Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘monthly income’

Want To Create A Second Income?

Get Rich Investments, an online leader in helping individuals to create income producing investments, has a newsletter to guide investors seeking a second income.  This is one of the most valuable tools for investors to learn how to create monthly income from stocks and option strategies.

Does the idea of using an income investing strategy to create a second income every month on your funds appeal to you?  Get Rich Investments has created the Get Rich Monthly Income Plan to teach individuals how to create multiple streams of investing income.  This is a low-cost newsletter providing the following services:

    1. A list of “monthly dividend stocks” that pay dividends month after month. These investments can pay more than 10% annually (focus on several 15% yields) and can sometimes be purchased at a discount to net asset value.
    2. A list of covered call trades consisting of high quality stocks such as the S&P 5-star research rating of the best stocks that are recommended as strong buys. These lists are updated each week with select trades added daily.
    3. Low risk investments to minimize market risk and to prevent your portfolio from taking a big lost in such uncertain market environments like we are experiencing today.
    4. We have created a strategy called the Blanket Put that will protect your investment from market downturns. The Blanket Put is your safety blanket to protect your portfolio from market downturns. This is worth the membership fee by itself.
    5. Access to multiple education resources to better learn how to be a more successful investor. Trades don’t end when you make a stock buy, sell a call, or complete the trade. Here we want members to be educated about how to manage a trade and when to take action.

The Get Rich Monthly Income Plan diversifies risk by seeking multiple streams of income. You can create monthly income by: covered call trades, monthly dividend stocks and dividends from owning high quality, conservative stocks. That is multiple streams of income from this simple list as we focus on “cash flow” to the investor to improve your quality of life. This is a true passive side hustle for income.

We have more than 20 years experience in the markets including trading covered calls and monthly income investments.  In addition, we have Masters in Business Administration (MBA) from a top business school and other experience in corporate finance and strategy.  We have authored several books including the original Get Rich – Stay Rich: Investing for Monthly Income that is currently on sale at Amazon and other bookstores around the world. It is important to you that your monthly income is in qualified, experienced investor hands who can be trusted to deliver the best trades.

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Should You Sell Covered Calls in an Up Market?

So the stock market is up and at record highs, should you still sell covered calls?  The answer is yes because stocks don’t move up in a straight line as there are many up and downs along the long-term trend.  Here are six reasons why you may want to consider selling covered calls in a rising market:

1 — Momentum
Maybe a stock has risen more than the market recently and the momentum traders are doubling down. In doing so they usually increase the call premiums to where they’re just too juicy to not try a deep in the money buy-write. These can be highly volatile so it is probably wise to keep the durations short (i.e. sell the near month, and not four to six months out).

2 — Pending News
Before a big news announcement, for example, Apple (NASDAQ: AAPL), or any company before an earnings announcement) the option premiums tend to increase. Rather than buying into the hype, consider selling the hype by selling covered calls. The amount in- or out-of-the-money should scale with your opinion of which way the news will fall.

3 — Margin
When trading on margin you need to be extra careful. You can get hurt quickly if there is a sudden move against you. One way to increase your protection is by selling deep in-the- money calls. You may still lose money if there is a dramatic move down, but the call premium should buy you time to exit the position (if you need to) with fewer losses than you would have had if you had merely held the stock long.

4 — Taking some off the Table
Don’t be too greedy. After you’ve had a nice run in a stock it is prudent to either (1) sell a portion of the stock, or (2) write some calls against it so that if it gives back some of its recent gains you can capture some profit from the call premium. Often these can be combined by selling covered calls that are in-the-money on the portion of the stock you want to sell anyway. That way you eek out a bit more profit from the position. Or, if you’re still very bullish then try selling some near-term out-of-the-money covered calls.

5 — Partial Cover
If you can’t make up your mind whether you should cover the entire holding, then consider selling covered calls on part of your position. You’ll end up being half right and half wrong at the same time, but at least you won’t have been all wrong.

6 — Monthly Income
If you have core holdings that you plan to own for the long-term then why not write some out-of-the-money calls on them to generate some extra income (even if they’re rising in a bull market)? Depending how far out-of-the-money you choose, you may need to sell several months worth of time instead of near-month (to cover the transaction costs).

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Getting High Yields from Closed-End Funds

This is the second in the investing for monthly income series: how to get high yields from closed-end funds.

What is a closed-end funds (CEF) and how is it different from other investments? A closed-end fund is legally know as a ‘closed-end company.” It is one of three investment types of investment companies. The other two are mutual funds and unit investment trusts. Unlike mutual funds, closed-end funds sale a fixed number of shares at one time that trade on the major stock exchanges such as NYSE, NASDAQ, etc.

The price of CEFs are set by the market and can be above or below their net asset value. Generally, CEFs do not redeem shares from investors as the shares are bought and sold at market value on the exchanges.

CEFs come in many varieties with different objectives, strategies and payment time frames.  These funds can easily be purchased through any discount brokerage in both taxable and tax-deferred accounts.  The CEFs we are interested in pay monthly dividends and provide a high yield. When these funds trade at a discount (share price is lower than net asset value), their dividend yield is higher. This creates an opportunity for potential capital gains in addition to monthly income.

Upon receipt of monthly dividends, you can reinvest some or all into more shares of CEFs or other dividend investments. Reinvestment of dividends creates a compounding effect that will grow your income each month. There are rumors that former President Bill Clinton receives $84,000 per month in dividend income. This is a large supplement to the $16,750 Clinton receives from his government pension per month. This is one method that helps the rich get richer. However, you can accomplish the same objective by investing for monthly income.

Where can you find a list of CEFs? I personally use CEF Connect to track a list of CEFs in a portfolio. This is a free service (requires registration) with a search engine that will separate monthly payers from the flock. At last count, there was more than 400 CEFs that pay monthly dividends. There is a comprehensive list in Get Rich – Stay Rich.

The best time to buy CEFs is when they pull back in share price. The one caveat is to ensure their earnings per share is more than their dividend payout (this is available at CEF Connect under the distribution tab). If not, then you should sell and evaluate another CEF. The other item to watch is that the CEF pays distributions from ordinary income and does not pay from return of funds. Any return of capital means the CEF is giving back capital in the form of dividends which means the company did not earn their pay. Sell immediately if you see a return of capital.

The more you research CEFs, the more you come to like the total return and consistency of monthly paychecks. Keep in mind that financial independence is replacing your current income with passive income. CEFs are one investment to help get you closer to living a life within your comforts.

Here are two preferred stock CEFs for consideration:

The AllianzGI Convertible and Income Fund 5.62% (NCV) cumulative preferred stock is now trading in the $24.61 area to give it a current yield of 5.71%. This issue is rated AAA by Fitch. The issue had an excellent asset coverage ratio of 353% when it last reported.

AllianzGI Convertible and Income Fund II 5.50% coupon preferred (NCZ) is trading in the $24.04 area to offer a current yield of 5.73%. With a rating of AAA from Fitch, it a very safe issue. This CEF issue has an asset coverage ratio of 368% at last report.

Most of the CEF preferreds from Gabelli are now trading with current yields in the 5.2% to 5.3% range, indicating that the AllianzGI issues are relatively underpriced and present a good opportunity to purchase the safety of a AAA-rated preferred stock issue.

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How to Invest for Monthly Dividends

This is the first in a series of articles based on types of vehicles that pay monthly dividends.

Many people have the desire to increase their monthly income which leads to various activities to accomplish this objective. They may work extra hours at their job, start a side business or stuff envelopes for a few extra dollars. These tasks are all legitimate ways to make more money. But most are not aware of the simple way to increase monthly income by getting monthly dividend checks.

Truth is that many people don’t realize that this is a great time to invest in dividend securities. Yes, the market was scary throughout 2008 and 2009 as the markets tanked and the economy sunk into a recession. Unemployment reached double digits in many areas across the United States. During volatile times, investors watch as their growth and technology stocks get hammered until they reach new lows in price. However, the best time to invest is when there are signs of an improving economy. This is what has happen over the last six to 12 months as the markets started trending up and stock prices reached new 52-week highs.

So why would you invest when the market has already started to recover? During the economic meltdown lead by the imploding debt crisis, companies started to batten down the hatches by conserving their cash. During the last few quarters, companies in the S&P 500 had more cash and current assets on their balance sheet than in the last decade. There are several things companies can do with this cash. But the one that is of interest to us is companies using the cash to increase dividends. Therefore, if you purchase stock in a stable company, there is a better than average chance that the dividend will increase in the future.

This increase in dividends will be a positive for many investments that pay monthly dividends. The result being that your dividend yield on cost increasing over the next few years. Generally, when dividends increase the share price will follow. the investor will have more income from the dividend increase and potential for a capital gain if share prices increase. This is the reason why now is a good time for dividend investing.

How do you invest for monthly income? Today, there are several investment vehicles designed to pay monthly dividends. These include closed-end ETFs, business development companies, royalty trusts, REITs and even high-yield corporate bonds. As we progress through this series, each of these investments will be examined in greater detail with specific company names that are potential investments paying dividends of 10% of more. Yes, some of these investments pay at or above 15% yields today.

Here is a couple monthly dividend payers to consider:

Global Net Lease (GNL)

Dividend Yield: 11.22%

Global Net Lease (NYSE:GNL) is another REIT, primarily serving the commercial market. It owns properties in the United States and Europe, and rents to quality tenantslike FedExFamily Dollar and ING Bank, organizations that can not only reliably pay their rent as it comes due, but outfits that tend to stay put once they establish roots.

There’s a bit of a twist Global Net Lease brings to the table that allows it to juice its payout to its current yield of 11.22%, however. It also acquires much of its rental real estate through an arrangement called a sale-leaseback.

In simplest terms, a sale-leaseback lets a property-owning company free up the value of real estate by selling a space it owns to a landlord like Global Net Lease, and then remain in that space as a tenant. It’s a win-win scenario, as the renter enjoys a big cash infusion and Global Net Lease has a tenant already lined up.

Horizon Technology Finance (HRZN)

Dividend Yield: 10.23%

Finally, Horizon Technology Finance (NASDAQ:HRZN) has earned a spot on a list of monthly dividend stocks to mull. As the name suggests, Horizon Technology Finance provides capital to young, upcoming technology outfits, though it doesn’t cater strictly to the tech sector.

It’s also heavily involved in the development of life science and biotechnology companies. Its portfolio includes biotech names like AccuVein and Celsion, along with traditional tech plays like cybersecurity company Control Scan and communications technology player Xtera.

Its results are as erratic as what you’d expect from major technology names, but it’s worth the wild ride. Horizon’s yielding 10.23% at its current price, and it has not had any sustained trouble affording its dividend payment.

Learn more about investing for monthly income here.

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How the Wealthy Keep Getting Richer

In a world of average people — and average salaries — many of us aspire to join the 7-figure club. Who doesn’t dream of becoming wealthy, so they can stop working, go on guilt-free shopping sprees and take endless vacations?

Here is a great answer from Entrepreneur Magazine – pay close attention to the multiple income habits.

However, most rich people don’t do those things, and that’s part of how they build and maintain their wealth. There’s a difference between living a life of careless spending (which will quickly drain even a wealthy person’s bank account) and living for long-term financial independence and wealth.

The self-made rich aren’t necessarily smarter than anyone else, but they have mastered some important principles that help them get ahead and stay ahead. Most important, they treat building wealth as a learnable skill — and it’s one that you can learn, too.

So, if you’d like to join the ranks of the super wealthy, try honing these 10 habits and lifestyle changes and see what financial freedom truly feels like.

1. Have a financial growth mindset.

Wealthy people are incredibly creative when it comes to thinking about business and finding different ways of making money. Mega-successful people set themselves apart because they nurture a financial growth mindset, which changes how you view money and helps you focus on seeing profitable opportunities.

This mindset helps successful and wealthy people believe that there are always bigger and better projects to work on and there’s always more money to be made. They’re open to exploring new ideas. They believe they’re always capable of making changes and creating a positive outcome.

2. Network with other successful people.

Wealthy people understand the importance of surrounding themselves with other successful people. Wealthy people spend time networking with others who are wealthy but also have drive, talent and, most important, the potential to become wildly successful. The rich spend time every month getting to know other like-minded people at conferences, events and gatherings, or just grabbing coffee or a drink with someone interesting.

This is time wisely invested, as it keeps their minds focused on success and helps them meet new people who have fresh and thought-provoking ideas. Doing this also helps wealthy people fill their contact lists with relevant and influential people who can potentially help them (and vice versa).

3. Get outside your comfort zone.

Wealthy people are successful because they have learned that success comes to those who embrace a little discomfort. They understand that the only way to really improve is to push yourself beyond your limits. If you want to become wealthy, you’re going to need to fuel your creative spark, come up with unique business ideas and then take the plunge.

Wealth and success don’t emerge from the safety of a 9-to-5 job. They come from drawing on your inner strength and going for your big dream. All successful business leaders, visionaries and game-changers have gone beyond their comfort zones in order to achieve the ultimate success. The people who will go down in history had the courage to face their fears and take that first step into the unknown.

4. Create multiple income flows.

The more money you have, the easier it is to make more money. And the easiest and fastest way to make more money is to have multiple income streams. That way you always have money coming in and can use the excess income to invest in new income flows. This, in a nutshell, is the primary way the wealthy stay wealthy.

There are two basic forms of income: active income, in which you work for the money you make, and passive income, in which payment isn’t directly tied to the number of hours you work. Passive income includes rental property, dividend stocks, index funds, writing a book or creating an app, all of which will bring in a steady flow of income from sales or royalties.

5. Invest.

Rich people make their money work for them. They know that investing is the key to growing their finances. While saving money for a rainy day is important, your investments are going to do the heavy lifting to help you become wealthy.

Saving means putting money into a safe place until you want to retrieve it, but most savings accounts don’t yield high interest, so this pile of money basically stays static — it’s not going to grow much beyond what you add. But smart investments will give you healthy returns, which you can then reinvest. When you invest in something, you also accept some amount of risk, so you never want to invest more than you can afford to lose.

6. Take calculated risks.

The rich don’t gamble on big financial decisions; they do what they can to mitigate risk. They do their research and analysis, and determine which options best suit their financial needs and business desires. They weigh the pros and cons, and then take calculated risks.

They make financial decisions by asking themselves, “Will this bring me closer to my goal?” They avoid frivolous risks that aren’t really going to benefit them, and never take a cavalier attitude when it comes to money.

7. Focus on self-improvement.

Wealthy people are usually avid readers, but you won’t find many mindless beach novels in their bookcases. The wealthy understand the importance of self-education and pushing themselves to become better in all ways. In fact, if you look at the books piled by their beds, you’ll mostly find titles on self-improvement.

While 85 percent of rich people read two or more self-improvement books per month, only 11 percent read for entertainment, compared to 79 percent of the poor. And a whopping 94 percent of wealthy people read news publications, compared to 11 percent of non-wealthy people.

8. Never completely retire.

The ultra-rich certainly have enough money to never work another day in their life, but the majority of them keep working, at least to some degree, often well past 70. That doesn’t mean they’re clocking long days at the office; indeed, they’re probably taking their fair share of vacations and enjoying flexible schedules. But many rich people never completely retire. This is not because they can’t afford to, but because they enjoy what they do.

Many are entrepreneurs at heart, and the desire to run and grow a business never leaves them. The stability of working and the sense of purpose and fulfillment it gives them is an important part of their overall happiness. Working gives them an ongoing feeling of success and an objective to keep them focused. Not to mention that it keeps the money rolling in!

9. Avoid overspending.

While non-wealthy people daydream about spending money without worry, buying fancy cars, big houses and expensive clothes, the rich understand that the more money you spend, the less you have. The wealthy wouldn’t stay wealthy long if they spent excessively. No matter how much money you earn, you’ll always be poor if you spend more than you make.

The rich recognize that the less you spend, the more money you have to grow your wealth. Keep in mind that frugality is relative to your income — a wealthy person may spend much more than someone who is considered middle class. But in relative terms, the rich tend to be thrifty, and they make sure they don’t overspend.

10. Take time to reflect.

Many of the self-made wealthy spend time in focused thinking every day. Spending 30 minutes (or more) in a quiet space gives them time to reflect on their life and goals, to think about their health and relationships, consider their career and financial goals, and analyze where they’re currently at and where they want to be. Critical thinking time is essential to staying ahead of the market and considering what changes may be coming your way.

This is also time to focus on self-improvement and working through ideas. Some may opt for journaling or writing to help them come up with creative solutions and ideas. Just make sure you’re spending your time on productive thinking. Don’t waste your mental energy on ruminations or negative thought loops that will make you second guess yourself. The wealthy don’t.

 

How To Recover From A Covered Call Trade

To remind you, this trade involves holding at least 100 shares of a company’s stock, then selling call options against them (one options contract for every 100 shares you own).  If the underlying stock declines, you’ll begin to see the option’s premium erode, too. But depending on the timeframe of the trade, you may see a greater loss in your stock position in real dollar terms than you will in your option position.  The objective of covered call writing is to produce monthly investment income and to protect your capital.

To calculate your exact current position in the trade versus when you placed it, you must:

  • Get the quote for the stock.
  • Get the quote for the option.
  • Subtract the current option price from the current stock price.
  • Compare that number to your net cost of the trade when you executed it.

The net cost of the trade is the breakeven when you enter a trade.  You can use this number as your threshold to take action if the stock price decreases to this point.  Some covered call investors use the breakeven to unwind a trade.  If the new net number is below your stop-loss threshold – let’s say 20% – then you have the following options:

  • Either: Stick with the position and hope that the share price recovers, so you can sell another option at expiration.
  • Or: Reverse the trade by buying back the current option and selling the stock.
  • Or: You can also buy back the option and sell another one at a lower strike price to mitigate some of the loss. However, if the new strike price you choose is below your cost, then you’re going to take a loss there, too.
  • Or: Buy a protective put on the stock used in the covered call trade.  The put will increase in value if the stock price falls so it will hedge losses from your stock ownership.  Of course you can buy a put as protection for all covered call trades especially when you plan to continueously sell calls each month on the same stock.  If you use a protective put, then select a month with a longer timeframe than the call sold against the stock.

But there’s one way to pretty much avoid this situation entirely… Sell deep-in-the-money calls against your position.  While this does reduce the overall return available, the upside is that it also reduces your net cost significantly and thus provides a nice cushion against risk.

Option Basics – What is an Option?

An “option” is a standardized contract originated by the Options Clearing Corporation (OCC) that is exchange-listed.  A stock option is a legal right, but not obligation, to buy or sell shares of a specific stock for a fixed time and a fixed price.  The fixed price gives the option holder the right to buy or sell at a fixed price known as a strike price or exercise price.  The fixed time indicates that a option has a limited life for only a specific period of time then expires.
 
There are two types of options:
 

  • Calls – the right, but not the obligation to buy the underlying stock
  • Puts – the right but not the obligation to sell the underlying stock

How to buy & sell Options

Click to enlarge.

The underlying stock are the shares of stock that are subject to a stock option.  The underlying stock can also be an exchange-traded fund, stock index and other tradeable securities that have options.

Each listed call or put option covers 100 shares of the underlying stock.  Stock options expire on the Saturday following the 3rd Friday of each month.  This 3rd Friday is the last day the options can be traded as the market is closed on Saturday.  If the 3rd Friday is a holiday, then the last trading day will be the Thursday before.  Recently, weekly options have been open on a limited number of stocks and ETFs.  These weekly options are opened on each Thursday and expire on Friday of the following week.  This gives the weekly option a time period of 8 days from opening to close.

There are many different calls and puts trading on each security that is optionable.  Each call and put strike price of each expiration month is a separate option series.  To be part of the same series, the options must be of the same type and have the same expiration, strike price and underlying security.  

For investors, option equal income.  I have always like to identify multiple streams of income from my portfolio. For many, they like to diversify using different stocks in different industries. Others like to add additional investments such as bonds and real estate to create diversification. There is nothing wrong with investors looking to create different types of income. In fact, I believe it may be as close to the holy grail as any concept in investing. I use multiple products and strategies to create multiple streams of income. 

I am focused on generating consistent monthly income by selling options for premium using low risk strategies. You can see more investments at my website: getrichinvestments.com

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How to Get Started With Writing Calls

How do you get started with trading covered calls?  Once you understand the principles of writing options, you must determine what stock to purchase for this trade.  The simplest method is to start with a list of stocks.  I suggest the S&P Dividend Aristocrats list.   Since this trade requires buying stock, why not get paid a dividend in addition to the call premium.  This is more effective when you continue to write calls on the stock month after month until you are assigned.  This gives you a second dividend income to increase your monthly income stream.

The S&P 500 Dividend Aristocrats is currently a list of 42 companies that have increased dividends (not just remained the same) for 25 years straight.  Keep in mind just because they are on this list now, doesn’t mean in the future they will be forced to reduce their dividend.  Unfortunately during our last recession in 2008 many investors found out their dividend was cut on their once stable stock.  For example, Pfizer Inc. (PFE) and General Electric Company (GE) both cut their dividend, and were removed from the Dividend Aristocrat list in 2009.  In 2009 a total of 10 companies were removed from the list.  As you can see from the list of stocks, these aren’t exactly a list of highflying tech stocks like Apple (AAPL) or Google (GOOG). In fact most people consider these stocks boring, but boring is sometimes better.

The list below shows the stocks included in the Dividend Aristocrats list for 2011.  You should start looking at the company’s with a 4 or 5 star rating by Standard & Poors.  You can find a level of ease when a stock is rated a strong buy or buy by S&P.  There are 5 stocks rated strong buy on the list: XOM, WMT, KO, PPG, and VFC.

Company Name Symbol Price PE Yield % SP Rating SP Recommend
Exxon Mobil Corp XOM        85.22 12.1 2.2 5 Strong Buy
Wal-Mart Stores WMT        54.52 12.7 2.7 5 Strong Buy
Coca-Cola Co KO        69.73 13.0 2.7 5 Strong Buy
PPG Industries Inc PPG        88.94 14.0 2.6 5 Strong Buy
VF Corp VFC      120.50 21.1 2.1 5 Strong Buy
Chubb Corp CB        64.45 9.1 2.4 4 Buy
AFLAC Inc AFL        46.21 10.4 2.6 4 Buy
Target Corp TGT        51.81 12.6 2.3 4 Buy
Abbott Laboratories ABT        52.95 12.7 3.6 4 Buy
Dover Corp DOV        66.84 15.0 1.7 4 Buy
Walgreen Co WAG        40.02 15.6 2.3 4 Buy
Johnson & Johnson JNJ        66.72 16.0 3.4 4 Buy
PepsiCo Inc PEP        65.76 16.7 3.1 4 Buy
Becton, Dickinson & Co BDX        87.16 16.8 1.9 4 Buy
Grainger, W.W. Inc GWW      155.45 18.5 1.7 4 Buy
Brown-Forman Corp B BF/B        75.96 19.5 1.7 4 Buy
Stanley Black & Decker SWK        70.10 19.5 2.3 4 Buy
Leggett & Platt LEG        23.50 20.3 4.6 4 Buy
Cintas Corp CTAS        34.37 20.5 1.4 4 Buy
Automatic Data Processing ADP        53.23 21.7 2.7 4 Buy
Sigma-Aldrich Corp SIAL        73.53 22.4 1.0 4 Buy
Archer-Daniels-Midland Co ADM        32.12 10.0 2.0 3 Hold
Cincinnati Financial Corp CINF        28.40 12.5 5.6 3 Hold
CenturyLink Inc CTL        38.66 13.0 7.5 3 Hold
Consolidated Edison Inc ED        53.58 14.4 4.5 3 Hold
Pitney Bowes Inc PBI        22.41 14.6 6.0 3 Hold
Kimberly-Clark KMB        67.90 15.4 4.1 3 Hold
Lowe’s Cos Inc LOW        22.62 15.9 2.5 3 Hold
3M Co MMM        95.38 16.4 2.3 3 Hold
Bemis Co Inc BMS        33.95 16.7 2.8 3 Hold
Procter & Gamble PG        64.25 16.9 3.3 3 Hold
Air Products & Chemicals Inc APD        91.90 17.2 2.5 3 Hold
McCormick & Co MKC        50.25 17.5 2.2 3 Hold
Family Dollar Stores Inc FDO        54.14 17.9 1.3 3 Hold
McDonald’s Corp MCD        88.56 17.9 2.8 3 Hold
Emerson Electric Co EMR        55.10 19.2 2.5 3 Hold
Ecolab Inc ECL        53.05 23.8 1.3 3 Hold
Bard, C.R. Inc BCR        99.28 26.9 0.8 3 Hold
Clorox Co CLX        74.36 39.4 3.2 3 Hold
Hormel Foods Corp HRL        30.29 17.7 1.7 2 Sell
Sherwin-Williams Co SHW        79.64 17.4 1.8 1 Strong Sell
McGraw-Hill Cos Inc MHP        43.92 16.1 2.3 NA NA

Investing Wisdom from Warren Buffett

In his essay for “Getting There,” Buffett elaborates on a message that he thinks “is very important to get across to younger people”: Take care of your mind and body.

Sounds simple, right?

But Buffett takes it a step further by offering an analogy: “Let’s say that I offer to buy you the car of your dreams. You can pick out any car that you want, and then when you get out of class this afternoon, that car will be waiting for you at home.”

As with most things in life, Buffett says there’s just one catch: It’s the only car you’re ever going to get…in your entire life.

“Now, knowing that, how are you going to treat that car?” he asks.

“You’re probably going to read the owner’s manual four times before you drive it; you’re going to keep it in the garage, protect it at all times, change the oil twice as often as necessary,” says Buffett. “If there’s the least little bit of rust, you’re going to get that fixed immediately so it doesn’t spread — because you know it has to last you as long as you live.”

And then, like a bag of bricks, Buffett hits us with a brilliant realization: The position you’re in with your car is exactly the position you’re in concerning your mind and body.

In other words, the way you treat your car should be no different than the way you treat your body.

“You have only one mind and one body for the rest of your life,” Buffett says. “If you aren’t taking care of them when you’re young, it’s like leaving that car out in hailstorms and letting rust eat away at it. If you don’t take care of your mind and body now, by the time you’re 40 or 50, you’ll be like a car that can’t go anywhere.”

Now, you might be wondering whether Buffett practices what he preaches — considering how vocal the billionaire has been about his love for Coca-Cola, hamburgers, steaks and hash browns.

For the most part, the answer is yes.

When a New Jersey nutritional dentist wrote Buffett a letter encouraging him to eat more healthy foods, he responded by saying his diet isn’t as bad as most might think.

“I have a wonderful doctor who nudges me in your direction every time I see him. All in all, I’ve enjoyed remarkably good health — largely because of genes, of course — but also, I think, because I enjoy life so much every day,” he said in his response.

And back in 2007, when he was in his late 70s, he told CNBC that his doctor told him two years before: “Either you eat better or you exercise.”

Buffett chose the latter, which he called “the lesser of two evils.”

How to Retire Rich – Master the Money Game

Retiring rich may be more possible than you think.

Especially if you’re young, you don’t even need to make a lot of money to end up wealthy, says Tony Robbins, a self-made millionaire and the best-selling author of “Money: Master the Game.” If you consistently set aside a portion of your earnings, whether you make $40,000 or $100,000, and let it grow over time, you could end up with a seven-figure portfolio.

If you’re just starting out in the workforce, “you have the greatest gift on earth: time and compounding,” he says. All millennials need to do is to use those advantages, he says, adding: “When they asked Warren Buffett, ‘What made you a wealthy man? He said, ‘Good genetics, time and compounding.'”

How exactly can these ingredients — time and compounding — help you build your net worth? For starters, it’s important to understand how compounding works.

What is compound interest?

Compound interest makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.

That’s why compound interest causes your wealth grow faster. It’s also why you don’t have to put away as much money to reach your goals.e dialog

Compound interest can also work against you when it comes to loans: It means that every year or month, whatever the frequency specific to your loan, the amount you have to repay gets bigger. So the longer it takes to pay off your loan, the more you’ll owe in interest.

Why does time matter?

The sooner you start to invest your money, the more you’ll benefit from compound interest. Starting to save early means you don’t have to put away as much over time — and even a few years can make a big difference.

To show just how advantageous it is to start saving and investing early on, personal finance site NerdWallet created a chart showing the percentage of each twice-a-month paycheck you’d need to set aside to have $2 million saved by the time you’re 67.

It assumes two different starting points, age 22 and age 30, and that you’re start with zero dollars invested. It also assumes a 6% average annual investment return and various annual salaries.

The 22-year-old has just an eight-year head start on the 30-year-old, but that makes a significant difference in how much is needed to save per paycheck. Scroll over the bars to see the exact numbers.

How to use compound interest to your advantage

Almost anyone save and invest of portion of their paycheck, says Robbins, no matter the size of their salary: “Oftentimes people tell me, ‘I don’t have any money. … I don’t know where to start. I’ve got to wait until I have money before I begin [investing].’ That is the biggest mistake you can make.”

Even if you can only save 1% to 5% of your income in a retirement account, start there. “What you want is consistency,” Robbins says. Then, work towards setting aside 10% to 20%. That may sound daunting, but it’ll be easier to do if you make it automatic, meaning that you have your contributions automatically taken out of your paycheck and sent straight to your retirement account.

As for where you should invest, the simplest starting point is to contribute to your employer’s 401(k) plan, a tax-advantaged retirement savings account that many companies offer, or other retirement savings accounts, such as a Roth IRA or traditional IRA.

“What you want is consistency.” -Tony Robbins, best-selling author of ‘Money: Master the Game’

Many experts, including Warren Buffett, recommend investing in low-cost index funds, like ones that track the S&P 500, which holds stocks for 500 of the largest companies in the U.S., including Apple, Exxon and Johnson & Johnson.

You can also look into robo-advisors, such as Betterment, Wealthsimple and Wealthfront. These are automated investing services that use an algorithm to determine the kind of portfolio that’s right for your age, risk tolerance and time horizon.

No matter how you choose to invest, the most important step is to open at least one account and start contributing to it consistently to take full advantage of compound interest. The earlier you start, the better off you’ll be.

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