Tag: Behavioral Finance, Financial Planning

The Ultimate How Bonds Work Guide

The Ultimate How Bonds Work Guide

Bonds confuse lots of people but actually they are very straight forward. When you buy a bond you loan your money to a company, city, state or country for a fixed term. When you first make the loan, the interest rate is fixed (in most cases) as is the maturity date (the date they have to repay you).

During the period of the loan, you usually receive interest every 6 months. In the vast majority of cases, the interest payment you receive never fluctuates; you always get the same payment regardless of what happens in the stock market and regardless of what happens to interest rates. When the term is up, you (hopefully) get your money back.

What happens if you need to cash in your bonds before they mature?
When you buy a bond, the company or government that borrows the money is only obligated to pay you interest every 6 months and to repay the face amount of the bond when it matures. If you need to cash the bond in before it matures, you must sell it to somebody else.

If you do that you may get more or less than you put in, depending on market interest rates, the general state of affairs in the economy and the specific situation the borrower is in. In other words, the value of your bond goes up and down all the time.

This doesn’t matter if you hold your bond to maturity because at that point, the borrower has to give you back the face amount (assuming they are able to do so).

Bond Terminology
Before we dive too deep into the world of bonds, let’s go through a little terminology. It’s not that complicated and it will really help you get a grasp of what’s going on.

Accrued Interest.

Bonds pay interest every 6 months. This period is fixed. As soon as the bond pays out interest, it starts accumulating interest for the owner the next day. This is known as the accrual period.

Let’s say you buy a bond that normally pays interest to the bond holders on January 1st and July 1st. If you buy that bond on June 1st for example, you’ll get all six month’s interest on July 1st even though you only owned it for 1 month. To make up for that, when you buy a bond in between payout dates, the buyer pays the seller for the number of days the seller held the bond after the last payout. That’s called accrued interest. If you buy a bond in between pay dates, you can confirm the accrued interest the seller is charging you by using any number of online calculators.

In this case, you’d owe the seller of the bond for 5 months of interest and you’d have to pay the seller that accrued interest in addition to the amount you pay for the bonds. That amount would be rolled into the price of the bonds when you buy them.

Call Date

Sometimes, the borrower (or issuer) has the right to repay their loan earlier than the maturity date. This is otherwise known as calling the bonds early. When you buy a bond, it’s always important to ask if the bonds are callable and if so, at what date and price. (Sometimes the call price is different than the face amount of the bond.)

Coupon Payment

This is the amount the bond holder will receive every 6 months. You calculate this by multiplying the interest by the face value of the bond.

CUSIP

The American Bankers Association developed a way to classify municipal, corporate and U.S. government bonds. What they came up with is known as a “CUSIP number” which is a unique nine digit alphanumeric identifier.

Discountbond funds

If you buy a bond at less than face value, the difference is a discount.

Duration

The length of years before the bond matures.

Face Amount

This is the par value of the bond. It is the amount that the borrower must pay the bond holder when the bond comes due.

High Yield Bonds

These are bonds that pay higher than market interest rates and they are otherwise known as junk bonds. Usually these bonds pay higher rates because the risk of default is higher. The added interest is meant to compensate the investor for this added risk.

Investment Grade Bond

There are rating agencies that evaluate how secure different bonds are. In other words, the higher the rating, the stronger this rating agency believes the bond issuer is and their ability to pay interest and principal. This in turn means that rating agency believes that the bond is appropriate for investors seeking preservation of capital.

Issuer

This is the name of the party that borrows the money by issuing the bonds.

Liquidity

This is an estimation of how easy or difficult it will be to sell the bonds on the secondary market. If the bonds are in high demand, it will be easy to sell them if the need arises. If the bonds are not in high demand or there are very few bonds being traded, they are referred to as “non-liquid”. Investors who hold illiquid bonds may have to offer them at a steep discount if they want to sell them prior to maturity.

Maturity Date

This is the date when the issuer must repay all bond holders the face amount of the bonds plus the accumulated interest since the last interest payment date.

Nominal Interest

This is the fixed interest rate that the bond issuer pays to the bond holder.

Payment Date

This is the date that the issuer pays out to registered owners of the bond.

Premium

If the market price of a bond is higher than the face value, buyers pay a premium.

Principal

This is the face amount of the bond.

Yield

This is the return the investor earns based on the actual amount they invest.

Why Bonds Fluctuate In Value Prior To Maturity
The best way to understand this is to look at an example. Let’s assume you buy a $100,000 bond with a 5% interest rate at par value. In this case, you will receive $2500 twice a year for a total of $5000. No matter what happens in the market, as long as the people who issued the bond have the ability to pay, that’s how much you will get. No more. No less.

Now, let’s assume that a couple of years go by and interest rates go up to 10%. If you try to sell your $100,000 bond on the secondary market, you won’t get $100,000 for it. Here’s why.

If I have $100,000 to invest when rates are 10% and I buy bonds, I’ll receive $10,000 a year in interest. So if your bond is only paying $5000 a year, I know I only have to invest $50,000 to earn that $5,000 (because interest rates are now 10%).

That being the case, since your bond is paying a fixed $5000, the most I’ll pay you for your bond when interest rates rise to 10% is $50,000. Make sense? This is why as rates go up, the value of the bonds typically go down.

All investments are ultimately valued by the income they generate; either now or in the future. Remember that. It will help you understand how other investments operate as well.

Of course, the other side of this equation also works. Let’s say rates go down to 2 ½ % rather than go up. Are you going to sell me your bond that pays $5,000 a year for $100,000? No. That’s because, when rates are 2 ½%, someone would have to invest $200,000 in order to replicate the $5000 income your bond is paying you. So if somebody wants to buy your bond when rates drop to 2 ½%, they better be willing to cough up $200,000 or you won’t sell.

Other Factors That Move Bond Prices
Besides market interest rates, there are other economic pressures that impact bond prices. One major influence is the financial security of the issuer. If the company that issued the bonds is on the ropes and nobody expects them to be around when it’s time to pay back the bond holders, the value of those bonds will plummet.

In addition, if the economic conditions of the overall economy change for the better or worse, that could also impact the value of the bonds. That’s because if the open market expects interest rates to shift, bond values will shift along with them.

Another force that impacts bond values is the time to maturity. The longer the maturity, the greater the impact of the changes outlined above – all things being equal.

What happens when a bond matures?
When your bond matures, the borrower (or issuer) stops paying interest and you are supposed to get your money back. In order to understand how you get your principal back, you first have to understand how people actually hold their bond investments.

In the vast majority of cases, people hold their bonds in brokerage accounts. That means they don’t have a physical certificate but merely an electronic notation in their statements reflecting their ownership. This may not sound that secure but in reality, this is by far the safest way to hold bonds.

When a bond comes due in this case, the brokerage company simply removes the bond from the holdings and puts the cash redemption amount into the account. Very easy.

But some investors hold physical certificates instead. In the olden days, this was the only way you could hold bonds; to get a physical piece of paper and store it somewhere safe. And while most people don’t have to bother with this today, some still prefer to do so. For these people, the process of redeeming a bond is more complicated.

If you hold the physical bond certificate and it matures, you send the paper certificate to what’s called the transfer agent when the bond matures. This agent is a fiduciary intermediary that acts as an agent for both you and the bond issuer. When the bond comes due, the transfer agent will get your certificate from you and send it to the issuer. Then, the issuer will send the redemption value to the transfer agent who in turn puts the money in your account.

The idea of holding the certificates may sound appealing to you but there are downsides to this approach. First, if a bond matures and you hold the certificate, the agent or issuer may not reach out to you. It may be up to you to follow up with them. When your bonds are held by the brokerage firm, you don’t have that worry.

Another concern is that bonds held in certificate form can be lost or destroyed. If you happen to misplace your bond, you may have to pay 3% of the face value or more in order to get it replaced.

Bottom line? If you own bonds, chances are you will be far better off by depositing them with a broker.

TYPES OF BONDS
All bonds are debt instruments because they represent a debt that someone has to the bond holder. There are many different types of debt instruments and each kind has its own benefits and risk profile.

The most prolific debentures are U.S. government notes, bills and bonds. These are all issued by the United States Department of the Treasury. These are all very liquid and are very easy to sell on the secondary market.

Treasury bills are debts that mature in one year or less. The interest is included in the price you pay for the bill. That means you pay less than the face amount of the bond when you purchase them. And when it matures, you will receive the full face amount. The difference is the interest and this is an example of buying bonds at a discount.

Treasury notes are issued for 2 to 10 years. These bonds pay interest semi-annually.
Treasury bonds are the longest maturity U.S. government debt you can buy. They are issued for 20 to 30 years.

The government also sells inflation protected bonds called “TIPS”. This is an acronym for “Treasury Inflation-Protected Securities”. You may recall that with typical bonds, the maturity value and interest payments are fixed while the value of the bond fluctuates prior to maturity.

With TIPS, the rate stays the same but the maturity value is adjusted by the Treasury department to compensate the bond holder for risk. If rates rise (CPI) the maturity value of the bonds rises as well. This way, if inflation gets out of control, TIPS investors have a built-in safety net.

Currently, TIPS investors receive interest every 6 months and can buy bonds that mature over 5,10 or 30 years.

While these bonds may sound attractive for those worried about inflation, you might want to hold on to your check book for a while. I say this because nobody knows which way rates are going and how long it will take them to get there. If rates are low and stay down for years, it might take a long time before your TIPS prove themselves as worthwhile investments.

The government bonds discussed above all provide interest that is taxable at the Federal level, but State tax free.

Municipal Bonds
Besides U.S. government bonds, you can also loan your money out to cities, and states. These are referred to as municipal bonds and when you buy these bonds, the interest you receive is Federal tax-free. And in many cases, the interest you earn is also State tax free. The reason the interest is tax free is to make these investments more appealing to investors while making the borrowing costs lower for the cities and state.

The value of the bonds fluctuate and are subject to the same risks as discussed above.

Other Types Of Bonds
You can loan your money out to different countries or private companies as well. The same risks apply to these investments without the tax benefits described above. When you loan money to another country, the backing is only as secure as the country itself.

The history books are full of cases where sovereign nations defaulted on their bonds and left bond holders high and dry. Because of these risks, some foreign nations have to pay higher rates in order to attract investors. Of course, this depends on the financial stability of the borrower at the time they seek out funds.

You can also lend money to corporations here and overseas. Again, these bonds work the same way I’ve described above. And like foreign national bonds, the interest earned and the investment safety are very much a function of the particular party you are considering lending money to.

What happens if the borrower doesn’t repay you?
If the company, city, state or country that borrowed money from you does not have the wherewithal to pay you the interest or the principal they owe, you probably won’t be a very happy camper.

When this happens it’s known as default and it’s usually ugly. When the issuer is a company, they usually file for bankruptcy before they default. If they don’t, the bond holders usually force bankruptcy on the company.

If the company goes into a Chapter 7 bankruptcy, the court takes over the business and its assets are sold off. If your bonds are secured by assets, you’ll be among the first to see some money. If your bonds are unsecured, you won’t see a dime until the secured creditors are taken care of.

Chapter 11 bankruptcy puts the court in charge of the company but assets are not sold off. The hope here is that debt holders will get more if the company continues to operate rather than be sold off.

In either case, bond holders usually lose money when the issuer goes into bankruptcy and the value of their bonds will likely whither.

Municipalities can go bankrupt too but that doesn’t happen often. That’s because it’s very difficult for a municipal government to do so. In fact, there have been fewer than 500 municipal bankruptcies over the last 60 years compared to tens of thousands of business bankruptcies filed each year.

In the rare case where a city does file bankruptcy and defaults on its debt, the recovery rates were about 62% according to Moody’s Investor Services. To give you something to compare this too, corporate bond holders of defaulted securities usually recovered only 49% on average between that same period 1970 to 2012.

What about bond funds?
There are many ways you can invest in bonds. You can buy individual bonds of course as I described above. But you can also use mutual funds and/or ETFs to buy bonds. There are pros and cons to each. Let’s take a closer look at bond mutual funds, ETFs and index funds).

When you invest in a bond fund, the fund managers buy……ahhhhh……bonds. No surprise there.
But there are big differences between buying a bond outright and buying them through funds or ETFs. When you own a fund for example, you incur fund expenses. Some bond funds are expensive and others are very inexpensive. (We’ll look at fund expenses later on in the guide.)

On top of that, funds don’t have maturity dates – individual bonds do. The fund is a pool of potentially hundreds of different bonds and each one comes due at a different time. When one bond matures, the fund managers will in most cases immediately turn around and reinvest the proceeds into a different bond. Because there is no maturity date with a bond fund, you never have a fixed date when anyone is forced to repay your money.

Also, with an individual bond, you know what interest you are going to receive and when. With a bond fund, it’s not that simple. Remember, there are hundreds (sometimes thousands) of bonds that make up the fund. They all have different rates and different pay dates. While the income won’t change that much in any one month, it will change over time as old bonds mature and new bonds (at different rates) are purchased.

(Bond funds themselves come in a variety of different stripes. You can buy muni bond funds, international corporate or sovereign bond funds, and corporate bond funds. The holdings of each fund is determined by the fund prospectus. This is the document that details what the fund managers can and can’t do. Typically, the prospectus spells out what kind of bonds the fund will purchase, what quality the bonds will be and what the duration of the bonds would be as well.)

So these are two downsides to owning bond funds. But there are also some strong positives.

First and foremost, a bond fund spreads your risk. If you put all your money into one bond, you could lose it all if the bond defaults. With a bond fund, no one bond default can hurt you that much. Also, with a bond fund you have expert managers at the helm. All they do is read prospectuses and check out the financial strength of potential bond issuers all day long. These people have more expertise and time than you have and they are better equipped to keep your money away from shaky deals. This is not to say that they are always successful. But they do have better tools and resources than you do.

Also, you can put any amount you want into a bond fund. That’s not the case with individual bonds. Typically individual bonds are sold in increments of $100,000. That’s a lot of scratch for most people. If you buy individual bonds you need to invest several million dollars in order to have a diversified portfolio. With bond funds, you have access to wider diversification with only a $100 investment.

Last, with bond funds, you usually don’t have to worry about liquidity. If you own an individual bond and want to sell it before it matures you have to sell it on the open market and hope for the best. That involves commissions of course but it also involves risk. And if the bond you want to sell is a small issue and illiquid, it may take time to sell. To make matters worse, illiquid bonds are often sold at steep discounts as I mentioned before. If that’s the case, you could take a major haircut on your principal if you need to bail out of an individual bond prior to maturity.

This isn’t a problem for bond fund investors because the fund has more liquidity. Keep in mind that on any given day investors are buying and selling shares of the fund. Often, a fund manager can use the cash inflow to pay off those people who want to cash out. Often they can do this without even selling off any bonds.

Also, as the market shifts, bond holders can easily shift with it. For example, if you decide you want to sell your corporate bond fund and buy a municipal bond fund (or any other fund) instead, it’s very easy and inexpensive to do. The same can’t be said for investors who own individual bonds as this process is much more costly for them.

How to buy bonds and bond funds
Most people who buy individual bonds do so through their broker. The one tricky thing about this is that sometimes you don’t know how much commission they are charging. For some reason, it’s actually legal for a bond broker to “bury” the commission into the cost of the bond so the customers don’t know what they are paying.

For example, lets’ say you want to buy a bond. You call up your broker and tell her what you are looking for and she comes back to you with an offer of XYZ bond paying 4% maturing in 2030.

Let’s say you like the sound of that so you give your broker the green light and she buys the bond at par value – $100. This could be OK – but you don’t know for sure. It could very well be that the broker only paid $97 for the bond and is charging you over 3% to make the transaction. This is referred to as “mark up”. It’s a cost that is often difficult to ascertain because it’s buried into the price of the bond. This might be OK in someone’s world but it’s not OK in mine.

There are calls in the industry for brokers to fully disclose markups but so far this requirement has not been put in place. The best thing to do is ask your broker what the mark up is and hope they are being honest. Once you get that information, check with another broker to determine what price they would charge for the same bond – and tell your existing broker you are going to do so. Very few people do this but it’s the only way you can audit your broker under current rules and is very much worth the time.

If you want to buy Treasuries, you can sidestep this entire problem and buy them directly from the Federal government.
All you have to do is go to their website (Treasury Direct) and have at it. If you do, you won’t have to worry about commissions and mark ups as there are none. There are some costs to this but they are relatively minor and nothing to worry about.

On your first visit, you’ll have to open an account – but that only takes about 10 minutes. Once you do that, you can buy Treasury Bills, Notes, bonds or TIPS.

The easiest way to buy mutual funds or ETFs is to do so through a broker. Don’t buy funds at a mutual fund company however. If you go that route, you can only buy funds offered by that particular fund family. If you buy your funds through a brokerage firm like TD Ameritrade, Fidelity or E*TRADE, you can buy almost any fund you like. I’ll discuss this in further detail later on.

Bottom line on Bonds
Bonds are very popular – but that doesn’t mean they are the right investment for you. It depends on your investment objectives. Please refer back to the Ultimate Investment Guide for a deeper discussion on this point. Bonds may have a place in your portfolio. And if they do, this guide has explained most of what you need to know in order to make smart decisions about bonds. As always, speak to your investment professional before making investment decisions.

How to Improve Your Finances with Personal Financial Statements

How to Improve Your Finances with Personal Financial Statements

How often do you sit down to review your finances? Not just taking a glance at your latest statement looking for fraud, but really sitting down and analyzing your income, spending, savings, investments, and whether or not you are on track to meet your financial goals? If you are like most people, the answer is not very often. In fact, some people never take the time to understand their finances. They just complain and react without taking time to set goals and make a plan to achieve them.

As a Senior Financial Analyst at a Fortune 500 company, I spent my days doing this for $1 billion+ product lines to ensure we were on track to reach our goals for product profitability. If you want to reach personal profitability, you should look at your finances like a business. Read on to learn about three common financial statements and how you can use them in the pursuit of personal finance success.

Income Statement

For personal finances, one of the most important tools you have is a budget. Your budget isn’t a restriction on what you spend, it is a tool to plan for your income and spending to ensure you reach your financial goals.

Businesses use their income statement to understand and report income and losses for a specific period of time. Also known as a profit and loss statement or P&L, this is the most important tool you can use for your own financial planning.

Remember that an income statement includes both revenue and expenses. You can budget until you’re blue in the face, but you will never get rich if you don’t increase your income. My side hustle brought in $40,000 in 2014 in addition to my full-time job. It is easier to earn more on the side than you may realize, and having diverse income sources helps protect you from unexpected income losses in the future.

There are a handful of free budgeting websites and apps that you can use to connect your bank, credit, and loan accounts to automatically create a personal income statement every month.  Also, if you want to make it simple, there are a fewingenious ways to track your spending that cost you nothing and take almost no time to do.

Balance Sheet

Big businesses use a balance sheet to understand assets, liabilities, and shareholder’s equity in a business at a snapshot in time. Public companies are required to report this information quarterly, but I look at my own personal balance sheet once a month, and have done so since July, 2008.

What most businesses call a balance sheet, individuals call net worth. Calculating your net worth doesn’t have to be difficult. I use the free site NetworthShare to update my net worth every month.

Looking at my personal balance sheet, I can get a quick view into my assets, debts (travel rewards credit cards I pay off in full every month), and financial health with less than five minutes of work every month.

Cash Flow Statement

A cash flow statement appears to be less related to personal finances than the others on the surface, but it also has an important role in your personal finance statements.  This statement tells you where your money comes from and goes to within three major categories: operating, investing, and financing.

For our purposes, operating activities are any source of work or self-employment income and expenses. Investing is activities related to stock market and other investments, or investing in your own education and skills. Financing is debt related activity like buying a car or home with a loan.

Looking at your finances through this lens shows you how each part of your finances is working independently of the others. Maybe your investments are doing really well, but debt is keeping you from success. Maybe your job is supporting your investments and debt – that is very common.

There is no right or wrong here as long as you bring in more than you spend. However, looking at your cash flow into investing or financing, for example, can show how much you are doing to prepare for retirement or how much of your income is being eaten up by debt payments.

A Small Investment Can Pay Big Dividends

Putting together financial statements and taking the time to better understand your finances doesn’t cost you a cent! It only costs you a little bit of time. But don’t look at that time as an expense, look at it as an investment. By spending the time to understand your finances today, you know where to focus and work in the future. That can pay back huge dividends.

For me, it led to earning about one hundred thousand dollars in real estate. It led me to earning over six figures between a day job and a side hustle. It allowed me to quit my job to focus on my side hustle full-time and move to the beach in sunny Southern California. I now make more than double what I was paid at my old day job, but it wouldn’t have happened had I not started by understanding my finances.

Of course, everyone can’t expect to quit their job just because they understand their finances, but if you can get your finances under control and start working towards your goals, anything is possible.

So are you going to take action and understand your finances, or just let your finances happen like most people who drone forward in their day-to-day life wishing for something better? Stop wishing. Take control of your finances. It starts today with your personal financial statements. Who knows what tomorrow has in store?

Should You Drive For Uber? These Real Numbers Help You Decide

Should You Drive For Uber? These Real Numbers Help You Decide

If you are interested in earning extra cash, you might consider driving for Uber. A lot of people are doing just that. In fact, according to a recent study by Princeton, 40,000 new drivers are signing on every month. They are attracted by the flexible hours, the opportunity to be their own boss and the potential to make big money. What’s not to love?

driving for Uber

I have to admit, on the face of it, it sounds appealing. And because so many people turn to me and ask for good ways to earn a few pesos on the side, I took a deep dive into the Uber opportunity to see if it’s really all it’s cracked up to be.

Super Important Note: Being an Uber driving partner (that’s what they call it) is a very unique experience. I scoured the net for everything I could find on this opportunity and a few very important points became very clear very quickly:

a. As you’ll see, whether or not this job is suitable for you depends on YOUR unique circumstances.

b. The profitability of this work is also highly dependent on your unique situation, the market you drive in and how you work the market. (More on this later).

For that reason, I did a ton of research – so you can make an informed decision. Reading or listening to one individual driver’s experience might be interesting, but it won’t give you any idea about what you need to consider in deciding whether or not to drive for Uber. That’s what this post is going to solve for you.

Specifically, here is what you’ll learn by the time you finish reading:

A. How much you can make as a driver.
B. How the Uber business model works and why that’s important for you.
C. 3 ways to earn more as a driver.
D. How to calculate your real costs to drive for Uber.
E. How to apply for the job.
F. How to run your Uber business
G. Who this job is good for.

Before we go too deep, I want to point out that Uber offers two services. Their first and trademark service is ridesharing. That’s what the following discussion is about. But they also offer UberEATS – which is a food delivery service. It’s not hard to get a job with Uber and it’s even easier to drive for UberEATS.

You only need to be 19 years old and have one year of driving experience to deliver for UberEATS. Also, just about any car is acceptable so it’s much easier to land that job. You can even work if you only have a motorcycle, scooter or bicycle. The pay structure is different but the cost structure is the same. That’s why even if you are interested in signing up for UberEATS you should still read this post in its entirety. Here is moreinformation about UberEATS.

How Much Can You Make as An Uber Driver?

To make a good decision about working for Uber, you have to calculate your net profit for each hour you work. It doesn’t matter how much you make. It matters what you keep. And in order to understand how much you make, you first have to take a look at Uber’s business model.

The Uber Model

Customers use the Uber app to request a ride for which they are charged a fare. This fare is based on a base rate, the distance traveled and how much time it takes to complete the ride. On top of that, customers pay $1 to $2 to book the ride. Other than the booking fee, all the revenue is split 80% to the driver and 20% to Uber.

Let’s look at an example.

Let’s say you are an Uber driver working in LA and you take a customer on a 9 mile trip that takes 35 minutes. (It’s important to specify the city you are driving in because the tariffs differ by local. This will be very important later on as you’ll see.) In this case, the customer would pay about $15 of which you’d be paid 80% or $12. Simple.

Can You Earn More?

Yes – and this is key. Uber charges riders “surge” pricing when there are fewer drivers and greater demand. This happens often during bad weather, special events, or rush hour. It can happen anytime during the day (or night) whenever lots of people need Uber and there just aren’t enough drivers. Surge pricing can be 1.3x to 2.1x times the normal rate. In the example above, if that LA ride was made during a surge period, you’d be taking down 80% of (maybe) $30 rather than $15. Sweet.

As I said, surges can happen anytime and there is no guarantee that if you work a particular time, you’ll enjoy the higher fares. But as a driver, you can make yourself available during times (and in areas) which are most likely to have surges as described above and increase your odds of earning more money.

Earning Even More Money With Uber

The basic service is called UberX. People who order up this program get a normal car to take them where they want to go. But many riders want to be carted around in luxury vehicles and Uber is only too happy to oblige. And if you own a swanky ride, you can earn more. The higher-end options include:

    • UberXL

 

    • UberBlack

 

    • UberSelect

 

    • UberPlus

 

    • UberSUV

 

    UberLUX

Each level up demands that you provide a cooler sled but also commands heftier fees. Again. that means you’ll earn more for every hour you drive. I doubt it’s worth trading in your Pinto for a Lamborghini just for those higher fees. But if you happen to own a nice car, this option could really pay off for you.

Bottom Line On Gross Income

Near the conclusion, I’ll provide a few of the hacks the successful Uber drivers use to make this gig pay. But as I said at the outset, your gross earnings will vary by when, how and where you work. But you need some figure to work from. That being the case, it’s probably best to use $20 an hour. That’s the national earning average as calculated by Uber.

Expenses

The pay sounds pretty cool but don’t forget about your costs. When you drive for Uber, you use your own car and pay all the associated expenses. Many Uber drivers fail to understand the true costs of this arrangement and as a result overestimate their earnings. Let’s take a walk through the cost side of the Uber equation. I want to make sure you really get this.

Insurance:

If you are thinking about driving for Uber, you probably already own a car and that means you probably already have car insurance. The thing is, your existing policy may not be adequate. That’s because once you start earning money with your car, you become a commercial driver and that usually calls for different car insurance.

Call up your insurance company and tell them that you will be driving for Uber. Ask them if the policy you have is enough. There is a slim chance that your existing policy will be sufficient but probably not. Here’s why.

When you become a paid driver you are a higher risk. That’s because you are on the road more hours and that means you are more likely to be involved in an accident.

Your insurance company might be able to sell you a hybrid policy that covers both personal and commercial use and if so, your premiums will go up. If your company doesn’t offer a policy, Uber can sell you this added coverage but the Uber policy isn’t enough. You’ll still need your own personal policy. So make sure to find out what your additional insurance costs are going to be.

Taxes

Of course if you make money driving for Uber you’ll pay tax on that income. Keep in mind that you are an independent contractor and while Uber will send you a 1099, you’re still responsible to file.
Also, remember you’ll be an independent contractor and as such your tax preparation may be more complex and therefore may cost you more money to have prepared.

But there is also some good news when it comes to taxes. Because you will be in business for yourself, you might be able to write-off more of your work related expenses and that could end up saving up a nice chunk of change. Rejoice.

Phone

In order to make this business work, you must have a smart phone and a data plan. You can install the Uber app on the iPhone 4s,5,5C,5S,6 and 6 Plus running iOS 7 or later. You can also use an Android 4.0 or later. If you already have both a smart phone and a good data plan, this isn’t really an added cost.

Gas, Maintenance, Wear and Tear

Each driver has different car costs associated with working with Uber. Your costs will depend on your gas mileage, how well you keep your automobile, the kind of driving you’ll be doing and your car’s current condition.

I did a lot of sniffing around and found that the typical Uber driver figures it costs them about $.30 per mile to drive for Uber all in. If I was thinking about driving for Uber however, I’d assume it cost me $.40 per mile just to be on the safe side. The cool thing is, the IRS allows you to deduct $.53.5 (2017) per mile or actual costs – whichever is greater. So you might be able to write off more than it actually costs you and save some tax dollars. Cool.

Adding It All Up

There is a lot of controversy about Uber driver-partner expenses. And it is a murky subject. Your expenses will vary depending on how you work. I read everything I could on this topic (including scouring the Uber driver forums). Bottom line? Expect to set aside about 30% of your gross to pay your expenses.

Who Is Allowed To Drive for Uber?

In order to get on the Uber gravy-train, you have to meet certain requirements:

  1. Be 21 years old or older.
  2. Minimum 3 years driving experience.
  3. Have an automobile insurance policy in your own name and in the same state you want to drive in.
  4. Have a Social Security number.
  5. Submit to a background check.
  6. Have a clean driving record.

This may seem onerous but don’t worry. Nobody expects you to be perfect. As long as your driving history is good and you don’t have a criminal record, you’ll probably be accepted.

Also, a basic license will probably be enough in order to drive at UberX level. If you want to drive at a higher level you may need a higher license classification. The company will let you know.

You need a model year 2000 or newer sedan that seats a total of 4 people minimum (including you). Your car must have license plates issued in the state where you’ll be driving and the car can’t be salvaged.  If you don’t have the appropriate car, reconsider signing up for UberEATS.

How Do You Start The Process Of Becoming An Uber Driver?

If you meet the requirements described above, you shouldn’t have any difficulty getting started.
All you have to do is fill out this application and have your car inspected. Then, you’ll turn in the paperwork to get your background check done. This won’t take long and once you’ve cleared these low hurdles, you will get started by setting your schedule and earning money. In most cases, you should be able to start driving within a week or two (max) of completing your online application.

How to Start Earning Money with Uber

The actual work process is very straight forward. You just open the Uber driver app. Once that’s done, you’ll be connected with the next rider you are closest to.

If you accept the trip, the navigation in the app will direct you to the passenger pick-up location. Then, the app will navigate you to the destination and your work is complete. You don’t need to collect any money as the rider is charged automatically and you’ll get paid via direct deposit every week.

One very cool benefit of this job is that you don’t have to submit a schedule. If you are ready to work, you turn the app on. If you don’t want to work, you shut it off. Simple.

Is Driving For Uber A Good Job?

Driving for Uber can be a great part-time, seasonal or temporary job for some people. This is especially so if you need a flexible work schedule. It’s also a cool way to supplement your income by putting in some extra hours behind the wheel after work or in between class instead of vegetating in front of the TV or computer.

More than 80% of Uber drivers work less than 35 hours a week in their 20 biggest markets and more than half drive between one and 15 hours a week. (Just keep in mind that in order to stay active you have to accept at least 1 trip every 30 days. If not, you’ll have to go through the application all over again.)

If we figure you can make $20 gross on average and it will cost you 30% of that in expenses, your hourly rate should come in around $14 an hour. Having said that, we don’t know yet what your gross will be and we don’t know what your expenses are going to cost you. That said, I’d say, give Uber a try if you are willing to earn $10 to $12 an hour. If not, find something better.

Who Uber Is Great For

If any of the following describes you, Uber is a gig worth trying:

  • You need a flexible schedule.
  • You want to try being self-employed.
  • You want to earn more money.
  • You are retired and while you dig having a few extra shekels in your pocket, you are really interested in meeting new people and staying useful.
  • You are looking for ways to pay off credit cards or other high cost debt.
  • You want to earn money to fund a very specific financial goal.

Of course, as I’ve pointed out, the money issue is tricky. After reading everything I could find on this topic I’ve come to the conclusion that the only way to really know what you’ll earn driving is to give it a try. Having said that, you’ll increase the odds of being successful if you:

  1. Make yourself available during surge periods.
  2. Work in a less-competitive market.
  3. Keep meticulous income and expense records.

Beyond these three tactics, the most profitable Uber hack is to use your time wisely. If you can utilize your downtime for things like studying or doing other work, this will be killer. That’s because you erase downtime from the equation and as a result, your hourly rate goes through the roof.

I started this post by explaining that 40,000 new drivers sign up to become an Uber driver-partner every month. There is a lot of turnover in this business but more than 50% of the drivers who sign on, are still driving a year later.

That tells me that a lot of people think this gig is profitable. Just don’t expect to hit cruising speed right off the bat. If you decide to give this a try, give yourself a few months to learn the ropes.

Once you do, you can make a good income, name your schedule, meet cool people, and have your own business. The thing is, you’ll never have any of this unless you give it a try.

Taxes Are Worse Than You Thought

Taxes Are Worse Than You Thought

“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.” 

– John F. Kennedy (Yes, a Democratic president back in the Camelot days of the early ’60s wanted to slash taxes.)

This week’s post will make half of my readers indignant and the other half feel righteously vindicated in their thinking. I have no idea which half you are in. What is so controversial? Who pays taxes and why they should.

Research indicates that the top 1%/5%/10% are already paying the bulk of the income tax. Research also points out that the progressivity of tax rates, which climb relentlessly upward with income, surprisingly fails at incomes of over $10 million. This is an assumption because at that point capital gains tax and other tax-incentivized income comes into play that is typically not available to those of us with merely mortal incomes.

The next time we have a crisis and Democrats are in control of the White House and Congress (and after almost 50 years of observing political to-ing and fro-ing, I consider that a near certainty), the only alternative will be for the Democrats to introduce and pass some form of a value-added tax, which will not be accompanied by income tax cuts. Income tax cuts for the upper end of the income spectrum is just not on their agenda. They don’t understand the philosophical or economic reasons why that is something that should be done. I’m not asking them to here – that’s a debate for another day. I’m just saying that if Republicans don’t come to the realization of the situation, and introduce a VAT in a manner that they can live with, they’re going to have it shoved down their throats in a far more devastating and complicated manner.

If we don’t change things around then everyone better prepare for a slow recovery, followed closely by the Mother of All Recessions. I’m quite serious about that and will be writing about it over the next few weeks. Meaningless “tax reform,” which only messes around at the edges, will not keep us out of the next recession, which will likely be triggered from Europe.

 

 

2 New Alternative ETFs Seek Absolute Returns In Any Market

2 New Alternative ETFs Seek Absolute Returns In Any Market

The premise of positive returns in any market is an alluring proposition for risk adverse investors.  These types of alternative strategies were once the realm of sophisticated hedge funds and institutional portfolios.  However, they are now starting to make their way into the accounts of mainstream investors via exchange-traded funds (ETFs).

Alternative strategies are generally given more flexibility than a traditional passive index tracking a basket of stocks or bonds.  They may have the capability to own futures contracts, short positions, currency pairs, or even volatility-linked products. Put simply, these “go anywhere, do anything” investment styles have the freedom to select virtually asset classes they feel are most appropriate for the current market environment.

The Virtue Of The Weekly Advisory Team Staff Meeting

The Virtue Of The Weekly Advisory Team Staff Meeting

Anyone in a growing business has had the displeasure of being stuck in an unproductive meeting. At best, they happen from time to time. At worst, the day is so filled with unproductive meetings that it seems like there’s no time left to actually get anything done… leading many to want to just eschew internal team meetings altogether.

Yet the reality is that done well, meetings can be a mechanism to keep your team on the same page, working towards the right priorities, accountable on a weekly basis to getting things done, and provide a crucial opportunity for everyone to work together on solving the business’s biggest challenges from week to week.

Accordingly, the real problem is not that “(team) meetings are bad”, but that “bad (team) meetings are bad”, and that the remedy is to formulate a better structure to the weekly team staff meeting in the first place, with time to review key business data, evaluate the tasks that need to be done, prioritize for the coming week, and then take more than half the meeting time to actually solve problems that are occurring in the business!

Bad Team Staff Meetings Are Bad

In a growing business, meetings are an inevitable reality. Whether it’s the coming together of an entire leadership team, the gathering of the key players in a particular department, or simply a two-person meeting with an advisor and his/her planning associate, meetings happen. And the larger the business, the more plentiful the meetings tend to be, as there are more people to coordinate amongst and maintain communication with. Throw in some meetings for outside activities and volunteer efforts, and you may reach the point where it feels like you spend more time in meetings aboutwhat to do, than actually getting anything done!

Yet while many financial advisors ultimately push back on this “Death By Meeting” feeling by trying to eschew meetings altogether, arguably the real problem is not that there are so many meetings, but the fact that they’re sounproductive. In other words, the problem isn’t necessarily having meetings. It’s having bad meetings.

After all, meetings at their most basic level are simply about facilitating communication and problem-solving, which are clearly relevant for any business that has more than one person in the first place. And the added virtue of regular meetings is that they can actually become a concrete deadline for ongoing projects, and a point of accountability to ensure that things really are getting done. In addition to being a means of keeping everyone on the same page about the key metrics of the business, and whether it’s growing and moving forward.

In fact, leading entrepreneur expert Gino Wickman makes the case in his book “Traction” that one of the most common problems for businesses is their lack of effective weekly team/staff meetings. The end result is at best wasted time, and at worst a business that literally can’t get the “traction” to move forward on its goals. Because it’s actually the pulse of the weekly meeting, and the shared vision, problem-solving, and accountability that it creates, which helps ensure a team is moving forward on its goals!

Setting A Weekly Staff Meeting Agenda

As a starting template, Wickman suggests a structured 90-minute weekly staff meeting agenda to provide the key aspects of both problem-solving, and accountability. The 7-item standing agenda is shown to the right.

In this process, the segue is simply the quick kick-off to the meeting, to get everyone mentally focused. It might include a quick check-in – “how’s everyone doing today?” – and ideally includes giving all participants a moment to share something positive to get the meeting started on a good note.

Sample Weekly Staff Meeting Agenda - Wickman's Traction

From there, the next step is to review the scorecard, a summary of the key data or metrics for the business. It’s literally meant to be the “scorecard” of how the business is performing. In an advisory firm context, this might include key metrics like the number of new and lost clients (or assets, or revenue) for the month or quarter, the number of client meetings you’ve had, the number of client financial plans you’re working on, the number of prospects in your sales pipeline, or the number of transfers your staff are processing. Whatever the Key Performance Indicator (KPI) metrics are that help you know as a financial advisor where the business stands. (And if you aren’t tracking this data, now’s the time to start building out your KPI dashboard!) You might even come up with a basic color coding system – green, yellow, and red – to highlight metrics that are good and healthy, in the warning zone, or that are concerning and need attention.

The third step in Wickman’s weekly meeting is the rocks review. In this context, “rocks” is a reference to the famous Stephen Covey analogy that in order to effectively fill your time, you need to place the big “rocks” (major priorities) first, then fill in the pebbles (small tasks), and finally the sand (daily drumbeat of minutia). Because if you place the rocks in your bucket first, there’s room to fill in the pebbles and sand around them. If you fill the bucket with pebbles and sand first – and let the business get buried in the minutia – the bucket is already full and there’s no way to get the rocks in. Accordingly, for an effective team meeting, everyone should know what their “rocks” are for the week/month/quarter, and be able to quickly report out whether they’re on track to complete (or not).

Next is the time to review any client/employee headlines – notable news that anyone on the team wishes to share, either about interactions with the firm’s clients, or other staff members. This could be pointing out something good (a client had a good service experience), a problem to be aware of (a staff member is unhappy with the new vacation policy), or simply something noteworthy (a key employee is having a 10-year anniversary!).

The To-Do list section of the meeting is the chance to review the status of the prior week’s action items. Because these are intended to be reviewed (and usually completed) weekly, they should be small and bite-sized. (A large project that could take a month or quarter to complete should be treated as a Rock, not a to-do.) The primary purpose of this section of the meeting is not to re-hash the details of each To-Do list item, but simply to affirm whether they’re done or not. If not, they should get done the following week. If it can’t be done because there’s a bigger issue, that can be discussed later (in the next section of the meeting). This is the essence of holding everyone on the team accountable to the team for completing what they committed to complete in the prior week’s meeting! (Think about how much more effective your organization would be if everyone simply got done every week the stuff they said they would do every week!)

Once all of these “minor” sections of the meeting have been completed, Wickman suggests that the focus should be on IDS, an acronym for Identify, Discuss, and Solve problems. In other words, this is the part of the meeting where everyone on the team comes together to actually resolve any issues that have arisen in the prior stages of the meeting. Notably, the first step to the IDS phase is simply identifying, not just what the issues are, but which are the most important, given that a growing business may easily have more issues to resolve than there is time in the meeting to solve. By prioritizing which are the most crucial to tackle first, by definition the team will be solving the most important problems first (and often solving big problems makes other problems go away altogether, as small issues often turn out to have been byproducts of the big issue). This may lead to more To-Do list items to be tackled for the following week, and some Issues that get carried forward to the following week’s IDS phase (but only those that weren’t deemed important enough to be resolved in the current week!). In the advisory context, this could be figuring out a problem in some new software, onboarding a new employee, handling a complex client problem, or brainstorming how to fix a process that isn’t working.

The conclusion of the weekly meeting should recap the To-Do list items that were assigned for the following week, any unresolved Issues that may carry over to the following week’s IDS phase, and a brief discussion about whether anything needs to be communicated coming out of the meeting (e.g., a message to a particular client, a new initiative to all clients, a new policy to be communicated to staff members).

Notably, the total breakdown of Wickman’s weekly meeting template includes a mere 30 minutes on 6 of the 7 phases of the meeting, and 60 minutes for the IDS phase, where the team problem-solving actually occurs. In other words, the meeting is 1/3rd communication and accountability, and 2/3rds problem-solving. And this balance is deliberate, as the number one failing for most meetings is the feeling that nothing is actually getting done, while this approach is designed to allocate the bulk of the time to getting things done!

My Journey Of Starting A Weekly Team Meeting Process

Personally, I will admit that I long resisted adopting a formal weekly meeting process myself. Having sat in on an incalculable number of unproductive meetings, to say the least I was not eager to voluntarily institute yet another regular meeting upon myself (and my team)!

Yet ultimately, having finally made the transition myself, I will have to confess I see the power of having a standing weekly team meeting. Although I personally haven’t adopted quite the weekly meeting template that Wickman advocates, my own standing team meeting agenda is:

– Review Weekly (and Monthly) Business Data

– Review Task List

– Weekly To-Dos (clients, internal business projects, etc.)

– Monthly Projects (my “Rocks”)

– Reprioritize for the upcoming week

– Other Business/Staff Issues

The meetings are scheduled for an hour, and although I don’t specifically articulate it in my staff meeting agenda, the bulk of the time is really spent not just reviewing the task list per se but actually digging into ‘problematic’ To-Do items (or Monthly Projects) and figuring out how to solve them. Thus, it seems I unwittingly evolved my own weekly meeting agenda to have the heavy component of problem solving that Wickman advocates (and is perhaps why I’ve felt like the meetings have been very productive!). In fact, the whole experience – and Wickman’s book – has made me realize in retrospect that the primary problem with most meetings is that they leave no time for actual problem-solving, usually because the whole meeting is spent on just communication and reporting… or simply because no one actually brought a substantive issue to the meeting with the intention of getting it solved! (Ever gotten to the end of a meeting and felt like the meeting was a waste because there was nothing substantive to actually talk about at the meeting? Exactly!)

Notably, the data tracking comes directly from our business software (and some light massaging of the data in an Excel spreadsheet), and the weekly To-Dos and prioritizing comes from our team’s task management software (e.g., CRM or project management tools). As the weekly meeting process has become habit, some meetings we’ll actually take a few minutes just to focus on how to make it easier to prepare the standard reporting for the meeting. We’ve also been working on automating the reporting of some of our key business metrics.

In addition, I would point out that personally, I’ve found the process of “re-prioritizing” for the upcoming week to be one of the most essential and valuable parts of the weekly team meeting, to stay on target. For a rapidly growing and iterating business – and a bit of a strategic thinker always seeing new ideas and business opportunities – the reality is that sometimes, new opportunities supplant ‘old’ action items and initiatives lingering on our weekly or monthly to-do list. By taking a few minutes every week (usually no more than 5 minutes total) to redirect the team on what they should be prioritizing this week, I can ensure that we’re always working on whatever I truly believe is the highest and best use of the team’s time every week.

Tips For Adopting Your Own Weekly Meeting Process

Ultimately, you may decide to precisely adopt Wickman’s Weekly Meeting Agenda, or instead may decide to craft your own. Whatever your path, I would make the case that the four core areas that have to be covered are:

Data Reporting. What are the Key Performance Indicators for your advisory business? And if you’re not sure, start tracking a few (e.g., new clients, new AUM/revenue, lost clients, prospect meetings, etc.) and adjust based on whether you’re finding them meaningful to regularly report for a period of time. Having a regular weekly meeting process to look at this data will help quickly accentuate whether it’s relevant, or if not what may actuallybe relevant, and will drive you to refine a process to get the data easily.

To-Dos. This is crucial for accountability and ensuring things are actually getting done. What were the tasks from last week, which ones are getting checked off (most of them hopefully!), which are getting carried over, and what are the new ones to add. Ideally this comes directly from the assigned tasks in the task management/workflows from your CRM, but at a minimum, keep track of key To-Dos separately, just so you can report on them at the weekly team meeting!

Prioritize. For me, this is about ensuring that the team is working on whatever is truly most important for the week (which varies from week to week as some projects are paused and revisited later). From Wickman’s perspective, this is where you renew your focus on the Rocks that have to get done in the current month or quarter, to ensure the business is moving forward on its big objectives.

Problem-Solve. Leave time – a lot of time – in each weekly meeting to actually solve whatever issues have cropped up in trying to execute last week’s To-Dos, and preparing for the upcoming week’s priorities items, as well as responding to any data tracking that was concerning. If you follow Wickman’s rule, this should be 2/3rds of your total meeting time!

In addition, one of the biggest keys to the success of the weekly team meeting is scheduling it at a fixed time, and making it a commitment for everyone on the team to honor that team meeting time every week. Our weekly meetings are at 10:30AM on Monday mornings – enough time for everyone to get oriented at the beginning of the day (including preparing the meeting agenda and the weekly data reporting), before diving in to discuss the upcoming week’s activity and obligations. In my case, this was part of my broader personal initiative to regain better control of my time and schedule by crafting a more rigorously structured “standard” weekly meeting schedule.

Beyond just helping for scheduling and time management purposes, though, the real value of having a standing weekly meeting is that it forms the basis for your team’s accountability in the first place. When “everyone knows” that the weekly meeting is coming, and required, and that everyone will be held accountable to their To-Do items in the meeting, it becomes a crucial mechanism for accountability. In other words, the weekly meeting becomes the weekly deadline for weekly tasks… and there’s nothing like a deadline to ensure that things get done!

In the meantime, if you’re looking for more ideas about how to gain momentum in your business, especially if you’ve reached the point of multiple team members (and especially multiple partners) and feel like the business is spinning its wheels with effort but not making much traction, I highly recommend Wickman’s entire “Traction” book, which provides a whole “Entrepreneurial Operating System” (EOS) blueprint to give your business more structure and help it gain some traction.

 

Why Many Financial Advisers Aren’t Worried About Posting Anti-Trump Opinions

Why Many Financial Advisers Aren’t Worried About Posting Anti-Trump Opinions

It’s common for parents to teach their children not to discuss politics in polite company, and the practice is especially rare amongst financial advisors who don’t want to accidentally offend a client who might hold differing political views. At the most, “politics” only came up in the context of discussing potential policy changes in Washington, and the impact it might have on either investors/markets in general, or a client’s financial plan in particular.  Powell notes that with the rise of President Trump, it’s become increasingly common for many financial advisors to share their political views, especially via social media platforms.

On the one hand, some believe the shift is simply due to the fact that social media, including sharing political views via social media, just simply become more socially acceptable. On the other hand, some advisors note that their political beliefs are so strong, they don’t care if they upset and lose a client from the other side of the political aisle, and prefer to work with clients with whom they have shared beliefs anyway. In fact, while advocating for or against any highly political figure is likely to offend at least some prospects and clients (and there are pro-Trump advisors speaking out more as well), what impairs a relationship with some may also resonate especially well with others, and could attract as many clients as it repels anyway (or even more, if being publicly political actually becomes a viable differentiator for the advisor!).

Notably, the nature of political posts also varies by social media platform – as advisors seem to be more likely to post politically on Facebook (which is more often used personally) than other platforms like Twitter (which is more often a professional platform for learning and sharing expertise). At a minimum, though, marketing experts urge that if advisors are going to speak up on political issues, they should have a plan for whether/how they’ll deal with any pushback that may arise, as making civil political posts is one thing, but an emotional outburst on social media is another.