Tuesday, June 14, 2005

The Big Honking Guide to What to Do With Your Poker Loot

I've finally finished up a big ol' project that I'd been working on, plus banged out a lot of monkey work for the day job. Which means it's time for another big honking long-winded post. And guess what? It's only tangentially related to poker. Boo ya.

The Big Honking Guide to What to Do With Your Poker Loot

If you work hard enough at poker, at some point you'll start making money. No, really. If you keep moving up in limits, that profit will grow larger. At a certain point, your profits will exceed the bankroll you need to play the limit you're at, thus posing a nice quandry: what to do with your poker winnings?

(Couple of quick caveats. This obviously applies to money management in general and not just poker profits. I'm also just a normal monkey who has experience with all of the stuff below. I'm not a financial advisor, though, or a professional of any sort, so take it all with the proverbial grain o' salt.)

Letting money sit in your Neteller account is -EV. That's completely dead money that's doing nothing for you. So the first step is to decide on what you absolutely need, as far as your poker bankroll, and withdraw the rest from Neteller.

Once that's done, you basically have two choices:

1) Spend the poker profits
2) Invest the poker profits

I won't dwell long on #1, as it's pretty self-explanatory. There's a lot to be said for buying loot or paying for a vacation with poker profits. Making the results of all of that grinding and poker playing tangible is a really, really good feeling. I encourage everyone to do it at some point. That said, most rich people got rich from saving and investing, not from spending money.

As far as investing, if you do absolutely nothing else, strongly consider opening an Orange Savings account from ING Direct. If you think you might need access to poker winnings to replenish your bankroll or just want to keep it completely liquid in the event of a financial crisis of any sort, an Orange Savings account is a great choice. It's all electronic, FDIC insured, no annual fees or minimum required balance, and you can open tan account with as little as $100. They offer a variable 3% annual percentage yield, which is much better than anything your bank is currently offering you on your savings account, and likely better than most money market accounts. The Orange account is linked to your existing checking account and you can move funds back and forth easily, with tranfers usually being completed with 2 business days.

A quick note about savings. You'll see different numbers tossed about, but you generally want to have 6 months-12 months of living expenses in liquid traditional savings. Anything more than that is dead money. No, really. In the best case scenario, any interest you earn from a savings account does little more than keep pace with inflation. So yes, indeed, saving every penny you can is a very, very good idea, but that logic doesn't extend to simply dumping those pennies into a savings or money market account. You're losing money by dumping too much cash into your savings account. What's worse is that due to the lovely magic of compounded growth, you actually lose more money the longer you put off investing in other vehicles with a higher rate of return.

If you're willing to commit to more long-term investments, there are plenty of choices.

  • Max out your 401(k) contribution: If you have a day job and your employer offers matching 401(k) contributions, you should strongly consider increasing/maxing out your contribution. If your employer is willing to hand you free money, which is put into one of the best investment vehicles available, you should take it, and take as much of it as you possibly can. Use your poker profits to make up the gap in your paycheck(s) each month that results from increasing your contribution.

  • Set up a variable universal life insurance policy: Not everyone is aware of these but they're pretty attractive investment options. Variable universal life insurance is exactly that, life insurance, but with a twist. You can invest your policy’s cash value in a wide range of investment options, including stocks, bonds, and money markets. Your policy’s cash value will increase or decrease depending on your contributions and the performance of your investment choices. That said, no matter the performance of the investment choices it still pays out the base amount for life insurance, in the unfortunate event that you die. What's even better is that it's tax-deferred and there are no penalties for early withdrawals (unlike IRAs where you're hit with early withdrawal penalties). Setting up the policy is pretty easy and almost all major home/auto insurers also offer variable universal life insurance policies.

  • Invest in index funds: If you want to invest in stocks but are afraid of buying individual equities, index funds are a great choice, especially Vanguard Index Funds. Index funds essentially try to mirror the results of larger indexes and groups of stocks or bonds. Index fund managers basically buy all of the individual equities in a target index or attempt to replicate it as closely as possible. They don't use traditional active money management techniques or take large positions on individual stocks or sectors. Indexing is a passive investment approach that emphasizes diversification within a designated market segment and low portfolio trading activity. The goal is to allow you to invest in segments and markets with as little risk and variance as possible. If you want to invest in equities but fear short-term fluctuations, index funds are a great choice, especially ones with very low annual fees such as the Vanguard funds.

  • Invest in mututal funds: Most people know about mutual funds, so I won't spend much time here. Nothing wrong with mutual funds, just keep an eye on the annual fees that you pay, as they vary widely. Mutual funds usually return less than index funds and have higher fees. They also are typically less volatile and more likely to return a positive, smaller return.

  • Invest in individual equities: Again, pretty self-explanatory. Buying individual stocks is much more risky than buying index funds or mutual funds but it also has the highest potential return. Researching and selecting good stocks is a lot of work and even the experts get it wrong, but it's not rocket science, so don't feel intimidated if you've never invested in individual stocks. Like poker, the key is to do your research then be patient.

  • If your poker profits include affiliate money, then you have an extra potential wrinkle to add into the mix. While it depends slightly on your situation, you really should consider setting up a corporation for any affiliate money, even if it doesn't on the surface seem to be worth it.

    You can incorporate in most states for anywhere from $100-$500 dollars, usually on the lower end of that scale. The paperwork is fairly minimal and you can do it all yourself, without the need (and expense) of a lawyer. You'll have to file assorted documents throughout the year with state and federal governments. Don't be fooled, it's sort of a pain in the ass, especially if you don't like paperwork.

    There are however, some nice advantages to incorporating, especially if you make a decent amount of affiliate money and you're the only employee of your corporation. The biggest advantage is that you can set up a SEP IRA (Simplified Employee Pension Plan), which is very similar to a traditional IRA account but one that allows you to constribute up to 25% of the compensation paid to you by the corporation (up to $41,000 or so) in pre-tax dollars in an IRA account. This is a very good thing and can be set up in addition to any existing IRA account you have. It's also very flexible, as you can contribute at any time during the year, any amount you like.

    Aside from a way to invest affiliate profits in a tax-deferred vehicle, incorporating for the affiliate side of things also allows you to potentially write off all sorts of related expenses, such as Internet access, office supplies, computers, furniture, monitors, trips to Vegas, etc.

    If you incoporate as a S Corporation, any profit/loss falls directly to the bottom line of your annual income, so a paper loss from the corporate activites can actually give you a bit of a break on your personal taxes when it's tax time. So having a booming, successful affiliate business isn't exactly a prerequisite to incorporating, although it doesn't hurt.


    Joe Speaker said...

    I took a chunk of poker profit and invested in this little company called Keeping The Wife Happy.

    All it took was a new dining room table and some patio furniture.

    Good prospects for long-term marital bliss.

    Chilly said...

    Can you set up a solo 401(k) if you are a full time pro poker player? If so, thats what I'd do.