of each firecracker was awesome! Dear ‘ol Doc jumped off the couch and started yelling, “Some damn fool is shooting at me!” Oh, then reality showed up. It was the worst spanking I endured in my life. Lesson learned.
Things We Did Not Do, but Thought Of
Acetylene Bomb: One idea we toyed with off and on was the acetylene bomb. I am glad we never tried it. The idea was to fill an empty 55 gallon drum with acetylene from a torch and set it off. We laughed as we envisioned the explosion and hole created in the field where the bomb would be placed.
I know people who actually tried this. None died, but most ended up with permanent hearing loss or injuries. Our self-preservation instincts served us well in this instance.
Whoopee for Church: I grew up in a religious family. The years have tempered my zeal (I have not been in a church for a few years), but most of my family holds the Bible high. At our church the pastor has a seat on either side behind the pulpit where he sits when song is sung. The wooden benches has a cushion. I always thought it would be a good idea to slip a whoopee cushion under the padding. When the pastor sat as a song began it would let out a loud fart for the whole congregation to hear. Alas, I never realized my calling. Good thing. I could have been struck down and sent straight to hell right there and then. If God did not take action, my father (not to be confused with, Father) would have.
There are many more stories to tell. I will refrain to protect the guilty (that would be me, guys). The stories above are fun. I think I am at my best when I get on a rant. When one shows up I’ll try to record it and see if it translates to paper. Usually I need a couple of espressos and a shot or three of whisky to get me going. It is an experiment worth practicing.
Enjoy your weekend, kind readers. Don’t take life too seriously. Early retirement and financial independence mean nothing if you can’t laugh and have a lot of fun along the way. Make life a trip worth travelling.
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Also, share your funny stories in the comments below. It eases the pain.
There are critical times in the course of life when financial independence is at risk of destruction. A lifetime of planning, saving, and investing can go up in smoke in a few short years without an adequate plan to protect the most vulnerable member of a marriage (or any relationship, for that matter) after the death of a spouse or loved one. The trauma and grief after a loved one dies is acute. Deep pain and emptiness creates risks for the surviving spouse. Well intentioned, and lonely, people will try to connect with the bereaved. A couple committed to a lifetime of financial discipline will acquire a massive nest egg of retirement wealth. The surviving spouse is a prime target, a highly desired, person for this reason. Even people with honorable intentions can wreck havoc on the surviving spouse’s finances.
One of the saddest moments in the Wealthy Accountant’s office is when a client dies. An elderly person dying is painful, but understandable. The deepest wounds come from clients who die at a young age. Today we will focus on people in long-term relationships, living a frugal lifestyle, and have attained financial independence. I will introduce you to a client who lost his wife at a relatively young age. His grief was only the beginning of his pain. Then I will offer some ideas to prevent the same damage happening to you or your loved ones when you face the same situation.
Who Goes First
As the years add up I have started to wonder if Mrs. Accountant will leave this world before me. I always say, “Dying is the easy part; we all do it right the first time. It’s the living that is hard.” I refuse to worry about it because there is nothing I can do about the future. What I can do is plan. With an adequate plan I can manage if Mrs. Accountant dies before me and by working with Mrs. Accountant now I can help her build tools to survive the trauma of my death before hers.
Survivors need my attention. There is no 100% guaranteed way to protect loved ones after you are gone. There are steps you can take to increase the chances your loved ones will be okay financially after you die. The best way to start this discussion is with an example from a client. Let me introduce you to Ben and Lou (not their real names).
Ben and Lou walked into my office decades ago. Lou managed the money in the household. Ben was a laid back husband living life one day at a time. Back in the 1960s Lou worked for the Zwicker knitting mills in town. Back then they had a program where you could take money from your paycheck and buy U.S. savings bonds. Lou did just that. Every week she took a modest amount from her paycheck and bought savings bonds. Ben and Lou also added to their retirement savings over the years in addition to the bonds.
Lou never invested optimally. She proved to me saving is more important than hitting a home run in your portfolio. She never owned a mutual fund in her life. Her money was in savings bonds, CDs, and fixed annuities. She did have the advantage of the high interest rate environment of the 1970s. Still, she managed to pay off the mortgage while building over $400,000 in liquid funds. Ben and Lou also had pension plans provided by their employers. The knitting mills went bust in the 80s, leaving Lou with a significantly reduced pension.
Ben and Lou stick out in my mind because Lou had a unique way of presenting her tax information to me. It was easy for me to understand and helped facilitate a fast and accurate tax preparation. Every year I looked forward to meeting with Ben and Lou.
They retired at a relatively young age, but not exceptionally so. By age 60 Ben and Lou were living the good life. It did not take long for disaster to strike. A few years into their 60s the news came Lou had fallen and was taken to the hospital. She had a stroke and did not survive. Ben was distraught and lost. He had no idea what to do with his life. He was alone. Money issues were now his to manage. His entire life he avoided dealing with money; Lou took care of that. I worked with Ben and his financial advisor to help him make good decisions on his finances. Then the second disaster struck.
Loneliness causes smart people to do really dumb things. Ben was alone in this world and lost without Lou when a widow befriended him. She lacked Lou’s skills with money. Soon a relationship started and the new woman was helping herself to Ben’s money. Let me make this clear, she was not stealing Ben’s money. But she encouraged Ben to ramp up his spending.
Ben married his new sweetie shortly thereafter. Now in control, the new wife really turned on the spending. The financial advisor contacted me. He was concerned about how fast Ben and his new wife were burning though their cash. I was shocked to learn the new wife ramped Ben’s spending to $180,000 per year. Yikes! Ben was too distraught to listen. He trusted his new wife would take care of things like Lou had. It was not to be. In just over two years the money was all gone and they went back to living on Social Security and a small pension Ben received. Even the personal residence was sold to cover spending. They live in a small apartment now.
Protecting Loved Ones
It breaks my heart to tell this story. Ben and Lou are awesome people; my opinion of the new wife is less flattering. She refused to listen to the financial advisor or me. She eventually convinced Ben to change accountants because she did not like my advice and I raised my prep fee $5 one year to a whopping $110. Let me repeat that: She was spending $180,000 a year like a crazy woman and felt $5 was too much extra to pay for sound financial advice.
Keith’s Rule # 16: Only wealthy people pay for sound financial advice.
Lou was great at saving and keeping the household spending reasonable. She never invested; she only saved. Lou never talked about money with Ben. She just took care of it and everyone was happy. Money was not an issue. Until Lou died.
It did not have to be this way. Steps could, and should, have been taken to protect Ben from himself and from a future partner with limited money skills. Here are some of my recommendations to clients:
- Talk Talking is the most important part of a relationship. I know some people have no interest in discussing money, investing, or retirement planning. It is still important for all parties involved to know where the money is, how to access it, and the best way to preserve the lifetime of saving/investing. A lack of interest in money does not mean a lack of interest in what life will be like for the spouse who lives longest. Mrs. Accountant and I talk about money on a regular basis even though she has about as much interest in it as Ben does. Regardless, I have armed Mrs. Accountant with tools to protect her in the vulnerable years after I die if I should die first.
- Annuities I am not a fan of this strategy, but in certain instances have recommended it because it was the only way I could see to protect my client. Annuities lock you into a low return with lots of fees. However, when both spouses are great at saving and live frugally, but have no interest in money, it might be time for an annuity. Here is the trick. Annuities are accessible in full (minus a surrender charge) at any time (in most cases) prior to annuitization. Annuitizing an annuity can make a bad investment worse. What is also does is protect you from a snatch and grab. Once you annuitize, the money belongs to the insurance company. You have a contract where the insurance company will pay you an income stream for a period of time, say monthly for a number of years or, more commonly, the remainder of your life (or that of your spouse in a second to die policy). You have no right to the original money so a new wife can’t show up and blow all the money in two years.
- Grandpa’s Rule My grandfather was tight with his money. He deposited most of his money in the bank with only a small amount of his portfolio in stock mutual funds. He managed to sock away well into the seven figures. And he was a farmer his whole life! My grandparents had a lot of great rules/advice on money. You had to listen close or you would miss them. He never came out and said ‘This is how you handle money.” Instead, he would make a comment on a certain situation which revealed his attitudes toward money. My favorite advice he gave was: Never take off the stack. If you blinked you missed it. What he was saying was you never touch the corpus. Ever! You can spend interest and dividends, but the original investment and capital gains are sacred cows never to be touched. It is sound advice. Both people in a marriage need to share this idea with each other on a regular basis. Then, when the day comes and somebody tries to convince the survivor to spend the original investment the rolling pin comes out.
- Warren Buffett’s Rule Warren Buffett’s advice to his heirs, including his wife, is put 90% of the money in index funds and the remaining 10% in short-term government bonds. The money in bonds is for daily expenses.
- Keith’s Rule My advice to family, including my wife, is nearly the same as Buffett’s. My advice to family is to keep 3-5 years in short-term investments (governments bonds, laddered insured CDs, money market accounts, or other insured bank deposits) and investing the remainder in index funds with dividends deposited to the short-term account. Reinvest capital gains.
- Know You can’t Protect Your Family When You are Gone The hardest part is knowing you can’t really protect your family when you are gone. If they are intent on destroying their wealth there is nothing you can do to prevent it. Even annuitized annuities can be destroyed by loans taken out again the income stream. You can plan accordingly and talk. After that there is no need to worry. You did all you could.
- Children There are a few additional protections available when it comes to the kids. First, you can smack them around. (Did I say that?) Seriously, when it comes to the kids you can set up a trust where they do not get the money in a lump sum. My girls will not see money from dad until they are 35 years old. There are no incentives for my girls to see dad step into the grave early. The best part is they get 1/15th each year. Yes, my kiddos get their inheritance over fifteen years starting at age 35. If they haven’t figured it out by age 50 they never will and it is not my problem.
Talking about money with a loved one is necessary. Talking about death is also important. The odds favor one spouse dying before the other unless a plane crash or auto accident takes both out at once. Someone in the relationship will live without their soul mate at some point. Gold diggers are everywhere waiting for an opportunity to get a free ride. Discuss the issues now.
No one knows the future. I don’t know if Mrs. Accountant or I will die first. We talk about it. Not every day, of course. We are not morbid. But we do discuss it. I want Mrs. Accountant to know that if I die I want her to be happy. She has my blessing to find love again. I hope she does if I die first. I want her to find another man who will love her as much as I do. I also warn her about men only interested in the money. Mrs. Accountant is a smart woman. She will be fine if I die first. I don’t want her to ever feel the pain of loss, but it is part of the deal in a life-long relationship.
You need to engage in the same planning. Legal instruments like trusts can help protect family members. Planning together and talking openly and honestly also helps. After that you can rest assured you did all you could. Now go out and enjoy your relationship. It does not last forever.