Is Cryptocurrency For Me?

Yes.

Currency is a figment of our collective imagination. The US Dollar – it’s just coins and pieces of paper that billions of people believe have value. The actual metal of the coin nor the paper of the bill have much, if any, value.

If currency is a figment of our collective imagination, why can’t a new currency take hold in our imagination?

Well, it’s already happening.

The top banks, leading investment firms and wealthy individuals across the world are starting to believe. The banks and firms are offering ways for their customers to invest and they, along with prominent individuals are investing in cryptocurrency themselves.

The next generation of wealth (Gen Z: birth between 1997-2015) are believers. They are the adults of tomorrow. The bank VPs. The creators of wealth. The transactors of currency.

If the banks believe. If the prominent individuals believe. If the future generation believes. What say you?

What is Cryptocurrency?

In its simplest form, it is internet money. No person, country, bank or entity owns it. Any person with an internet connection can acquire it.

Is there just one Currency?

There are over 5,000 different cryptocurrencies in the world. The most well-known is Bitcoin.

Where do I buy it?

There are 100’s of online “exchanges”, but the most notable are Coinbase, Bittrex, Binance and Gemini. Not every exchange has every coin, but they all have the most widely known coins (Bitcoin, Ethereum, etc.).

Why do people believe in Bitcoin?

Believers of Bitcoin typically focus on 3 key attributes: Decentralization, Efficiency, Trackability.

1. Decentralization

This is the biggest difference between fiat currency (like US Dollar) and Bitcoin. It means the banks don’t control it. A country doesn’t control it. The collective people do.

There’s a fixed supply. No one can print more Bitcoin.

2. Efficiency

The value of bitcoin is the same in South Africa as it is in the United States. No currency conversions needed. No boundaries to be concerned with. No middlemen doing the transaction. The coins can be transferred immediately over the internet with immediate audit-ability through the blockchain (the technology backing Bitcoin).

3. TRACKABILITY

All transactions made with bitcoin are recorded on a public ledger (blockchain). This ledger is constantly updated and is immutable. No one can “fake” the money because the ledger would deny its existence. Anyone who cares to know can find out how many bitcoin are in “circulation” at any given time.

How Risky is Cryptocurrency?

Every investment has risks. Cryptocurrency is a healthy risk.

If your portfolio only consists of some combination of index funds, cash and your house: you’re not risking enough.

If you’re under 40, you’re really not risking enough.

Why?

The younger you are, the more time you have to bounce back from a risk gone wrong. Opportunistically, the more time you have to enjoy a risk gone right.

The collective imagination of cryptocurrency is building.

What say you?

How to Use Bank Cash to Make You Wealthy

We each fit into one of these buckets:

  • We own a home
  • We don’t own a home

If you own a home

You probably have a mortgage. If not, way to go!

You certainly have some level of equity in the home. Equity can be calculated by taking the value of your home (you can use Zillow’s Zestimate feature) and subtracting the remaining balance on your mortgage. Boom – there’s your equity.

Example: Your home is worth $225,000. You have a remaining mortgage balance of $125,000. Congratulations – you have $100,000 of equity!

The challenge is, you cannot just use that $100,000 of equity to make more money….yet.

The beauty is, you CAN start a process to use that $100,000 to make more money.

The best way to get money out of your home is to get a HELOC: Home Equity Line of Credit. It’s exactly as it sounds: a line of credit that is determined by the amount of equity in your home.

Where do I get a HELOC?

Most local and national banks offer HELOC’s. I suggest making some calls in your local area to determine what rates they offer. I will plug First National Bank as a great bank to do a HELOC through.

What is the bank going to ask me for?

The bank will need a few things:

  • Home address
  • Recent mortgage statement to determine equity
  • Your approval to run your credit score
  • A recent pay stub to show you have income
How much money will I get on my line?

As with anything financially, it will be dependent on your credit score and financial situation. However, most banks will allow you to borrow between 75%-85% of the equity in your home.

In the example above where we calculated $100,000 of equity: The money you would have access to would be between $75,000-$85,000.

I can just use it? No questions asked?

Once you have the money sitting in the HELOC account – it’s yours to use. It acts just like a checking account. You can wire money from the account, write checks or transfer money to other accounts.

Do I have to use it?

No. Most banks do not require it to be used. In theory, you could open a HELOC and never use it. Some people do this as they have no need for the funds, but use it as their “emergency fund” – should they need quick access to cash.

Once I take money out, when do I pay it back?

Most HELOCs only require interest-only payments. Therefore, if you take out $2,000 – you won’t have to pay the $2,000 back until the end of the HELOC. However, you will need to pay interest on the $2,000 each and every month until you pay it back.

Example: Your HELOC is 4% interest. You take $2,000 out. Each month, you will pay $6.67 in interest until you pay back the $2,000. However, let’s say you pay back $1,500. Now, your outstanding balance is $500 and your monthly interest is $1.67.

If I use my entire HELOC, do I get to use the money again?

Yes! This is the beauty of a HELOC. Let’s say you use all $75,000. However, each month in addition to your interest payments, you pay back $500. After a year, you’ve paid $6,000 of principal back. Now, you have an outstanding balance of $69,000, but you also have $6,000 of HELOC you can use again.

How long do I have access to the money?

Most HELOCs will allow you to pull from the account for 7 years. At the end of the 7 years, the remaining balance will turn into a fixed loan.

Example: After 7 years, you have an outstanding balance of $15,000. The bank will convert the $15,000 to a fixed loan (perhaps 10 years at 4% interest). You will no longer have access to the funds and will be required to pay off the loan over that 10 year period.

If you don’t own a home

There are many reasons why someone does not own a home. Don’t fret, there’s still a way to get money to make money.

Many banks offer personal lines of credit. The ability to secure a line of credit will depend on your financial situation. This includes your credit score, income, debt:equity ratio, among other factors.

What is the bank going to ask me for?
  • Home address
  • Your approval to run your credit score
  • A recent pay stub to show you have income
  • Statements of any current debts

With this information, a bank will be able to give you an estimate on the amount ($) and the interest rate (%).

How long will I have access to a Personal Line?

Most personal lines of credit are valid for 1 year. The bank will renew the line of credit assuming your income and credit score have not been negatively impacted.

What Interest Rate should I expect?

Be very wary of interest rates on personal lines of credit. Sometimes these can be over 10%, which is not ideal for using money to make money. Most of the time, they are stated as “Prime + x%”. As of December 2020, Prime is 3.25%.

  • Prime + 0-1%: Phenomenal
  • Prime + 1-2%: Great
  • Prime + 2-4%: OK
  • Prime + 4-5%: Be cautious
  • Prime + 5%+ : Don’t do it

Reach out to your local banks (yes, shop around) to understand what a personal line of credit would look like for you!

I have the money – now what?

It’s time to invest.

There are many investment options, but my first recommendation is to find a cashflow positive investment. An example would be real estate (single family rental property, office space to lease, etc.).

A second option is to use the money to make improvements to your existing home:

  • Update a bathroom
  • Update the kitchen
  • Add a garage
  • Add a screened porch
  • Add squarefootage

A third option is to treat the money as your emergency fund, which frees you up to use existing cash you may have to invest.

We’ll focus on the first recommendation: invest in a cashflow positive investment.

Let’s say you have $75,000. You could go find a $200,000 rental property and pay 20% down ($40,000) and get the remaining 80% covered by a mortgage ($160,000).

I’m going to go into more detail, but look at that last sentence: That was you buying a $200,000 asset with none (read: $0) of your own money.

Let’s say you get a renter in there for $1,300/month.

Your expenses are $1097:

  • $133 interest on the Line of Credit (4%)
  • $764 principal and interest on the 30yr Mortgage (4%)
  • $200 estimated property taxes and insurance

You are netting $203/month

For argument sake, let’s assume:

  • $600 in repairs on the house/year
  • 2.5% appreciation in home value/year
  • 3% vacancy

In 10 years: here’s what this looks like

  • Home value: $254,768
  • Mortgage balance: $126,054
  • Line of Credit balance: $16,020 (assume you take remaining profit to pay off the principal)
  • Equity in the home: $112,694
  • Cash used: $0

You’ve just turned $0 of your own cash into $112,694 of equity!

How to Turn $10k into $46k

So you have some money to invest into a stock portfolio. For argument sake, let’s say it’s $10,000. 

Where do you put it?

Simple answer:

  • 35% US Stock Index Fund
  • 35% International Stock Index Fund
  • 10% Small Cap Index Fund
  • 10% International Bond Index Fund
  • 10% US Bond Index Fund

Set it. Forget it. 

(Some people just want the answer and move on)

For those that want to know more detail:

Why Index Funds?

Funds are a grouping of stocks. Every fund has an ‘expense ratio’. It’s the fee that the fund charges to manage the fund. A low expense ratio is typically found in “Index Funds” and can be as low as .05%. A high expense ratio is typically found in “Mutual Funds” and can be as high as 1.25%. You should never have a need to go over .3% – meaning Index Funds are the way to go.

But, .3% is nothing, why should I care?

You know that $10,000? Let’s say you selected a .6% expense ratio vs a .10% ratio. In 25 years, you’ve thrown away $3,345, assuming average market return. 

$3,345! 

For just selecting a lower expense ratio. $3,345 for a single click – that’s a great return on a click!

Why no individual stocks?

Picking individual winning stocks is like picking the winning horse at Kentucky Derby. If you pick the right one, you can really make great money. 

It’s difficult to pick the winner. This is why index funds are the recommended approach. Sacrifice some upside and all but eliminate risk. 

Why 20% bonds and 80% stocks?

This asset mix is right in between aggressive and conservative. 

Bonds (20%) are a safer investment (read: low risk, low return). 

Stocks (80%) are a more risky investment (read: average risk, average return).

There is a definite relationship between risk and upside. The more risk you take on, the more upside you have. However, the more downside potential as well. 

If you want to be more risky (more upside), you could shift the mix to 90/10 or even 95/5. 

As stated above, the fact that we are investing in index funds makes the overall investments much less risky vs individual stocks. 

What if I already have investments in the stock market?

You need to balance your portfolio across all of your holdings.

  • Do you have a 401k?
  • Do you have a Roth IRA?
  • Do you have existing stocks/bonds?

If so, it’s time to apply your asset mix (the %’s above) to the entire portfolio. 

What return should I expect?

Nothing is guaranteed. Historical performance is no indication of future performance. 

With this asset mix, historically you would see a 5-8% return each year. Over 25 years, your $10,000 turns into $46,000. 

You spent 15 minutes setting up the account, don’t touch the money for 25 years, and you add $36,000 to your net worth. 

Where can I invest?

There are unlimited institutions that will happily accept your money. 

My top 2 recommendations would be Vanguard or Fidelity. Both offer low expense ratio index funds, have good apps to track your investments and are large institutions that will be around for the long haul. 

Conclusion

Investing doesn’t need to be rocket science. If you have funds you want to invest in the market – make it easy on yourself:

  • Setup an account
  • Deposit $
  • Determine your asset mix (i.e. 80/20)
  • Invest in the appropriate Index Funds
  • Leave it alone
  • Enjoy the returns in the long-run

Happy investing!