Let’s Talk About…Index Funds

ID-10043721One of the most beneficial items I discovered when I started reshaping my investing philosophy has been index funds.  For most of my investing life, I believed that the only true way to invest was to buy and sell individual stocks.  It didn’t help that I was overconfident that since I was an accountant by trade, I could easily analyze annual reports.  Once I was introduced to the world of index funds, everything I was discovering just made sense.  Index funds offered diversification that I just couldn’t match in my taxable account.

So what are index funds?  Well, according to Investopedia, “‘Indexing’ is a passive form of fund management that has been successful in outperforming most actively managed mutual funds.”  So an index fund is a mutual fund or ETF (exchange-traded fund) that is built to track a specific index, like the S&P 500 or Russell 2000.  So instead of investing in a single individual company, if you invest in an index fund, you will be investing in a much larger pool of companies.  For example, if you invest in a S&P 500 index fund, you will be buying a small portion of the companies that comprise the S&P 500.  This diversifies you into many different industries and can help off set losses that occur in others.

Advantages of Index Funds

  1.  Cost – One of the main advantages of using index funds is that since they are passively managed, their expenses are normally
    much lower than actively managed funds.  The lower the cost, the more investment is left to compound over the
    years.  Actively managed funds normally will have many transactions during a year which will lead to higher fees, thus lowering your annual return.  Many actively managed funds can have expense ratios north of 1% while many index funds are around 0.20% or lower (especially Vanguard funds which are normally some of the lowest in the industry).
  2. Regularly Beat Actively Managed Funds – According to “The Case For Index Fund Portfolios“, a whitepaper by Portfolio Solutions and Betterment, passively managed index funds outperformed comparable actively managed portfolios 82%-90% of the time over the period of 1997-2012.  The study also found that the longer investors held those investments, the better the change of beating the actively managed funds.  Index funds hold the advantage of being able to hold onto investments for the long-term and are able to take advantage of compound interest.

Disadvantages of Index Funds

  1. No Big Winners – Since you are investing in specific indexes, you won’t be hitting those big winners on individual stocks.  A big gain in one stock may not move the needle on your investment since you will be invested in a larger amount of stocks.  Investing in index funds means passing up those large potential gains (or losses) for lower, steady gains.
  2. Under Performance – Since index funds have costs, those costs will go against your gains, leading to a slightly lower return that the specific index your fund is targeting.  This under performance can be managed by searching our for lower cost funds, but you will always incur some sort of cost.

As you can see, index funds should be an important part of any portfolio.  With their ability to keep costs low so expenses don’t cut into your gains long term, you are better able to take advantage of compound interest and keep more of your gains.  I used to think that the best way to invest was by picking individual stocks, but I am realizing that using index funds is the more practical avenue to help grow my wealth.

Do you use index funds?  How do you incorporate them into your overall investment strategy?

Photo Source: Sujin Jetkasettakorn

Consequences of Retiring Early?

I recently came across an article on Yahoo! Finance discussing the Unexpected Consequences of Early Retirement, which named multiple consequences that I didn’t necessarily agree with.  Today, I wanted to give my two cents regarding these items and whether they truly are “consequences.”

Your Career Can Still Feel Very LongID-100206724

The author tells us that even though you only worked until 45, it is still 20+ years of hard work, spending little, and saving lots.  The idea that you can’t have an enjoyable life while working, controlling spending, and saving is not factual.  Just from reading numerous personal finance blogs you find numerous stories and examples of people who possibly have a more enjoyable life by following these principles.  They have learned that spending doesn’t necessarily bring happiness, but life experiences does.

Working hard is not exclusive to people who are trying to save for early retirement either.  Whether you want to retire early, retire in your sixties, or maybe just not retire, the hard work you put in is more of a definition of you than what you are trying to achieve.

Working So Hard Could Make You Want to Retire Even Sooner

As stated above, hard work is not exclusive to people wanting to retire sooner.  However, for people who are implementing the strategies needed to retire sooner they will be able to capitalize on that want.  To state that working hard will want you to retire sooner is not a direct result of early retirement, it is a result of the often stressful, face paced jobs that many people go to every day. The people who do it have a plan laid out, however, will be able to move passed the want of retiring earlier and earlier, and actually be able to do it.

You Might Be Afraid To Quit

I believe that this point is a natural feeling.  I am currently no where near retirement, but hope to be able to retire early someday.  The decision to finally call it quits and no longer have that guaranteed income stream has to be a very hard thing to become comfortable with.  You will be taking a leap and hoping that the planning you did was correct. However, if you work hard, and trust your system and lifestyle, making the jump to early retirement will be much easier.

Other People May Not Be Happy For You

Ahh, the main issue I have with this article.  Retiring early is not about what other people think.  A person trying to retire early has been going against the cultural grain for their entire career.  We live in a culture where materialism and spending are commonplace.  To be able to get to a place where you can retire early, the need to keep costs down and save more are huge.  Why would a person change their opinion on what people think of them now?  They haven’t cared for their career, while they have passed up spending on status items and instead saved the money, why would they began caring what people think of their lifestyle now.

I personally believe that while people may be envious of you for retiring early, they still would be happy for you.  Retiring early and having the freedom of time is a big dream for a lot of people.  Unfortunately, some people aren’t willing to commit to the strategies needed to get there.

It’s Scary To Spend Down Your Life Savings

Passive income is extremely important when planning to retire early.  Whether it is dividend streams, income from side hustles, or rental income, it helps make income more predictable and help in not having to tap into principal early in your retirement.  Yes, it will be hard to tap into the principal when that time comes but if you set up good strategies, you can keep this amount to a minimum and make your retirement savings last a longer.

There Will Be Parts of Work You Will Miss

Now this is an item that I do agree with.  For most people, they don’t dislike every aspect of their jobs.  If fact, there are probably parts that they enjoy.  In a work environment, you are able to create and grow relationships with co-workers.  You don’t necessarily have this same experience once you retire. Maybe your job provides you with different challenges that you enjoy tackling.  This is something that everyone has to deal with whenever you retire.  It definitely is not exclusive to early retirement.

Conclusion

Overall, these are all things that might go through a person’s head when they think about wanting to retire early, but I wouldn’t consider them consequences.  If a person is dedicated and adapts their lifestyle to a frugal one, they won’t look back at these things as they pass on by to early retirement.

Do you agree/disagree with any of these?  Are you working towards being able to retire early?

Photo Courtesy of Stuart Miles, http://www.freedigitalphotos.net/

Side Hustle Series #1: Pact

Everyone wants to make some extra money on the side and I am not an exception.  With so many options out there, someone needs a place to start.  So welcome to the Side Hustle Series – a periodic review of new side hustle ideas that I have tried out to find out if they are worth the time.

Pact

Pact Logo

Pact – Commit to you.

For the first ever Side Hustle Series, I want to talk about Pact (formally GymPact ), an app that “rewards you for living a healthy lifestyle, using money from people who don’t”.  I’ve been using the app since December 2013 and so far have made $42.64, all for working out/going to the gym, logging the food that I eat, and for eating fruits and vegetables.

The goal behind Pact is simple, as stated on their website:

Getting fit and staying healthy are hard. Pact uses cash stakes to help you achieve your health goals, week after week.

The premise behind Pact is that you will wager on how many healthy activities you will do in a week.  If you succeed, you get a portion of the losses from members who couldn’t complete their pacts.  However, if you don’t complete all of yours, you lose the amount you wagered (minimum of $5 per activity).

So how does it work?

Pact currently has three types of pacts that you can take part in: Gym, Food Log, and Veggie.  Each pact has specific ways they can be completed.

My best week!

My best week!

For the GymPact, there are a few different ways to log an activity.  One option is to log in to your gym using GPS and working out for at least 30 minutes.  Don’t have a gym membership?  Well, you can also link certain apps (like RunKeeper or MapMyRun) or wearable devices (ex. Jawbone Up) to complete your pacts.  Each of these options  have their own set of criteria to complete an activity so make sure you know what is needed to successfully complete an activity.

Food logging is done through the My Fitness Pal app which links up automatically with Pact.  As long as you log 3 meals for a minimum of 1,200 calories in a single day, your food logging will count as complete.

And finally, the Veggie Pact works by taking a picture of the veggie or fruit that you are eating through the Pact app.  Once you take the picture, it is uploaded to the Pact review system where it is approved by users of the app.  This portion of the Pact is self-regulated by users of the app who will vote yes or no if what you have submitted is a serving of a fruit or vegetable.

Questions/Issues

One of the big questions I had when I first started using Pact was “What happens if something doesn’t count correctly?”  I knew that customer service would become important because no one wants to lose money because the app didn’t read an activity correctly.  So far I have had issues with 4 activities and I am happy to say that all of them have been solved quickly after submitting the issue to customer service.  The speed at which they corrected any issues has given me confidence in the company and their commitment to providing an incentive to a healthy lifestyle instead of just turning a bigger profit.

The only real issue that I have come across is the fact that if you wager more per activity, you do not receive more payout.  If you wager $10 per activity, you will get the same payout as if you wagered $5.  The only real reason to wager more is if $5 doesn’t motivate you.

Should you use it?

Now, you are not going to get rich by using this app.  In  July, I had my most successful week ever using the app, completing 4 GymPacts, 4 Food Logging Pacts, and 20 Veggie Pacts.  All together, I risked $140 if I didn’t complete any, and made $3.11 for a 2.2% return.  While the rewards will vary a bit every week, you also get the reward of extra motivation to live a healthy lifestyle.  If you are anything like me, the extra push from knowing I have money on the line is what I need to make sure I stay active and eat healthy.  It doesn’t hurt that you earn a little side hustle money while doing it.

Have you ever used Pact?  What are you experiences with it?  Do you use any apps to make extra money?

Wealth Hike – The Beginning

Welcome to the debut of Wealth Hike – a personal finance blog set out to help educate others on the different aspects of personal finance.  I’m Thias and I will be your (hopefully) decently informed guide to wealth building.  I’m from Northeastern Wisconsin, where I live with my wife (Nikki) and dog (Murphy), and work as an accountant in the manufacturing industry.

Nikki and I-2

My Story

While growing up, personal finance or investing where never common topics in my home.  I was always encouraged to save money but was never told what to do once I saved it. In college, as most students these days, I paid for just about all of it through students loans and the little extra money I made while working at a gas station.  Upon graduating, I left to start my career with 30k in loans and little idea on how I should proceed.  On top of that, I was newly engaged with a fiance working at getting her Masters and her own set of loans.

So, long story short, we were your typical graduates – lots of debt, little in savings, and no idea where to go financially from there.   So I put away money in my 401k, started making loan payments, and saving what I could.  No real plan, just doing what I always thought I was suppose to.

How Did I Get Here

Blogging has always been sitting in the back of my mind.  My wife runs a healthy living blog (www.grabyourkicks.com) and always talked about how freeing it was to write down her thoughts and ideas.  So you can say that I have been surrounded by blogging over the past year.  The idea was there, but I wasn’t sure what I could add to the personal finance world.  Then, a couple months ago, I found a couple podcasts that changed my view on personal finance and helped inspire this blog.  I began listening to the Listen, Money Matters and Stacking Benjamins podcasts.  These two podcasts changed the way I had been viewing debt, investing, and overall wealth growth.  All of a sudden, the idea of investing in individual stocks instead of index funds lost its appeal.  I thought more about paying off debt and building wealth than finding the next hot small-cap stock.  Discovering these two new sources of information helped me focus on what I actually wanted and to work at starting to develop a plan.  What better way to hold one self accountable than by documenting their journey along the way?

Where Do We Go From Here

I hope that you will join me as I begin my journey of learning how to better manage and grow our wealth.  I hope that I might be a resource to readers out there that are also looking to do the same.  Feel free to send in questions/comments and connect with me on social media.  I see this as a great opportunity to learn new ideas and techniques and be able to pass along that information to others.  Now it is time to see what we can do to give our wealth a hike (see what I did there?!).

Follow Wealth Hike on Twitter (@WealthHike)
E-mail Questions or Comments (wealthhike@gmail.com)