How Do You Pay Yourself?

[CandleWhisperer 10]

Let's get this out the way before we begin:

 

1. Anybody that answers can use hypothetical numbers (for math reasons or illustration purposes). Your personal financial status is your own business.

 

2. Newbie’s that are not yet trading real money but have ideas of how they plan to pay themselves when the time arises, are free to answer.

 

The question as the thread name states is : How do you pay yourself?

 

A few years ago I read an article about Michael Jardine of Enthios.com. In the article he said he paid himself as follows:

 

1. he had a minimum amount that he started the month with. For math purposes assume $50,000.00

 

2. At the end of the month/beginning of the next month, he took all monies above the minimum out of the account (in the form of a check to him) and started the month out new. So if he had $300,000.00 at the end of the month he would keep $50,000.00 and get a check for $250,000.00. Again, I am making the numbers up here, but you get the idea.

 

3. What I do not remember is what he did if the month came up short. Suppose he had $35,000.00 at the end of the month. Did he deposit the $15,000.00 to get the number back to his min level?

 

One of the reasons he did this was psychological. It helped him under trade in size. In other words, just because he could trade 10 s&p contracts did mean he should trade that many. By keeping the size of the account down, at the start of the month, there was no temptation to increase size beyond his personal risk tolerance level.

 

I prefer the taking out some amount at the start of the end of the month/start of the new one, but keeping the bulk of the monies in the account. Suppose there is $25,000.00 in my account. At the end of the month there is $50,000.00. I take out enough to cover bills and some externalities, say, $10,000,00 and now have $40,000.00 in the account. On the plus side, if the next month ends with a drawdown of $15,000.00 I am back where I started the prior month at $25,000.00. More importantly for me, I do not have to deposit again. On the down side, I do not get paid that month , or I got paid 1/2 as much for the last two months if you will.

 

This brings up the other question. Are you making at least as much as you could be making if you did something else commiserate with your skill set? If you graduated from Harvard and could be making $250,000.00 a year in corporate America, but are trading instead and are making $75,000.00 a year that's a $175,000.00 loss to you. So basically, the minimum amount you should be paying yourself is the minimum amount you would be worth in the labor market. Be honest. Economists call it being under-employed. By being a trader, are you volunteering to be under-employed?

 

Anyway, I look forward to your answers.

[brownsfan019 17]

CW - My view is simple & similar to the example you provided from that website or author. Basically I want enough in the account at all times to provide enough of a cushion for me and that's about it since futures accounts pay little to no interest. I then have basically a savings account or money market where my 'secondary' futures account sits at least earning something.

 

So the account(s) held at the actual futures broker is 'just enough' and excess is moved to something that will earn interest. In my eyes that's dead money sitting at a broker earning 0.00% interest. I'll take .25% or whatever the rate is over 0.00% any day. May not be a ton of interest w/ today's rates, but I can't stand watching money earn nothing while sitting there.

 

From there it's a matter of paying bills, having some fun money, etc. I'm one that likes to pay off current and future bills as well, esp during good months. So after a good month, I may pull a chunk out and pay off the mortgage a few more months out, etc. I just don't like bills and like to take chunks out of them whenever possible.

 

And if at any time the primary futures account takes a hit, a quick bank wire and it's back to normal. If things are going as planned, this does not happen too often.

[BennyHey 10]

Good question CandleWhisperer as this is a question a lot of people might have.

 

I wish I had one answer to your question but I don't. I have have a good run of 1-2 weeks I will take x-amount out and put it in my checking acct. I am similar to brownsfan in that when I have the money I like to pay off bills.

 

That's the thing with trading, money does not come in a set amount every 2 weeks like a job, it is very erratic. I currently need $500 per contract on es with my broker. So If I want to trade 4 cars I need at least $2500-$3000 in my acct. (to also give myself a little cushion.) When I am profitable I like to take it out as when it sits in my acct I am more likely to let it get away from me. In this regard I keep my acct. margin low as a money mgt. tool.

 

I would also like to add that TradeStation raised their Minimum margin requirement to $6,200 per contract when we were super volatile in October. This made me close my acct. with them as $24,800 + daily drawback to trade at my level seemed like overkill. I also know IB raised their minimum as well.

 

Has this effected anyone trading with these guys?

[SwingTradinJay 10]

Anytime I'm profitable, I take the money ASAP...

 

Bills: rent, groceries, car, alcohol. . .Lol

 

And with currency trading, I need no minimum, except a few K, it doesn't take much with 1:100 leverage!

[darthtrader3.0beta 10]

  BennyHey said:

When I am profitable I like to take it out as when it sits in my acct I am more likely to let it get away from me.

 

Same here.

I still have a day job that covers my expenses. Then I have my futures account, a straight out brokerage account for equities and my Roth.

I try to keep my futures account as close to flat as possible and put winnings in the equity account. Namely a pyschology thing and so that I really have to think about things before adding contracts. Then I put in a set monthly contribution to my Roth as if it was a 401k at a real job.

I'll know I'm in good shape at some point when the futures account is really feeding the equity account, and the equity account is maxing out the Roth.When that happens, thats probly when I quit working my day job.

[daedalus 10]

This is a great thread.

 

I remember the one useful thing one of my business prof's told me - entrepreneurs #1 mistake is forgetting to pay themselves a salary at all - or paying themselves too much. Its a fine line.

 

I am on the same ideology of Brownsfan - I hate bills and try to pay everything that I can as far in advance as I can. I may be a bit neurotic but the idea of this profession and the fact that I may not have income every month makes me very cautious with and how I spend my money and I like knowing that I don't have any pressing bills 6 months out.

 

That being said, I have a very small account right now and i'm just trying to grow it so i'm actually taking hardly any out at all. I have the unique situation of having some people who loaned me money to get this account going so I pay them 10% of profits each month. I take an additional 5% out to pay myself.

 

Keep in mind though - this is simply so I still have a TINY bit of cash for food, maybe a movie, etc but to keep my maximum capital in my accounts where I can grow it. I'm at the point where i'm working towards being able to trade 10 lots - and i'm by no means there yet so I keep as much in the accounts as I possibly can.

 

I know a couple guys who do start every month with X and at the end they take everything else out. It seems like a logical way to go about it except I kind of feel like i'd be cutting my profitability short doing that. Yes you get all that money every month but you're also going to be capping you're income level every month.

 

The OP brings up an interesting point about taking that money out at the end of each month so it doesn't influence you're trade size and you don't get in over you're head. Part of me agrees with this logic (I can see where it could cause problems) and part of me disagrees. I disagree from the standpoint that if you are trading 1 lot per X amount of money then your $ risk per lot is 1Y. If you increase your account size to 2X then you can trade 2 lots with still only risking that initial 1Y. So be it 10 lots on 100k or 1 lot on 10k i'm still risking the same $ per lot. That makes me think why not trade bigger size as your account grows? Its the same $ risk is it not?

 

I'm on the fence personally - lets put it this way - i'm not in a position to have any of the problems with big size or paying myself a big salary each month right now. But it is something that I am already starting to ponder.

 

Either way - great thread, great points, great discussion. Keep it up!

[TradeRunner 10]

How about trading behind your own limited company?

 

This to me would be one of the advantages of trading for a living by controlling the amount of money you receive as salary.

 

From a UK tax perspective...

 

If Inland Revenue viewed your trading income as salary then you would pay 40% tax on any salary above approx £35000 + national insurance. If they viewed your profits as capital gains them anything earned over £9600 would be liable to 40% tax. That's pretty steep!

 

Running your trading business as a limited company would mean you have more flexibility and control over how much tax you pay.

 

I'm not sure how this translates to the US tax system or any other country but I would guess that goverments tends to screw employees (because they don't have much choice) and encourage businesses (by giving them more generous tax breaks) because they create jobs ....

[TradeRunner 10]

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Edited January 19, 2009 by TradeRunner
double post

[CandleWhisperer 10]

  daedalus said:

...The OP brings up an interesting point about taking that money out at the end of each month so it doesn't influence you're trade size and you don't get in over you're head. Part of me agrees with this logic (I can see where it could cause problems) and part of me disagrees. I disagree from the standpoint that if you are trading 1 lot per X amount of money then your $ risk per lot is 1Y. If you increase your account size to 2X then you can trade 2 lots with still only risking that initial 1Y. So be it 10 lots on 100k or 1 lot on 10k i'm still risking the same $ per lot. That makes me think why not trade bigger size as your account grows? Its the same $ risk is it not?.....

 

 

Thank you for the response. I am shocked at the lack of them for such an important topic.

 

Anyway, the point had to do more with a trader's psychological make up than a strict risk/reward equation. It is possible to increase position size in such a way as to keep the r/r the same as you pointed out, but the accompanying psychological change doesn't necessarily stay the same. The idea of trading 10 contract in the es may effect a trader simply because the contract size is 10 rather than 2 even if the account is 10xs bigger when trading the 10.

[daedalus 10]

^^ Very understandable. I'm sure it would effect me in that same way.

[Hlm 10]

I have been through a few, but here is the basics of my current structure which may change in the near future due to OPM.

 

Broker Accounts: Amount required to cover multiple time frames (positions maxed) plus my potential statistical draw down for two weeks.

 

Bank Account (specifically for trading): Revenue is moved over from my broker accounts every two weeks. If a loss occurs, the account is replenished and triggers a detailed personal audit to ensure that it has statistical merit. All trading expenses are paid from this account. Decisions to increase or decrease size is based off of this account.

 

Personal Account: As long as my trading bank account (not broker accounts) is in good standing and above required figures, I am paid every two weeks. Adjustments are made quarterly if needed.

 

As always, this most likley will be different due to ones strategy, goals, funds, personality, etc. The one thing that should not change is a well thought out plan/system with defined rules.