Financial Samurai

The best CD interest rate I can find is 2.3% for a 7-year CD offered by Bank of America at the time of this post (5/7/12).  2.3% is pretty weak, but the next best rate I’ve seen from a known institution is around 1.85% for the same duration.

I’m seeking yield to further enhance my passive income streams for financial freedom (highlights the various income streams).  My current CD monthly interest income is around $2,800 a month and I’ve got some liquid cash that’s sitting in a money market account earning 0.2% interest.  Let’s say that amount is $225,000 in new money to provide more clarity to the numbers.

Having $225,000 in a money market earning 0.2% interest is a lousy $400 a YEAR, which means I can’t even buy an overpriced iPad like millions of crazy rich folks are buying nowadays!  The amount of money people have to spend on material things makes me so bullish about the economy.  People don’t spend money they don’t have, just like I can’t drive a Ferrari Italia that I don’t own.

Everyday I keep my money in a pathetic money market is another day I’m missing out on free money.  As such, I have been focused for the past couple of weeks on searching for ideal products to invest my money.

Narrowing the investment choices down to the following:

1) 2.3% 7-year CD with Bank of America.  Guaranteed estimated return $5,175 a year / $431 a month and bringing my CD passive income to $3,243 a month.

2) 6-10% potential returns via peer to peer / social lending. Non guaranteed $13,500-$22,500 a year / $1,125-$1,875 a month.  Have $50K ear-marked to this stream if and when the partnership comes through.  But, could invest more if things work out well.

3) Structured CDs, with a guaranteed rate of 2% for the first two years and LIBOR + 1.45%.  $4,500+ a year / $375+ a month.

4) Online trading via E-Trade or ScottTrade.  No guarantees.  + or – $40,000 a year.

5) Private equity investments.  I’ve received a couple offers to invest in some start-ups in the Bay Area.  70% chance for a -100%, up to a 5-10% chance for a 500% return.

6) Rental property.  Borrow at 3%, earn a rental yield of 8%.  Estimated cash on cash return is 5% therefore $10,000 a year / $833 a month.  Return on principal based on potential appreciation is different.  Problem with rental property is that it is a PITA compared to online income or CDs.

7) Structured Notes.  Similar to Structured CDs, but not FDIC guaranteed, and different return profile.

Not too narrow a list huh?  The goal is to raise the $6,500 gross a month passive income to around $15,000 a month in order to have a comfortable lifestyle enough to take care of a family of four.  The other goal is to have money work for me so I can focus on my business.  The strictly passive income goal (excludes online and all other income) may change over time, but for now, $15,000 a month is what I’m shooting for.

If possible, please don’t get distracted by the capital amount discussed and if it helps, use whatever capital amount that makes you feel comfortable.  The discussion focus should be on understanding structured products and feedback on a couple choices below.

THE FOCUS ON STRUCTURED PRODUCTS AS AN INVESTMENT OPTION Read more…

Eddie from Finance Fox writes an intriguing post entitled, “Money Will Change You“.  I salivate at the picture he uses because it is my dream to one day never have to fly commercial again!  Having a matching Aston Martin waiting for me with Kate Upton in Monaco wouldn’t hurt either!

When Eddie was in serious debt, he writes, “My mood sucked. I was edgy, worrisome, desperate and a nut case. Our moods are strongly tied to our earnings. I know this first hand.”  Who can blame him, given not being able to do what you want due to a lack of money, or worse yet, doing things you don’t want to do because you need the money is a horrible way to live.

Thankfully, Eddie now has three income streams: 1) A commercial cleaning business, 2) A full-time job, and 3) Blogging income.  Rock on!  No longer does he suffer from money anxiety.  Instead, he describes money as a “high“, a type of “laughing gas” if you will that lets him breathe easier and not be in constant worry.  In a large way, I agree with him.  Sometimes I pinch myself when I realize that I no longer have to work at McDonald’s for $3.25 an hour, or work at all for that matter!

WHAT HAPPENS IF YOU MAKE MONEY TOO QUICKLY? Read more…

What’s the one thing I’ve told you guys to study in the markets if nothing else?  Forget?  Well, let me remind you.  The one thing you should always pay attention to is the US government long bond yield eg the 10-year US Treasury yield.  See chart below and take a moment to study it.

From this simple chart, you will understand:

* What the risk free rate of return is.

* Expectations on interest rates.

* Expectations on inflation.

* Borrowing/credit costs.

* Risk aversion, or lack thereof.

* The health of the world.

That’s right.  By understanding what the latest 10-year treasury means, you will be able to save a lot of money, make a lot of money, and stop being an bozo who just follows the heard and listens to whatever people tell you to do.  Think for yourself!  

The tone of the article was inspired by a response from a “mortgage specialist” who wrote a book on mortgages.  I received an e-mail from her asking me to promote her book.  I congratulated her and mentioned I had just refinanced a 5/1 ARM at 2.625%.   Instead of responding in a normal way, she replied, “Oh, no! You can’t refinance to a fixed rate???? That sucks!”  I couldn’t be more disappointed with her response and her subsequent reasoning.  I fear for the public if people are reading her books.  Refinancing to a 5/1 ARM was my choice.

I’m dismayed how people are paying more in mortgage interest expense than they have to.  A large part of it is because the media and mortgage officers continue to push people to get as long a fixed rate mortgage as possible.  In America, the longest conforming standard is 30 years.

Borrowing on the long end is a suboptimal use of funds.  The people who are pushing you into 30-year fixed loans: 1) Are not economics majors or bond traders, but journalists, and/or 2) Have a vested interest in you borrowing as long as possible so they can make as much money off you as possible.  The higher the rate, the easier it is for them to earn a wider spread.

WHY 30 YEAR FIXED MORTGAGE LOANS ARE A WASTE OF MONEY Read more…

At long last, my latest principal residence mortgage refinance is now closed!  Things were looking very dicey towards the end after PG&E threw a couple grenades my way that hit my credit score by ~100 points due to a $8 non-payment from three years ago by my tenants.  Alas, the Humvee was able to withstand the blast from corporate evil and make it back to home base!

The mortgage loan refinance started on January 20, 2012 when I overheard a colleague say he just locked a 5/1 ARM for only 2.75%.  Ehh?  I had just refinanced my own 5/1 ARM in the fall of 2011 to 3.125% from 3.625% and I wanted to dance the mambo too!  I incredulously gave Citibank a call to see if I could get the same offer as my colleague with all fees baked into the price and they said absolutely!  In fact, the very next day, my banker called me to say that they could give me 2.625% with all fees included.  Yeah baby, yeah!

All giddy and bullish, of course I take a moment to thank our savior, Ben Bernanke and order some extra hamachi sashimi for lunch to help stimulate the local economy.  If my refinance goes through, I’ll be saving several hundred dollars more a month in interest, and pay $100 more a month in principal.  Who doesn’t love free money for doing “nothing”?  So long as I continued to pay homage to BenGenie, I knew the rain would keep pouring.

Unfortunately, one week I forgot to pray to the heavens and BenGenie decided to toy with fate and punish me for my insolence.

THE MORTGAGE LOAN REFINANCE SAGA Read more…

“Why work if I make $1,800 a month in unemployment benefits?” was a question asked to me by someone I met in the hot tub last year.  At 28, Julie has been on unemployment for over 52 weeks.  Her old job was as a designer for Billabong USA.  During her time off, she’s been selling some of her paintings via Facebook where she posts her portfolio.  Of course, all her art earnings are not reported, otherwise, her $450 weekly benefits will start getting garnished after the first $25 dollars of income earned.

We’ve stayed in touch over the year and she’s been generous enough to give me some insights into the unemployment process.  She’s planning a two month trip to Jamaica with her friends, and she wants to do the right thing by suspending her unemployment benefits for that time period because she won’t be looking for work.

Despite her good intentions, she could not get through to the California Employment Development Department (edd.ca.gov) after calling 58 times.  That’s right, 58 times!!

So guess what?  She’s going to Jamaica for two months and will have her friend back in California fill out her bi-weekly continued claim form.  One of the questions she will have to answer is, “Did you look for work during the week?“  She will answer, “No.”, but undoubtedly, her unemployment benefits will still hit her Bank of America debit card like clockwork.

WOULD YOU WORK IF YOUR UNEMPLOYMENT BENEFITS EQUALED HALF YOUR EARNINGS? Read more…

Despite mentally writing off the value of my Social Security benefits, in the bottom drawer in the way back of my cob-webbed mind, I know it will be there to fund my early bird special seafood buffets when I’m retired.  Sure, the eligibility age for withdrawal might rise from 62 to 67, but we’re all hopefully living longer too.  Besides, who really needs Social Security benefits if we’re saving over half our after-tax income for some many years anyway?  Don’t get greedy now!

The Middle Class of America has given me a tremendous boost in conviction that Social Security benefits will be around for all, forever.  If you read the comments on my post, “Disadvantages of The ROTH IRA: Not All Is What It Seems“, people have come out in force defending the virtues of the ROTH IRA, even though I clearly telegraph why we should not be contributing to a ROTH IRA if we haven’t maxed out their traditional IRA and 401K yet.  To pay more in taxes to an inept and corrupt government that shirks on its promises is an atrocity.

We should ignore the fact that people comment on things even if they know they are wrong, to justify why they did something to make them feel better.  Instead, we should take comments at face value.  Those who support the ROTH IRA most likely have opened a ROTH IRA.  Because they’ve opened a ROTH IRA, they believe that the government will do better with their money than they can on their own.  Remember, only middle class people are allowed to contribute to a ROTH.  Higher earners be damned!

As you know, I have an open mind and always look at both sides of each debate.  My conclusion from the comments in my ROTH IRA post is this: Because so many people support the ROTH IRA, the people of America believe in the efficiency of the government and the fact that Social Security will be fully guaranteed at the age of eligibility.  If people did not believe the government would make due on its promises to fully pay for Social Security, there’s no way people would give the government more of their money to manage!

People Vote With Their Pocket Books  Read more…