Beating Broke

Personal Finance from the Broke Perspective

Why you Should only use Three Categories for Your Expenses Budget

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I teach an entrepreneurship and financial literacy elective to 8th graders.  I have learned that when it comes to the topic of family or personal budgets, simplicity works best.  I’ve seen all sorts of budget templates online, most of them unnecessarily complex.  While adding multiple categories can provide layers of detail to a household budget, it can hide or at minimum endorse, certain expenses. I teach them to simplify their expenses budget.

For the expense side, you only really need three categories: 1) Fixed costs 2) Variable costs and 3) Non-necessities.  When you add categories like, Transportation, Loans, Entertainment, Utilities, Daily Living, Housing, and so on, the budget sheet takes on a life of its own.  I get it, personalizing your family budget by adding columns, headings, and colors can be a ton of fun.  Not!  Sure, you may have been using the same budget template now for a decade and it works for you.

As the saying goes, “if it ain’t broke, don’t fix it.”  I too had been using the same budget template for several years.

Budget Template
Budget Template

As you can see from the picture, I had several categories and the Excel spread sheet allowed me to sort any way I needed.  I’ve seen templates with a similar style, a long laundry list of fixed and variable cost items all under an “expense” column.  While this may work, it’s not going to help (as much) when it comes to making a push to save more money.  After teaching my students using an example, balanced budget from PwC’s Earn Your Future Curriculum, I decided to adopt this style for my family, but not just because it’s simpler.

Three Expense Category Budget
Three Expense Category Budget

You don’t teach the skill of budgeting for the sake of your students knowing “how” to do it.  You teach the skill so that they know “why” they’re doing it.  So after the basics, I tell my students that the ultimate goal of a budget is to identify opportunities to cut spending.  “Wasting money is stupid,” I say to them.  “Plus the more money you save, the more you’ll have available to buy assets.”  Yes, they know what assets are by this point.

The PwC template makes it easy for me to provide my students with an easy to grasp savings strategy.  I ask, “If you were going to cut back your monthly expenses, where would you look to do so first?”  This template is so intuitive.  Of course the response is, “Non-necessities.”  This is why I love this budget style so much.  You are forced to differentiate your variable expenses.  More importantly, you are showing yourself the map to future potential savings.

Budgeting doesn’t have to be a chore.  And a budget should be a visual that doesn’t take an accounting degree to make sense of.  If an 8th grader can’t take one look at your budget and tell you where to slash, perhaps you’re making it too hard?

According to a 2013 Gallup pole, only 1 in 3 Americans prepare a “detailed” household budget.  Maybe it’s because Americans dislike being detailed?  What are your thoughts on household budgeting?  Please share your comments below.

4 Reasons Why Dividend Income is the Best Passive Income

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Passive income is the best income. I frequently argue this case to the readers of my personal finance blog. Passive income is money that comes my way based upon work that I’ve done in the past. It might come from an article or a blog post that I wrote years ago, or it might come from a dividend-paying stock that I bought a couple of months ago. It comes in whether I decide to work hard on a given day or I choose to sleep in and watch a football game. Most people think that more work is required for additional income, but passive income requires no additional effort on my part. This is why I think passive income is the best type of income to have and I want to build it up over time. When thinking of passive income and how to increase it, I’ve decided that dividend income is the best passive income. Here are four reasons why I’ve come to this conclusion.

1. Dividends Are A Solid Component Of Return On Capital

When many people think of investing in stocks, they don’t really have investing in mind. They tend to picture greedy men in suits running around on Wall Street or day traders sitting in their living room who try to make quick trades to cash in capital gains. This is trading in the best-case scenario and speculating at worst. People who are actual investors find a company that they like that has solid revenue and income streams. They generally intend to hold a stock for the long run. Warren Buffett, possibly the greatest investor ever, argues that his ideal holding period is forever. Investors understand that the stock of a company they choose might go up $2 one day and down $4 the next. In a recession, most stocks will get hit. This does not mean that the underlying fundamentals of a given company are necessarily bad. It could just mean that stocks are on sale.

Many companies that make a nice level of income over time decide to pay a portion of their profits back to investors in the form of a dividend. This is actual cash that can be used in any way a shareholder might decide, and depending upon the amount of the dividend and any growth in that dividend over time, an investor could actually see all of their original capital returned to them, and then some. This all happens while the investor continues to own a portion of the company. If the company has the growing revenue and income over time that is necessary to support a growing dividend, it’s also likely that the price of the stock will appreciate. This is a win-win situation for the shareholder.

2. Dividends Can Usually Be Reinvested Easily

There are basically two ways that an investor who decides to reinvest dividends can do so. The first option is to sign up for a dividend reinvestment program, otherwise known as a DRIP. A DRIP buys additional shares in the company that paid out the dividend. For example, a hypothetical company might have a share price of $100 and a quarterly dividend payment of $1. For every 100 shares that an investor holds, he or she would get one additional share the first quarter. An investor with 50 shares would receive one-half of a share. This process is usually available for those who buy shares directly from a company, but it is also available through many brokerages. Charles Schwab, Fidelity, and TradeKing are just three of the online discount brokerages that allow for DRIPs. All that the investor has to do to DRIP is inform the company or brokerage that they want to. There might be a request form, but it’s usually a pretty painless process.

The second option for those who want to reinvest their dividends is to collect dividends from all companies that they own and then make a purchase when the pool of dividend payments gets to a certain pre-determined level, be it $500, $5,000, or anything in between. They could also choose to jump on a great company at a great price if the opportunity arises before reaching the ideal amount of pooled dividends. This reinvestment can go toward a company that the investor already owns, or it can go toward diversifying into a new company. Regardless, it is a deployment of new capital that can bring more passive income over time. In the interest of full disclosure, I’ve used both of these methods for reinvestment at different times. I’m currently pooling my dividends, rather than allowing them to automatically reinvest into the company that paid them, but I am not fundamentally opposed to DRIPs.

3. Dividends From The Right Companies Can Grow Over Time

There are several publicly traded companies that have grown their dividends for 25 years or longer. Even better, there are a few that have a dividend growth record of at least 50 years. Both Johnson & Johnson and Coca-Cola have grown their dividends every year since the Kennedy administration. Getting a dividend increase each year is essentially getting a raise on your passive income that will oftentimes exceed the amount of any raises your regular employer will give you. When trying to find a solid dividend growth company, it’s a good idea to look at metrics like income growth, revenue growth, and dividend payout ratio (the percentage of profit that’s paid out to investors). Growing income and revenue are good signs. A relatively low dividend payout ratio is a good sign, as well. I’ve seen investors who want a ratio of below 50 percent. Others are comfortable with a payout ratio of 80 percent. Regardless, lower payout ratios are generally better.

4. The Combination Of Reinvestment And Dividend Growth Can Lead To A Compounding Stream Of Passive Income.

Putting dividend growth and reinvestment together can lead to a supercharging of your passive income stream. Reinvesting a dividend effectively increases your dividend payment by the current yield. For example, if the current yield is 4 percent, an investor who initially had 100 shares would have slightly more than 104 shares after a year (because of compounding), and the dividend payment for the next year would be more than 4 percent higher (and growing because of compounding). After two years, she would have more than 108 shares, and so on. This example assumes a stable dividend and share price. Dividend income would double in about 18 years in this scenario based upon the rule of 72.

When the dividend grows, however, the passive income stream would increase even more rapidly. With the example given above, the dividend yield and the rate of the dividend increase would get added together to calculate the overall increase in dividend income on a year-over-year basis. The 4 percent dividend yield, if combined with a 6 percent increase, would effectively lead to a more than 10 percent increase over the course of a year (keep in mind that compounding is in play every time a dividend gets reinvested). If this process could continue for about 10 years, based upon the rule of 72, our hypothetical investor would see his income grow from $100 to roughly $200. This all happens with no new investments outside of reinvested dividends, which is why I believe dividend income is the best passive income.

Caveats and Concerns

While I firmly believe that dividend income investing is a great way to build wealth over time, investors should perform due diligence when putting available capital toward equities. Dividend cuts definitely happen, and from time to time dividends are suspended altogether. Companies can also go belly up. These are all risks that come with investment although diversifying across companies that have solid financials and reasonable payout ratios can limit the possible risk and make it more likely that a dividend investor can succeed over the long term.

Disclosure

This article is intended for educational and informational purposes and is not intended as a recommendation to purchase any particular investment. Be sure to perform due diligence before putting money toward any investment.

How to Turn Unwanted Christmas Gifts into Cash

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The stress has come and gone and Christmas is over. As you go through your gifts you might see some that aren’t your style, don’t fit, are duplicates of something you already have or something you just don’t need. You don’t need to have them sitting around your house collecting dust in the back of your closet. Christmas is also a financially difficult time of year, and you might need to get some cash in your hand along with another type of assistance such as a car title loan to use toward your debt. Consider turning your unwanted Christmas gifts into cash and use it for something that you really want or need through one of these five ways.

Return them to the Store

One of the most common things to do is to return the item you received back to the store where it was purchased. It helps to have a receipt when returning something to avoid receiving a lower price than what was paid or being limited to store credit for the amount of the return. Stores tend to have more lax return policies around the Christmas holiday and take items back for longer time periods than usual. Don’t take too long to return the item or you might get stuck with it if you end up trying to return the item after the specified time frame. If you do end up with a gift card and don’t anticipate using it, read on to see how you can turn them into quick cash.

Trade Them

Trade your gift online through one of the many trading websites and services available. Sites such as Cardpool, allow you to trade or sell gift cards to others. Trade your gift card for one to a business that you’ll patronize, or sell it for cash. Depending on where your original gift card is for, you can typically get back up to 90 percent of its value. You get rid of the gift card and the recipient gets a small discount on their purchase. It’s a win-win for everyone. PaperBackSwap is a book lover’s dream. You list your unwanted books and earn credits to get books others are looking to get rid of. Gamers benefit from Game Trading Zone to swap games and accessories with others interested in gaming.

Sell Them

It makes sense that selling your items can give you cash quickly, but it helps to understand where your item will sell quickest and give you the most money. Don’t expect to get the full value of the item, because buyers want to find a good deal, but you can still get some cash from the item. Craigslist is a quick way to sell items without needing to pay listing fees or worry about shipping costs. Always meet people you meet from Craigslist in a public location for safety reasons. Other sites, such as Poshmark, allow you to list accessories and clothing that you don’t want. You’ll appeal to a large pool of buyers looking for your items, but keep in mind that you’ll be required to pay small fees in exchange for listing your product on their website.

eBay is another site with millions of users. You can sell pretty much anything and everything on eBay, but keep in mind you have to pay a listing fee along with a seller’s fee, which is a percentage of the sale price of your item. OfferUp is an app only service that allows people to buy and sell items to individuals in their local area. It requires parties to meet in person to exchange items, which saves on shipping costs but stay safe by always meeting up in a public location.

Give them as a Gift

Indirectly get cash by saving the item and giving it to a friend, family member or coworker who you feel would benefit from it. Clothing you got might be too small or large for you but would probably fit someone you know perfectly. Keep in mind who gave you the gift so you don’t embarrass yourself by trying to give it back to them or someone you mutually know.

There’s no reason to leave unwanted Christmas gifts lying around when you can turn them into cash while helping someone else get something they want at the same time.