Financial Samurai

“Every battle is won before it is ever fought.”

This was the infamous line said by Gordon Gekko in the popular 1987 film Wall Street. Derived from Sun Tzu’s Art of War, a 2400-year-old Chinese text on military strategy, the teachings of this tactical mastermind have proven useful in various aspects of present-day life besides warfare.

Although Sun Tzu’s Art of War is studied most religiously by military commanders, political leaders, and corporate executives, the concepts are scalable to conflicts as minuscule as your struggle with debt. Like in war, where the objective is to overcome the enemy resistance, it is everyone’s goal to conquer their personal debt.

Debt is the bad guy. We are the good guys. The road to financial independence is a righteous path where we’ll have multiple encounters with debt – a merciless obstacle that seeks to consume us. Luckily, an old man from many many years ago jotted down some powerful advice that may serve the purpose of securing a victory against debt.

Universal Debt Teachings Read more…

Recently, I’ve been on a mission to tell anybody who will listen to refinance their mortgage.  I get nothing in return, just the satisfaction of knowing that someone who isn’t a rate hawk like me can get a nice kick in the pants to save some money every month for the next 5-to-30 years of their lives.  Nobody gave me a kick in the pants when I locked in my refi, which is why I had to pay 0.125% higher than I should have because I was unsure and waited a little too long.

Banks have promotions all the time, and your duty as a borrower and saver is to identify which banks are offering the most attractive terms at any given moment.  That bank is Citibank, with mortgage rates often 50 basis points (0.5%) cheaper than any competitor out there for 5/1 and 30-year mortgage products.  Citibank is on a rampage to build up their loan book again.  As patriots, it’s our duty to spread the word and make sure we don’t fall off a cliff again!

THE BIGGEST HURDLE IN REFINANCE LAND 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”

Follow on Twitter @FinancialSamura and subscribe to our E-mail or RSS feed.

You guys know that the one and only data point I track religiously is the 10-year yield right?  Well, after the 10 year yield dipped below 3%, I went to the bank with a buddy of mine to go see how much money we could borrow.  The wiry banker sat us down like a loving couple and asked us to go through our finances at which point I kindly stepped out of the room and let him go first.  Five minutes later, he came out with a grin on his face, so I curiously went in.

I proceeded to disclose some of my finances, and he proceeded to tell me some curious news.  “Look here Sam, you can borrow up to $1.5 million dollars at a 5 year fixed rate at 3.75%!”

Holy moly really?  You mean little old me, just like that can borrow that much money at that low of a rate?  “So what’s the catch?”, I ask.

“Zero points, and $2,500 in closing costs.  But don’t worry, we are giving you a $500 credit for being a preferred member, and frankly, if you guys both take out loans, I’ll throw in another $500 credit,” said the banker.

“Done!  Where do I sign?, I ask as I think about the new Audi R8 I plan to buy with just $150,000 of the $1.5 million.  Or maybe I should be more conservative and spend $100,000 on the new 2011 Porsche 911.  Or actually, I heard the 2011 BMW  335i coupe is coming out for only $55,000 this fall.  With all the money “saved”, time for a bachelor’s trip somewhere fun!  (I’m still thinking to myself here).

NOT SO FAST FOOLIO! Read more…

Pick any private school.  The cost is about $200,000 over four years.  These figures don’t surprise anybody anymore given the ever rising application volume to storied institutions such as Harvard, Yale, and Princeton.  That said, there have to be some who believe $200,000 for a private school is a hard pill to swallow over an excellent public school for just $40,000.

With an estimate 17% of people aged 20 through 24 unemployed, swallowing a bowling ball may be easier than finding a desirable job post graduation.  Let’s say you are one of the unlucky few who can’t find a job after a $200,000 education.  Does it really matter? Let’s think about why it doesn’t really matter from the eyes of several recent graduates.

THE BOY WHO WAS FORCED TO GO Read more…

Here’s an insightful post from Allan from The Philippines.  He shares with us his story about growing up poor and working his way up.  It’s always great to read about international perspectives.  Hope you enjoy!

They say we are creatures of habit. This is especially true when it comes to money. When the going gets tough, it is easier to resort to what’s comfortable. When that happens, your own money habits take over. The only question is – will your money habits get you through and make you rich?

Money Habit # 1 – Playing with money

Learning my money habits started when I was still a young kid playing outside the house on a sunny afternoon. The first money habit I learned was playing with money. Yes, literally. But not with actual money. My friends and I would play games betting on carefully folded cigarette packs looking like play money. A red Marlboro is worth PhP 50 (US 1$). A green local brand “Champion” cigarette is PhP 5 (10 cents). A Philip Morris cigarette pack is worth PhP 100 (US $2).

It was all play money then. And it was easy to get. I only need to wait for my father to finish his cigarette pack and I’d be on my way to earning my (play) money for the day. Sometimes, we even played with coins, taking turns and rolling them on the floor like a dice. Playing with money was fun!

Somewhere between playing with other kids and being conscious on what’s cool, I learned that money can buy me things. But since we were poor, I had to make do with my worn out clothes. After some time I’ve already outgrown it so much, I already looked like Winnie the Pooh.

It’s not so much about other kids having better clothes. It was more because I was not able to play outside as much as the other kids. My mother would always remind me to do my house chores. Wanting to go out and play instead, I would reason out “how come the other kids are not doing any chores?” To which my mom lovingly responded,

“Because we are not like them. They can do whatever they want because they are rich. We are poor. ”

That was the first time I realized we were different from other people. We were poor. I began to notice how worn out my clothes and shoes are. I remember even going to school with no shoes on.

That’s one lesson I took to heart. If you don’t have money, you are poor. If you are poor, you need to work to have some money.

Money Habit # 2 – Working for money Read more…

Look around.  What do you see?  I see packed buses, traffic jams, busy open houses, expensive restaurants with only 9pm seatings, and friends finding new jobs again.  Double dip recession?  I don’t think so.  With the Dow over 11,000 and the S&P 500 over 1,200, it’s as if last year was just a bad dream.

Yet, it is exactly during good times, when we must be more diligent about our finances.  It’s so easy to forget how bad things were and stray.  Rather than spend more money, save more money during upswings so that we can spend more money during downturns.

When times are good, it’s not necessary to spend more money to create any sort of additional fulfillment or pleasure.  We’re getting paid more, the opportunities for promotions are greater, and the demand for our services surpass our supply.

In essence, we feel good because we feel wanted again.  It’s when a downturn hits when money can help balance the mood out a little with some retail or food therapy, or maybe even a vacation.  In essence, spend money counter-cyclically for better returns.

DAY DREAMING TO RELIEVE DESIRE Read more…

For the past two years I’ve taken the bus to work after driving for 7 years prior.  The company removed our free parking benefits and I wasn’t about to pay $350/month to park in a garage just 5 miles away.

I have a love hate relationship with the bus.  When it’s raining, and I have to stand outside shivering, I hate it.  When the bus skips my stop every so often, I hate it.  When the bus driver slams on the brakes a couple feet away from the stop light and we all go flying, I hate it.  When the bus is packed like sardines, but there are some very attractive riders I need to squeeze next to, well, I guess it’s OK.

My VIP Pass aka monthly bus pass costs $60, while taking a cab to and from work costs $30.  Hence, the cost breakdown is simply $60 for a bus, $350 for parking, and $600 for a cab every month.  Out of principle, I wasn’t going to spend 5-10X more on transportation if I could just ride the bus.

WHAT A DUMMY Read more…

The beauty of an economic downturn is cheap credit.  It’s ironic, because cheap credit is one of the main causes of this collapse in the first place!  That said, for those of you with mortgage debt, now is a great time to call your local bank and check up on rates.  Refinancing can be a daunting process, but it shouldn’t be with the right representative and proper frame of mind.

As I’m currently thinking about refinancing one of my rental properties, now is a good time to share with you some key things to think about and assess.  Hopefully by the end of this article you will be able to make an informed decision and save lots of money as a result!

INFLATION Read more…

Back in the 9th grade, I remember goofing off quite a bit with my buddies.  We skipped class, stayed out late, and essentially did a lot of stuff that was detrimental to our grades.  Despite working with plenty of Spanish speaking colleagues during my part-time job, I still only got a “C” in Spanish because I didn’t care.   All I wanted to do was have fun, and fun is what I had!

My parents spoke to me one evening and asked, “How are you ever going to be a great business man if you can’t even get an “A” in math?  Do you think award-winning scientists get “C’s” in high school chemistry?  Do you think Andre Agassi doesn’t practice hard every single day?”

The questions stuck with me because ever since I was 12, I wanted to be a “business man.”  I remember getting picked up in a sweet Mercedes 300 SEL by one of my father’s friends to take us to their mansion party.  The whole experience with the infinity pool, car, food, and servants made me want to do what they did, whatever that was!

After the pep talk, I began caring about my grades through college.  I didn’t want a silly thing like grades to get in the way of my dreams.

THE QUESTION TO ASK ALL PEOPLE Read more…

Publisher: The Penguin Group.  Hard cover. 257-pages. Price: $26.

Author: Charles Farrell, JD., LL.M., investment adviser with Northstar Investment Advisors, in Denver.  He writes the “Retirement Roadmap” column for CBS Moneywatch.

Review: “Your Money Ratios” sings to me!  For someone who loves using ratios such as the 1/10th rule for car buying, and 30/30/3 rule for home buying, I absolutely adore this book.  Charles’ writing style is very balanced and easy to understand.  When it comes to math, many people, including myself fall asleep.  But, if you can just do simple division and multiplcation, this book will keep you on the right path towards financial security.

Charles’ “Unifying Theory of Personal Finance” is his core philosophy that all decisions you make should help move you from being a laborer to being a capitalist.  In other words, make money work for you, and not the other way around.  It’s important that with every single monetary decision you make, you ask yourself will this help you become a capitalist or not.

Capital To Income Ratio Read more…

The answer depends on if your name is Saddam Hussein, although proponents would say no proof was ever found!  You hear so many stories of consumers up to their eyeballs in credit card debt, and I’m just wondering WHY?  Credit card debt is the most expensive debt out there, second only to usurious rates of loan sharks.

Perhaps the reason why is because credit cards are ubiquitous.  According to the US Census Bureau, there were 173 million credit cardholders in the US in 2006, using 1.5 billion credit cards?  That’s right, the ratio is almost 10 credit cards to every one user, with transaction volumes of over $2 trillion a year!  No wonder the US consumer gets in trouble, and why credit cards are such big business!

My view on credit cards is quite simple: Use credit cards only to your advantage, and never let them take advantage of you!  Whenever you see your credit card misbehaving, you should think to yourself “Bad boy!  Bad, BAD!”  I think my wife tells me this sometimes, but I try and tune it out.

Joel is hosting a $500 American Express giveaway, and gosh darnit, I’m entering to give myself a chance to win.  In “You’re Rejected!  How I Use Rejection To Motivate Me Every Single Day,” we discuss how success is a numbers game.  The more you put yourself out there, the higher the chance you have to succeed.  Here’s my attempt to win and use the proceeds to buy toys and clothing for underprivileged children this winter in San Francisco.  The program is called “Toys 4 Tots.”

TWO MISSLES IN MY WALLET Read more…

What is this blasphemy you say?  One of our main tenets is to observe what people DO with their money, and not what they preach.  The public clearly loves Bank of America and Wall Street again because how else would Bank of America be able to raise $19 billion from us, to pay us back?

In an “Open Letter To Vikram Pandit, CEO of Citigroup” we urged Vik to sell the 34% government stake back to the very public that bailed Citigroup out before year-end. Why?  So Citigroup can pay their employees big bonuses in 2009 by saying they are no longer under the government’s stewardship.  Sure, paying back $45 billion in TARP sounds like a lot, but Bank of America just did it!

In fact, joining Bank of America are Bank of NY Mellon Group, Goldman Sachs, JP Morgan, Morgan Stanley, and State Street who’ve all been able to pay back their TARP loans and pay their people handsomely this year.  This begs the question, what’s wrong with Citigroup, one of my main “go broke banks” used to optimize my finances.

SORRY, I DONNO

Read more…

We Don't Need No Medicine!

I’m pleased to bring you a guest post by faithful reader and commenter, Larry Ludwig (bio below).  He writes a thought provoking piece about challenging the norm of becoming debt free.  You’ll be smarter after reading this, guaranteed!  Enjoy, and as always, feel free to debate away!  Rgds, Financial Samurai

You’ve heard the financial gurus like Dave Ramsey perform pasectomies on his show and Suze Orman with her numerous “I have 50k in debt” guests.  The gurus all say, debt is bad, credit is evil, and being debt free is nirvana, yada yada yada.  While I do think as a whole Americans have too much consumer debt, the goal of being completely debt free is actually a terrible idea. Let me be specific: buying things that depreciate with debt is bad, that big screen TV, new clothing or car.  Most of the financial gurus do not make this distinction and make all debt to be “evil”.

I believe Rich Dad/Poor Dad Robert Kiyosaki has said it best, “There is good and bad debt and being debt free is more risky than having good debt.”.  Now before you go off on my recommendation of Robert and his questionable background, I believe his statement is sound and correct.

The primary reasons are:
•    Opportunity Cost
•    Asset Allocation
•    Inflation
•    Tax Deductions
•    Arbitrage
•    Leverage

Read more…

I was driving downtown to drop my wife off at the museum when a car started drifting dangerously into my lane.  I beeped the horn to alert the driver and when I drove by, the teenage kid in the back seat flicked me off!  I didn’t have a long annoying horn, nor a machine gun type rat-ta-tat-tat beep.  All I did was beep once so we wouldn’t collide.  The father was reading a map and driving at the same time.

I have to admit that my blood started to boil and I was tempted to blast him a new one when their car stopped next to me in front of the light.  Instead, I buzzed down my window, stared intently, and told the kid, “Don’t embarrass your parents.  I beeped at you guys because you were halfway in my lane and didn’t even know it.”

The dad was still clueless as to why I was talking to his punk kid and he also rolled down his window to ask, “What’s up?” Read more…