Investing Your Tax Refund For A 1,000% Return

Mauna Kea, HawaiiIn the article, “How To Get Over Your Fear Of Investing” I mention how your risk tolerance decreases the more capital you accumulate. When you were rocking a $100,000 net worth as a 30-year-old, you had no problems investing 30% of your net worth in your employer’s promising stock. But now that you’re 50 and less enthusiastic about working for decades more, investing 30% of your $1 million nest egg doesn’t seem like a good idea.

The tax refund actually provides for a great opportunity to swing for the ROI fences every single year, no matter your age or net worth. Given that the average tax refund is only around $3,000, many people just blow it on material things like shoes, clothing, gadgets, and LED TVs. It’s not necessarily a bad idea to use your “bonus” money to buy something tangible: any of these things can provide solid utility until next year’s refund. Alternatively, going the traditional route of paying down debt or increasing a depleted emergency fund is also fine, just terribly unexciting.

Now if your tax refund was a whopping $100,000, I’m willing to be that your approach to spending it would be substantially different! Some would unwisely go out and spend the money instantly on a luxury automobile; most, however, would probably give considerably more thought to the question of how to deploy such a large sum. Things like paying down a mortgage, investing for retirement, buying a home, putting money away for a child’s education, or helping out a loved one all come to mind with this level of money. But most people will never receive such a large refund, so the point is moot (sorry!). The $100k refund simply provides a mental exercise that highlights how our spending habits shift when dealing with different levels of money.

Although a tax refund often feels like a nice windfall each year, it’s actually been your money all along. And how boring it is to just invest that money (now that you finally have it) in the stock market for a potential 8% historical return. Of course if you’ve got revolving credit card debt with interest rates in the teens or higher, certainly give that a whack. But as a Financial Samurai reader, I’m thinking you guys are savvier than this.

Is “Fake It ‘Til You Make It” The Reason We’re So Screwed?

Faking It Until You Make It Leads To Being ScrewedI remember when Milli Vanilli got busted for lip synching. I was so sad. They made their millions, garnered tremendous fame, and just like that, were humiliated off the stage forever. They probably would have kept selling albums for years if they hadn’t got caught, and Rob Pilatus may have never died from a drug overdose. After that incident, however, everybody started watching singers and music videos with a very close eye. No music fan ever wanted to get duped like that again.

But there are fakers hidden everywhere in the public eye, not just in the music business. It’s peculiar that so many fakers feel no guilt pulling the wool over people’s eyes when livelihoods and finances are at stake. I’m constantly surprised with how much nonsense there is online. I’m not talking about mind-numbing Buzzfeed articles. I’m talking about articles that pop up in search results when you’re looking for useful information on the web. What appears like helpful content written by niche experts is often plagiarized or written in a hurry by a random person with no relevant experience.

WHAT ARE YOU REALLY READING?

The online publishing ecosystem is fascinating. I’ve thought long and hard about making Financial Samurai into a magazine-type site with 10 different staff writers pumping out news and factoids. In order to grow readership, I’d direct my writers to write in as plain vanilla as possible so as to not offend anybody. There’s a reason why vanilla is the most popular flavor in the world.

In my quest to become a Vanilla Online Media Tycoon (VOMIT), I’d sit back and shake my head at all those starving writers pouring heart and soul into their craft. My fellow VOMITs and I would clink our glasses of Macallan ’46 together as we laugh at the poor schmucks who toil for hours over original pieces based on hard-won experience, yet receive no traffic…and therefore, no money.

Of course I’m joking about this evil plan. I would feel too guilty, churning out content about things I know nothing about in a greedy quest to make millions from the internet. That being said, it’s always good to see the other side of the story, so recently I had a nice conversation with a real VOMIT who is just killing it online. He said I could share his thoughts if I kept him anonymous. So read on what follows, if you’re prepared to handle the truth.

Why You Should Really Do Your Own Taxes

1040Every year I spend $49.99 to buy the H&R Block Premium Edition to do my own taxes. And every year someone scoffs at me for spending a couple hours of my life learning, understanding, and optimizing my finances to pay the least amount of taxes legally possible. A part-time tax preparer who’ll make $375 doing my taxes isn’t going to know more than me. A full-time tax preparer with a CPA who charges $1,000 might be worth it. But after doing my taxes for 12 years, the only way the CPA will save me more money is by cheating. There is no magic that only tax accountants can use to reduce taxes.

The best way to learn about something is to do it yourself. Remember when you were growing up and your mom taught you how to do a math problem, only for you to completely forget how to do it come test time? How about reading all those SAT test prep books and then getting a mediocre score because you didn’t take enough sample tests? Being instructed on how to do something is helpful, but getting in the weeds and solving different variations of the problem over and over again is the only way to achieve mastery. The same concept goes for understanding and minimizing your taxes.

Dealing With The Guilt-Joy Of Raising Taxes On The Rich

view-from-aboveWatch out, rich people: I’m coming for you! A preliminary run-through of my 2013 taxes has revealed that I now earn a low enough amount to no longer qualify as a prime tax hike target. And yet, as sad as this apparent reduction of my own productivity may be, I still possess a wondrous power: the ability to vote to raise taxes on others to benefit me, me, ME!

It’s quite amazing, really; first we learn that the average 401(k) balance surpasses $100,000 for over 50 million working Americans, then we find out that the national unemployment rate has dropped to 6.6%, and now this? Drinks for all, paid for by my rich blogging buddies next time we meet.

I think it’s everybody’s duty to pay taxes. A flat tax above a certain minimum income level of comfort (MILC™) for individuals and families sounds like a fair approach, right? Make 10x more than someone, pay 10x more in taxes than someone. Stuck below the MILC? Don’t worry about income taxes, we got you; just pay sales tax, and FICA tax for your own good (assuming you have a job). We all enjoy the same benefits of military protection, libraries, a functioning judicial system, the NSA, and manicured public parks; it’s only right that we should all help pay for them.

This post offers a little bit of honest introspection as to how I’ve felt going from paying no income taxes as a student, to paying a boatload of income taxes as a worker bee, to once again paying not so much at all. I now find myself assailed by an odd sense of guilt; while my own tax liability has decreased, I still have the ability to potentially vote for legislation to increase someone else’s taxes in order to benefit myself and my family. Deep in my heart I know that ganging up on any one group is wrong, even if the law allows it. But hey— if I don’t pick up the $100 bill lying on the street, someone else will!

As a reminder, the ideal (adjusted gross) income for maximum happiness is $200,000 because:

  • Regardless of how high the cost of living may be in your neck of the woods, anything over $200,000 is a target for tax hikes, period.
  • The marginal federal tax rate is 28%– a reasonable number, even if you add a state tax rate of 8% to your wages.
  • You don’t have to pay the new Net Investment Tax of 3.8% for every dollar you make over $200,000 as an individual, or $250,000 as a couple (why 1+1 = 1.25, I don’t know!).
  • You still get to max out your 401(k) and save plenty in after-tax money at $200,000.
  • You get to be a part of the middle class, which is the best class in society.
  • You can vote to raise other people’s taxes without having to pay more yourself.

Credit Card Approval Standards On The Rise: Excellent Credit Scores Still Get Denied

Deny ButtonOne reader with a 805 credit score e-mailed me saying he recently got denied for the Barclaycard Arrival World MasterCard. As part of the FICO Open Score Access initiative, he got his credit score in the mail plus the nice rejection letter. The reason for the rejection was a high debt-to-income ratio.

The credit score is supposed to encapsulate everything from outstanding debt, number of credit lines open, and debt to income levels, yet here he is being denied a credit card with just a $3,000 monthly credit limit to start! If someone with a credit score that’s in the top 10% can’t get a credit card, what hope is there for the other 90%? Let’s find out more about his story.

The reader used to make about $200,000 a year for the past three years, but is currently unemployed and earns $40,000 a year from his various passive income streams + his $1,800 a month unemployment checks. He’s only got two other credit cards and always pays them off in full. The problem with his financial profile is that he has a $800,000 mortgage on a $40,000 income. With the industry standard of a mortgage amount no more than 5X your annual income at existing rates, it’s easy to see why a 20X ratio would cause concern.

But here’s the kicker. The reader also has $500,000 in cash, CDs, and liquid after-tax stock investments! Surely if you were the credit card company you’d be OK with approving a potential lifelong client even if he does have a high debt-to-income ratio of 20:1. What’s missing here is the calculation of debt-to-total-assets

How To Get Paid And Promoted Faster: Is Your Nose Brown Enough To Get Ahead?

Great Redwood TreeI’ve written extensively about how to get laid off in order to get a severance package and ultimately live a more purposeful life. While learning how to get laid off is a fantastic way to learn how to never get laid off, in this post I’d like to share some direct advice on how to excel in the workplace so you can make more money, get promoted faster, and reach financial independence sooner.

So, what are my credentials for advising people how to get ahead in the workplace? I’ll sum it up this way: at the age of 27, I made Vice President at my Wall Street firm from a non-target, public school with no connections.

The VP title is generally reserved for people with at least eight years of experience out of college, or with at least three years of experience after attending business school. I had just finished up my fifth year out of college and my first year of part-time business school before getting the nod. The percentage of students getting into an institutional front office position at a bulge bracket firm like Goldman, Morgan, and Merrill from a non-target school is probably less than 1%. Of that 1%, less than 25% make it directly to Associate. And of the 25%, less than 40% make it to Vice President after three years. Basically, if you can get your foot in the door, I estimate there’s only about a 10% chance of ever becoming VP.

Most people don’t last beyond three years on The Street, one of the most unforgiving industries on the planet. It’s an environment where your competitors are not only smart and ruthless, they’re also willing to consistently work insane hours to get ahead. The pressure is unbelievable. In fact, the longevity of a Wall Street employee is very similar to that of an NFL player. Like a halfback who’s plowed through a career’s worth of goal line surges, my “legs” finally gave out. I was done after 13 years.

This is the environment in which I learned five key lessons applicable to all industries I’ll share with you here. I’m pretty sure if you take my advice to heart, within a year you’ll see a noticeable difference. Like making more money, it’s up to you to decide whether you want to put in the effort or not.