Monday, January 3, 2011

Income Investing Plan Step Two

All successful people use a plan and collecting information is an important part of that procedure.  Step two is heavy on collecting information:

Expenses: Categorize your expenses into two categories:

  • Mandatory Expenses
    Mandatory expenses include housing costs such as rent (some well off retired people do rent,) mortgage, homeowners' fees, insurance,taxes, utilities. Other mandatory expenses include car payments and insurance. Some would consider health insurance a mandatory expense; others would not. Another family may own income property that has mandatory expenses and if so, those expenses also need to be included.
  • Discretionary Expenses
    Now we get to the fun of life. How much money do you want to spend to create your dream? More than basic cable would be an example. Business class instead of coach? How about gifts? Annual freshening of your decor. New machinery. I can go on forever. Look back, add up the costs of your pleasures and budget for your future.

Seriously speaking and trying to keep this simple, really think about those expenses that could be cut if you had to and you could still enjoy at least one home, have transportation, eat, and have some form of entertainment. Be honest and be careful as you gather this data.


List each source of income but divide them into two categories:
  • Income Sources not under your control, examples are:
    • Social Security
    • An already contracted annuity,
    • Uncle Henry's trust
    • A pension
  • Income Sources under your control including:
    • Stock dividends. Just add them all up even if you reinvest.
    • Bond Interest.
    • Income from selling covered calls.
    • Rent. Your income is the amount you have left after the many expenses that go along with being a landlord.

Later on you will find that you need more detail about your income sources particularly net income or tax adjusted income, but at this point keep it simple and calculate your total income as the sum of (1) income sources not under your control and (2) income sources you can control.

Portfolio Value:

Investments that you will depend on to create income are the assets you list in total portfolio value. You can fool your self and list your house, but your house is just an expense even if it is paid off.

The value of your income investments is critical. If these assets are worth $100 you have little chance of creating retirement income. $100,000 dollars can create $500 per month if done properly. You need to calculate the total value of those assets that you can control. We are not asking for net worth; we need to know total investment portfolio value.

Risk Tolerance:

Knowing your risk level is critical. I recommend using the Rutgers University quiz available on at their website, When you complete step two of your plan, you should be able to have all your data on one page.

Complete step two by writing down your mandatory and discretionary expenses, the value of your investments, your current income, and finally your risk tolerance. Remember to date it.

Very Truly Yours,