DCA

I wish I had learned about DCA when I was much younger. I am teaching my children about DCA now so that they can benefit from it in the future.

DCA stands for dollar cost averaging where you invest a certain amount of dollars into a stock over time. It is difficult to impossible to time the market over the long term.

A good way to invest is to buy the stock of good companies that you know where you use their products and see that they are growing. Many times in the past, I have seen a stock that I know and like but I think the price is too high. The stock may be at an all-time high, have been climbing recently, and seem like a crash is imminent. That causes me to delay buying the stock and staying in cash for longer. DCA helps to overcome this hurdle as it is hard to know if it is a good time to buy a stock. When investing for the long term, the way to overcome this fear is to buy some on a regular basis along the way.

For example, I have been a fan of Apple for a long time. Many times in the past I thought of buying it but it was touch to drop $5k at once on the stock because you keep wondering if it has had a long run, this can’t last forever, and a correction is coming soon. In the meantime, the $5k sits in cash and time goes by and the biggest loss is not being in the market at all.

DCA allows you to own stock as it goes up or as it corrects and then grows again. A good tool to look at is the DCA Calculator from BuyUpSide. For example, buying $500/mo of AAPL over the last 5 years would have taken an investment of $30k and turned it into $85k.

AAPL 500 per mo 2015 - 2020

Apple may be an outlier as one of the best-performing stocks this century. This model can be done for other known companies that you know and use. Another example can be Nike – who we see on most sporting events, many star athletes, and worn by many people. The same $500/mo invested in NKE over the last 5 years would have resulted in $30k turning into $50k.

Nikie 500 per mo 2015 - 2020

Or another example of Starbuck who many of us frequent or know of family, friends, and neighbors that go to it regularly. A regular $500/mo investment in SBUX would have been $30k turning into $43k.

Starbucks 500 per mo 2015 - 2020

Do Not Buy Whole Life or Universal Life Insurance

avoid whole and universal life insurance

While there are many ways to invest, one type of investment I think you should stay away from are Whole Life and Universal Life Insurance. Historically, they have performed worse than the market and they do not provide much value after ~20 year period when it is needed the most.

Life Insurance is mainly an insurance policy in case of an untimely early death of a parent to help support the partner and children until they become of age and can survive on their own. Generally, this can be a 20-25 year period from the time your children are born to the time they turn 18 or finish college by 22. So a term life insurance policy for 20 – 25 years should suffice. (of if you have not purchased a policy, it should be until the time that your children get to an age where they can work and survive without your financial support.

For the significant other, if you make it through the 20-25 years of raising children, then investing for the long term will reap a better investment than Whole Life or Universal Life Insurance. Even paying off your house will be better than buying these policies.

A good supporting article on this is by Jonathan Ping from My Money Blog on Equity Indexes Life Insurance.

Basics

Let’s start off with the basics of personal finance.  
 
Income vs. Expenses
 
Assets vs. Liabilities
 
In general, to get ahead in life we want our income to be greater than our expenses and our assets to be greater than our liabilities. 
 
Income for most people comes from working at a job.  The time we spend gives us a weekly, a bi-weekly, or a monthly paycheck.  Other forms of income include methods like rent, dividends, interest, royalties, and business profits. 
 
Expenses are everything we spend our money on.  The basic expenses are food, water, shelter, clothing, phone, utilities, and transportation.  The list of additional expenses can vary including items like entertainment, vacations, gifts, etc.
 
Assets are items that add to you total net worth.  These can include items like stocks, bonds, real estate (minus loans), and cash.
 
Liabilities are items where you owe money to another entity.  They are mainly debts or payables.  Examples of personal liabilities include a mortgage, car loan, credit card debt, college loans, and auto loans.  
 
In order to move towards financial independence, we need to have enough income to cover our expenses.  With the extra income, we want to pay off the liabilities and add to the assets.  Think of the flow of money starting with income and flowing to expenses, then to liabilities, and finally to assets.  

Why?

For many years, I have been thinking about how we spend most of our time working for someone else.  Many of us only spend a few hours on the weekdays with our family or friends.  We look forward to the weekend to have a little time off before getting back to the grind at work.  Once or twice a year, we take a long weekend or possibly a week off from work.
 
We work for a couple of reasons.  If we are fortunate, we work at a company or a field where we fill a sense of purpose and are productive.  We also work in order to earn income to cover the costs of life for our family.
 
It’s a cycle in which the costsmay fluctuate up or down, though they will not go away.  Therefore, we need to have income to cover the costs of life.
 
For many years, I have been thinking of how to get out of this cycle to spend more time with family and friends and take time off more than the sporadic short vacations.
 
Financial Independence in my humble opinion means not having to work to cover the costs for your family.  In simple terms, it means having a monthly income that is greater than the monthly expenses.
 
This blog will cover practices and ideas that I have used towards getting to financial independence.  Friends who I have shared this with had encouraged me to share this with more people.  I hope this helps you take steps to financial independence.