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Proverbs Guide to Finance

The proverbs of Solomon son of David, king of Israel: for attaining wisdom and discipline; for understanding words of insight; for acquiring a disciplined and prudent life, doing what is right and just and fair; for giving prudence to the simple, knowledge and discretion to the young- let the wise listen and add to their […]

3 Steps to Getting Rich

by Derek Clark

Dishonest money dwindles away, but he who gathers money little by little makes it grow. Proverbs 13:11

I have a 100% fool proof way to get rich. This is not a scheme or a penny stock tip, and it works every time. You ready? It’s only 3 steps, and they really aren’t that hard.

Step 1. Spend less money than you make.

Step 2. Save the rest.

Step 3. Repeat steps 1 and 2 for a long time.

See, that wasn’t that hard was it. Really it’s only two steps, but the title says 3 steps so I had to go with it. This is the really the key to personal finance. It’s so simple and yet so hard all at the same time. To spend less than you make you have to get on a budget and actually stick to it. Then you have to find a place to save the money and not actually touch it.

You have to have a strategy and plan to succeed. Get rich quick is not a strategy, it is a scam. The way to get rich is to save money over a long period of time and invest it wisely. If you do this, you will get wealthy. Dave Ramsey suggests saving 15% towards retirement in baby step 4. If you continue to do that over your working years you should be in good shape. I’d personally suggest saving a lot more than that if possible. Jacob at ERE suggests that if you can save 75% of your net income you can retire in as little as 5 years. Anywhere in between is reasonable and will make you wealthy if you can do it consistently.

There is plenty of material out there on spending less than you make, and making that gap as wide as possible. Basically it comes down to 2 things. You have to either reduce your expenses, or you have to raise your income. I’d start with the first part, as it is probably easier. Attack your debt if you have it. All that interest going out the door is the biggest killer of wealth. From there cut down on the little things like $4 cups of coffee and eating out for lunch all the time. Make your own coffee in the morning and pack your lunch. It will save you a lot of money over time. Basically get on a budget and follow it.

The second part is about raising your income. Do you have the opportunity to work overtime? Can you think of a way to make money from one of your hobbies? Start a side business. If you can make enough from your hobby to support your hobby, it frees up money in the budget for saving. Do you like writing? Blogging is certainly not a get rich quick scheme, but you can bring in a few extra dollars here and there. If you are still in debt you might consider getting a second job delivering pizza. The best way though is to work hard and make yourself indispensable at your day job. Your career is your biggest financial asset, and you should work hard to grow it.

Now we’ve widened the gap between our expenses and our income. Save the money in income producing assets like dividend stocks until you are making enough money from your money to quit your job. If you work really hard and cut back you can do it in as little as 5 years like Jacob did. If you are in a lot of debt or already have a family 5 years may not be that feasible. It can be done though. You can do it. He who gathers money little by little makes it grow. Keep working at it and you will make it.

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First off, let me get a disclaimer out there. I am not a professional and this is not to be considered advice. I have however spent a decent amount of time buying and selling options and stocks, and I spend tons of time researching the market and individual companies. If you ever want to discuss investing, I’d love to chat. Shoot me an email at clarky07[at]gmail[dot]com or leave a comment here. Now with that disclaimer out of the way, onto the bull call spread.

A bull call spread is a strategy where you buy and sell different strikes of the same option. If you don’t know what an option is, there is a great introduction at Investopedia. As an example, take stock ABC that is currently trading at $24.50. First, you would buy a call option(s) at the $20 strike. Then you sell an equal number of call options at the $25 strike. Both sets of options need to have the same expiration month. This is a bull call spread.

In this example, we will use the current month calls. The $20 call will cost you $4.65. Then you sell the $25 call for $0.65. Net you pay $4.00 for the spread. The maximum you can make on this is the difference between the strike prices or $25 – $20 = $5. That gives you a profit of $5 – $4 = $1. That turns into a profit of 25% if ABC trades to at least $25 by expiration. The break even on this trade occurs at $24. If the stock is at $24 at expiration, the call you sold will expire worthless, and the one you bought is now worth $4. If the stock is anywhere below $24 you start to lose money. If it is below $20 you lose everything.

The idea behind a call option is to use leverage to increase your potential earnings. When you do this you also increase risk. The idea behind a bull call spread is to reduce some of the risk. The penalty you pay for reducing the risk is that you limit your upside. Depending on your objective and how much risk you are willing to take you can adjust the strike prices you choose. The lower the strike for the options you choose the less risk you are taking. The higher they are the more risk you are taking.

Let’s take another look at example. For this one we will go with a real stock and the current price on the options. Pepsi (PEP) is currently trading at $65.05. For this example I’m going to look at the January 2011 options which is about 3 months away. The $55 strike option currently is about $10.20. The $65 strike is about $1.75. If you buy the $55 and sell the $65, your total cost is $8.45. The max you could make on this trade would be $10, if Pepsi is trading above $65 in January. $10 – $8.45 = $1.55 of profit. $1.55/8.45 = 18% profit over three months, and the stock doesn’t even have to go up at all. It simply has to stay where it is currently. The breakeven point on this trade would be at $63.45 which is 2.4% lower than where Pepsi is currently trading.

This trade structure gives a margin of safety but not too much room for lot of profit. This is good if you have a stock that you are confident isn’t going to go down, but you don’t necessarily think it will go up a huge amount. You can take in the premium on the at the money option and have a margin of safety on your long option.

If you want to add some risk and give your self more room to profit, pick a strike to buy that is closer to the money and sell one that is slightly out of the money. You could buy the $60 strike for $5.50 and sell $67.50 strike for $0.75. This would give a total cost of $4.75 and if the stock moves up over $67.50 by expiration the spread would be worth $7.50. That gives you almost a 58% gain. Obviously this has a higher potential profit, but it also has considerably more risk. There is less margin of safety, and if Pepsi moves lower you will lose more money. It does have less risk than simply buying a call though. If you think Pepsi will move up, this is another way to play that thesis.

Conclusion

A bull call spread is an interesting way to play options when you are bullish on a stock. It can give you a margin of safety while still allowing you to profit from leverage. Making 18% on a stock staying at the same price is pretty compelling. Just remember that options involve risk. Don’t ever invest in something you don’t completely understand.

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Money Crashers recently released a new ranking list for the top personal finance blogs using a new ranking scheme. It combines 9 different rankings to get an overall rank. The separate categories it uses are:

Feedburner Subscribers
Twitter Followers
Alexa Rank
Compete Rank
Technorati Rank
Google PageRank
Yahoo Inbound Links
SEOmoz mozRank
SEMRush Search Value

There are several nice features to the Money Crashers list that some others may not have. The first, which I already mentioned, is that it uses an algorithm that combines each of the rankings rather than just using one of them as a default. It does however allow you to sort by ranking if you want to see the blogs in order by a particular metric.

Another nice feature is that it has the blogs separated into categories, so it allows you to show the rankings for different blogs that are similar. For example, Christian Finance is one of the categories.

If you have your own personal finance blog go over and check out the list to see where you rank. If you just like to read about personal finance this is a great way to find new blogs that you may not have heard of before.

I’d suggest checking out the Christian Finance category to start. It includes some of my favorites including Bible Money Matters, Christian PF, and Redeeming Riches.

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Random Acts of Kindness

by Derek Clark

A generous man will prosper; he who refreshes others will himself be refreshed. Proverbs 11:25

My wife and I recently added a new line to our budget. Random acts of kindness. It isn’t going to be huge, just a few bucks a month, but I think it will be a very rewarding thing for us. Remember that generosity was the last principle in my series on Proverbs Guide to Finance.

I got the idea while out to dinner with my family for my Mom’s birthday last week. On a whim I decided to buy everyone’s meal. It wasn’t a birthday present, I’d already given her that. My dad and I got her a Blu-ray player with Wi-fi built in so she could get Netflix. She’s a big fan. Anyways, back to the point. I just thought it would be nice to buy my family’s supper that night. Just as the Proverb said, it was very refreshing.

Random Acts of Kindness

So we decided to add a new category to our budget. It is strictly going to be for doing nice things for people for no reason at all. It could be for someone it need, or it might just be someone random. It could just be doing a nice thing for friends and family who don’t need it at all, just to show we care. We will probably pick up the tab when going out to eat with our friends more often. It might be paying for the person behind us at a drive thru. Maybe we decide to buy a meal for somebody next to us when we are out for dinner.

What we decide to do isn’t really important. It is just nice to brighten somebodies day. It is letting people know that people still care. Free Money Finance talked about this type of creative giving awhile back here and here. Several people commented that it was silly to give money to people that didn’t need it while others need it more. Here was my response that was included in the second article.

I completely disagree with those saying you should only give to those desperately in need. I’ve seen this done, and had it done for me and it really brightens that persons day. The person may or may not need it financially, but it is always nice to know that there are caring generous people out there. You can make a difference in the life of an average joe just as much as someone who is homeless. We should be striving to make the world a better place for everyone we meet. I especially like those who are giving to people in the military or some such.

Giving to those in need is great, and we should do as much as we can for people we know need help. However, sometimes you don’t know who might need your help. It isn’t always financial. Maybe they just need reminded that people still care and that there are good people still out there. The person behind you in line at McDonald’s can almost certainly afford their double cheeseburger. That isn’t the point. If you can show a person in need that people care, it is worth way more than $3.98, or whatever the total happens to be.

If anybody has any stories of doing something like this I’d love to hear them. If you have other ideas for creative ways to give I’m all ears as well.

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Tradeking Review

by Derek Clark

Tradeking is an online discount broker. I’ve been using it for around 2 years now so I thought I’d do a review. I’ve used several different brokers including ETrade and Zecco, and so far Tradeking has been my favorite.

Pros

Let’s start off with the good things. First, the price. It is only $4.95 to make a trade for stocks or options. With options you have to add $0.65 for each contract. I found ETrade to be significantly more expensive at around $9.99, and Zecco was about the same as Tradeking. If you have $25,000, Zecco gives you 10 free trades a month. 10 trades would be plenty for me, but I don’t have that much invested right now. As such, I’ve chosen Tradeking for some other reasons that I’ll highlight below.

I’ve found the interface of Tradeking to be very easy to use. It is simple to switch between accounts. I have both a taxable account and a Roth IRA with them. Making a trade is easy, and even the research is half way decent. These are the areas I found Tradeking to be better than Zecco, and ultimately they are why my accounts are with them now. While the research options aren’t as good as with ETrade, it is half the price. Ultimately I use Yahoo Finance for most of my research, so the price was the main factor in my decision, with the user interface being second.

Cons

While I have liked most things about Tradeking, it isn’t perfect. There a few small things that are slightly annoying. I use TurboTax to do my taxes, and there isn’t an automatic import of trades for the year. Several companies work with them to make it easy at tax time, unfortunately for the last few years I’ve had to enter everything by hand. It is a bit of a pain. I’ve sent requests to them to support this, and I have high hopes that this will change. If it does, I’ll recommend Tradeking even more.

The other con for me is a little silly. In the name of security they make you click pictures of a keyboard on the screen to enter your password. You can’t just type it in. It is a pain and in my opinion doesn’t increase security. It is a minor annoyance, so I just go with it.

Conclusion

Overall I am a big fan of Tradeking. It is cheap enough that you don’t have to have a ton of money invested to make reasonable trades. You should generally aim for a maximum of 2% in trade costs, so taking into account a buy and a sell I recommend starting with at least $500. Until then the costs to trade make it very hard to make any money. As such, you can get into the market easier with Tradeking than you could at say ETrade. If they managed to hook up with TurboTax to make my life simpler at tax time, it will be just about perfect for me.

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This past weekend I had my car broken into. We lost a GPS, phone car charger, and my bowling bag with 2 balls, shoes, and braces. Seriously, who steals bowling balls? It was a pretty unfortunate weekend. After filing a police report, I went to check on my insurance to see what it would be covered by and if it was worth it to make a claim.

I wasn’t sure if it would be covered under the car insurance or my home owner’s insurance, but I was hoping for the car. Since I’ve been with my current insurance company for so long the car insurance deductible is down to $100 since I hadn’t made a claim yet. The home owner’s insurance deductible was $500. Wouldn’t you know it, stolen stuff falls under the home owner’s insurance.

So, unfortunately there wasn’t much point in making a claim, as all the things that were stolen added up to a little less than the deductible. My agent said there would be a good chance of my premium going up if I did, so I decided against putting the money towards our deductible. We aren’t going to replace everything right away anyways.

Now to the checkup part. While I was going through my policy, I noticed that while my total insurance level was fine, there are limits to how much I can get for certain categories. I’ll be honest, it isn’t something I really paid attention to when I first got the policy, as I didn’t have much of anything in the house. I was under all the limits easily. Some examples of categories that were there are:

Jewelry
Cameras
Guns
Tools
Silverware
Computers

Like I said, when I first got the policy I was easily under the limit for all of these categories. However, since then I have gone over in a few categories, and it never crossed my mind to raise the limits. Thankfully this served as a good reminder to check those out and see what the difference in premiums would be. I raised 2 categories by a few thousand, and the difference in premium is about $1.33 a month.

Hopefully I won’t ever need to collect on the insurance, but thankfully now if something were to happen it wouldn’t be as big of a problem as before. This served as a good reminder that I should probably check up on this at least once a year. If it has been longer than that for you you may want to give your policy a look.

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One man gives freely, yet gains even more; another withholds unduly, but comes to poverty. A generous man will prosper; he who refreshes others will himself be refreshed. Proverbs 11:24-25

This is the final principle in my series on Proverbs Guide to Finance. Check them out if you missed any.

Generosity is one of the most important parts of personal finance in my opinion. If you aren’t helping others it just isn’t as meaningful. I truly believe it is better to give than receive. Sure I like getting stuff, but some of my best memories of gifts are from the ones that I have given. Being generous is really the end goal of financial independence for me.

A generous man will himself be blessed, for he shares his food with the poor. – Proverbs 22:9

We have a duty to take care of those less fortunate than ourselves. The widows, the orphans, wives of military men. This doesn’t mean I think we should turn to socialism. The government isn’t nearly as efficient at taking care of the needy as the private sector is. Non-profits like Nashville Rescue Mission do a far better job of helping people than our government does.

Unfortunately we don’t do as good a job of taking care of people as we should. If we did there would be much less need for the government to try to take over like they have been.

Whether or not you believe in tithing, giving to those less fortunate than you in some fashion needs to be a part of your personal finance planning. The blessings are real, and you generally feel better than the person receiving the aid.

Free Money Finance had a great piece today on creative giving. Thanks to FMF for featuring a comment of mine. I think creative giving can be a lot of fun, you never know what kind of day a person is having, and paying for their meal in the drive-thru could really brighten their day. Who knows, maybe even change their life, showing them that some people still care.

Let me know what you think about creative giving and being generous in the comments. If you have a story of how you’ve given creatively in the past please share it. I can always use more good ideas. If we get enough responses I may turn them into a post.

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Plans fail for lack of counsel, but with many advisors they succeed. Proverbs 15:22
The plans of the diligent lead to profit as surely as haste leads to poverty. Proverbs 21:5

Planning

Financial freedom isn’t easy. It doesn’t just happen. You won’t just wake up one day and say wow I have a lot of money in the bank and no debt. It doesn’t work that way. You have to plan for success, and then work diligently to make your plans succeed.

Make a budget. Set up your debt snowball. Learn how to save for retirement. These are all things you need to plan ahead for. Many of them are also things you should get some outside advice for.

Advisors

You are only as smart as the people you put around you. Now this doesn’t mean you have to go and spend lots of money on financial advisors, though that is an option. You just need to gain wisdom from smart people you can trust. Hopefully you have a friend or family member that is like minded enough to bounce ideas off of. Having somebody that you are accountable to is very helpful for financial success.

There is also tons of really great free advice on the internet. Do some searching around. Check out Free Money Finance, Bible Money Matters, Get Rich Slowly, Christian Personal Finance, Yakezie, or Early Retirement Extreme. Each of these sites are full of great advice. If you want to talk to someone for advice, send me or one of these guys an email and we’ll be glad to help. My email is clarky07[AT]gmail[DOT]com. You are welcome to email me any time. I’m happy to help. Many of these sites have ask the readers days as well. You can have your question discussed and answered by the many intelligent readers of these sites.

You can’t just wing it. Make a plan to succeed, and then follow through with it. Also, there is too much great information out there to try and do everything yourself. Reach out to others for help and your plans will have a better chance of success.

If you missed it, check out the whole list of principles in my intro post on the principles of finance found in Proverbs. Each principle is key in your journey to financial freedom.

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Lazy hands make a man poor, but diligent hands bring wealth. Proverbs 10:4

Hard work has always been the key to success. Get rich quick is always a scam. Unless you have a big inheritance coming, the only way to become financially independent is to be diligent about working hard. Getting rich slowly is the way to do it right.

This is obviously closely related to principle 4 of avoiding laziness. I decided to include both because of how many times diligence is repeated in Proverbs.

Proverbs 12:24 – Diligent hands will rule, but laziness ends in slave labor.
Proverbs 13:4 – A sluggard craves and gets nothing, but the desires of the diligent are fully satisfied.
Proverbs 10:4 – Lazy hands make a man poor, but diligent hands bring wealth.
Proverbs 21:5 – The plans of the diligent lead to profit as surely as haste leads to poverty.

Just as a side note, profit is not a bad word. As much as some in the government and media would have you believe, it really is a good thing. When people work hard and provide a good or service that people want, profit is the result.

Let’s take deeper look at a few of the other verses. “The desires of the diligent are fully satisfied.” If you have a desire and you work hard to fulfill you will be satisfied. If you don’t work hard and instead sit on the couch, you get nothing.

“Diligent hands will rule, but laziness ends in slave labor.” Everyone tries to vilify CEO’s, but guess what, they worked really hard to get where they are. You aren’t able to go that far without a little diligence. The lazy people end up working for them, or slaving away to them back in the case of the bankers. You can’t expect to get to the top without putting in any effort.

“Lazy hands make a man poor, but diligent hands bring wealth.” Anybody see a trend here? The point is obvious. God makes it clear that working hard and staying diligent when things get tough is a very good trait that will be rewarded. Being lazy and hoping for someone else to take care of you will make you poor and a slave. Whether that is a slave to debt, slave to job you hate, or slave to a government that holds your well-being in its hands. Any way you look at it things look much brighter for the diligent hard working person. Take your future into your hands and do something productive with it.

If you missed it, check out the whole list of principles in my intro post on the principles of finance found in Proverbs.

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Laziness brings on deep sleep, and the shiftless man goes hungry. Proverbs 19:15

In other words, get to work. Too many people expect everything in life to be given to them. Right now we have more people than ever living off the government. Help in bad times is one thing, laziness is another. You have to actually work hard to succeed.

As the Proverb says, the shiftless man goes hungry. Dave Ramsey puts it this way, “Get out of the cave, go kill something and drag it back.” You have to get out there and work hard if you want to succeed in personal finance. Laziness on the other hand is just going to lead to heartache and despair.

Now this is going to step on some toes, but I believe many of the people fired in this last recession deserved it. Many of the companies that cut salaries used the recession as an excuse to trim the fat. In good times many of these people would have kept their jobs, but in a recession companies get an excuse to get rid of people who aren’t performing.

Unless the companies went out of business completely, the really good employees kept their jobs in most cases. I watched companies like Microsoft layoff 5000 people as they reported billions of dollars in earnings. They certainly weren’t going to go bankrupt if they didn’t let them go, but the recession gave them the excuse to get rid of people who were not performing. This is good for the company, but not for those people.

Unfortunately, many of the people currently out of work don’t even want jobs. I know some are truly trying hard and struggling to find work, but many simply don’t want to go back to work. This is an actual conversation a small business owner I know had recently:

Unemployed person: You aren’t hiring are you?
Owner: Not at the moment.
Unemployed person: Good, can you sign this for me saying I came looking for a job?

Seriously. Many people are happy collecting their unemployment check while they sit at home watching TV. Proverbs 10:4 says that lazy hands make a man poor, but diligent hands bring wealth. If you want to win at personal finance you have to get out there, kill something, and drag it back to the cave. People like Jeff at Deliver Away Debt who have been working overtime and multiple jobs to get out of debt. If you need some inspiration take a look at his blog. He is really killing it. That is how you succeed. Sitting at home collecting an unemployment check doesn’t cut it.

If you missed it, check out the whole list of principles in my intro post – Proverbs Guide to Finance.

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