Going Broke to Win Big! The Ultimate Way To Budgeting

To err is human and frugal living is a necessary element to building long term wealth. At the very least, one has to spend less than one earns to accumulate savings and give oneself a chance of making profitable investments. The financial community has beaten to death basic financial practice such as: Paying oneself first, saving early and frequently to maximize compounding, and budgeting. Hence, we’ll skip these common sense practices here on Financial Samurai, and go for a new method of building wealth: Going Broke to Win Big.

The concept of Going Broke to Win Big is simple. Essentially, if you see nothing in your bank account, you’re going to do the darndest to try and build some savings and wealth. You’re also not going to be tempted to spend frivolously, either. I don’t literally mean bankrupting yourself, but simply create three separate banking accounts, and not just three separate accounts within one bank.

If you are like me, you’ve blown yourself up through dumb investments and unscrupulous spending in the past. The key is to protect yourself, from yourself, and create that renewed sense of urgency to forge ahead and stay disciplined in your finances. You may laugh at the concept of protecting yourself from yourself, but everyone of us has the means of blowing ourselves up financially every single day. We are bombarded with temptations and we have collectively taken down the economy with overspending in recent years.

Below are the basics of “Going Broke To Win Big.” Create three separate bank accounts as follows:

1) The Go Broke Bank. The first bank account is for working capital needs, namely where your paycheck goes, and where you pay all your bills. This bank is your operationally efficient bank which has the best tools for bill pay with the most branches for accessibility. Citibank is a good example, a ubiquitous bank with good online tools, but provides ridiculously low savings rates and horrible credit card rates. Bank #1 is where you are constantly “Going Broke.” Your paycheck must be managed so that it lasts to cover all your expenses. But before you pay all you expenses, you must pay yourself first by transferring your target savings automatically to a Bank #2.

2) The Freedom Bank. The second bank is strictly for long term savings via money markets and CDs. This bank may not have as big of a footprint, but it doesn’t matter because you don’t need to access money from this bank. That’s what bank #1 is for. Due to lower overhead, Bank #2 provides better long term savings rates. Online banks such as Ally, and boutique banks such as First Republic provide fantastic rates, often 500-100bps higher than the competition. Do not tempt yourself by creating a checking account. You want money to easily come in (ever notice tellers don’t require IDs when depositing?), but very difficult to go out.

3) The Lockdown Bank.
The third and final bank is for your debt, namely mortgages, personal loans, and car loans. By loading the majority of your debt with one bank, you compartmentalize your debt which may relieve you of any mental stress related to this debt. It’s easier to tackle your debt at one bank and employ the “Snowball Method.” Furthermore, from the bank’s point of view, you may get better rates given you are such a good debtor customer. You’re buying debt in bulk from Costco if you will, and in normal times, they want your business and will give you discounts. During crisis times, it’s also good to have all your debt in one place b/c your bank doesn’t want you to cause a default cascade and will do their best to work with you.

For insurance purposes, one should set up a “checking plus” account which serves as an insurance mechanism just in case you go past $0 in your main checking account.  I’ve come close, and have breached zero multiple times over the years, and the $5,000 checking plus account I have has served as a handy buffer.  I’ve never been over by more than $300, and interest on $300 for one day is nothing.  A checking plus account should be free. If it’s not free, ask for it to be free, and if they don’t budge, find some other “go broke bank” to use.

CONCLUSION

All banks strive to cross sell as many products as they can. They try and capture you with rewards points and so forth. The goal is to protect yourself from spending unscrupulously with the commingling of monies through one bank, and to force yourself to actively manage your budget. Humans are weak, and we need to constantly remind ourselves to focus on our finances.

After using the “Go Broke” system for the past 5 years, I know exactly what’s going into and out of my checking account within 10 dollars. When the fuel tank is running low with only $200 left for the month, I should probably go on a nature hike than go play poker with the buddies this weekend. Lavish spending has gone out the window since employing this method as well. I pretend everyday that all I have left in the world is in Bank #1. The dearth of money keeps me motivated to work hard, keep on budgeting, and focus on my finances. Meanwhile, the growth of savings in Bank #2, and the decline in debt in Bank #3 is optimized and automatic.

Recommended Action For Increasing Your Wealth

* Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and when my CDs are expiring. I can also see how much I’m spending every month. If you are interested, they can even provide tailored financial advice for much cheaper than traditional wealth managers.

* Check Your Credit Score: Everybody needs to check their credit score once every six months given the risk of identity theft and the fact that 30% of credit scores have errors. For over a year, I thought I had a 790ish credit score and was fine, until my mortgage refinance bank on day 80 of my refinance told me they could not go through due to a $8 late payment by my tenants from two years ago! My credit score was hit by 110 points to 680 and I could not get the lowest rate! I had to spend an extra 10 days fixing my score by contacting the utility company to write a “Clear Credit Letter” to get the bank to follow through. Check your credit score for free at GoFreeCredit.com and protect yourself. The averaged credit score for a rejected mortgage applicant is 729!

Keigu,

Financial Samurai – “Slicing Through Money’s Mysteries”

The Less You Have, The Less You Lose

In October of 2008, Warren Buffet lost about $9.6 billion on paper. Put it another way, that’s a freaking a lot of money! To also put it another way, in my chase to match Warren’s wealth, I caught up to him by about $9.599 billion dollars.

Many of us have lost a lot of money in this market, but we could have lost more if we were already very wealthy. I am absolutely positive that it hurts much more for some poor rich CEO losing $50million of his net wealth, vs us losing $50,000 of our own.

Now is absolutely the best time to be relatively young and buy all the assets we can. And since we have such a wonderful opportunity, it makes wasteful spending that much more expensive because of the potential returns down the road.

Who knows whether we are going to double dip in the 2nd half as unemployment marches to 11%+. What I do feel strongly about is that if we don’t buy some distressed asset now, we are going to be kicking ourselves in 20 years. Personally, my site is set on a vacation property in Nevada, Lake Tahoe. I hope to pick up a foreclosure that is 50% off of peak values, and that can provide a 8% rental yield vs. the current government risk free 10 year treasure of 3.54%. In 8-10 years, i plan to move there and pay 0% state income tax, vs. 9.6% here in California.

INVESTMENT PLATFORM RECOMMENDATION

Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.

You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.

Updated on 12/1/2014. Let the bull market continue. Just don’t forget to rebalance.

What’s Your Number?

If one can accumulate $3 million in cash, that should be enough to lead a comfortable life. Would you agree?

With $3 million, you would earn $120,000 a year in interest income at a 4% yield doing squadoosh. Not only will you be receiving $120,000 a year, you’ll STILL HAVE your $3 million bucks in the bank!

I don’t think I need more than $80,000/yr to live a comfortable life in one of the 5 most populated cities in America. $80,000/yr would be especially enough if my mortgage was paid off, another goal of mine before “retirement.”

Readers, before I delve deeper into the number, I’d love to hear your thoughts on what the ideal and realistic number is for retirement, and how much is the minimum amount of income you would be happy to live on.

Best,

Financial Samurai

Poker is Just for Fun – Don’t Rely On It For Extra Income

I started playing poker about 4 years ago, and quickly got addicted to the game. The strategy involved, and the thrill of the bluff were fantastic elements that kept me coming back for more.

Initially, we’d start off playing $20 buy-in tournaments. We then progressed to 25 cent/50 cent blinds and then to $1/$2 blinds. At one point, there was a foray into $2/$5 blinds, but people lost way too much money to keep the game friendly. Poker has gotten so popular, that in many circles, poker has replaced golf, or drinking as the client entertainment event of choice. I don’t recommend ever playing high stakes with clients. It’ll only end in tears and resentment.

Despite 4 years of experience, I would rate myself a very average poker player. The main reason for this is my fear of losing money and getting bad beat. A bad beat is where you have significant odds of winning, and you still lose. Pocket Aces all in vs. Pocket KKs means you are 80% favored to win. Yet, 20% of the time you lose, and it is the worst feeling out there. 2008’s World Series of Poker Champion won via a bad beat. He runner runnered (4th and 5th card) to catch his gut shot straight vs. his opponents AQ with a Q on the flop. How unlucky.

We play $1/$2 blinds, and the individual buy-ins have gotten progressively bigger while our individual net wealth have all gotten smaller. The average buy-in used to be $100, now it is $300, with pot sizes surpassing $1,000 on a regular basis. Yet, I still only buy in for $100 or less at a time, for reasons stated above. I can regularly take on $50,000-$150,000 stock positions, and yet I can’t buy in more than a measily $100, nor can I call a $31 bet when I have a flush and gut shot draw on the river if my odds are not correct.

I lost $200 bucks last night when my QQ call all-in lost to A-3 b/c my opponent caught a 10 on the river for a straight. How do you go all in with an A-3, I don’t know. I had QQ again and went all in for my remaining $65 bucks and lost b/c my opponent caught his K on the river. It sucks to lose, but all I can do is make the right bets, and hope that my odds hold up in the long run. Because if you play incorrectly and call or bet without the correct odds, you will eventually lose all your money.

If you decide to play poker, you must set a loss limit and walk away once you reach that limit. Don’t let revenge, or the mania of gambling get in the way of what you must do. You must walk away and regroup your mind, b/c a tilting player will generally tend to lose even more money.

Poker is a zero sum game. If you win, it’s at another’s expense. Do not rely on poker to fund your food budget, or pay your rent. I promise you, there will be sessions where you will lose all your money, and you start skipping meals just to save $5 bucks. Those “poker pros” you see on TV have all gone BUST AND BROKE at one point in their careers. Don’t believe the hype. you may get lucky and win a big tournament, but you’ll make much more money using that time to focus on your career and job at hand.

SIMPLE POKER STRATEGY

1) Identify the type of game you are joining. Is it a loose, or tight game? Generally, if it’s loose, play tight, and if it’s tight play loose.

2) Observe each opponent and characterize them in different buckets: Playing for Fun, Super Tight, Animal on the Loose, HotSh*T, or Ringer and play accordingly. Be cognizant of who you are, and what other players think you are.

3) Treat a $200 bet the same way you would treat a $2 bet. In other words, if the odds are in favor for you to put all your money at risk, do it.

4) Realize that poker is a zero sum game. You can only make money if you risk money with favorable probabilities. If you get bad beat, just brush it off and focus on the next hand.

5) Just have fun and don’t take the game too seriously. It’s when you start getting addicted to the game, going beyond your loss limit, and taking buses to the casino where you start getting into trouble. You may win a lot in a hot streak, but at what cost to your general well being?

6) Finally, If you really want to make money, you should probably target the one who’s just playing for fun (but that’s not cool), the animal on the loose, and the hotsh*t 20-something year old who think he’s so great. It’s important to feed their egos and make them think you are weak and timid. Just be patient, and let them talk and strut all they want until you have something to clean them out. When you win, just brush it off to luck and move on. They’ll never know what hit them, and really attribute their loss entirely to bad luck.

Keigu,

Financial Samurai - “Slicing Through Money’s Mysteries”

Time Accelerates, Let’s Not Waste It

Have you ever woken up one day and asked yourself, “Where did all the time go?” We look at old photos and sometimes surprise ourselves with how young, or how good we looked back then. Not to worry, I still say we look pretty good today.

Time is like an oil field which eventually gets depleted. And sadly to say, the depletion rate accelerates! If for simple math’s sake, we were to live till 100, the first year of our life takes only 1/100 of time. Yet, the 51st year of our life is takes 1/50th, and our last year is takes up 1/1, or 100%.

Today’s challenge is to simply accept the fact we only have one shot at life, so we might as well do the best we can. If we have an urge to put things off until tomorrow, just finish it today. If we want to learn a new sport and get better, hurry up and practice! Don’t let your guitar gather dust and that rose go unappreciated.

I strongly believe that financial stability is achieved through a mindset and a way of life. Like trying to lose weight by just going on a temporary diet, it just won’t work in the long run. It takes many simple steps to change one’s mindset. The first simple step is just reading as much as you can about the various situations on the many different blogs here: http://www.wisebread.com/top-100-most-popular-personal-finance-blogs/.

Readers, have you achieved financial stability through a change in mindset? What are the main differences between the new you and the old you?

Keigu,

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

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About

FINANCIAL SAMURAI – INTRODUCTION

The Journeyman’s Goal To Financial Independence By 45

After 10 years in corporate America, I thought I had it made. A six figure job, a real estate portfolio, company stock, and a savings/emergency fund that would last me 3 years if I ever became unemployed. I did everything the personal finance books taught us to do and I still lost 35% of my net worth in 2008-2009 due to the economic meltdown.  The financial downturn has motivated me to share my experiences to not only help others, but to keep myself honest in my spending habits.

FROM HUMBLE BEGINNINGS

My first job ever was at McDonald’s for $3.12/cents an hour. I was responsible for opening up the store at 6am every weekend for several months. The job was horrible, and we had a power hungry manager who scolded us for speaking Spanish and not English in front of customers. At least I got a “B” in Spanish. I remember trying to make 9 Egg McMuffins at a time for 3 straight hours, adeptly cracking eggs left and right with both hands. It was hot, and oh the pressure was immense. Things weren’t all bad though. After-all, we could eat as many hot apple pies we wanted.

My parents never bought me anything too expensive growing up. They were frugal and made an average middle income salary working for the government. I never had a camera or a Nintendo console, but I did enjoy playing tennis with my father and listening to my mother talk about religion. The most expensive gift I ever got was a 1987 Honda Civic with 140,000 miles for $1,800 bucks after doing well in HS. I’m truly thankful for this gift as I drove it until I graduated college.

COLLEGE

I had a choice between private school or public school for college, and I chose public school. There was no way I could feel comfortable allowing my parents to pay $25,000 a year in tuition alone, when there were plenty of top quality public schools for only $5,000 a year. Besides, I planned to payback my parents and couldn’t stomach that type of debt. The $30 a day I made at McDonald’s had a more profound impact on me than I realized!

STOCKS ARE VOLATILE

My father introduced me to the stock market in college. Through stocks, suddenly I could make much more money than through working at the library at now $4.5 an hour. Little did I know, that I could lose an infinite amount more money though! The taste of success came when I bought 500 shares of Books A Million (BAM, a now defunct Book Seller). The stock went up 25%, and I made $550 in 1 hour. From that trade on, I knew I wanted to do something in finance, where anybody with enough guts could make as much money as they wanted.

LUCK AFTER ENTERING THE WORK FORCE

When I first entered the work force out of college, things were explosively recovering from the 1997 Asian & Russian financial crisis. I got lucky and purchased a particular internet stock (VCSY) for $3,000. It shot up to $150,000 in three months and I sold, not at the peak of $180,000, but close enough.

Flush with cash in my early 20’s, I went kind of nuts, buying a motorcycle and a very fancy car. I’d eat at the fanciest restaurants in NYC and went on lavish vacations. When I changed jobs for a better opportunity, I finally woke up to the realization that I was just flushing my good fortune down the drain. I started to get serious about my finances. In early 2003, I sold my $80,000 car and used the proceeds along with the rest of the money left to buy my first 2/2 condo in a prime location in a big city. It is now renting out for positive net income, and I plan to pay it off within 8 years.

Despite this initial taste of success, I’ve made so many personal finance blunders in my 20’s, it wouldn’t be right not to share with you the errors in hopes you don’t do the same. Hopefully, through Financial Samurai, we will never have to say “if I knew then what I know now” as it relates to personal finance again.

WHY RETIRE BY 45?

Retiring at 45 is a “see if I can do it goal.” I actually really enjoy my job, but I think I’ll enjoy it more if I didn’t need to work! What’s the fun and challenge of choosing to retire at 80?  I might be dead by then!  Like studying for an exam, people tend to cram the week before. I want to cram now.  Essentially, I believe that if you can work for 20 years in your profession, you will have the power to retire if you want to.

One of my main motivations for writing is to interact with readers, so please feel free to comment!  I hope we can all grow rich together over these next 10 years!  Welcome to the journey!

Interviews around the web:

* On Couple Money: Sunday Blogger

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Rgds,

Financial Samurai – “Slicing Through Money’s Mysteries”

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SENSEI & PART-TIME EDITOR – INTRODUCTION

I’m in my mid-40’s and have reached financial independence through a lot of hard work, and a little bit of luck.  My net worth is in the multiple seven figures, and my primary residence is paid off.  With no debt, I still don’t live extravagantly, but I am living carefree.  All expenses are paid for entirely by my interest income from my cash savings.

Unlike many personal finance sites who have young writers with little financial experience, I’ve already made my money, and am happy to share my knowledge and opinions with you.  My belief is that you would rather take personal finance advice from someone who’s been there and amassed a good nut, than from a 25 year old kid in debt, making less than you!

Ideally, you already know the basics of personal finance, such as: 1) spend less than you make, and 2) pay yourself first.  I seek to discuss other topics, such whole life insurance, derivatives, and seeking tax efficient strategies.

Financial Samurai is a site where I will freely write about money’s great mysteries.  My posts will be straight from the gut and unbiased.  My passions lie in real estate, the stock market, and private equity investments.  I believe you must think big, to win big.  Risk taking is necessary, and is the only way to really achieve financial success early or ever!

Why “Financial Samurai?”

A Samurai is a noble, disciplined warrior who serves their citizens and fights with honor.  The world of finance is full of traps, taking tremendous skill and discipline to artfully navigate through the dangers.  Temptations are everywhere, and we will seek to slay them one by one.  Every now and again, we will be tempted to cheat the system like so many white collar criminals have done in the past.  Bernie Madoff and Ted Kozlowski have no sympathy from me.  They, along with all their co-conspirators should rot in jail, and then proceed to rot in hell.  As a financial samurai, you will never dishonor the system, and will righteously fight towards financial freedom!

I’ve known FS for several years, and we have decided to combine resources and share various opinions.  We are a lot alike, I’m just older.  As a team, we can reach out to a wider audience, especially those who have gravitated beyond the personal finance basics.  I hope you will find Financial Samurai to be fun, informative, and real.  We aren’t rich because of this blog and pretend to be less financially secure so we can better relate to readers.  We’re rich because we’re disciplined and understand basic necessities for financial freedom.

The secrets to wealth are quite simple:

* Spend Less Than You Earn

* Don’t be a weak spending fool on things you don’t need

* Come in first, leave last and work your hardest.

* Take calculated risks and press when the opportunity is right.

* Never invest in anything you don’t understand.

* Give freely, and give often.

Welcome to Financial Samurai!  Please sign up at the top right to get updates via Twitter,  RSS or Email!

Keigu,

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