Retirement | Financial Samurai

Government Employee Entitled to A $100,000,000 Bonus!

Yes, I know I’m being a tad bit facetious here, but not really. After getting US$45 billion in government aid, the US government and we the people of America own roughly 36% of Citigroup. The interesting debate is whether Citigroup employee, Andrew J Hall should be paid his $100 million bonus as described in his contract.

Most initial responses are with a vehement “HELL NO!” Who on earth deserves to get paid that much, people must think. However, what if Andrew Hall was responsible for bringing in $1 billion in revenue? Is it so egregious to pay the man responsible, a 10% cut? After all, $900,000,000 sure does employ and pay for many other Citigroup employee’s salaries! Should Citigroup risk not paying their star, and his team of employees for the overall sake of the firm and shareholders? As one colleague aptly put it, “RB, we live in America not North Korea!”

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The Correct Change

Posted by FS 7 Comments

The California Muni Bus system recently raised their one way fare from $1.5 to $2, as they desperately try to pay for another mismanaged government agency. When the fare was $1.5, sometimes you had to just eat the 50 cents change you were owed because you only had two dollar bills. Fine, your fault, no big deal. But is this the right type of thinking for those who are really looking to save money? After all, $2 is 33% more than $1.5. Would you be ok with paying $200 for that jacket if it was only $150, because the store has no change? Heck no. Government transportation systems around the world rely on this type of consumer laziness to pad their profits and make more than they normally would. Retailers who sell gift cards, either count on the consumer to lose the gift card, forget they even have it, or let the usage date expire to reaping in millions of dollars each year.

As I was on my way way home from work this afternoon, a woman told the bus driver after he started moving that she didn’t have correct change and only had a $20! He muttered something under his breath and told her to go ask fellow passengers. Come on lady, how many of us bus riders are going to have one $10, one $5, and five $1s for your $20? We take the bus! Change for $5 bucks ok, but $20? So sorry. In the end, none of the 20+ passengers had any change, and she sheepishly put the $20 bucks through the feeder!

If we’re taking the bus in the first place, we’re generally more frugal than the average person, so why would we be so lazy as to not give correct change? The answer probably has to do with convenience. Convenience is definitely valuable, no doubt. However, I want to challenge the RB30RB40 readers on this type of thinking, because collectively, over our life times, not giving the correct change ads up. Laziness is what results in late charges, and over draft fees and robs us of our financial freedom. So much about personal finance is about making conscience decisions that allow us to prosper going forward.

When the lady got off the bus, the bus driver yelled, “Correct change appreciated as always unless you got a $20! Hold on!”

Have a fantastic weekend everybody!

Best,

Sam

Controlling The Urge To Splurge

Posted by FS 17 Comments

I went shopping this weekend to buy myself a new pair of comfortable brown leather loafers for work. I’ve worn my $60 Timberland loafers from Shoe Pavilion (discount store) for the past two years, and they are starting to get holes. I have to say, when it comes time to shop for work clothes, I’m just so uninterested. To me, shopping for work clothes becomes a “work expense” I resent. Because dressing reasonably professionally is a necessity at work, I feel I’m not spending my money on what I want, and that annoys me. My ideal outfit, after all, is a t-shirt, a well worn pair of jeans and flip flops.

I decided I wasn’t going to buy the same old boring shoes anymore. I was on a shoe revolt! Instead of going to DSW Shoe Company or Ross Dress For Less, I went to Barney’s New York to buy a $435 pair of Tod’s loafers (see picture)! I’ve actually been eyeing this shoe for more than two years, and just couldn’t find my size when it went on sale for “only” $250 last Christmas. It’s a good looking shoe, with beautiful leather and a nice rubber sole. However, there’s no way in heck it’s worth $435, or 5X what I’d normally pay for shoes. That said, I bought it anyway, because I wanted to enjoy the shoe, at least temporarily before I see the charge come up on my credit card bill online.

I’ve really spent $0 dollars, b/c the credit card is a wonderful tool to temporarily borrow something without any cash outlay. Where people seem to get in trouble is when they actually keep the item, go figure. Barney’s has a 30 day return policy, and I expect to tempt myself for at least a couple weeks before I wake up, smack myself and realize that $435 is just an absolutely ridiculous sum of money to spend on loafers. I’m just being lazy, and not searching cheaper stores for equally attractive shoes. In the mean time, I’m going to enjoy these loafers to my heart’s content.

My system of resisting the urge to splurge is quite simple:

1) Splurge on things if you really want it, but make sure there is a return policy and that you understand the terms! The initial point of purchase is generally the highest point of euphoria, especially when not paying cash. The euphoria tends to fade over time, and the dread mounts when the bill comes due. If there was a return policy on cars, I’d be all over it! But, as my wife always says when i’m about to buy a new car, “There’s no return policy!”

2) Enjoy the item for the life of the return policy minus 1 day. You need to enjoy the good for as long as possible to rid yourself of the desire for that good. Return it one day before it’s due at the latest, b/c you may forget, or the store may try and manipulate you into not being able to return the good.

3) Take the cost of the item and multiply it by 130% to get the pre-tax income you need to make/spend. Take this pre-tax income and divide it by your hourly wage to figure out how many hours you need to work to buy that good. The first exercise is generally enough to make me not buy anything wasteful. It’s the second item that really pushes me over the edge.

4) Remind yourself never to pay full retail. The reason why luxury goods manufacturer LVMH has 90% gross margins, is because they charge customer 9X their manufacturing cost. Try your hardest to find a similar good at a much cheaper price during your “borrowing period.” Make it an adventure in savings if you will.

5) Finally, take a look at that credit card bill on-line and tell yourself how good it’ll feel not having to pay such debt and return the darn thing! The reward for not splurging is the cash/savings that remains in your bank account! Think about the lost investment returns you’ll be missing, and remind yourself that the money you spent is less money you’ll have for achieving early retirement.

After all these defenses, there are some things in life you just have to have, such as that fine Rolex watch you’ve waited 10 years for ever since graduation. Whatever the case may be, I firmly believe one should be able to treat oneself within reason. For a car, my limit is spending no more than 1/10th my gross income. It’s just when you want to have that 2nd watch, that 5th pair of jeans, or third LV handbag where things start spiraling out of control. I think you’ll have fun resisting the urge to splurge with the 5 defenses above because you’re actually getting to enjoy the item without having to buy it. Don’t ever feel guilty returning an item. It is your right, and your early retirement prerogative!

Rgds,

Financial Samurai - “Slicing Through Money’s Mysteries”

Going Broke to Win Big! The Ultimate Way To Budgeting

Posted by FS 10 Comments

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

Posted by FS 4 Comments

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

Be Your Own Fund Manager: For your after tax investments, Motif Investing allows you to build a basket of 30 stocks for only $9.95, instead of spending the normal $7.95 for each position ($230+ commissions). There’s no need to pay expensive and ongoing active management fees for mutual funds again. Once you build your own portfolio, or purchase one of the 150+ professionally created motifs, you can simple dollar cost average with one click of the button every time you have money to invest. You can even buy retirement Horizon motifs, that act like target date funds, except you don’t have to pay the 1% management fee either. Finally, you get up to $150 in free trading credit when you start trading with Motif Investing. Motif Investing is truly the low-cost, efficient, and most innovative way to invest today.

Updated on 2/8/2015. Let the bull market continue!

What’s Your Number?

Posted by FS 8 Comments

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

Posted by FS 9 Comments

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”