CD Investment Alternatives: Why I’m No Longer Investing In CDs

Hawaiian SunsetCertificates of deposits, aka CDs have long been a stable part of my overall investment portfolio. Whether it was a bull market or a bear market, I would always invest roughly 30% of every dollar saved in the longest CD possible since college. Although I lost around 30% of my net worth during the worst of the crisis in 2009, I knew that even if everything went to hell I’d have at least 30% of my net worth intact. The feeling was very comforting, especially when yields were over 4%.

Unfortunately or fortunately, times have changed due to the Fed’s stance on keeping rates low until 2016 if not much longer. I strongly believe that low interest rates are here to stay for a while. We’ve still got a lot of economic slack in our economy to keep significant inflation at bay. Policy initiatives are also much quicker and more effective thanks to technology. As a result, everybody should:

1) Refinance their mortgages, call their credit card companies, and consolidate their student loans. Refinancing a mortgage or locking in a new mortgage at current low rates is a no brainer given the Fed has signaled they will be raising interest rates in 2016 and beyond.

2) Be more amenable to taking on debt at the margin to build wealth e.g. buy real estate, invest in a business.

3) Look at all other investments besides CDs.

The best CD interest rate I can find is 2.2% for a 10 year CD in 2015. The funny thing is, 2.2% is not bad given the 10-year yield is at around 2.2% as well. It’s better to lock up your money for only five years versus 10 years, after all.


How To Better Manage Your 401K For Retirement Success

Early Retirement Hawaiian SunsetEarly retirement is fantastic. There’s only one problem. Most early retirees no longer contribute to their 401Ks unless they start a business. Not only that, early retirees lose employer 401K match and profit sharing. I just took a look at my final year’s employer 401K profit sharing plus match and it came out to $27,000. There’s much more to your job than just your salary!

My 401K makes up a minority portion of my stock exposure as I’ve been aggressively investing through structured notes and after-tax accounts. Furthermore, I’ve been receiving more deferred company stock than desired. Although $400,000 is not a lot to retire on, it’s the best I could do after maxing out for 13 years after college. It should serve well for illustrative purposes to see how a portfolio can grow under different assumptions.

With the way the government loves to spend our money, I wouldn’t be surprised if the retirement age for distribution without penalty increases beyond 59.5 or the government imposes a “distribution tax” to take more of our money. That said, we can hope for the best by reducing our mutual fund expenses and creating different scenarios to better prepare for our future.

The best way to increasing our odds for retirement success is to run various investment scenarios. I will run three investment scenarios (Conservative, Realistic, Blue Sky) using the free 401K investment analyzer by Personal Capital. Regardless of whether you are retired or not, I encourage everybody to perform at least these three scenarios and write down some notes. Early retirees need to be extra diligent given we are more dependent on our investments to survive. If you have years to go before retirement, I suggest you pretend you are retired now so you can develop a fire to be all over your money!


The Best Of Financial Samurai 2012

Financial Samurai In Mayan TempleIt’s reflection time here at Financial Samurai. I’d like to go over some of the most visited posts by search, the most commented posts, as well as other posts I think are worth highlighting. I wrote over 200 articles in 2012, so there’s a lot to sort through!

I’ve done my best to be as helpful as possible on important subject matters such as investing, retirement savings, and career moves. We’ve got one life to live, so we might as well get our finances in order to live it to the fullest!

The theme of this site is to slice through money’s mysteries to achieve financial independence. I’m not one to shy away from providing my own opinions when I feel strongly about a subject. If I think you are wrong, I will tell you so and provide reasons why. I hope you do the same because that’s the best way we can learn.

It’s important that Financial Samurai never turns into a factory site with neutered content. I started Financial Samurai in 2009 as an outlet for my frustrations about the financial crisis. I hope none of us ever revisit such times, although our government is doing their best to bring us there with the budget debacle! If I ever hire staff writers, I will make sure they come with their own thoughts and not be afraid to challenge conventional wisdom and defend their positions.

Without further ado, let’s recap the year 2012!

Top Five Most Read Posts Written In 2012 On Financial Samurai

1) How Much Should People Have Saved In Their 401Ks At Different Ages? (168,422 views, 431 comments) – A positive sign visitors are taking the initiative to understand whether they are on track for retirement. Although I do not think the 401K is enough for most people to live off in retirement, it’s a big portion of the retirement puzzle. I get the sense that despite the growth of our government, more people are coming to realize they should only depend on themselves.

2) What Income Level Is Considered Rich? (108,232 views, 147 comments) – The term, “class warfare” was bantered around a lot during the Presidential campaign, pitting the wealthy against the not-so-wealthy. People wanted to find out what income level started to make people “evil.” There’s so much hatred towards people who have more. Hopefully this post helps provide some perspective that cost of living is very different across the country.

3) The Average Net Worth For The Above Average Person (81,800 views, 233 comments) – Taking things one step beyond income to find out what above average people have in terms of net worth. Everybody believes they are above average, but that’s mathematically impossible.

4) Definitions Of A Middle Class Income: Do You Consider Yourself Middle Class? (76,300 views, 106 comments) – With so much talk from Obama and Mitt about how they plan to take care of the Middle Class, everybody is wondering whether the candidates are talking about us!

5) Don’t Get Fired Or Quit, Get Laid Off Instead (42,283 views, 143 comments) – There’s tremendous dissatisfaction in the workplace. Studies show that less than 50% of workers are happy at their jobs and a full 25% hate their jobs. The economic downturn of 2009-2010 created pent up demand for those who want to move, but couldn’t. As the economy continues to get better, I forecast a surge of people looking to find more meaning in their lives by taking the leap of faith and doing something they truly want to do.

* For reference, the most read post was written two years ago and received over 450,000 views in 2012.

Top Five Most Commented Posts Of 2012 (Outside The Top Five Most Read)

How To Reduce 401K Fees Through Portfolio Analysis

Do you know how much in mutual fund fees you are paying a year? I didn’t, so I ran my 401K portfolio through Personal Capital’s 401k fee analyzer and I’m absolutely shocked by the results! I always figured that from a percentage point of view, my mutual fund fees were small. But, when you take a small percentage multiplied by a big enough number, the absolute dollar amount starts adding up.

401K Fees Add Up!

As you can see in the picture above, I’m paying $1,748.34 a year in fees across four mutual funds. In 20 years, I will have paid roughly $84,000 in fees based on only this amount. The second portion of the above chart shines a light on the specific fund that costs the most. In my case, it is the Fidelity Blue Chip Growth Fund with a 0.74% expense ratio.

I’ve got another fund worth about $22,000 as part of my 401K which does not show a fee, because it is a hedge fund whose fees are baked into the performance. Typical hedge fund fees are 2% of assets under management and 20% of upside. This is called 2 and 20, which is egregiously high, but it’s the only way I can get short exposure to hedge my bets.

I’ve been wanting to do a 401k/mutual fund fee analysis for the longest time, but was too lazy to do the analysis until I realized I didn’t have to do the calculations myself. Every year I want my portfolio to be as optimized as possible.

Should I Borrow From My 401K? Only If You Are A Petulant Fool

Cash Only RegisterYour 401k is for your retirement, you know, the time where you no longer work and need capital to support your life. By borrowing from your 401K, you are robbing your future self in the hopes of having a better life now. This is completely backwards thinking. Instead, you should be squirreling away your income now so that you can live a more comfortable life when you are less able.

Who is going to take care of you when you are old? The government? Doubtful. Your kids? Hahaha! Only you can rely on yourself. If all my wealth disappears now at age 35, I have the energy to find a new job, work on a new idea, and survive. If I have nothing at the age of 70, I’m screwed and will become a burden on society, thank you very much.

So many people who borrow or want to borrow from their 401K think they are smarter than they are. They argue that they’ve either found a better investment, or they just absolutely need to have that new car or house. This inability to delay gratification is one of the main reasons why we got into this economic mess in the first place!

Unless you have some serious type of life-threatening emergency and for some reason don’t have any savings, do not borrow from the 401K. Treat your 401K like a sacred hippopotamus. Let’s talk about various reasons why some borrow from their 401K.


The Main Reasons To Borrow Money Through Peer-To-Peer (P2P) Lending

Borrowing Some Needed Cash Everybody needs to borrow money some time. Peer-to-peer lending is a good alternative if you don’t want to pay usurious rates from loan sharks, if you’ve been denied a loan by your local bank or credit union, or if you are just too embarrassed to ask someone you know for help. From $1,000 for an emergency medical bill to $15,000 to pay for an engagement ring, some reasons are more legit than others!

As an investor in P2P lending, it’s always a good idea to set parameters on what type of person you plan to lend to. As P2P lending is primarily going to replace my low risk CD income that’s coming due, I intend to focus on low risk borrowers with high ratings between C to AA. They’ll probably pay rates of 6.59% to 15% so I can make a 4-10% return. An important part of understanding a borrower’s risk profile is to therefore understand what they plan to borrow money for!

I highlight all the main reasons why people borrow money through peer-to-peer lending. These are actually selections for borrowers to choose from on I bucket the reasons into four categories (Great, Good, Borderline, Suspect) and analyze each reason from a borrower’s point of view. As a potential borrower in P2P lending, you can then decide whether you want to go forward with borrowing based on my rationale. The same goes for lenders when selecting loans to fund.


How Does It Feel To Be Financially Independent?

Girl Picking Up Shells During Sunset On The BeachA number of people have asked since I left my job how it feels to be financially independent. The quick answer is, everyday feels like Christmas. Whether you are Christian or not, the feeling is the same as when you were a kid every holiday morning. You go to bed late because you’re so excited, and you wake up early because you’re so excited!

I’ve been financially independent since 2009 when I realized my passive income could cover all expenses, forever. There was one point during the recession where I thought I’d have to start all over if things continued to worsen. Thankfully, the world didn’t end and I decided to hang on for the recovery and then some just to be safe. It didn’t hurt that financial firms raised base salaries by ~70% to comply with the government’s desire to lower year end bonuses. Ironically, the government allowed us to live more freely with higher cash flow. Those smart enough to negotiate received much higher severance packages because severance is based off base income!

When you’ve accumulated enough capital, or have built enough income streams, you no longer have to worry as much about money. Money will always be somewhat of a concern, but the concerns fade into the background. The end game has always been health, friends, family, purpose and happiness. Money is only a means to help facilitate such desires. In order to stop caring about money, you’ve first got to care a great deal about money. This means saving and investing your money, creating a financial plan, less complaining, and more doing.

Sacrificing and hustling when you still have the energy is worth it. If you are torn between being an optimist or a pessimist, waking up at 6am to get extra work done or sleeping in, and controlling what you can control or complaining about why the world isn’t fair, I always encourage the former, former, former!


Real Estate: My Favorite Investment Asset Class To Build Wealth

Small apartments

Can you spot the tiny rental?

Real estate is all about asymmetric risk and reward. When the government gives you subsidies in the form of mortgage interest tax deductions and bails out overextended homeowners over and over again, you’d be silly not to invest in real estate! When you can invest lots of other people’s money and not have to split the proceeds if you make a killing, that’s a wonderful thing!

There’s a reason why every rich person you know owns multiple properties. There’s a reason why enormous fortunes have been made through real estate as well. How can Donald Trump still be a billionaire after declaring bankruptcy? Asymmetric risk and reward!

It’s no wonder property owners were once called lords, or now more colloquially, landlords. The wealthy own assets, while the not-so-wealthy lease assets. After 30 years of paying $2,000 a month in rent, your return on $720,000 is negative 100%. At least through a mortgage you’ve got an asset which you can live in rent free or pass on to your children once paid off. You might not make money as the downturn has certainly shown, but at least you have a chance.

When it comes to making money, if there is no risk, there is very little reward. After a lifetime of working, not owning might be one of the biggest risks of all!


The Ideal Mortgage Amount Is $1 Million Dollars (If You Can Afford It)

Talin EstoniaWhoah, that’s crazy! I can hear some of you who don’t live in an expensive part of the world say. Meanwhile, some of you are surely thinking you can’t get anything livable with a $1 million mortgage. The ideal mortgage amount of $1 million is based on the premise that the ideal income for maximum happiness is $200,000 per person.

Back in 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense given mortgage rates were 5%-6.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.

In 2015, a $1 million mortgage costs around $22,500 to $35,000 a year in interest expense given mortgage rates are now 2.25%-3.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three again and you get $67,500 to $105,000, a far cry from the $150,000-$195,000 you originally needed to make! Note, banks still only lend out 3-4X your income despite a drop in rates.

It is aggressive to think that someone who only makes $79,500 a year in gross salary can afford a $1 million mortgage, but it’s also absurd that one can borrow $1 million dollars nowadays for only 2.625%! I’m not recommending everyone with impecable credit scores, great financial habits, and steady savings rates all get $1 million mortgages. I’m just saying that it’s now possible for someone making $79,500 a year to service $1 million worth of debt at 2.625% if the bank approves.


How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye

How To Engineer Your LayoffIt took me two years to engineer my own layoff because I was concerned and didn’t know how. There were no resources on the market that could guide me to quit my job with money in my pocket. What was I supposed to say, “Hey Boss!  If you give me $200,000 I’m outta here!” over coffee one morning?

What if I quit and my bank account goes dry in six months? What if I can’t find a new job in a new industry that I really love? What if my entrepreneurial endeavors fail miserably and some exogenous variable knocks me out for the count?  What if I turn into a deadbeat with no more motivation to do anything again?

I didn’t hate my job, I just didn’t love it anymore like I once did 13 years ago. Nothing is worth doing for an extended period of time if you don’t love it. Ten years in a row is the maximum amount of time I can truly commit to one occupation or firm with full enthusiasm. To go much longer would be unfair to my employer, to others who have a deeper hunger, and ultimately to myself.

I kept questioning what type of idiot would quit a good job in this type of economy? After a while, I started asking myself what type of idiot not to quit in this economy! Wages are down, profits are abysmal, and industries are going through multi-year consolidation phases that won’t be pleasant.

With no kids, a 16-18 year financial safety net, and a clear idea of what I want to do after my separation, I decided to make the move in 2011 after creating a healthy stream of passive income over the past 13 years. I was so close, but couldn’t pull the trigger because I was STILL too unsure. What I needed was that one last kick in the pants to send me on my way to entrepreneurship.