Beating Broke

Personal Finance from the Broke Perspective

Can You Earn a Stable Income by Only Freelancing?

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Many ambitious professionals are turning to freelancing in order to advance their career and make extra cash. In fact, studies suggest that freelancers will soon comprise a majority of the US workforce. What’s more, there are lots of well-known benefits to freelancing. After all, freelancers get to be their own boss, set their own schedule, and follow their passion. However, it’s understandable for prospective freelancers to wonder about the financial viability of such a job. At the end of the day, can you really make a good living just by freelancing?

How Much do Freelancers Make?

Unfortunately, the answer to this question depends on a number of factors including your experience level, skills, personal connections, and industry. However, it’s not unreasonable for freelance writers, for example, to make anywhere from $40,000-$60,000 per year. And while that’s hardly an opulent salary, it’s certainly enough to keep the creditors at bay. It’s important to remember though that these figures are just estimates. Certain freelancers with highly sophisticated knowledge of an industry or web-design practice should be able to attract high paying jobs. Indeed, B2B companies will pay top dollar for freelancers who are familiar with an esoteric product like a chamber slide or a high pressure homogenizer. Alternatively, new freelancers without much experience and with few connections could find it difficult just to make ends meet.

Financial Drawbacks of Freelancing

While on paper freelancers may seem to make more money than their traditional, nine-to-five counterparts, the reality is that there are certain financial considerations that only freelancers have to deal with. For one, most freelancers operate as independent contractors. As such, freelancers have to cover all costs associated with their business, such as office equipment and startup expenses. Furthermore, freelancers are unable to access certain benefits like group health insurance, which are usually provided by an employer. Instead, they typically have to pay a premium for such services.

Do Industry Trends Affect Freelancers?

The short answer is that the fluctuations of the stock market and changes within a given industry inordinately affect freelancers. Harsh though it may sound, business owners will typically cut ties with a freelancer before they think about laying off any full-time personnel. On the other hand, freelancers can make a killing in a market that’s riding high while large corporations have plenty of capital available.

Is Freelancing a Good Idea?

In the end, each professional is different. They have different goals, dreams, and preferences. So while it is possible to carve out a career working solely as a freelancer, it’s probably a wise idea to take on a few side projects first before you commit yourself fully to this path.

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.

Are You Leading Your Finances?

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This last weekend, I attended a young professionals conference.  As you can imagine, a large part of the conference was spent talking about leadership.  One of the speakers was legendary basketball coach Dale Brown.  One of the breakouts was entitled “Visionary Leadership”.  I’ve also just started reading the book “Entreleadership” by Dave Ramsey.  In all of those places, there are lots of buzzwords that describe leadership, and what a leader is.

Of course, this being a personal finance site, my mind couldn’t help but apply as much of it as possible to personal finance.  When we think of our personal lives, we rarely apply the word leader to any aspect of it.  We apply it to ourselves and others in our work and volunteer lives, but not our personal lives.  Why not?

When it really comes down to it, we are the leader of our lives.  We are the ones who apply the same principles that leaders apply to business and volunteer organizations to our lives.  Or don’t.  We try and become better leaders at work.  We expect better leaders to lead us.  But rarely do we try and become better leaders in our personal life.

Leading your Finances

Leading Your FinancesPersonal finance aren’t all that much different from a business and a business’ finances.  We still have income coming in, expenses going out, and the profit left over.  Unfortunately, for many, that’s where the parallels end.  Let’s change that.  Let’s apply some of those leadership principles to our lives.  Specifically, let’s apply them to leading your finances.

Financial Efficiency

Business leaders are always looking for ways to make their business and employees more efficient.  Over the years, businesses have foregone the paper and pen and replaced them with computers.  They’ve replaced old marketing tactics with websites and social media.  Leading your finances means finding, and embracing, new ways to make your finances more efficient.  Forego the old check and envelope method of paying your bills and sign up for bill-pay.  Or automate your bill paying by setting them up for auto-pay.  Find ways to save that also create income.  Look into better rates at better banks.  Learn about dividend investing.  Learn about peer-to-peer lending.

Financial Opportunity Seeking

Many of today’s biggest and brightest businesses wouldn’t even exist today if their leaders hadn’t been continually opportunity seeking.  If all Apple still made was computers, it wouldn’t be the multi-billion dollar company that it is today.  If Steve Jobs hadn’t seen the opportunity in the iPhone, iPod, and iPad, they’d be just another company making computers.  Apply the same to your finances.  Peer-to-peer lending hasn’t always been what it is today.  There was a time where it was still a fledgling opportunity.  A small percentage, relatively, of the population saw the benefit of it as an investing avenue, and, for most, their finances are the better for it.  Be open to services and products that can help you make your finances better.

Continual Financial Improvement

Good enough is never good enough for a business leader.  The only thing that stays the same is their desire for improvement.  Beyond always seeking opportunity, we must also always be finding ways to improve our finances.  We must always be assessing the risk involved with those new opportunities, and making decisions on what will best improve our finances.

Financial Failure

Businesses fail.  If they have good leaders, they only fail momentarily and spring back stronger than ever.  They’ll have set the company up to be diversified so that any one failure shouldn’t be enough to ruin the company.  Investors talk all the time about the importance of diversifying an investment portfolio.  But, it can be applied elsewhere in our finances.  Having all of your money in one online bank is great.  Until your internet goes down and you can’t get to it to bill pay.  Diversifying to have a set amount of cash available in an emergency can help you out there.  Not depending on just stock investments is another great way to diversify for failure.  Prepare your finances so that an opportunity that fails only sets you back, doesn’t bankrupt you.

How can you improve your finances today?  What opportunities can you learn more about and assess for use in your finances?  What efficiencies can you create to make your finances better? What other leadership qualities can you apply in leading your finances?