Aug
28
Money Moving In The Opposite Direction
August 28, 2007 | 1 Comment
For a long while I had a rule: money that goes into investment account stays there. Dividends: reinvested, capital gains: reinvested, spare money in checking: invested. All of the money flowed into the Ameritrade stock brokerage account.
In my new stage in life I have to make changes on that rule. Now I am living out of my investments. Yesterday I made my first withdrawal of money from my brokerage account. Just enough to cover my monthly expenses for the next month, and to pay for capital gain taxes. Still well below what I have made so far during the month of August.
It hurts! I do not like to see my account value go down! I like it to move in only one direction: up. And I do not like to be removing money out of it, even if it just means a temporary account value reduction (as I expect to keep trading and building it up).
Although living out of investments has proven to be feasible, it has some things I have to be careful about:
- Total Value Up: Month over month, the account value should be moving in the right direction: up. If it isn’t, I am doing something wrong.
- Active Management: I have to actively manage it now, as it is as crucial as a job – it is the source of food. I have to make sure that the account value increases by a quantity that is higher than what it would have increased if left on its own… and I can only take that amount that it has increased on top of it.
- Increase Dividends: Some months are brutal for the market. Like last month. I have been able to maintain my account value moving in the right direction by day-trading. But it is not up until now that it is moving up on its own. Dividends help on brutal months: they come to my pocket even if the market is not smiling at me.
- Limits: I have to set up very strict spending limits. No special projects. If I do not make lots of money on trading, I don’t get money out.
- Taxes: In a job, someone takes care of tax withholding. On top of that, they withhold so much that it pays off for your capital gains taxes. In my new life, I am not having someone withhold the money for me, so I have to do estimated payments. And short term capital gains (most of my recent trades) are taxed higher than long term capital gains.
I will keep learning on this new adventure.
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