Paying Yourself - Trading As Primary Source of Income

[abuguapo 10]

For anyone who already trades for a living:

 

It seems the more specific the MM topic, the harder it is to find any information on it.

 

I was wondering if any of those who trade for a living would care to share anything on the topic of paying yourself ie. trading for a living while paying yourself on a weekly basis/ bi weekly basis.

 

How do you take profits? i.e. not "how do you technically take profits from a trade on the chart" but "how do you take profits to put in your checking account after you've won?"

 

Do you use a formula that gives you a percentage and then kick some back to your trading account? What accounting do you use to pay yourself - to pay your mortgage or your car payment?

 

Philosophy, practical implementation, any reads you recommend?...anything. And if you'd care to mention; input on minimum size of account you think necessary to maintain while at the same time being able to make enough to pay yourself as you trade.

 

 

Any help is greatly appreciated,

 

gg

[brownsfan019 17]

I'm sure others might have complex calculations to do this, but basically what I do is:

 

1) Take enough to pay the regular bills + cushion = checking accounts

 

2) Figure out what I want to keep in the trading accounts

 

3) Rest goes into a mix of savings/money markets/etc

If the need arises, I can quickly wire money to and from any account.

[abuguapo 10]

Thanks Brownsfan,

 

And I guess you've captured the essence of my question. So you are figuring out your monetary requirements - on a say bi-weekly (monthly?) basis?

 

In other words you don't have set % you abide by? I.e...I always give myself 30%...the trading account gets 30%...and 30%+ to retirement?

 

Is that because you don't know how much you'll make on a given month coupled with fluctuating monthly bill requirement?

 

In short - you don't have set rules because you can't (no one can) predict how much they are going to pull in - not to mention you can be down - a given month?

 

gg

[Spydertrader 10]

For anyone who already trades for a living:

 

How do you take profits?

 

At the end of each month, I withdraw profits from all of my trading accounts leaving enough money in each account to meet the margin requirements of 40 ES contracts (my current [self-imposed] size limit for any one trade). I move these excess funds into a savings account until the end of the year. At that time, I move a dollar amount equal to my yearly expenses (plus an upward adjustment due to inflation or changes in lifestyle), and my estiamted remaining tax liability, into my checking account. As a result, I 'live' in the current year off profits earned in the previous year.

 

When I first started trading, I'd perform the same functions - but on a weekly basis - as my top priorty (at that time) was growing each trading account. As the accounts grew, I transitioned to a monthly budget, until finally, I settled on a yearly budget with a monthly withdraw.

 

The most time consuming part of this whole process involves the creation of a monthly / yearly budget. Your checkbook log (combined with credit card statements) helps with the broad strokes, but you'll want to be as detail oriented as possible when it comes to the budgeting process. However, when finished, you'll have the added benefit of knowing exactly where all your money went - and whether (or not) you want to continue spending in those specific areas in the future. I found the entire process quite eye-opening. I'm confident you will as well.

 

Lastly, always, always, always make sure you set aside a cut for Uncle Sam (and / or whatever governmently entity currently has its hands in your pockets). Seek (and pay for) top of the line expert legal advice when it comes to your taxes (preferably someone who specializes in trader taxes). This is one area where you do not ever want to cut corners.

 

Good trading to you.

 

- Spydertrader

[brownsfan019 17]

Thanks Brownsfan,

 

And I guess you've captured the essence of my question. So you are figuring out your monetary requirements - on a say bi-weekly (monthly?) basis?

 

In other words you don't have set % you abide by? I.e...I always give myself 30%...the trading account gets 30%...and 30%+ to retirement?

 

Is that because you don't know how much you'll make on a given month coupled with fluctuating monthly bill requirement?

 

In short - you don't have set rules because you can't (no one can) predict how much they are going to pull in - not to mention you can be down - a given month?

 

gg

 

It fluctuates b/c I simply don't know what the results will be, but usually check each month.

[DugDug 10]

Similar to Spydertrader.

Key to remember is that this is a business.

my advice is to initially - maintain a fairly simple lifestyle initially, keep way more than you need in a trading account (inefficient maybe but you dont want to get stuck - business risk is something a lot of people forget about - you must remember to pay the bills, especially the tax man - unless you are in the Caymans, BVI (or risking it):haha:)

Remain conservative in the trading and shuffle money off elsewhere to invest in some other traders. Which means you will probably never be a person who turns $2000 into millions. But it will (I hope) mean you never go broke. I would prefer to use more leverage in the trading account whilst trying to keep the risk similar.

Ensure you keep good records - you dont want to have to spend weeks each year trying to work your book keeping out. Keep your personal and business spending separate - makes it easier.

Depending on the amounts you have and the area you are in - corporatise yourself. taxes are usually lower. Of in the UK use CFDs (tax free)

A lot of this depends on how much you have to play with, and the lifestyle needs of family?

 

Or just put everything into trading and go for it. Either way you will either never need to worry about it again as you will either be back working for someone, or rolling in it.

Edited December 15, 2009 by DugDug

[TradeRunner 10]

Of in the UK use CFDs (tax free).

 

CFDs - No stamp duty, but there is capital gains tax on profit.

Spread betting is tax free.

[abuguapo 10]

Thanks (both) SpyderTrader and DugDug for the thoughtful responses - I'll take all your suggestions into account in forming my own strategy.

 

Thanks Brownsfan for keeping it real.

 

Does anyone have any suggestions about good resources on the topic? Anybody read anything that speaks to this specific issue?

 

Cheers,

 

gg

[brownsfan019 17]

Thanks (both) SpyderTrader and DugDug for the thoughtful responses - I'll take all your suggestions into account in forming my own strategy.

 

Thanks Brownsfan for keeping it real.

 

Does anyone have any suggestions about good resources on the topic? Anybody read anything that speaks to this specific issue?

 

Cheers,

 

gg

 

It's hard to follow a guide b/c it depends on your very specific situation. If you need to pull money weekly that's different than someone that can let it all just accumulate. It's also dependent on your profitability - are you making profits most days or not?

 

It's just a very personal thing and no one can say here's how to do it exactly.

 

My only general suggestion is that you shouldn't keep too much excess sitting in your futures accounts that earn zero interest. Keep enough to cover your trading but after that, get it out and into something earning interest. I realize bank accounts aren't paying much, but they are paying something. And as it builds and depending on your situation, you might want to start learning about tax-free bonds if your state has an income tax.

[daedalus 10]

When I first started making money consistently I started paying myself 10% a week of the profits because I wanted to grow my accounts primarily. But at the same time, you want to pay yourself something to make it all worth it.

 

For years while I learned I never paid myself a salary (even when I started to make money on occasion) and all I can say is that it wears you down psychologically because you never get any reward for your work. So some type of small compensation in the beginning is recommended if for no other reason that being able to go out to a restaurant at the end of the week and know that the markets are picking up the bill this time.

 

Personally i'm really scared of ever not being able to pay bills, etc on time so i've done a couple things...

 

As soon as you can afford to put money away into a "oh shit" savings fund to cover the expenses that can pop up at any time. I try to add to this fund every time I take money out of my trading account and continually grow it because I like having that added buffer in my life. Makes me feel all warm and fuzzy at night knowing that I have a backup should something bad happen in the markets, etc where I can't trade for awhile.

 

Beyond that, I budget yearly on what expenses i'm going to have (car payment, insurance, cell phone, rent/mortgage, food, etc) and put this money away ahead of time. Much like others in this thread I put money away towards these expenses each month FOR THE NEXT YEAR.

 

There is something for me mentally that having all of my living expenses paid for one year out that reduces stress on me and my trading. I don't like monthly bills so I pay all insurance/rent/cell phone bills in lump sums once a year. Upsides are this - I never have to worry about paying bills during the year, and a lot of times with rent or insurance you can get discounts for paying ahead of time. So it saves money as well. Most utility companies allow you to have a credit balance in your account (just as if you were to have overpaid on a bill) so I just overpay 13x's on my first bill of the month (one amount for each month + 1 extra buffer month) and am done with it. Of course you can still check the outstanding balance each month on your statements but you don't have to worry about pulling funds out of X, Y, Z, wiring them to A, and then bill paying them to B all the time.

 

Just a couple thoughts.

 

Cheers!

[robertm 10]

A lot of it will depend on your market/time frame. I know a lot of "FX Hero's" who became full time FX traders late last year. Most of them are back in jobs & haven't made money for 6 months +, markets change, sure you can adapt but some conditions are better than others for pulling in the $$'s.

 

If you rely on big longer term wins on equities then mid 2007-mid 2009 you probably didn't make much. It'll take years for those trades to gather momentum as well. Think of it like being a commission only salesperson working the big end of town. It may take years to close a deal, but then you get a big thumping commission check all in one hit.

 

Markets move in cycles, ensure you understand the cycles of the markets you want to trade (trend, congestion, range, volatility, duration), and what time frame to trade them on. Becoming a scalper isn't necessarily the path to full time trading, and certainly isn't everybody's cup of tea.

 

My own preference is to leave all my money in my trading float unless I need to use it (which doesn't mean it's sitting at a brokers). Risk management takes care of the rest, and living within my means (or as a mentor once put it, sometimes you dine on noodles, other times you dine out, the market will tell you which and when).

 

The more you have to lose, the more conservative you should be.

[The Henk 10]

Paying everything once a per year is a fantastic idea! I love the fact that by doing so you dont have to feel the stress of having to earn money each month for bills etc.

 

Ill take that advice!

 

Thank you!!! :cheers:

 

 

When I first started making money consistently I started paying myself 10% a week of the profits because I wanted to grow my accounts primarily. But at the same time, you want to pay yourself something to make it all worth it.

 

For years while I learned I never paid myself a salary (even when I started to make money on occasion) and all I can say is that it wears you down psychologically because you never get any reward for your work. So some type of small compensation in the beginning is recommended if for no other reason that being able to go out to a restaurant at the end of the week and know that the markets are picking up the bill this time.

 

Personally i'm really scared of ever not being able to pay bills, etc on time so i've done a couple things...

 

As soon as you can afford to put money away into a "oh shit" savings fund to cover the expenses that can pop up at any time. I try to add to this fund every time I take money out of my trading account and continually grow it because I like having that added buffer in my life. Makes me feel all warm and fuzzy at night knowing that I have a backup should something bad happen in the markets, etc where I can't trade for awhile.

 

Beyond that, I budget yearly on what expenses i'm going to have (car payment, insurance, cell phone, rent/mortgage, food, etc) and put this money away ahead of time. Much like others in this thread I put money away towards these expenses each month FOR THE NEXT YEAR.

 

There is something for me mentally that having all of my living expenses paid for one year out that reduces stress on me and my trading. I don't like monthly bills so I pay all insurance/rent/cell phone bills in lump sums once a year. Upsides are this - I never have to worry about paying bills during the year, and a lot of times with rent or insurance you can get discounts for paying ahead of time. So it saves money as well. Most utility companies allow you to have a credit balance in your account (just as if you were to have overpaid on a bill) so I just overpay 13x's on my first bill of the month (one amount for each month + 1 extra buffer month) and am done with it. Of course you can still check the outstanding balance each month on your statements but you don't have to worry about pulling funds out of X, Y, Z, wiring them to A, and then bill paying them to B all the time.

 

Just a couple thoughts.

 

Cheers!