Transcription
Hi, good morning everyone. Hope you're off to a great weekend. It's Sean with Paycheck to Portfolio. Today I'm going to talk about how I turn borrowed money into monthly income. We'll go through a cash flow cycle, the business spread calculation, and then I'm going to answer questions from the YouTube poll and on my YouTube channel for this week.
First, I'm going to jump right into the portfolio update like I do for every video. Last week was pretty choppy in the market. I think obviously as we all felt, we had some China tariff situations pop up again. We had some some bank credit issues that spooked the market a little bit, but overall it was it was a it's been a good um month so far. Obviously, a good quarter. We're in earnings season, so it'll be an interesting next couple months. I expect obviously some high volatility, but I'm going to keep investing my full paycheck and I'm going to keep um compounding as time moves on.
So, currently my net account value sitting basically at $157,000. My total unrealized gain is at $33,000 or basically 11.5% there. Friday, we flipped um from being down early in the morning to being up $885. Looking down below, you can see my time weighted performance or my time weighted return. Basically, what this is is this is the growth of my portfolio with any dividends received. This does not account for any cash that came in or any cash that came out. That's under the historical values tab, which I'll show next.
Year-to- date, I'm sitting at 33.6%. Um, the S&P 500's at 13.3%, the NASDAQ's at 17.5, the Dow's at 8.5, and the Russell is basically at 10%. Looking at one year, I'm at 37.7%, the S&P is at 13.6, the Nasdaq's at 22.6, the Dow's at 6.7, and the Russell's at 7.7 there. And then finally, on the three-year, I'm sitting at 113.6% 6% cumulative return. The S&P is at 83, the Nasdaq's 112.9. Basically 113 there. Uh the Dow's at 57 and the Russell's at 44.
On the three-year index, basically I started fully living out of my brokerage account of 2024. My mom had had a heart attack. I had to fly up home to Washington State where I'm from. And um I used my Erade debit card to pay for that flight. And then my dividends rolled in on the Friday, which basically paid back all of my my costs for that that quick flight. And I thought to myself, why am I not fully living out of my brokerage account when that situation came up? So, I started living out of the account in June of um May or June of 2024. So, I started living out of it right about in this area here. So, in the three-year, the S&P, the NASDAQ, and the Russell actually have a head start on me from when I implemented this strategy, which you can see I bypassed it pretty quick, even with that head start.
Looking at the historical values over the last um one year. So, if you're new to my channel, all of my W2 income rolls into my brokerage account, my Erade brokerage account. I invest into three buckets: long-term growth, stocks, and ETFs. closedend funds such as Cornerstone and Goth and high yield funds that pay a monthly or weekly or quarterly dividend essentially. And so I'm frontloading those investments and fully living out of my brokerage account. And what my dividends don't cover, my margin bridges until a crossover happens to where my dividends exceed my monthly living expenses, which will set me free from a nineto-ive job. We refer to that in the community as FIRE, which stands for financially independent, retire early. That's been around for a long time. Um, but that is what the community stands for when you see that that acronym.
Um, so over the last year, back in November 2024, my net portfolio value started at 102,000 essentially. You can see currently I'm at 157,000. So even while fully living out of my brokerage account with the growth of the portfolio, I'm up $54,67. And again, that's possible because I'm creating dividends with each cash flow cycle and the market's growing historically. And um all those things and all those forces are working together to um create a velocity of cash flow. my gross portfolio value is getting close to $311 $314,000 right around there. In fact, let me show you real quick just so you can see that in full transparency. My current um including my cash secured puts, I'm sitting at $317,000 right now of a gross portfolio with those included.
So, let's jump right into the cash flow cycle that I was just articulating as I was showing my um my portfolio there. So, I I I created a couple charts. I've had a few of these for a while, so I put two different views just to hopefully make it easier for you to understand um my viewpoint on on a brokerage account. You know, um the way I'm viewing the brokerage is is a lot different than historical and and traditional methods. Most people invest the leftovers, they buy long-term growth funds, and that's it. and in 30 years hopefully they can retire and live free from a nineto-five job. I think everybody knows that if you invest 10,000 you know a year at 7% growth in 30 years you're going to be north of a million dollars and that you can retire at that point. What I'm trying to do is to flip the script on that with the paycheck to portfolio method. I'm trying to frontload all of my income and essentially expedite that compounding curve which will set me free from a nineto-ive job and say 5 to 10 years versus 30 years.
So starting out with the chart on the left, my W2 income comes in again, it's all deposited into the brokerage account. I invest in the three buckets. long-term growth stocks such as SPY, McDonald's, Costco, and others. Closed end funds such as Cornerstone and Golf. Those drip at the net asset value. If you want more information on closedend funds, I have specific videos on my channel that discuss Cornerstone specifically. And then high yield stocks, covered call funds or ETFs such as QQQI, SPYI, and others. So, I take those as cash that covers my margin interest rate and covers my expenses, which you can see those specifically broken down on my monthly series called the bottom line, where I'm showing basically all of my income and all of my expenses. You can check that out as well.
So, what my dividends come in as cash flow, what they don't cover, for example, I need about $8,300 a month in core expenses. Right now, on average, my uh dividends are between four and $5,000 a month roughly, right in that range. It es and flows um with the distribution by the covered call, covered put type of strategies, what they pay out every week, month or or quarter. And so what happens is margin steps in and bridges the gap between my what my dividends don't cover and what my expenses require. And then that allows me to stay fully invested in the market instead of spending to zero. Having to trade time for money and creating that vicious cycle all over again. What I'm doing is fully investing, owning an asset instead of spending to zero, which is creating cash flow for me in a business spread because I'm borrowing at 8.4% interest in Erade. And I choose to keep Erade because I have closed end funds whereas some of the others don't. That's my my my personal preference, but all other brokerages can work in this system as well. And then I'm investing in the 20 to 30% paying assets in the high yield side.
So on the right I have a little bit more of a simplified view. So again, W2 income comes in, goes into the brokerage account. I invest in uh growth stocks, closed end funds, high yield funds, and then my dividends don't cover margin pays the bills. And that cycle continues, which will essentially set me free from a 9 toive job, which I'll show you on a calculator we have.
So, I have a simple business spread calculator I put together, and all of my documents I upload onto our membership Discord, so folks can take a look at them and play around with the numbers and and see how it applies to their specific situation. But just very high level here, let's say you had a total portfolio value of 10,000. Let's say you started out with zero margin debt. Okay, right here in column B. Let's say you were able to invest into a blended yield of 25% annually. Let's say your margin interest rate is 8.4% like mine is. You can adjust these um if you get access to the calculator very simply. So that would um mean that you would have 100% equity in your account at this point. So your business spread, the difference between the blended yield and the margin interest rate would be 16.6%. So you could see what that would equate to from an annual dividends perspective if you had margin, what that would equate to in costs and then what your business spread would look like annually and then your your net um I'm sorry, your monthly net amount would be as well. So let's say you were you were floating, you know, uh $1,000 of your bills so far and and that's what you were doing. You would see what the business spread would be like there. And again, you can play with these numbers, but what I'm trying to show you is basically this system is creating the exact same spread that any business would when they go get a capital loan or a capital investment and they create cash flow off of that investment. So every time my paycheck rolls in, I'm investing in 20 30% blended yields and I'm borrowing at 8.4%. So each check that comes in, I'm creating an arbitrage situation off of with my own money.
So um we have some specific calculators in our Discord. I want to show you what some of those look like. You can grab this in the tools section. All of my resources are pinned under all of my comments in all of my videos. So if you're interested in any additional resources, please see those pinned comments. But in this situation, I grabbed these specific dividends with these specific tickers here. I'm going to make this a little bit bigger just so it's a little bit easier to see. So, you can see the tickers that I I put here just for um for an easy example. I picked a few of of the ones that that I would consider if I were starting out. Basically, I picked the growth and closed end funds as the drip funds. I left the high yield funds unripped because we would take those as cash in this scenario. On this calculator, all you have to do is hit update yield and it will scrape the website um or online for those specific yields. We have some very smart um members in our Discord and and one gentleman named Fernando helped me build this and he's he's he's very good with spreadsheets. So, we have that so it just scrapes for you automatically. In this scenario, I'm just showing you. Let's say you wanted to start out small and you wanted to just float a car payment. So, let's say you were starting with a $10,000 account. You would have zero margin debt because you haven't bridged anything yet. Let's say you have to pay your car bill anyway. So, let's say it's $500 bucks a month. You're going to have to pay that regardless. So, let's say $6,000 a year you would contribute to your Erade account or your whatever brokerage you choose. is we have many people using Fidelity, Schwab, Robin Hood, Erade, and others. So, let's say you instead of just straight spending that 500, you bring that into the brokerage account. Now, we're talking 6,000 a year. Let's say the inflation rate's 4%. That's going to adjust monthly. Your annual living expenses, in this case, we're ramping into the system. Instead of floating all of our bills, we're simply starting out with the car payment. Okay. In the spread, we're going to do 12% in the drip and 38% in the non-drip or the high yields. You can tell the calculator how you're going to distribute your future paychecks. You know, let's say you had 2,000 a month um coming in just as an example for easy math. Um or 500 in this case since we're talking about the car. 250 would go towards drip, 250 would go towards non-drip obviously in 2000 a,000 and a,000. And then you can put your specific margin interest rate in here. And what the calculator will do is it will forward project. It'll say, "Okay, your gross portfolio value is starting out at 10,000. Your drip dividends are going to be $50. Your non-drip dividends are going to be $159. Your interest is zero as you're starting out. So your cash immediately you've generated $159 worth of cash. your monthly expenses. And you can see it adjusts for inflation, which is a bit a little bit overkill, but um I always try to build these calculators conservative. Um that's just the way my brain is. So uh your $500 um dollar car bills already eroded down to 341. That's good erosion. Okay? You're not paying down any of this margin flow or bridge yet. So you accumulated $341 of margin debt to begin with. Now, just FYI, margin debt does not show up on a credit report because you're borrowing from your own equity. I just wanted to call that out because that question comes up fairly often. So, your W2 contributions in this case, you'd bring the $500 back in and your net portfolio at the end of the day would be 9659, but you still own those assets that you bought and being fully invested. So, if you come all the way down and you didn't change anything, in 5 years, you're looking at a $53,000 gross portfolio value. Drip dividend dividends would be $268. Non-drip would be about $8.49. Um, the interest you would have to pay on that borrowed money would be about $50 here. Your cash after interest would be $799. And you can see basically your monthly expenses would be 606. So you've hit that that curve to where your non-drip dividends have now exceeded your car bill and you can actually see where the zero happens is where the crossover happens with compounding. The same thing can be true of all of your bills. So in this scenario, you know, at about month 18, you would start maybe bringing in your car bill, your mortgage, you know, at month 29, you know, maybe you start bringing in all of your core bills because your portfolio is big enough to handle this. And then essentially yours would start to look like mine. So this is my actual portfolio balance right here. Basically my start starting portfolio is 317. My starting margin debt where I floated is 156. I always keep 50% equity or greater. My W2 contributions are 132. My core living expenses are 100,000. You can see my blended yield breakdown here. And basically what's going to happen is on this this dashboard, and I'm going to zoom out on this just so it's easier to see. Um it'll create basically a dashboard here for you that shows the crossover. So it shows the growth of the portfolio, the margin debt, your W2 contributions, and the net portfolio value. It'll show you the debt equity trend line to where the crossover happens to basically where you break free from um needing any margin bridge or float. Now, you can take that margin and create an arbitrage with that as well because you're borrowing at 8% and creating cash flow with with the margin piece of it as well. But I'm trying to balance growth, compounding, and margin. And I'm trying to keep it safe and equitable. So you can see we have a a dashboard here that breaks down basically your gross and net portfolio growth, debt and equity trends, cash flow waterfall, and then we have a really neat stacked graph that shows the income and expenses. Basically over five years, how much dividend income would you receive? How much interest would you actually be paying? and how much of this would go towards projected inflation costs. So that's available in the Discord.
Going back to questions, so every week I put out a poll normally on on Wednesday or Thursdays. Uh it's a great way just to just to engage in the community and really appreciate everybody's engagement. So you can see I had a few things I wanted to talk touch on. Turning borrowed money into opportunity. building income without touching my paycheck, managing risk while using margin. And then there were multiple questions I would like to try to answer here. So I just put it simply so you can you can slow down and read this if you would like to.
So turning borrowed money into opportunity. I've touched on a few times, but I want to try to simplify it even more. So in my system, margin isn't debt to me. I don't look at it as debt. I look at it as capital investment. It's a business tool. It's similar to a business taking a capital or operating loan to generate cash flow. I'm borrowing at 8.4% and reinvesting in the assets that generate 20 to 30% blended yields. That dis spread. I manage it through my three buckets. Long-term growth stocks and ETFs, closed end funds, and high yield funds. The key is discipline. Keeping equity well above 50%, 50% plus. And only using margin as a bridge, not a crutch. I'm not using margin to go buy a car. I'm not using margin to go take a trip. I'm not using margin to uh speculatively invest in penny stocks, nothing like that. I'm simply using it as um as as a float or a bridge to continue to compound the system.
So, building income without touching my paycheck. So, again, every W2 paycheck I earn goes straight into my brokerage account. 100% is invested into those three buckets. And I'm going to keep repeating it just so people hear it because sometimes what I see when I talk to folks is they'll chase the highest yield or the highest yield fund will be their number one holding and then their growth funds are low or they don't have growth funds at all. And all those things make me a little bit nervous. So, you know, I look at the growth funds as my anchors and my long-term appreciation. So, again, I invest in the growth such as SPY and McDonald's. Closed end funds such as Cornerstone and Goff, which compounds, drip at the NAV. Again, we talked about that. And then high yield funds, as I mentioned before, QQQI, SPYI, YAX, and others that are monthly cash flow um engines that are paying my expenses.
So how do you manage risk while using margin? You know margin is a part of the system but it has to be managed like inventory in a business. I'm capping mine around 45 to 50% of uh the total equity to protect against draw downs. I also maintain put option insurance. I've created multiple videos on how I protect my portfolio against a market correction or a market crash. Um please see those videos on my channel for additional information there. My growth and closed end funds keep compounding while my high yield bucket produces steady income to cover expenses and interest. And again, I'll hedge with put options. You can use inverse ETFs as well such as SQQQ or SPXU when volatility spikes or if you don't have options level two trading, you can use those inverse ETFs to offset um draw downs in the event of a market correction or a market crash. So the goal is to stay protected, preserve equity, and keep compounding forward. So I hope that that was helpful from a simple outline there.
Looking at a few questions. So I'd like to hear your thoughts on um paying back your margin balance where you start to pay it off once your dividends cover your living expenses. Um so yeah, I don't really, if I'm honest, I'm not focusing on margin as a loan. I'm focusing on margin as as a business. um tool to create cash flow. So my I'm not hyperfocused on paying down a quote unquote bad debt like a credit card. I'm focused on cycling my paycheck and my income to create compounding which far exceeds the expense of the margin draw is kind of the way I look at it. So I'm treating my brokerage like a business would, not like a long-term investor would. So, as I mentioned in my comment, I'll touch on this in detail like I hopefully have for you. I'm worried about the equity of my portfolio and the growth of it.
How do you determine which income fund is best suited for the individual? Well, you know, you have to believe in the underlying stock or asset that the high yield funds um you know, using as a as a covered call or covered put type of a strategy. So, you know, if you like Birkshshire Hathaway, um basically Round has a fund that will do a covered call strategy on Birkshshire Hathaway. So, uh obviously that's a no-brainer for me. I own the Birkshshire Hathaway stock and then I'm using the Roundill fund as well to create additional dividends off of. Again, we have some really super sharp members in our Discord. We have a gentleman named Andrew who's created an ETF um tool here that he's broken down basically the 12 month, six month, and three-month performance of some of these high yield funds, which is really neat is you can even click on these and it will show you the total return, the price plus the dividends and the actual price and its current state. Again, you can find that in our Discord membership and that's available to anyone in there. And again, I'm blessed and fortunate to have smart um folks in the community who want to help each other out and and that's a good way to assess um essentially which funds might work for you in the way that we're tracking it as a community.
Um one one person said, "I need this bad because I feel like I'm constantly doing something off in Fidelity." So, basically, um this person had some confusion around the cash flow cycle. I hope I've clarified that today. You can see we had uh correspondence there of seven replies and again in the discord one of the nice things we have in the community is we have uh different brokerage chats here to where folks are helping each other out. So that's an additional resource as well.
So last question I'll touch on here. Desperately seeking some context to help my lovely wife see that moderate low percentage of margin can be safe and to help build income. I think I could be answered with uh all of the topics we covered. I sincerely appreciate the lessons learned you share with us. God bless and much success. You know, I I'm so thankful for the community. You know, I'm I'm a Christian guy. I have my plans. The good Lord has his. Um I'm trying to simply uh be a good steward of those resources I was given and and and my prayer is that everybody here will be in a much better position than they are today in 5 years. nothing would make me happier than than to see everybody doing well and and um you know I'm not a financial adviser. I'm just simply sharing how I live and the business experience that I do have personally. Um but thank you so much for your kind words and and everything you're saying.
And so closing here, what I would say is, you know, in our country it's interesting. We'll we'll go out, we'll buy a $500,000 home, we'll put 3 to 5% down and the bank owns 97% equity. and everybody's throwing you a housewarming party and saying congratulations, good job. To me, that's a very risky situation when you look at it from an equity perspective. But we know that homes grow typically over time. We know that typically those are good investments. It's a little shaky these days, you know, with the expense, but historically we would say that's a good investment. Therefore, you're you're you don't view that as much as a risk. Um, you know, where somebody today goes out and buys a 60 or $70,000 truck, borrows at 6%, and the minute they drive the truck off the lot, it's depreciated $20,000 immediately because now it's a used vehicle. To me, that's risky. To me, those things are risky. when I'm, you know, using my full paycheck, being fully invested in a market that historically grows, as you see on my one-year, three-year charts, I'm up 38% plus in the last year, and I I'm keeping my equity over 50%, that's way better than the house analogy. I'm using put option insurance as a homeowner's insurance policy. So, you know, I think unfortunately it's just the way that our American brains have been conditioned to think that bad debt is good and comfortable and normal and business spread or what I would call maybe good debt. I don't even look at it as debt. Again, it doesn't show up on a credit report to create cash flow and growth is something that's that's common sense for most businessminded folks and obviously private equity companies or private companies in general. So, that's all I'm simply trying to do with um applied wisdom. And so, I hope you found this video helpful. I know it was a deep dive. Please like and subscribe. And again, if you need any additional resources, it will be in my pin comments. Hope you have a great day everyone. We'll talk to you soon. by