Financial Samurai

The Bay Area is full of entrepreneurs.  There’s something in the air that creates an almost godly electric spirit that causes people to work hard and innovate.  As 2011 nears, more and more I hear about how small business owners are clamping down in preparation for next year’s tax hikes.  Clamping down is generally not a good term to use if you are a politician who wants to create job growth.

Let’s say you make roughly $3 million in annual gross revenue from your internet business like my friend Zach does.  Not bad, but not exactly big money if you take into account his cost structure.  If his pre-tax operating profit margin is 25% after he pays the salaries of all his employees, the rent, and so on, Zach is left with roughly $750,000 subject to taxes.  If his tax rate goes up from 36% to 39.6%, for every dollar he makes over $375,000, he will pay roughly $25,000 more in taxes a year in 2011.

Well guess what?  My friend is letting go of one of his junior programmers who makes roughly $85,000 to pay for next year’s $25,000-$35,000 tax increase!  My friend feels bad letting his 2006 college graduate employee go, but he has no choice since revenue has declined since 2007, and the government is tightening the screws.  Zach believes that 2011 revenue will be worse next year than this year, and is budgeting a decline.  Thank goodness for 99 weeks of unemployment insurance!  And no, it’s not reasonable for the junior programmer to just go work in fast food after only several weeks of looking.

DON’T LISTEN TO THEIR LIES.  THEY AREN’T IN IT FOR YOU. Read more…

Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500.  Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math.  After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match.  Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.

The government needs to get it together and raise the amount of 401K contribution for those in the later part of their lives.  How is it that a 40 year old executive who makes $165,000 can only max out the same amount in his 401K has a 23 year old kid out of school making $35,000?  It just doesn’t make sense.  Instead, the government should allow pre-tax contributions to increase by $5,000 every 5 years so that by the time one has served 20 years in the work force for example, s/he can contribute $35,000+ a year to their 401Ks until retirement.

Let’s talk about the pencil geek IRA retirement plan for example.  If you’re one of the fortunate who are allowed to contribute, you can only fund $5,000 a year!  Whoopdeedoo!  $5,000 X 30 years later, assuming you don’t lose it in the market yields $150,000-$300,000 maybe!  Great, just enough to buy me a Honda Accord sedan when I’m grey.  Get it together government and raise that $5,000 contribution amount higher with better tax incentives.  Furthermore, let hard working Americans who make over $120,000 the opportunity to contribute regularly, and not just through odd year loop holes.  Empower people to want to save for their future!

DIFFERENT STROKES Read more…

Elephant > Moon. Eh?

One of my graduate school friends recently found himself out of a job.  It was a tough slog, but at last, he and his co-founders decided to shutdown their startup and start something new.  Nobody is really going to feel sorry for Greg, as he joined Google the year they went public and cashed out on a couple million dollars in stock options over the next 4 years.

His $180,000 a year salary was nothing to sneeze at either, but also nothing too spectacular in the land of $1 million dollar starter homes.  In a nutshell, Greg is the typical Silicon Valley success story who busted his butt to get ahead, networked like no other, and fell victim to a downshift in the economy these past couple years.

There are literally thousands of millionaire 30-somethings in the San Francisco Bay Area who are underemployed or just not working because they haven’t found that great idea, or that premium company fit yet.  Why should they bother wasting a companies’ time and enlist only to quit 6 months to a year later when something better comes along?  That’s not fair to the company and so they do the right thing and wait.

When I asked millionaire Greg about his thoughts on the government extending unemployment insurance to 99 weeks he let out a big “YIHAW!“  You see, Greg has been collecting unemployment insurance for the past 16 weeks via the solvent state of California, and he is worried that Obama will crack down on people like him once Federal care starts kicking in.

A MILLIONAIRE’S TAKE ON COLLECTING UNEMPLOYMENT AS A MILLIONAIRE Read more…

The reason why Warren Buffet is so great is because he’s able to distill the most complicated financial topics into very simple terms.  Lucky for us, there is someone like Warren in the economics world.  Regular reader, Investor Junkie who disagrees with the government’s unemployment insurance extension, but agrees with the cessation of rising taxes, highlights a fantastic video by the great economist Milton Friedman about four different ways of spending money.

Professor Friedman’s examples are simple and perfectly to the point.  In an environment where we are spending other people’s money on someone else (deciding how other people’s tax dollars are spent), we don’t maximize the value of the dollar because we simply don’t have much at stake.

Professor Friedman highlights that people spending someone else’s money on others is a “distributor of welfare funds.”  Strong words with a certain amount of truth wouldn’t you agree?  In “The Ultimate Solution To A Fair Tax Policy In America”, I discuss the concept of limiting the voting ability of the 47% of non tax paying Americans on raising taxes for the other 53%.   Don’t worry, voting rights for everything else is status quo.  The reason why I suggest this rational solution is because it makes sure the country isn’t overrun by those who have their cake (don’t pay taxes) and get to eat it too (enjoy the benefits).

One can easily see an America where 90%+ of citizens don’t pay taxes and stick it to the 10% rich because it’s rational to look out for your own interests.  It’s up to balanced people who believe in equity to continue fighting for those who perpetually get unfairly blamed for our economy’s problems.  It really is ironic, because if everybody studied hard in school, volunteered their time to help others, and were self-sufficient (doesn’t have to be wealthy), America wouldn’t have nearly the amount of problems we have now!

The 4 Ways Of Spending

1) Spend your own money on yourself.

2) Spend your own money on somebody else.

3) Spend somebody else’s money on yourself.

4) Spend somebody else’s money on somebody else.

Readers, do you agree or disagree with Professor Friedman’s thesis that the 4th way of spending is the worst way of spending?  If you do agree, why do you think people feel it’s OK to spend other people’s money as they wish?

Regards,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

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Get The Rich!

With the Bush tax cuts set to expire next year, there’s going to be a big debate during the mid-term elections this November!  But, should there really even be a tax debate?  It’s obvious that we should NOT raise taxes on small business owners and higher income, hard working Americans in a nascent economic recovery!

Everybody knows roughly 47% of Americans pay no federal income taxes.  Hence, the ultimate solution for tax legislation is to strip away tax voting rights for the 47% of Americans who pay no tax, but who still get to enjoy the benefits of other people’s contributions.  If you’re one of the 100+ million Americans who pay no income tax, isn’t it good enough to enjoy free public schooling, nice roads, friendly firemen and police officers protecting your neighborhood?  Being thankful is a great disposition to have.  Being greedy is not.

An Example Of A Family Making $120,000 Paying No Taxes: Read more…

Hear that?  That is the sound of another self righteous employed person complaining about the unemployed sucking up resources and driving the government deficit further into the red.  Who cares employed people??  You guys aren’t the ones who are struggling to find a job in this economy!

There are several tautologies here:

1) Few can live a comfortable lifestyle off of unemployment benefits which average $200-3oo a week

2) The vast majority of people who are unemployed want to make more money, find jobs, and do something meaningful with their lives.

3) Our budget is headed towards a $1.4 trillion+ deficit, so who cares if we’re going to spend another $50 billion to help millions of unemployed people survive for up to 99 weeks?

THE BUDGET DEFICIT DOES NOT MATTER WHEN YOU HAVE NO JOB Read more…

As far as I’m concerned, the US economy is recovering handsomely.  How could it not with packed restaurants, and traffic that makes me want to pull your hair out?  The most anticipated IPO of the year is Facebook, which may very well go public for $20 billion plus dollars.  Meanwhile, the whole world is hooked on Apple products with iPads ($500-800) and iPhones ($200-300) selling like hotcakes.  Who needs yet another computing device?  I guess millions do!

There is so much money flowing into the Bay Area, it’s hard to imagine another financial crisis on the wing.  Yet, I’ve read plenty of posts on “steps to take when the next financial crisis comes” and I’m scratching my head.  Am I living in a parallel universe where every other car I see is a fancy German vehicle, and I can never get a reservation at my favorite sushi joint?  I feel like I’m living in a little optimistic bubble where the world isn’t falling off a cliff and is actually doing well.  Tell me if I am, because bubble living is delusional living at its finest.

The stock markets, although highly volatile have recovered some 50% from the bottom and generally serve as as a leading indicator for the economy.  Yet people are still talking about a double dip recession.  Yes, the biggest worry is stubbornly high unemployment, but you’ll never be able to tell if you walk the streets of San Francisco.

LOTS OF POSITIVE ANECDOTES Read more…

One of the most anticipated NBA free-agent announcements came when Lebron told the world he’s heading to South Beach to play for the Miami Heat.  Of the six teams coveting him, really only three stood a chance: Miami, Cleveland, and New York City for obvious reasons.  The other three teams: Chicago, LAC, and New Jersey will just be footnotes and forgotten.

What’s most interesting is not Lebron’s decision to make millions of dollars less to join two guys he thinks he can win championships with.  Instead, Lebron’s decision to completely spurn President Obama is what really gets me thinking!  No less than seven times has President Obama made a public statement insisting that Lebron join the Chicago Bulls. As you know, Obama was the Senator of Illinois before he became President.  Many pundits also believe that Chicago is a better candidate for Lebron to win championships with Carlos Boozer, Luol Deng, Derrick Rose, Brad Miller, and Joakim Noah.  But, nope.  Not Lebron.

If Lebron James, who is a huge Obama fan, doesn’t even listen to Obama’s words, why should the general public?  It wasn’t like Obama was saying go to the Minnesota Timberwolves where they have a snowball’s chance in hell of winning.  Chicago is a seriously legitimate team if not the best choice!

FIVE REASONS WHY LEBRON DOESN’T LISTEN TO PRESIDENT OBAMA Read more…

Yowza! Source: NY Times

Over 11 million people are estimated to have died by the hands of the Nazis during the Holocaust just 65 years ago.  5 to 6 million of the 11+ million were Jews and over 300,000 were Athenians during the Axis’ occupation of Greece.  It’s a fallacy to blame modern day Germans about the atrocities of the past.  Yet, just because the demons have all died, shall we forgive and forget?  Absolutely not.  The offspring and relatives of the 11+ million dead live on, and their stories will never ever be forgotten.

With a GDP of US$3.6 trillion, Germany is now the largest economy in Europe as well as the 4th largest economy in the world.  Germany also has roughly $50 billion in estimated loans to Greece, a large amount, but not an overwhelmingly debilitating amount given the size of their economy.  Saving Greece helps the Germans and the rest of the 27 EU members who in some way were all negatively affected by Germany decades ago.

GRAND STANDING AND FINGER WAGGING Read more…

In “How To Dramatically Increase Your Job Security For Life“, the article suggests managers are more inclined to fire those workers who have nobody to support but themselves.  As a result, one should strategically at least hint at the intention of starting a family to protect oneself from unemploymentville.  Clearly I’m being somewhat flippant.  My goal is to make people realize that relationships and emotion play enormous roles in shaping work success.

Whether you work for a small family business or a large corporation, hiring and firing is a very personal decision that comes down to one or only a handful of decision makers.  By tugging at their souls, and increasing their guilt factor, you’re well on your way to dramatically higher job security for life.

Let’s say you’re not particularly wealthy, nor make a particularly impressive amount of money.  You still have loads of student loans and consumer debt to pay off.  In essence, you’re the typical American!  Shouldn’t you be putting on your air mask before helping others?

Child raising is estimated to cost anywhere between $250,000 to $1 million from birth to after college.  If a family can’t even have the discipline to save 20% of their paycheck after contributing to their 401K and IRA, how can one consciously start a family?

$250,000 ISN’T A LOT, YET HOW MANY CAN SAVE THAT MUCH? Read more…

Insensitive statements by Senate Majority Leader Harry Reid (D) not only infuriates many, but also raises one titillating question: Why isn’t President Obama considered white? Obama’s mother is white, and his father is black.  He relates more to his white side of the family given his father left him as a child.  Hence, isn’t it logical to think Obama is more white than black?  Let’s see if we can change Obama’s default setting to the world.

THREE SUGGESTIONS AS TO WHY

1) “He doesn’t look white.”

Well, what does “white” look like?  Yes, Obama doesn’t look like a Norwegian Viking, but you can still tell he’s mixed.  Since when does being half black mean that he’s full black?  If a white person is only supposed to look like Tiger Wood’s wife Elin, then we need to revise what the definition of white is. Read more…

President Obama plans on limiting the tax break for charity deductions to 28%, penalizes those in the 33%, 35%, and soon to be 40% federal income tax brackets.  Since the overwhelming majority of charitable contributions come from households, and the overwhelming absolute dollar amount comes from those in the highest tax brackets, one can deduce charitable contributions at the margin will go down in 2011 and beyond.  Given this logical conclusion, why are Democrats and President Obama against helping others through monetary means?

Currently, if you are in the 25% tax bracket, you can save 25% in taxes due to your charitable contributions i.e. donate $10,000, save $2,500 off your tax bill.  Meanwhile, there is equality among those who pay the highest taxes at 35%.  35% tax payers can equally save 35% in taxes from their donations.  So far, so good.

Due to massive government pork spending it’s egregious that politicians now want to not only raise the highest marginal tax bracket from 35% to 40%, but also cut tax breaks on charitable contributions down to 28%!  That’s two slaps in the faces of hard working Americans and a punch in the gut for those who need the most help.

BASIC UNDERSTANDING Read more…

Congratulations to the Democrats for passing a smaller, less corrupt version of Obama’s health care plan to cover the 30 million+ Americans who are uninsured.  I’ve read numerous articles about the pros and cons of this plan, and I still can’t figure it all out.  An Associated Press article writes, “Obama practically needs a spreadsheet to tell people what’s going on and when.“  That said, progress has been made.  I’d like to go over some of the basics, and end with a discussion.

LOOKING OUT FOR EACH OTHER Read more…

Out of curiousity, I surveyed five of my married friends to answer two questions: 1) Did you pay more or less in taxes after you got married, and 2) How much more or less did you pay?  The answers I got were concerning.  They all responded they paid more and by a magnitude of $3,000 to $25,000!

It’s just not true that the “marriage penalty tax” no longer exists.  The IRS just renamed it the “love me long time tax.”

I’m by no means a personal income tax expert.  All I’m doing is highlighting facts from people around me, and proposing the likely reasons as to why their taxes went up.  Our income tax system is so darn confusing, hopefully someone can shed some light on the situation!

TWO QUESTIONS TO THINK ABOUT AND UNDERSTAND Read more…

The Rock Of Gibraltar, Only Backwards

Anybody want to guess what happened on Wed, January 19th right before the market fell off a cliff?  If you guessed Obama delivered a politically charged speech to rally for his own support and crucify others, you’re right!  On Wed, January 19th, Obama went on national TV to tell the world, “we want our money back” and “if they want a fight, a fight is what they’ll get.” The “they” of course, are “greedy rich” people.  The markets immediately started to sell-off and the S&P 500 is now down about 6% since.

Good old fashion class warfare is never good for the economy, neither is continuous political jibber jabber.  Do you ever remember a president being on TV as much as our current president?  The risk of overexposure is very real, and the record low approval rating for any president at this point in his term shows this.  The State of The Union address is supposed to be an opportunity to unify the people.  Besides the typical feel-good rhetoric, what I heard was a continued attack on others, protecting personal interest groups, and maintaining giant silos.

YOU SO CRAFTY NEBRASKA Read more…