Friday, August 22, 2014

Investment plans

Recently I hit a milestone from a financial perspective. Beth and I have been saving for the last few years and now have accomplished two of my main goals, we have a three month emergency fund, and we have saved enough for the adoption fund (minus some legal fees, nursery outfitting etc). With that in mind its time to start working on a new war chest of money.

I have usually set aside a few hundred dollars in my ING Direct (now Capital one 360) online account as mid term cash reserves. That worked well for a while, but the interest rate was always sad. It currently sits at 0.75%. Better than my checking account, but nothing to write home about. So I want my money to do some more work. I need to go a bit riskier and focus on real honest to God investment. Over the last few weeks I 've developed a new strategy.

First I 've been playing with Betterment for several months and I 've been generally happy with their approach. I 've set up an automatic deposit of $200 a month into an account I 'm calling "Spending Money." This is used to invest in a big basket of stocks and bonds that will, in theory, grow at a better more reasonable rate than my sad 0.75%. There 's risk here, but for this account I go 70% Bonds and 30% stocks as I view this as short term investment money that I can and will pull out for large home projects, vacations, etc.

The nice thing about betterment is that you can set up a bunch of sub-accounts, with different goals and time lines. It will then calculate how much you should set aside and what mix of stocks and bonds you should use to maximize your chance of meeting your goal. So if you want to take a trip to Italy in three years, just set up a goal, name is Italy, say you need three grand in three years. It will tell you how much a money and make a one click setup available.
Its the kind of "set it and forget it" approach to investing I approve of. I only have the "spending cash" account right now, but I may set up some other goals later on, like finishing the basement, or buying property for the next house. And you can withdraw money whenever you want. They got in trouble for saying it 's like a bank account, but I can understand the thinking behind it.
I also plan to do larger deposits into this account when I have leftover money at the end of the month. As long as you set an automatic $100/month your cost of using the service is 0.35%, with a drop to 0.25% after you hit $10,000.
So if you have a few extra bucks at the end of each month looking for a home, take a look at Betterment.

My second area of investment is VERY long term. My goal is to retire at 57. In order to do that I need to get some additional sources of income and investment other than the pension I 'm working on. With that in mind a dividend based investment strategy seems to be in order.
I started by looking at just some stocks I was interested in buying. Then I noticed that some of them paid an annual dividend, usually in the 3-5% range. "Well," I though "If they pay as much as my bank pays, and I get to own the stock that will slowly but steadily rise over time, that's like double dipping. I like double dipping." So i started to research.

I read this book, Retire With Dividend Growth: A Better Way, and it made a ton of sense. I 've further followed the Dividend Growth Investor blog, and started to do some math.
If Ispend $500/month on a common stock that grows 5% a year. and that stock pays 3% commission a year, then by the end of the second year, I 've spent $12,000, I have $13,000 in value, and I 'm making $30 a month is dividend, that just free income. I 'm assuming I 'm using that money to buy more stock with, which certainly help get that compounding up.
Lets say I do this for five years, then the costs of everything else just gets too much, and I can 't put away more money. At this point I have $36,000 value in my account and a monthly income stream of $90. Adding no more money to this account but just reinvesting that dividend. by the time I retire I 'll have a monthly income stream of $450, or $5,400 a year. Not amazing, but that certainly fun money. It pays for a car, or two vacations a year.

Lets say I continue, $500/month. This gets easier over time since $500 means less later on than it does now. 25 years of $500 a month gets me a value of roughly half a million dollars, with a monthly dividend of $1,200. Seems like rent is paid forever.

Compare this to just putting $500 in a bank account at 1%: Value of $151k with a monthly interest stream of $125. Same money with vastly different results. I could stop saving in five years and still beat the bank account.


I set up an account with Tradeking. I went with them because they have the lowest transaction fee I was about to find at $4.95 a trade. You can find a few places that are lower but they either do bulk trading where you don 't know the price you 're getting, or you need to pay a lot of money up front. I 'll discuss some of these other options at a different time.
So far I 've only made one purchase, 28 shares of GM. this is not a long time recommended dividend stock, but I believe they will be, so we 'll see. In the future I 've developed a trading system that will focus on long term winners with LONG history of dividends.

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