Tag: income

How Monopoly Teaches You Everything You Need to Know About Quitting Your Job

For many of us, Monopoly was the only financial education we had growing up (further discussion on this is coming in a future blog post!). The depression-era Parker Brothers (now Hasbro) board game was based on an even earlier game called The Landlord’s Game, designed to educate the players about taxes. Monopoly takes it a step further, educating the player (I was always the battleship or car) on cashflow, taxes, financial ups and downs (Chance!) and…jail.

Assets

As in life, in Monopoly the name of the game is assets. To quote from a well-known financial literacy advocate, an asset “is something that puts money in your pocket.” This includes stocks, real estate, or a business. To Quit Your Job, you must have assets. Let’s say you’re hired as a retail employee. You are paid a low wage because your only asset is your time. If you move up, or get hired into management, your assets include your time and skills or knowledge.

To break away from this, you need assets that generate income irrespective of your time. Stocks, for example, are an easy asset to obtain. Stocks can go up in value. Even better are dividend stocks, which pay out money to those that hold shares on a regular basis.

Real estate is also an asset. It retails value, the value can go up and then the real estate is sold at profit, or you can charge rent to put money in your pocket. This is the backbone of Monopoly — green houses and hotels. Both generate money for you as your car or thimble roam the board. In real life, you can purchase real estate to rent to create monthly cash flow. You can also purchase REITs (Real Estate Investment Trusts) and collect rent dispersed as dividends.

Businesses are a third type of asset. Represented in the game as utilities (Water Works, Electric Company) and railroads, businesses are a way of generating income (aka ‘cash flow’). A business is the ultimate asset — it can grow in size, become an excellent source of cash flow, and is tax beneficial. Even better, you can continue to collect your $200 GO! salary as a business owner.

To Quit Your Job you must have assets. Saving up a bunch of money and then quitting will only give you a long vacation. Eventually it ends with you having to go back to work. Bills don’t end — even if you own your home 100%, you still have taxes and insurance and maintenance costs. You still need to eat. Life also likes to come knocking at the door. You need income — and assets provide it.

At the start of the game, every player has some savings and a job (this is what GO! is, where you collect your $200 salary). You must balance your income (salary) early on while acquiring property and utilities. You can also save your income for later purchases. For those who don’t have a drive to Quit Their Job, they happily move around the board, trying to get to GO! as fast as possible – to collect their $200. Money is spent on things like Luxury tax and the occasional Community Chest mishap. They are happy not taking any risks with property and thus never get anywhere. In the context of the game, they will eventually be wiped out by landing on a red hotel at some point.

The winner of Monopoly is the one that ends up with all the assets.

Cash

Is cash an asset? Technically, cash can put money in your pocket through interest. However, in this day and age, most bank interest rates require a microscope to see and inflation easily wipes out any gains. But to Quit Your Job, you must have cash readily available.

Cash serves two purposes:

  1. Protection. In real life, you’ll inevitably flip that random Community Chest or Chance card. Hospital fees. School fees. It will be someone’s birthday and you have to give them $10. Also referred to as an Emergency Fund, you must have cash on hand when you Quit Your Job. Not having an Emergency Fund will require you to go into debt for sudden expenses, or sell assets like stocks to pay for it. Loss of assets or going into debt leads to going back to a job.
  2. Preparation. If you have cash, you can be ready to strike at any time. Imagine having a cash reserve when the 2008 crash started. Stocks and real estate (assets!) severely went on the cheap. By having cash at opportune times, it enables you to acquire assets at low cost. This is another facet of Monopoly: when another player is in desperate need for cash and looking to auction off a property, those with cash can scoop them up. Or if you already own Park Place and land on Boardwalk and not having the cash to purchase it. You just missed out on the biggest monopoly and biggest potential for cash flow because you didn’t have cash handy.

Jail

You want to stay out of jail both in the game and in real life.

It’s scary to think about how in the game, when you have nothing and you’re behind, that the best place to be is in jail. I’m not going to wade into the ‘poor people and jail’ arguments made online or in sociology circles, but there is an eerie correlation between this component of the game and real life.

Other Lessons

Overall, Monopoly is a great education in life. In addition to what’s been mentioned above, Monopoly also teaches about negotiating and compromise. There’s the wheel-and-deal component to it when it comes to trading properties and utilities. It’s also about accepting the randomness of life (I don’t expect to ever randomly win second place in a beauty contest) and the inevitable things ($75 Luxury Tax).

There is a reason Monopoly has been popular for 80+ years. The game is competitive, as is life. ‘Getting ahead in life’ is part of life. Whether it’s trying to get promoted, pay the bills, or Quit Your Job, Monopoly is the early childhood education in doing so.

And for all the realism in Monopoly, there’s always one thing that never happens:

How to Build a Dividend Ladder

“I believe non-dividend stocks aren’t much more than baseball cards. They are [only] worth what you can convince someone to pay for it.”

Mark Cuban

A dividend ladder is the rich man’s way of making their own paycheck. It’s an awesome tool to generate income, merely by holding stocks in various companies. You’re paid a set amount at a certain time, on a schedule, and you don’t even have to get out of bed in the morning to earn it. But before we can discuss what a dividend ladder is, you have to know what a dividend is.

Simply put, a dividend is profit paid out by a company to its shareholders. Think of it as a reward for holding on to a company’s stock. It only makes sense, for as a shareholder, you OWN part of that company. If it does well, you get to share in the proceeds. Not all companies pay dividends, however. It’s usually up to the discretion of the company to pay any dividends, and the company can lower the dividend or even outright end it if it sees fit. For example, the company I used to work for T-Mobile (TMUS), stopped paying a dividend in May 2013.

Great, so dividends are cash paid to shareholders by the company. So what is a dividend ladder?

Most dividends are paid on a quarterly schedule. To stick with telecommunications companies, take a look at Verizon (VZ). Verizon pays a dividend in January, April, July, and October. The dividend is currently $2.41, paid quarterly — so in each of the above months you would collect about $0.60 per share. A thousand shares of VZ would pay you $600 every three months, regardless if you do a shred of work or not. BP or British Petroleum, pays in February, May, August, and November about $0.59 per share. A thousand shares of BP nets you $590 every three months, but in different months than Verizon.

Let’s take a third stock, Walmart (WMT). A share of WMT currently pays $0.53 per quarter, but pays in March, June, September, and December. One thousand shares of WMT would pay you $530 three different months. So with your three stocks, you now collect $600 in January, $590 in February, $530 in March, and repeat throughout the rest of the year. You collect a monthly paycheck from your assets, and you didn’t have to lift a finger. That is a dividend ladder.

The strategy comes in the stock picking. It’s not all WHEN the dividends pay, it’s also other factors such as dividend yield, dividend history, the health of the company, and the risk of having a dividend cut or suspended. A company like Coca-Cola (KO) has increased their dividend for 56 years straight. AT&T (T) is known for prioritizing their dividends, paying them even through the 1930s Great Depression. REITs (Real Estate Investment Trusts) are required to pay out 90% of their profits to shareholders as dividends (tax rules are a little different, again check with your CPA) so they make reliable sources of dividends. MLPs (Master Limited Partnerships) are another example. You also want to diversify your holdings, not buying only consumer companies or only tech companies. There’s protection in splitting up the sectors your holdings are in.

If you’re not one for stock picking or don’t want to do the research, there are plenty of ETFs to choose from. ETFs or Exchange Traded Funds, are baskets of stocks that are already diversified and made up of many holdings. An ETF like Vanguard Dividend Appreciation Index Fund (VIG) is merely a basket of dividend stocks. It pays just like individual stocks would.

The best part about a dividend ladder is you can start before you quit your job. It will take initial investments to get it going. So what if you don’t have a lot of money to invest yet? Start by buying a few shares. When the dividends are paid, you can use your brokerage’s DRIP (Dividend Reinvestment Program) to reinvest the dividends when they’re paid — this means the money from a stock’s dividends is used to then buy more shares (or fractions of shares if it’s not enough to buy a whole share). Or, you can let the money pool in the account and buy more shares. It works like a snowball, start small and let it grow over time. If you start before you quit your job, you can have a nice portfolio paying you monthly when you do leave.

To get started, I recommend check out http://www.dividend.com’s Dividend Stock Screener to look through the list of all dividend-paying companies. Always do your homework when it comes to stocks! I’ll be publishing more posts on stocks and dividends, so stay tuned!

Full disclosure: I do own shares of T and VIG in various accounts. I am in no way affiliated with Dividend.com, but I do use it on occasion for research.