Goal Update: End of December 2015 And A Stock Option Primer

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of December, 2015
Current value: $20,001
Change from last month: +$1,300
Percent of Goal:  18.40%

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Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses sales was $276.My account took a big jump in value thanks to Realty Income stock taking off. More on that below. I've also unlocked a new achievement this month:

I squeaked across the $20,000 threshold. It was December last year when I hit the $10,000 saved mark. Looking back at the last year, my contributions to this fund totaled $7,442. To put it another way, $2,558 this year came from investment gains - just over 25% of my increase this year. That shows the difference between just saving and investing money.

At $10,000 per year, I'm looking at another 8 years before I will reach my goal. However, as I accumulate more savings, my returns will start compounding and that time frame should come down.


As I mentioned last month, because I'm getting close to the point where I will be selling my shares of Realty Income and moving the money into a hard money loan, I started looking at a way I might be able to wring a bit more money out of the stock before selling it. One way to do that is with stock options. Specifically, by writing covered calls.

A Short Stock Option Primer

Calls and puts are types of stock options. A call gives the owner the right, but not the obligation, to buy a stock at a certain price. Similarly, a put gives the owner the right, but not the obligation, but sell a stock at a certain price.

Those definitions are written from the perspective of the option buyer. From the perspective of the option seller, it is reversed: selling a call gives the seller the obligation to sell the stock at the specified price (should the buyer of the call want to exercise, or use, the option). Selling a put gives the seller the obligation to buy the stock at the specified price (again, should the buyer of the put want to exercise the option).

(I'm going to stick to calls for the remainder of this discussion, as people tend to have an easier time comprehending those than they do with puts, for some reason.)

Some other things you need to know abut options: One option covers a block of 100 shares, so a single call option gives the owner the right to buy 100 shares of stock. The buy or sell price of the underlying stock that the option is written for is called the strike price. Options are only good for a limited time and the day they expire is called the expiration date. Although one option covers 100 shares of stock, the option price is quoted on a single share basis, so the cost of an option is 100 times the quoted price.

The Terminology Of Buying And Selling Options

Selling a call or put is referred to as writing a call or put. You can write two types of options: covered or naked. Writing a covered call is selling a call where you own the underlying stock. Writing a naked call is a call where you do not own the underlying stock. For instance, if you write a call option for IBM and you own 100 shares of IBM, you have sold a covered call. This is because if the option buyer exercises the option, you must sell him or her 100 shares of IBM stock, which you already own. If you sold the call option and you did not own IBM stock, this would be a naked call. In that case, if the buyer of the option decides to exercise the option, you are required to buy 100 shares of IBM stock to sell to him. The problem is that IBM shares may now cost more than the strike price of your option, so you would lose money in this case.

Obviously, selling naked calls exposes you to unlimited losses. Suppose you sold an option to sell a stock for $10 per share in 30 days at an option price of $1 per share. By selling this option, you collected $100 up front. Fast forward 30 days and now that stock is trading for $75 per share. The option buyer comes to you and says "Here's $1000, give me my 100 shares of stock." Because you didn't actually own the stock, you have to go buy 100 shares at the current price of $75 and sell them to the option holder at $10, giving you a net loss of $64 a share (the difference between what you had to buy the shares for and what you had to sell them for, including the $1 per share you received for selling the option in the first place). Selling naked options is extremely risky.

Writing covered calls, on the other hand, is much more conservative. Let's look at the same situation, only this time, you own 100 shares of the stock. The option buyer comes to you and says "Here's $1000, give me my 100 shares of stock." You already own the stock, so there's no problem. You do have some "fictional" losses. You have to sell at $10 per share instead of the current market price of $75 per share, so you didn't make as much money as you could have. Hopefully, you bought these shares originally at less than $10 per share, so you still made some money.

If the option expiration date arrives and the stock is below the strike price, the option expires worthless. You, as the person who sold the call, gets to keep the money the option buyer paid you. The option buyer however, is out of luck. He or she loses the money paid for the option and gets no stock in return. Since no one can tell where a stock price is going in the future, buying options is pretty much legalized gambling. Selling options can be viewed the same way, however, it makes a bit more sense if you are in a situation like me, where I am planning on selling my stock anyway.

Got that?

It can be complicated. Let's walk through what I did:

On December 22, I wrote 3 covered calls for Realty Income stock at a strike price of $50 with an expiration date of Jan 15, 2016 at a price of $1.70. So I received 3 * 100 * $1.70 or $510 for this. The stock was trading at 51.18 at the time, so this is a bit of a premium over the current price ($51.70 per share versus $51.18 per share).

What happens now? I sit on my stock until January 15, 2016. On that day, if the stock price is below $50 at the close of trading, the options expire worthless. I get to keep that $510 and my stock. If the stock price is above $50, I will likely have to sell it at $50 per share. But keep in mind, I already collected $1.70 per share when I sold the option, so if the stock closes between $50 and $51.70, I've made more than I would have just selling the stock outright. If the stock closes over $51.70 per share, then I will have lost out on some potential profits because I will be forced to sell at a below market price. Overall, though, I will still have made a profit because I originally paid less than $50 each for my shares.

Why Bother?

Why did I do this? It's a complicated process and I've got the potential to miss out on some profits. Why wouldn't I just hold onto my shares and straight up sell them later? Because I don't believe the price of the stock will go much higher. (It's near a 52 week high and the Fed has started raising interest rates, which typically causes REIT stocks to drop in price.) In effect, I'm betting that, come January 15, the price will be below $50 per share. In that case, I'll have received an extra $510 for nothing. Its a way to squeeze a little extra cash out of the stock before I sell.

And if the stock ends up above $51.70 per share? Meh. No big deal. I was looking to sell anyway.

Another factor played into my decision to sell the covered calls: I want to move $20,000 into a hard money loan. Right now, my partner is getting 8% interest on loans. For $20,000 that works out to $133.33 per month. So the $510 premium I am receiving for three and a half weeks (Dec 22 to Jan 15), is more than I could earn from the loan, so this was the better investment.

I'll keep you posted on how this turns out. As of the time I am writing this, December 31, the stock closed at $51.63.

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Option Writing For Passive Income Part Two

Back in August, I wrote about making passive income by selling cash backed naked puts. If you haven't read that post, I suggest you first go back and do that now. After four months of doing this, I thought I'd post about how it's going so far.

I made four trades total, each time selling 5 or 6 contracts with an expiration date three to four weeks out. Details of three of those trades can be found at these two posts. The fourth trade ended the day I am writing this (Dec. 15) when the options expired out of the money. Last week, Realty Income stock dropped and I thought there was a pretty good chance I would be called and have to buy the stock. However, the stock rallied 2 points this week to close at just over $57. My $55 options expired out of the money. This investment netted me a 9.11% annualized ROI. 

Compare This To Straight Out Buying The Stock 

The total amount of money I have received from trading naked puts since August is $899.70. How does this compare to if I had just bought the shares outright?

I sold my first puts on August 10. At that time, I sold 5 contracts, which translates to 500 shares. My other three trades were for 6 contracts, or 600 shares. So for this comparison, let's assume I bought 500 shares on August 10 and another 100 shares when I sold my second put - October 6.

Realty Income also pays a monthly dividend. If I owned the stock, I would have received this money, but, as an option writer, I do not. Furthermore, the company also raised the dividend during this period. So this comparison needs to include any dividends I might have received. (For the sake of simplicity, I'm going to assume I would not have reinvested the dividends and instead just took them as cash.)

The closing price for the stock on August 10 was $57.02. This would have been my cost to buy 500 shares. The closing price on October 6 was $56.48. This would be been my cost to buy an additional 100 shares, bringing my total shares to 600.

Had I bought the shares outright, my total gain would have been any price appreciation of the stock between when I purchased it and today plus any dividends received. Since my last batch of options expired today, we'll take today's closing price of $57.40 as a sell price for this comparison. My options figures include commissions, so we'll also take those into account for the stock purchase scenario.

Here are two tables showing the calculations. This first shows gains from the stock price going up. A negative price indicates a purchase, a positive price, a sale. The second table shows the dividends I would have received. The Dividend Record Date is the date I have to own the stock in order to be eligible to receive the dividend. The Dividend Payment Date is when the dividend is paid.

A Hefty Increase

As you can see, had I bought the stock outright, I would have made $733.30.

By selling naked puts, I earned $899.70.

I made 23% more by selling naked puts!

It Gets Better

And let's look at this another way to see how it can get even better. Assume the stock closed below the option strike price ($55) today and my options were called. I would be forced to buy the stock at $55. But don't forget, I've already been paid $0.40 per share to sell the option in the first place. Now let's also take into account the money I received from the previous three times I sold puts that were NOT called ($.55, $0.30, and $0.40 per share), that means I've already received a total of $1.65 per share. So if I had to buy today at the option price of $55, my actual net cost would be $55 - $1.65 or $53.35 per share. That means I would only have lost money if the stock closed below $53.35 per share. That's quite a bit of downside protection built in!

The more astute of you will realize that the more times I sell puts that are not called, the greater my downside protection becomes.

What's The Catch?

So why doesn't everyone do this? That's a good question. My overall profit was helped by one big factor - my options were never called. I was never forced to exercise the options, so I maximized my investment. I'd like to think this is because I'm a fantastic stock picker, but I'm not. In the long run, no one is. I happen to know this stock fairly well because it's been my main investment for over a decade.

The market is still volatile and things could have gone differently. If the the stock experienced a rally, I would have missed out on it. The price could have dropped a lot and I might have been forced to buy at a price over market value.

But here's the thing: I'm completely OK with my options being called. I wouldn't mind paying slightly over market value for this stock. Obviously, I would prefer my options are not called - I'll take that extra 23%, thank you very much - but I like the underlying stock and I would have no problems owning it. So this is pretty much a risk-free investment for me: If the options aren't called, I keep the money and do it again the following month. If they are called, I buy the stock and hold on to it. I'm happy either way.

I'm trading earning extra cash and getting a higher ROI now for the possibility of missing out on a big price increase. By only selling options with 3 or 4 weeks until they expire, I'm also minimizing this risk somewhat.

Make Some Extra Cash Before You Buy

Not everyone is in my position. This won't be a suitable investment strategy for many people. However, if there is a stock you are looking to buy, it might be worth your while to investigate this investment tactic as a way to pick up some extra cash as you buy the stock.

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Option Writing For Passive Income

As I've written about in the past, my real estate partner doesn't have enough deals to invest in, so I've been looking for alternate places to put my funds to work. I was toying with the idea of investing in RealtyShares. I think this is a viable option for the future, but right now I need my funds to be a little bit more liquid. I'm looking to buy a house after our move to Washington. The funds I am investing are technically my Tesla funds, but the housing market is so crazy here, I may need to borrow from them, so I don't want to lock them up for an extended amount of time. (More on this is a later post.)

Enter Option Investing

I have already traded options for passive income in the past. What I did then was sell covered calls. When you sell a call, you are giving someone the right to buy the stock from you at a certain price within a certain amount of time. It's called covered because you already own the shares you have promised to sell. (If you didn't own them, it would be called a naked call.)

Selling Covered Calls

Covered call selling is about the safest way to use options to generate additional income from a stock. In return for agreeing to sell the stock to someone at a certain price, that someone pays you a fee, called the option premium. If the expiration date arrives and the stock is trading above the price you agreed to sell it at, the option buyer makes money because you have agreed to sell them the stock at a price below the current market value. You lose out on any additional gains above what you agreed to sell for. If the stock is trading below the agreed on option price, you get to keep the money the option buyer paid you and your stock (since it would be cheaper for the option buyer to buy the stock on the open market then from your agreed upon higher price).

Here's an example of a trade I actually made back in 2007 and wrote about on my old blog:

I sold 5 March 17 calls with a strike price of 55 for $1.25 per share per contract. One contract is good to buy 100 shares of stock, so I've sold someone the right to buy 500 shares of SFI from me at $55 per share on or before March 17. For this right, they paid me $625, or $1.25 per share times 500 shares. If the stock price on March 17 is below $55 per share, their contract is worthless (since they can buy the shares on the open market for less). If it is above $55, then they can exercise their contract and I must sell them the shares at $55 per share. But because they have already paid me $1.25 per share for the option, I actually make $56.25 per share.

Obviously, I hope the price on March 17 is below $55, but even if it isn't, I'm not worried. It can go up to $56.25 and I still won't be losing money.

In that case, the options expired out of the money (meaning at the option expiration date, the stock was under $55/share) and I was able to keep the premium I collected and did not have to sell the stock.

 Selling Naked Puts

A few months ago, I read a couple of posts over at Early Retirement Now where they talked about another strategy - selling naked puts. (I recommend you read their posts, as they go into much more detail than I will.)

In a nutshell, when you sell a put, you are agreeing to buy stock from someone at a specified price, even if the price on the open market is lower. For the person buying the put, this represents insurance against price drops. Even if the price drops to zero, they have a contract to sell it to someone at a higher price.

But for the person selling the put, i.e., the person guaranteeing to buy the stock at a certain price, this represents a potential loss. If the stock price does drop, they would have to buy the stock at the higher price. Why would you want this?

Well, as the folks over at Early Retirement Now point out, many mutual fund managers are highly risk averse and don't want to take any losses, so there is a big market for puts. If you can get a good price, the risk vs. reward ratio can be good enough to make this an attractive offer for the put seller.

There are some things the put seller can do to minimize the risk. Most importantly, keep the length of the option contract as short as possible. The folks at ERN trade futures options with an expiration date one week out. I don't have the funds required to do that, so I'm trading options on common stock with a one month expiration date. I'm also only selling puts on stocks I am willing to own and hold. In my case, this means Realty Income, my favorite REIT.

By the way, if you want to sell puts and you have the cash to cover any purchase you might be forced to make, you should ask for your brokerage account to be approved for cash-backed naked put selling. This is one of the option trading levels available at most brokerages.

My Trade

I made a spreadsheet to make the calculations easier. Here's a screenshot:

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What I am really trying to do is get a certain rate of return. In most investments, you calculate the rate of return by taking the income or profit received divided by the amount of money you invested, then converting that percentage to a yearly percentage figure. But when you sell a naked put, this formula can't be used.

Why? Because I really haven't invested any money! I simply received money in exchange for promising to buy stock from someone at a certain price. I have incurred no out of pocket expense. You can't divide by zero, so how do you calculate the rate of return in this case?

I did some research and there are a couple different methods people use, but the one I settled on is this: you treat the money you would be forced to spend to buy the stock at the specified price as your investment.

So, looking at the spreadsheet above, the cells highlighted in green indicate the cash I would need to spend if my puts were called (i.e., if I was forced to buy the stock at the option strike price).

With that definition out of the way, we can go over the rest of the spreadsheet. The first couple of cells show the date of the trade, the expiration date of the option contract, and how far away that is in days and years. I also enter the current stock price, the total amount of cash I have in my account, and how many option contracts I want to sell. (One contract controls 100 shares of stock.)

The cells in the next column contain commission data and the dividend data of the underlying stock, used in calculations later.

The bottom rows of cells is where the calculations are performed. I enter two strike prices and the price those puts are selling for. The next column, net stock cost if called, gives me the net price per share I would pay, taking into account the option premium I receive. In the case of the 55 put, I was paid a $0.55 per share premium, so if my put was called and I had to buy, I would actually only be paying $54.45 per share ($55 - $0.55).

The Net Income cell shows my how much cash I get from selling the number of contracts specified above (5) minus the various commissions and fees.

The two yield columns tell me what my rate of return is. This is calculated using the cash needed if called figures (green cells) and the time until expiration fields. One value is straight percentage and the other is an annualized return (per annum, or p.a.).

The two fields for stock dividend yield don't play much of a role in my decision to sell a put, but are more for informational purposes. They calculate the dividend yield of the stock at the strike price and at the strike price taking into account the premium I received from selling the put. As I said, I'm only doing this with stocks I would be happy to own, so I like to see what my dividend yield would be if my option is called and I had to buy the stock.

My Criteria

In order for me to sell a put, I'm looking for an annualized return of at least 8%. As you can see above, the 55 put meets this criteria. In fact, this spreadsheet shows an actual trade I made.

As long as Realty Income stock is trading above $55 on September 15, I get to keep the $266.70 I received for selling the put and I don't have to buy any stock. Then I can sell another put the following month.

I'll keep you posted on how this turns out.

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Goal Update: End Of November, 2017

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of November, 2017
Current value: $37,550
Change from last Month: +1,385
Percent of Goal:  34.53%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

My SQL courses on Udemy generated $96.64 of income. One of my courses was selected to be part of the Udemy for Business program. This means Udemy will be including the course in a package of courses that they sell to businesses. I will earn income based on minutes viewed for courses in this program rather than earning a flat fee per course sold. There seems to be great potential for a large number of students with this program.

And speaking of getting paid per minute viewed, I received my first payment from SkillShare. I made $11.14. Not bad considering I only have 5 students there and they have only watched about 200 minutes of my courses so far. Next month is looking better: I'm up to 11 students and 300 (additional) minutes already.

Cash Backed Naked Put Update

As I mentioned last month, Realty Income stock took a bit of a dip and I was able to sell some cash backed puts at what I felt was a very safe strike price. I received $231 for selling puts with a strike price of $52.50. Sure enough, the price rebounded and when the options expired, the stock was trading at $56.48. This means I keep the $231 I received and was not forced to buy any stock. This three week investment netted me a 10% annualized ROI.

I turned around and made pretty much exactly the same trade on November 22 - I sold 6 puts for $0.40 for a net income of $231. This time, the strike price was $55 with an expiration date of Dec. 15. I have a feeling my options might be exercised when that date rolls around and I'll have to buy the shares. As of this writing, the stock is trading at $55.55. It has to stay above $55 for 2 more weeks for the options to expire worthless (which I want). My mistake, if you can call it that, was that I miscounted the weeks remaining in this option when I sold it. I normally like to only have about 2-3 weeks until the option expires but this time, I sold options 4 weeks out. That gives me a little more exposure than I like.

Assuming the options don't get called, I'll have made a 9.11% annualized ROI. If the stock closes on Dec. 12 below $55, I'll have to buy 600 shares at $55 each. I'm not opposed to that. I like the stock and have no problem owning it at that price. It's just that then I'd be earning a 4.66% ROI from the monthly dividend instead of roughly double that by selling options each month. We'll have to wait and see how this one turns out.

In other news, I've changed jobs! Starting yesterday, I'm now working for a new company based in the Washington area. Although not the reason for the change, the new position did come with a 28% salary increase, plus a significant signing bonus. There was one drawback, but I'll get into that next week. Once I know what my regular paycheck will be, I'll be re-figuring my budget. I expect I'll be able to up the amount I put in the Tesla fund each month!

Net Worth Update

Our net worth increased by $9,922 over last month. This is more or less just a reporting adjustment. Mint finally resolved their issue with accessing my 401(k) account, so that figure finally got updated after a couple of months. (Note there is no more red dot next to the Investments" category.) I did pay about $10,000 in a repair bill for the new house, but the check has not cleared the bank yet, so that's not reflected in this month's numbers.

October 2017

November 2017

If you have any questions or suggestions for topics, please drop me a line in the comments section!

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And We're Off!

Welcome! I've created this blog to track my progress towards my goal of owning a Tesla Model S. I'm doing things a bit differently than most people, however. Most people would save up enough for a down payment on the car or perhaps even the total cost of the car, then go out and buy it. Not me.

I've been investing in real estate for over a decade and one of the most important things I've learned from that is the power of passive income. For the purpose of this blog, I will define passive income as income you receive from invested money. It's money that your money earns, not you. The example most people are familiar with is interest earned from money in a bank account. Other examples are income from a rental property, interest payments made to you on a loan you made, and dividends from stocks. These are all instances where your money earns more money for you. You get that money whether or not you are working, on vacation, sleeping, or whatever. It's completely passive on your part.

There are many ways to get rich. One of those is to buy assets that generate passive income. If you do this long enough, you'll eventually accumulate enough assets so that the passive income they generate will exceed your living expenses. At that point, you no longer have to work for income, which is most people's definition of "rich."

The Tesla Model S is an expensive car. As of this writing, the version I want with the options I want lists for $96,770. That's a big chunk of change. If I had that money sitting in a bank account, I could buy the car. But everyone knows what happens to the value of a car over time - it drops. So by buying the car outright, I've traded a huge lump of cash, which I could use to generate income, for an asset that will go down in value as time goes on. Even if I took out a loan to purchase the car, I'm still spending money that I earned (non-passive income) on something that will decrease in value. This is Not Smart.

Instead, I want to use investment income to pay for the car. There is some amount of money that, when invested, will generate monthly income equal to or greater than the amount of an auto loan payment. All I need to do is collect my investment income each month, then send it in as my auto loan payment. No net money out of my pocket! As a bonus, I can make the car payments whether or not I have a job. But the best part of this is that after the car loan has been paid off, I'll have BOTH the car and the lump of money I have invested! Score!

The trick to performing this financial magic is finding an investment that provides you with a high enough consistent rate of return and that is also safe enough so that your principle is not lost. Let's look at a couple of options:

• Savings Accounts: If you've checked your bank statement lately, you've probably noticed banks are paying virtually nothing in interest right now. Currently, a 5 year $100,000 certificate of deposit, typically the highest paying savings vehicle a bank or credit union offers, is only paying 1.2% interest. That means if you invest $100,000, you'll get paid $100 per month in interest. If you figure your car payment will be around $700 a month, you'll need to invest $700,000 to cover that payment. Clearly, this is not the way to go.

• Dividends from stock: Many publicly traded companies pay dividends to their shareholders. Looking at the top dividend paying stocks in the Dow Jones Industrial Average (as of the day I'm writing this), AT&T is currently the highest paying one with a dividend yield of 5.15%. The dividend yield of a stock is defined as the yearly dividend amount paid per share divided by the price per share of the stock. For example, AT&T is currently paying a $1.84 dividend and the stock price is currently $35.76. So 1.84 / 35.76 = 0.51454, or 5.15%. But there are some problems with this. First of all, companies are under no obligation to pay out a dividend. They may decide to reduce their dividend or cancel it altogether. The dividend yield is also dependent on the company's share price. So if you bought some AT&T stock today at $35.76, your money would be earning 5.15% interest. But suppose 6 months from now, AT&T is trading at $42. Now, the dividend yield, assuming the actual dividend amount remains at $1.84, drops to 4.4%. And let's not forget you have to pay commissions whenever you buy or sell a stock. If you are trying to save money over an extended period and you make frequent purchases of stock, your commission costs will likely eat up any profits you might get from dividends. Furthermore, the changing stock price will make it very difficult to earn a consistent rate of return. So this isn't the best option either.

• Real estate: This is, in my opinion, the way to go. Perhaps this isn't surprising since I've been investing in real estate for so long. In this case, I'm not talking about renting property, but rather hard money lending. I've done over 30 hard money loans and am still doing them. I receive a 9% return on my investment with these loans and they are secured by real estate (meaning I'm listed on the mortgage as a lender and I can foreclose on the property should the borrower not pay). I'm not going to go into all the details of hard money lending here (after all, I've been blogging about that for 10 years here), but suffice it to say that I believe this represents a safe, dependable, high value passive income stream.

So now that I've determined what type of investment I'm going to use, I need to figure out how much I need to invest. I'll go over how I did that in my next post. Warning: there will be math. But I'll also include some bunnies, so it won't be too scary.

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Goal Update: End Of October 2017

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of October, 2017
Current value: $36,165
Change from last Month: +1,201
Percent of Goal:  33.3%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

I saw an increase of just over $1,200 this month!

I was able to sell another round of cash-backed naked puts of Realty Income for a net income of $171. In terms of a dollar amount, this is less than I made last month doing this, but because the options I sold this month have a shorter time until expiration - two weeks - my annualized ROI is actually higher. The options expired out of the money on 10/20, so I earned an annualized ROI of 10.22%, higher than the 8.28% I made last month.

Realty Income stock took a little bit of a dive in the fourth week of October, so I turned around and sold another 6 contracts on 10/23 for $0.40 per share with a strike price of $52.50. They expire 11/17, which is three weeks out. That's about one week longer than I prefer, but the stock was heading down, so I thought it would be a good time to make a little money. The 52-week low for the stock is $53.63, so I think there's a good chance these options will expire out of the money. Total cash received for this was $231 and I stand to make a 10% annualized return.

My courses on SkillShare.com have seen a little bit of activity. Students have watched 188 minutes total of my three courses. I don't have details on how much income that translates to yet - October stats aren't paid out until November 16th. I don't expect it will be much. I should note I haven't really done any promotion for these courses (other than what I have written about here) and I've only got a total of 5 students enrolled. I'm going to wait to see what the payout is before deciding how much effort I should put into promoting them. I've got one more class ready to publish over there, but I'm going to wait until my other classes have more students. When you publish a new course, students of your other courses are automatically notified of your new offering, so that's free advertising.

Over on Udemy however, I picked up another $128.60 in income.

I earned a whopping $0.01 on my ebook royalties.

Achievement Unlocks!

It's been a while since I last unlocked an achievement and this month, to make up for it, I've unlocked two!

I crossed the $35,000 saved threshold!

And I reached 33.3% of my goal!

For those old folks that remember vinyl

Relocation Update

We have moved into our new house! We've still got boxes everywhere and are trying to figure out where to put stuff. We also had to have some maintenance work done to the house, so that is a big reason why our net worth dropped this month - several thousand dollars worth of new paint, new carpet, repairs, etc. Our garage is filled with furniture that does not fit into the new house, so I'm also selling that off a piece at a time on Craigslist.

Net Worth Update 

Our net worth dropped by $2,069 from last month. This was due to the aforementioned repairs. Some bills have not come in yet, so next month I'm expecting another drop of about $10,000.

September 2017

October 2017

You can see we've moved some money from our investment accounts to cash in anticipation of the upcoming bills.

If you have any questions or suggestions for topics, please drop me a line in the comments section!

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Goal Update: End of January 2016

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of January, 2016
Current value: $20,820
Change from last month: +$819
Percent of Goal:  19.15%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses sales was $353. I also earned a whopping $0.04 in ebook royalties. Woo hoo! That wasn't even for a sale. My book is part of the Kindle Unlimited program where subscribers can read ebooks for free. Authors are paid based on the percentage of a book someone reads. Someone read 7 pages of my book, so I got 4 cents. Other income included a $205 quarterly bonus at work that I put into my Tesla fund.

Last month, I mentioned I sold some covered calls as a way to try to get some extra cash out of selling my stock. Those options expired on January 15 above the strike price, so they were executed and I had to sell my shares. I sold $50 calls at $1.70 per share, so my net sales price was $51.70. The stock closed on the 15th at $52.19 per share, so I lost a total of $147 compared to if I just straight up sold them without the options on that day. The stock continued to climb the remainder of the month, crossing the $55 mark. Remember how I said option trading was legalized gambling? Missing out on that gain cost me another $1,000 or so, but, oh well. No one can predict the future and the stock could have just as easily fallen. I stuck to my plan, which is all you can do.

Speaking of my plan, I sent my lending partner $20,000 to lend out. He doesn't have anything immediately available, but he's got some deals in the pipeline. Hopefully, I'll get that money invested soon.

My online course payment for next month looks pretty low - under $200. That represents sales in December, which is a traditionally slow month. But sales for January are looking awesome. So far, it's shaping up to be my second highest grossing month to date. Because people can cancel within 30 days and get a refund, we'll have to see if it holds up.

As a reminder, if you have any questions or suggestions for topics, feel free to contact me by clicking on the Contact link at the top of the page!

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Ditch Your Savings Account

In the past, when people wanted to save money, they put their cash in a savings account at a bank. I remember when I was growing up in the 1970s and 1980s, I had a passbook savings account at a local savings and loan that paid 5.25% interest. Today, however, the Federal Reserve has been keeping interest rates incredibly low in order to stimulate the economy. A consequence of that policy is that the interest rates banks pay on savings accounts have plummeted to almost zero.

I bank at a credit union, which typically pays higher interest rates to its customers than a bank does. A savings account at my credit union currently pays 0.05% interest. The highest rate they offer is 0.2% and to get that, you need to open a money market account and have $250,000 in it. Yes, in order to earn a measly little two-tenths of a percent, you need to have one quarter of a million dollars on deposit. Think about that for a minute. That works out to just $500 per year in interest. On a quarter of a million dollars. That sucks!

Online banks are slightly better. I have a savings account at Capital One 360, formerly ING Direct, that pays 0.75% interest. That's significantly better than my credit union, but still somewhat sucky in general.

But Savings Accounts Are Safe!

Yes, savings accounts are insured by the government and are one of the safest places to park your cash. That safety comes with a steep price, however.

According to the latest available figures at the time I am writing this, inflation is at 1.7%. (Inflation measures the rise in the cost of goods and services over time.) If inflation is at 1.7% and your savings account is paying you 0.2%, you are actually losing money at the rate of 1.5% per year. That $100 you have in your savings account today will only buy $98.50 worth of stuff next year.

So What Can You Do?

There are a couple of alternatives you can look at and which one is right for you depends on what the money in your savings account is for. Or to put it another way, what you do with that money depends on how soon you need it. To put it a third way, it depends on your time horizon.

If you absolutely must have the safety that a savings account offers or you will be needing your money in the short term (0 - 9 months), a traditional savings account is probably the best bet for you, but at the very least get one at an on-line bank, such as Capital One 360. Not only will you get a higher interest rate, but you will likely also have lower, if no, fees. You lose the ability to go into a local branch office and withdraw money, but who does that anymore? With ATMs and internet transfers, there is really very little need to visit a physical branch. You still will lose out to inflation in the long run, but at least that loss will be less than it will at a traditional bank.

If your savings account is more for a long term goal or an emergency fund, invest in the stock market. If you won't need your money for over a year or you plan not to touch it unless an emergency happens - such as a job loss or a major appliance or car breakdown, then I suggest opening a brokerage account and investing that money in a very low cost index fund. I like Vanguard's Total Market Index Fund or Dividend Appreciation Index Fund. These mutual funds have an expense ratio of 0.2% or less and their five year returns are 14% or higher. (See this series of posts on why expense ratios are important factors to consider when choosing a mutual fund.) You can purchase shares of these funds through a brokerage, which will probably charge you a commission (although some brokerages do not), or you can buy them directly from Vanguard. Buying directly from Vanguard however, will require a minimum purchase of $3,000.

Going this route does mean your money is less liquid. Still, if an emergency came up and you needed access to that cash quickly, you could sell your shares and get the cash within a week. If you need it sooner, an option would be to put your expenses on a credit card until your funds become available (and then pay the card off, so you won't get hit with interest charges).

Another option is to open an account with Betterment. When you open an account with them, you can specify the purpose for your account - such as an emergency fund, retirement, etc., give them your age and income and they will recommend an investment strategy for you. They will diversify your investments for you, but you can always adjust the risk level and investments yourself if you want to have more control. You can set up automatic deposits and purchases and put your savings on autopilot. Fees range from 0.35% to 0.15%, based on how you much have in your account. There is no minimum balance required to open an account and you can transfer funds electronically to and from your checking account.

A fourth option is to invest in individual stocks that pay dividends. This is riskier than any of the other options and is not for everyone. The lack of diversification means you are exposed to the risks of the price volatility of one or two stocks. However, if you have been following a company for years and have a good understanding of the business and they have a strong history of increasing dividends, this might be the way to go. Personally, my Tesla funds are invested in Realty Income until I accumulate enough to lend out as a hard money loan.

You'll notice I'm recommending investing in funds and stocks that pay dividends.Why not just funds or stocks in general? If you buy a stock that does not pay a dividend, you are at the mercy of the market when it comes to your return. The stock price will fluctuate outside of your control. But if you have a stock that pays dividends, you will get a fixed amount of money each quarter or each month for every share of stock you own. That's income you get regardless of whatever the market decides the stock is worth on any particular day. The dividend will help protect you from price fluctuations. Let's look at an example.

Say you bought 100 shares of XYZ company at $100 per share. They pay $5 per share per year in dividends, paid monthly. That works out to $0.41667 cents per share per month. Suppose, after 15 months, the stock price has dropped down to 95 dollars per share. Your hundred shares that you paid $10,000 for is now worth only $9,500. But in those 15 months, you have been paid $625.00 in dividends, so your investment, including the dividends you got paid, is really worth $10,125. Even though the price per share has dropped since you purchased the stock, you have still made money. This is what I mean when I say dividends can help protect you from price fluctuations.

In Summary

In the current low interest rate environment, keeping your money in a savings account is a losing proposition. Your earnings in a savings account will not keep up with the pace of inflation and the actual buying power of your money will decrease over time. Any of the four options I've listed will give you a greater return on your money than you'd get parking it in a savings account at a bank or credit union. In the current environment, the only way to beat inflation is to invest in the stock market and the safest way to do that is to invest in a diversified portfolio, either through a service like Betterment or a low cost mutual fund. 


Note: The links to Capital One 360 are referral links and I will receive some money if you use them and open an account. You will also get free money for doing so - $25 to $50, depending on the type of account you open. Other than that, I receive no payment from Capital One 360 and they played no part in the creation of this post.

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Boy, Was I Stupid - A Look Back On My Financial Life

"If only I knew then what I know now."

Man, do those words ring true. When I look back at my first 20 or 25 years of earning income, I am appalled by the investing mistakes I made. I easily could be a millionaire at this point in my life if I had the financial knowledge then that I have now.

Those Were Heady Times

I graduated college in 1992 with a degree in electrical engineering and got my first job that same year. I was smart enough to enroll in my company's 401(k) plan as soon as I was able. I also was smart enough to contribute enough to get the full company match, but that's about where my smarts ended. I didn't contribute anything more than that. I was on my own and getting a decent paycheck for the first time - thoughts of saving money never entered my mind. I had a couple student loans, but the payments were small, around $100 a month if I recall. I did not try to pay them off early.

After working for the company for about 3 years, I realized I would never be able to afford a home in the area. (I was living and working where I grew up - in Orange County, Southern California.) Home prices were approaching a million dollars. I was making just $25,000 out of college. The math didn't work.

I decided to leave the state. Housing prices weren't the only catalyst: The Rodney King riots had just happened. I got punched in the face at Knott's Berry Farm while trying to prevent a fight. Traffic was horrendous any time of the day. Air pollution was horrible. Despite growing up there and all my family living there, I decided it was time to leave.

I had a vacation planned to visit a friend in Connecticut and before I went, I managed to set up a job interview for while I was out there. The company liked me and offered me a position. They were also willing to pay for half of my moving costs, so I packed up and headed off to Connecticut.

This Is Not The State I Was Looking For

Once there, this Southern California boy experienced some serious culture shock. People tended to stay up later. They mocked anyone who liked ham and pineapple pizzas. And, something I never got used to, the sun rose from the ocean instead of set into it. That's just wrong. I was there for one winter, but wasn't really bothered by the snow. (Although come February, I was starting to get a bit tired of it.) I later discovered that Connecticut is one of the most expensive states to live in, so moving from California to Connecticut did not really lower my cost of living.

Rising Or Setting?

When I left my company in California, I rolled my 401(k) into a traditional IRA. This let me decide what to invest in. Because I was working as an engineer in a technology field, I invested heavily in tech companies. It was what I knew. This was right before the dot-com bubble started inflating.

The Connecticut company was a publicly traded company and I participated in their employee stock purchase plan. Employees could purchase company stock through payroll deductions and get shares at a discount (about 15%) to the market price. I enthusiastically enrolled because, hey, instant 15% profit, right?

The company made Caller ID boxes and cordless phones. Cellular phones were still expensive and somewhat rare, so landlines were the norm back then. However more and more phones were being made with Caller ID built in and the need for separate Caller ID boxes was going away. Further, since we made mass-market consumer products, price competition was tremendous. Our stock price started falling.

After 1 year, I got a call from the person who used to be the president of the company I worked for in California. He was now heading the engineering department for a company in Arizona and wanted to know if I would be interested in working as a database developer for him. Even though I had only worked as a hardware engineer before, he felt I would be good at the job. I took the offer and moved to Arizona and this time, the new company paid for 100% of the move. (One lesson learned!) Shortly thereafter, the Connecticut company went belly up. The shares I had purchased were worthless. I wasn't at that company long enough to be eligible for their 401(k), so their stock purchase program was the only investing I was doing at the time. Continuing my trend from the previous years, I did not make any contributions to my IRA.

Back Out West

I worked for the Arizona company for three years. I learned SQL Server and that started me down the career path I am still on today. But the company made predictive dialers - the devices telemarketers use to call people - and I never really liked being associated with the telemarketing industry.

During this time, the tech bubble was in full swing. I was participating in the company's 401(k), but again, only enough to get the full employer match. I was also actively trading stocks in my IRA account. I wasn't a day trader, but I definitely was trying to time the market and was caught up in the bubble mentality. I bought high and sold low way too often. I remember owning a lot of Lucent and Cisco shares.

One of the few smart things I did during this time was to pay off my student loans early. I had finally gotten tired of making student loan payments, which I had been doing for four years. I started making payments more frequently, sending in a payment every three weeks, then every two weeks, instead of once a month. Eventually, I paid the loans off completely, two or three years early.

Chased Money, Didn't Like It

By this time, I had accepted a new position at the company because I was looking to increase my income. I left the engineering department and became the manager of the Professional Services department, which meant I was in charge of the teams that went to our customers to install our product and train the users. I was a manger! Now the money would come rolling in! I had a nice bonus package, but I quickly discovered it was unattainable. Upper management had structured my bonus so that it would get paid if I reduced costs and/or increased revenue. However, when I tried to do this, customers would call the CEO and complain about the fact I had the gall to ask them to pay for services. She would cave and give away for free what I was trying to charge them for (even though she had previously given me the ok to charge them). Tired of this and realizing I do not have the temperament for office politics, I started looking for a new job.

New Horizons

I found one with a company in the education field, still in the Phoenix area. When I left my old company, I once again rolled that 401(k) into an IRA. The tech bubble was still in inflating, so of course, I plowed my money in more tech stocks. This company, like the one in Connecticut, was also publicly traded. I also participated in an employee stock purchase plan here, but because I was stung the last time, I was a bit more restrained in how much I contributed.

Missed Signs

The dot-com bubble began to deflate and then it eventually burst. Before it completely burst, in an attempt to boost our dropping share price, the CEO renamed the company to the same name, but with a ".com" on the end, which was the big trend back then. If there ever was a warning sign, that was it. Another warning sign I should have paid attention to: I was at the company for 5 years and no one got a raise that entire time. Can you say "RED FLAG"? It was also around this time that, while browsing though a book store, I came across Rich Dad, Poor Dad by Robert Kiyosaki. Coincidentally, the housing bubble was starting to grow.

At the time, Enron was wrapping up the final stages of its tremendous implosion. I did manage to make one smart stock move, although it was too little, too late. I managed to short Enron as it was collapsing. But I had never shorted a stock before and had read all kinds of horror stories, so I was very hesitant to pull the trigger. I ended up shorting Enron at $5 and change. (Stocks usually get delisted at $5, so I got in at the last moment). I covered at around $1, so I made some money, but just a couple hundred dollars.

My IRA however, took a big hit from the resulting market collapse. Cisco and Lucent tanked. I don't even remember what else I owned, but the total value of my already small IRA was cut in half. After 5 years, I left the company to go work for a video game developer where my high school and college friend worked. He hired me and became my manager. Shortly thereafter, the education company I just left was sold to a new company and went private. Again, I lost money on the shares I had purchased. My five years there was the longest stretch I had ever been with an employer. Considering I never got a raise during that time, it probably wasn't the best place to stay. However, inertia is a powerful thing and the whole economy was under a pall, so, right or wrong, I was happy to just have a job during those years and sat tight.

Reading Rich Dad, Poor Dad opened my eyes to the power of cash flow and passive income. I started investing in real estate and I started flipping houses and bought two rental properties. Around this time, I started my real estate blog. See that site for full details about this part of my life. I am pleased to say almost all of my real estate investments turned a profit. I sold one rental property for a profit, the other for a loss. (The loss was due to me just being stupid and buying something I shouldn't have. I was under the influence of the bubble mentality still.) All my flips made money, as did all my hard money loans. This is the period where I really began my financial education in earnest.

Finally Starting To Learn

I once again rolled my 401(k) into my IRA when I changed companies. Funny, this was the third time I had rolled money into it, but the total dollar value of my IRA was still about the same as the first time I did it 12 years prior. My new company was also a publicly traded company (THQ). I don't remember if they offered an employee stock purchase plan, but if they did, I didn't participate. Getting burned twice was enough for me. (I did get stock options when I was hired, but they soon were underwater and I never exercised them.) Around this time, I started realizing the stupidity of my frequent stock trading and chasing hot sectors. I invested my dwindling IRA assets in shares of the one company I found that I was pretty sure wouldn't collapse - Berkshire Hathaway. My love of passive income also saw me start to invest in real estate investment trusts for their high dividends.

The video game industry is inherently volatile. Gaming companies hire people to develop a game and lay them off once it ships. The process is repeated for each new title. As part of the IT department, I wasn't a member of the programming and artist groups that regularly faced layoffs, but it's still unsettling to see lots of your co-workers get let go on a regular basis. Eventually, the company started to flounder and THQ management started closing studios and laying off people to reduce costs. I survived two rounds of layoffs, but the third took me out. I can't imagine it must have been easy for my friend, who had hired me and was still my boss. Making things more awkward, our families had planned a dinner together for what turned out to be the day after my layoff. The dinner still took place. Luckily, we both knew the layoff was a business decision he really had no control over and we're still good friends to this day. Eventually, THQ went bankrupt.

A Year Of ...

I was out of work for almost a year. I was collecting unemployment and had to drastically cut my expenses. By this time, I was married, so there was additional income coming in, but it was less than half what it was before. I had purchased a house and had a monthly mortgage payment to keep up, but no real emergency fund to rely on. During this period, I truly began to understand the power of passive income. If I had enough passive income coming in, it wouldn't have mattered that I was laid off. I resolved to build up my passive income streams. I took this opportunity to convert my IRA into a Roth IRA, as my earned income was pretty low, so the tax hit wouldn't be so bad.

Temp To Perm Jobs

Eventually, I picked up a couple temporary jobs which each lasted around 6 months or so. The second, again with a company in the education industry, turned into a permanent position. I worked there for a year or so before management changed and I began looking for a new place. They offered a Roth 401(k) and I participated in that, but I wasn't there long enough to become vested in the employer match, so I lost that money. Again, I did not contribute to my IRA while there either.

And Here We Are Today

I found a contract-to-hire position at the largest credit union in Arizona and got hired on as a permanent employee. Being in the financial industry, they've got a much nicer financial benefits package than the other companies I was at in the past. I am participating in their Roth 401(k) and this time more than just enough to get the full match. I'm saving 10% of my salary. They match 4%, so that's a net 14% savings rate for me. This is invested in low cost Vanguard index funds. The company also has a pension plan which I have now qualified for. It's not big, but almost no company offers pension plans any more, so I'll take it. It's at no cost to me and, as of now, I am eligible for an amount equal to 4% of my salary when I retire. My wife and I are now, finally, making regular contributions to our IRAs.

It's All About The Cash Flow

My journey has made me realize how important passive income is. That's one reason why my Tesla purchase will be paid for with passive income. I'm no longer interested in spending large sums of money on things. Things wear out or become obsolete or boring and then your money is gone. If I am going to spend big bucks on something, I am going to buy an investment and let the investment pay for the item. That way, I get the item and the money.

Reflections

Looking back, I cringe at how I handled my investments. I did so many stupid things. I lost years of compounded interest. I don't want others to make the same mistakes. I have two nephews who recently graduated high school and they each got a copy of The Richest Man In Babylon when they graduated. One more will be graduating in a year or two and he'll get the same thing. (Sorry to spoil the surprise, Matt.) I'm teaching my 12 year old daughter about compound interest and the power of time. Although I believe that one of the best ways to raise children is to let their mistakes be their own, maybe, just this one time, mine can be hers.

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An Introduction To Hard Money Lending

Last time, I mentioned how I like to receive cash flow from my investments, which is why I am a dividend investor. There is one other type of investment I like and have used for years to generate cash flow and that is hard money lending.

What Is Hard Money Lending?

Hard money lending is the process of making a loan based solely on the value of some item put up as collateral by a borrower. Hard money lenders are usually private investors who lend people money using a piece of real estate as collateral. Most lenders will only loan up to a certain percentage of the value of the property. For example, my partner and I don't loan more than 73% of the value of a property. This is referred to as 73% LTV, or loan to value ratio. So if a property if worth $100,000, we would loan a maximum of $73,000 based on that property. This is because if the borrower defaults and doesn't pay the loan back, we need to foreclose on the property and then sell it to get our money back. That process takes time and costs money, so the 27% cushion in the loan gives us some room to cover those expenses, should they occur.

When investing, my primary concern is that my principal is safe. I don't want to lose money (who does?), but no investment is without risk. So hard money lenders secure their investment by writing a mortgage on the property. This is just like a mortgage a bank would create when you buy a house, only in this case the hard money lender is the bank. The mortgage states how much is borrowed, what property is being used as collateral, and how long the borrower has to pay it back. This is a publicly recorded document and the house cannot be sold until the loan has been paid off. When this happens, another document is recorded stating the loan has been paid off and the hard money lender's claim on the property has been released. If you've ever bought or sold a house or refinanced a mortgage, you've gone through all this paperwork.

Hard money lenders usually charge borrowers higher interest rates than a bank would. This is because the whole process moves much faster, which is advantageous to the borrower. There is no credit check or income verification because the loan is based completely on the value of the property.

Who Uses Hard Money Loans?

So who would use a loan like this? People who need a big chunk of money quickly. The borrowers my partner and I lend to are people who buy houses at foreclosure auctions. When you buy a property this way, the entire purchase price is due in full by the end of the day of the auction. Obviously, there is no time to go through a loan process with a traditional bank. Enter the hard money lender. We loan the borrower money to buy the property. The whole process is handled through an escrow company, just like a regular house purchase. The escrow company handles the paperwork of writing and recording the mortgage and distributing the money to buy the house. The borrower then either keeps the house to rent out as an investment (and does a refinance to a standard bank loan later to pay the hard money lenders off and get a loan with a lower interest rate) or fixes up the property to sell it for a profit. The profits from that sale pay the hard money loan off and the rest goes to the borrower.

Who Are Hard Money Lenders?

I don't have enough money to make hard money loans for houses myself, so I have to pool my money with other people to make loans. This is where my partner comes in. He has several investors whose money he pools and lends out to borrowers. When a loan is made, each investor is listed on the mortgage so we are all fully protected. Altogether, our group of investors has a pool of about $6 million that we loan out.

There's much more to hard money lending than this and, if you are interested, I suggest you read about the 30+ loans I've made and written about on my real estate blog.

Why Do This?

So why switch from dividend stocks to hard money loans? Because I can get a better rate of return. My dividend paying stock is right now returning about 4.5%. With hard money lending, I can make between 7% and 8%. When I started years ago, before interest rates dropped, I was making 12%. Now yes, if the share price of my stock goes up, I could end up with a higher overall rate of return when you factor in stock price increases, but that's not a sure thing. Also, a stock price increase is not money I can spend until I sell the stock. Once again, I like cash flow and asset appreciation isn't cash flow.

There are other options for hard money lending besides real estate. Prosper.com and Lending Tree are large peer-to-peer lending sites that basically allow anyone to become a hard money lender. I lent money through Prosper.com eight years ago and I didn't enjoy the experience. I'm sure much has changed since then, but there is still one basic fact about their business model that I don't like: when you make a loan through them, it is an unsecured loan. If the borrower doesn't pay you back, you have almost no recourse. There is nothing you can sell to get your principal back. Recall when I said my primary concern was the safety of my principal? An unsecured loan is not safe. But if you've got $50 you're willing to gamble with and want to experience what hard money lending is like, go ahead and make a peer-to-peer loan. See if you like it.

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