Can Cash Be Considered An Investment? Or Is Cash One Big Drag?

Cash As An InvestmentThere’s a debate going on between Charles Schwab, who recently launched its Charles Schwab Intelligent Advisors service (robo-advisor), and robo-advisors, Wealthfront and Betterment about whether Charles Schwab’s robo-advisor service really is free. Because Charles Schwab wrote that it will recommend a 8-30% cash weighting for its clients depending on market conditions, Wealthfront and Betterment have gone on the offensive to point out that investing such a huge weighting in cash is not only costly in a hypothetical market return scenario, but irresponsible as well.

Charles Schwab can make money off its client’s cash by paying practically no interest, and reinvesting the cash in higher income producing investments. In other words, Charles Schwab can act like a bank, with a much lower funding cost. This may come as a surprise to many, but those who know how the finance industry works know it’s a simple spread business. The more money that can be cheaply procured, the more money can be deployed for hopefully higher profits.

It’s good that Wealthfront and Betterment have pointed out how Charles Schwab can actually make money from its free robo-advisory product. But here’s the thing, when was there ever a free lunch? Furthermore, although Wealthfront and Betterment keep their clients fully invested at all times, Betterment still charges a 0.15% – 0.35% fee and Wealthfront charges 0.25% on money after $10,000. There are also underlying ETF fees, averaging ~0.15%, which the client ultimately pays for their robo-advisors to build their portfolios.

Charles Schwab is charging 0.00% in fees for their robo-advisory service. Yes, if Charles Schwab also charged a 0.15% – 0.35% fee to manage money like Wealthfront and Betterment, while recommending 8%-30% cash, that would be odd. But Charles Schwab isn’t.

Let’s not debate which business model is better. Instead, let’s discuss whether cash can be considered an investment through a logical discussion.

The Best Of Financial Samurai eBook: Invest In Your Future And Give Back!

The Best Of Financial Samurai eBookNote: All proceeds after expenses goes to a charity focused on keeping kids off the streets and in the classrooms. Thanks for your support!

After six years of writing over 1,000 personal finance articles, I’ve compiled 35 of the best Financial Samurai articles into one eBook to help you achieve financial independence sooner, rather than later. Financial Samurai is one of the largest personal finance sites with roughly one million organic pageviews a month. I write from experience as someone who received his MBA from UC Berkeley, spent 13 years in the financial world as an Executive Director at a couple major investment banks, and retired from Corporate America at the age of 34 with a very healthy financial nut to focus on living life on my own terms.

For some reason, there is a dearth of personal finance education in our school system. Yet, what is more important than securing our financial future? The goal of the book is to empower you with the knowledge to make better financial decisions. I’ve learned from my money mistakes (e.g. 401k, job, real estate mistakes) to help you avoid the same land mines. Money can be intimidating, but it shouldn’t be so complicated as to cause paralysis.

For long-time readers, the book acts as a terrific reference guide to review some of the most important personal finance topics in one place. You can even purchase the book for a friend or loved one as a gift. For new readers, The Best Of Financial Samurai will teach you new financial concepts and new ways of thinking to solidify your financial future. Many of the articles have been featured in major publications such as The LA Times, Kiplinger, The Wall Street Journal, The Chicago Tribune, and more.

Stocks Versus Real Estate: It Depends On Your Luck

Fortune (fu) in Mandarin

Always Lucky

I’ve written a pretty detailed post about analyzing whether it’s better to invest in stocks or real estate. Check it out if you’re wondering where to put your money. I tried to be unbiased in my analysis, but due to my experience investing in both asset classes for over a decade, I came to the conclusion that real estate was my preferred choice to building wealth.

Once acquired, real estate is pretty straightforward. Maximize rent, minimize expenses, let inflation take its course, and keep tenant turnover to a minimum. You are the King or Queen of your asset. Stocks, on the other hand, require constant re-balancing, trust in management, trust in a fund manager if you buy an active fund, and careful analysis of competitive forces that may hurt your investment. Think about how many great companies have disappeared over the years. This is why I recommend keeping most of your equity investments in low-cost index funds and focus on asset allocation instead.

One commenter pointed out the reason why I prefer real estate is because I was lucky to have bought in San Francisco in 2003. In this post, I’d like to address his beliefs and see if we can all just get lucky with our investments. After all, it’s always better to be lucky than good!

The Financial Benefits Of Joining The Military: Free Education, Great Retirement, And More!

Raising The Flag in Iwo Jima 1945

Raising The Flag in Iwo Jima 1945

The following is a terrific guest post from Spencer, a captain in the US Air Force, who gives a complete overview of the financial benefits of joining the military. Spencer has been publishing on Military Money Manual for the past three years, helping military folks achieve financial independence.

There are many different paths you can take in life. Blue collar, white collar, no collar – the jobs you do often reflect your upbringing. If you come from an affluent community or family, one path you might not have considered is joining the military. Military service has many rewards, some of which can be a free college education, an exciting non-standard job, travel opportunities, and the chance to do some amazing things around the world.

A college degree is a necessity to achieve substantial financial goals, unless you’re the next Mark Zuckerberg or Bill Gates. But college is getting more and more expensive every year, way outpacing inflation. Student loan debt only gets you a negative start on your journey to financial freedom. Alternatively, military service can enable you to get a free college degree, have a job lined up when you graduate, and make money while you go to school.

A Way To Level The Playing Field: Create A Wealth Identification System

dog-tag-hidden-war

Wealth Identification Program

A long time ago, one of my tenants who drove a Range Rover told me, “I need an extra day to pay rent in order to withdraw money from my trust fund. Can you wait?

I thought to myself, you knew today was move-in day when rent would be due, couldn’t you have planned ahead? This is not how a new tenant / landlord relationship should start.

OK, please send in your portion of the rent the following day,” I responded, trying to hide my annoyance. This was the first time anybody ever admitted to having a trust fund. Why was I taking the credit risk when his roommates could have covered for him? Did he really not have an extra couple thousand dollars in his bank to honor our agreement given he drives a $50,000+ car? Was he lying on the rental application when he said he has $20,000 – $30,000 in liquid savings? What the F is going on?

The next morning, his father’s assistant e-mailed me asking how she could deliver the rent for my tenant: Fed Ex or wire? Wow, talk about having everything done for you. At least I got paid by the Bank of Mom & Dad.

This little episode reminded me the world is never going to be fair. There will be people who work their asses off, say all the right things, and still won’t get ahead because they don’t have the finances or connections like the rich.

The rental situation for my place was highly competitive. Had I known my tardy tenant had a trust fund, perhaps I would have rented out the place to someone else who wanted the place just as much, but whose financials were all her own. In the past, I’ve rented an apartment out for way below market because the tenant was a middle school teacher. They get paid way too little for what they do.

As a way to help make the world more equal, I’d like to introduce The Trust Fund And Inheritance Identification Program.

Strengthen Your Brand By Registering Your Name Online

Strengthen your brand online by registering your name

Strengthen your brand!

Do you know what one of the first things an employer does before interviewing a prospective employee? They Google your name to learn all about you. If they happen to forget searching your name beforehand, if you’ve made a good impression, they’ll certainly search afterwards.

Sites like LinkedIn and Facebook flourish because people have decided to provide these sites massive amounts of content for free. Unlike Financial Samurai, where I’m the main creator of content. 

If you don’t have a LinkedIn account and are interested in employment opportunities, you best open one up ASAP. LinkedIn has become the defacto source for all employers today. You can look for jobs, login to various applications with your LinkedIn profile, and so forth.

A good resume is still standard to go along with any employment application. But I’m going to argue that in addition to a LinkedIn profile, you should also register your own domain name and create a dynamic site.

Candid Advice For Those Joining The Startup World: Sleep With One Eye Open

Eyeball

Sleep w/ one eye open

Ever since college graduation in 1999, I’ve had equity ownership in every single company I’ve worked for. When you get equity, no matter how small it is, you tend to pick up the litter in the hallway, champion your company outside of work, and work harder than the actual value of your total compensation. In short, having equity makes you care more!

Pride of ownership is important for maximizing employee production. There’s just one problem: sharing. If you’re a founder, you’ve got to have the generosity and foresight to let your employees share in your company’s equity. Giving up equity is one of the hardest things a founder can do because we are all naturally greedy. We want everything for ourselves despite the need for great people to make our company a raging success. Sometimes, we’d rather fail and hold onto everything than give up equity in order to succeed. Irrational.

As an owner of an online business and as a consultant/advisor for startups, I straddle both sides of the fence. And, for the first time in 16 years, I’m doing some work with no equity. Sure, it’s rare for consultants to gain stock options or RSUs, but that’s exactly what I got from my first client after 1.5 years of service. In this culture of moving around every 1-3 years, why shouldn’t a consultant who’s stuck around longer than some employees also deserve something similar?

Working with no equity feels off. It makes me want to do only 101% of what is expected, not 130%. I wonder if this is how much of the workforce feels where they don’t have any stake in the organization they are working for? Please let me know.

This post offers up some candid advice for people looking to join the startup world, either as an employee or as a founder. It’s the sexy thing to do nowadays given people want more excitement, more purpose, more control, more money (?!?) and more flexibility. Be forewarned. This post is a 2,700 word beast that will make you see the world a little differently by the end. 

Mortgage As A Forced Savings Account To Build Wealth

Ship in a storm - Money leaking everywhere

Our journey with money

Back in 2000, many investors were cocky, much like investors today with the stock market at record highs. I remember asking my Director at the time what he thought about the concept of the mortgage as a forced savings account? At the time, as an investor, it appeared he could do no wrong.

He said, “I don’t need no forced savings account. Only irresponsible people who don’t have the discipline to save every month would consider their mortgage as savings. I’d rather have as big of a mortgage as possible so I can make money in the stock market!

My Director ended up losing millions when the dotcom bubble collapsed. He no longer looked down on people who slowly grew their wealth. At least, unlike most people, he had millions to lose!

If you have a traditional mortgage that pays down principal and interest, the mortgage “forces” you to save because you are forced to pay your mortgage every month if you want to keep your property. A percentage of each mortgage payment goes towards principal, which can be considered savings.

I’m also in the camp that it’s better for most people to receive a tax refund, even though it’s like giving the government an interest free loan, because most people can’t save for crap!

Mortgage Payoff Fees And Procedures To Know

Mortgage Payoff Letter Sent

Final mortgage payment!

“Work a lifetime to pay off a house. You finally own it, and there’s nobody to live in it.” – Death Of A Salesman

After twelve years of methodically refinancing my property whenever rates dipped, and consistently paying down principal every month, I finally own my two bedroom condo in Pacific Heights, San Francisco free and clear!

The condo originally cost $580,000, which I thought was relatively good value for a 2/2 with parking and a park view in 2003. I had relocated from Manhattan two years earlier where all park view condos cost a bloody fortune. Go watch Millionaire Dollar Listing New York to see for yourself. My condo is nothing fancy, but it has everything one needs to live a comfortable life in my favorite city in America.

According to Zillow, USAA, and a one bedroom sale in the same building last month, the value of the condo could be worth double its purchase price with a little bit of updating. Whatever the real value is, I don’t plan on ever selling because it is an income generating engine. Real estate is “forced savings” at its finest.

The Top 1% Net Worth Amounts By Age

Mega Mansion - What Is Considered Rich?

Tom and Gisele’s mansion

People like to throw around random net worth figures all the time when asked how much is considered rich or how much they would need to never work again. Often, the figures just sound nice, like saying “one meeeeleon dollars” without any mathematical justification.

This post puts some numbers behind ascertaining how much wealth one needs to be in the top 1%. Remember, having a large net worth is better than having a high income. The government goes after income more than it goes after wealth. For example, you can live in a $8 million mansion and get Universal Healthcare subsidies if you make less than ~$94,000 a year with a family of four.

So what do we know?

Based on my Top 1% Income Earners post, we know that in order to be in the top 1%, you’ve got to earn at least $380,000 in gross income a year. The data comes from the all-knowing IRS.

Based on my Net Worth For The Upper Middle Class post, we learn that the net worth range for the top 15% of all Americans between the ages of 45 – 74 is around $700,000 – $830,000.

Finally, I’ve shown numerous examples as to why earning roughly $200,000 – $250,000 gross a year per person and $300,000 a year per couple is the ideal income for maximum happiness. Being rich is sometimes a state of mind, and I’ll use these income figures in my analysis as well.

Given these data points, I’d like to construct two simple models to demonstrate what I think should be considered top 1% rich. All wealth and no income is not ideal. Similarly, all income and no wealth is not ideal either. There needs to be a balance.