The wooden bar shimmers with beer stains as I stubbornly try to wipe them away.  Each jab of the napkin gets stuck, like a fly to Venus.  Eventually I give up as my friend returns from the Thomas Crapper smiling.

“Sam, when I get my bonus this February, I will have hit my goal of saving $1,000,000 in the bank!” said my 38 year-old friend Paul over his Guinness.  He went on to explain, “I’ve been saving my bonus every year for the past 16 years so that I can one day quit my job and do something more relaxing and fun.”

“Well done Paul!” I respond as I pat him on the back.  “But what else are you going to do?  Not many jobs in the world pay your type of income.  Are you sure you’re willing to give it all up for a life of leisure?”

“Hmm, I don’t know Sam.  I guess all I have to do is work another year, and I’ll get another $100,000 or so in bonus after tax.  Maybe I should just continue to work?” questioned Paul.

“I think a lot of people would give up their left nut to receive a $100,000+ after tax bonus every year.  Maybe you should think about taking a sabbatical instead to rejuvenate?” I replied.

“A sabbatical would be great!  But, I think my company just demotes, underpays, or ultimately lays off people who take them,” explained Paul.

“Well isn’t getting let go exactly what you want?  That way, you can get all your deferred compensation without a hitch!” I said.

“Good point!  Time to kick back and get faded baby!” Paul cheered as we chugged our beers in unison.

MORE MONEY, MORE QUESTIONS

Paul is an account manager at a major software company.  He joined the firm out of undergrad in 1996 and slowly rose through the ranks to become a “Vice President” of the firm.  Paul likes his job, but doesn’t love it as the industry’s go-go days are over.  Ever since the 2008 downturn, Paul no longer feels proud to work at his firm or in his industry.  He feels constantly assailed by politicians and people who think making over than $200,000 is evil.

Paul’s job is to simply sell his company’s software and make sure his clients are satisfied with the product.  Whenever new software company updates come up, it’s up to Paul to notify and up-sell those upgrades as well.  Software sales is not a sexy job, but it pays very well.  Paul has built friendships with his clients, often going out to dinner with their husbands or wives and attending the same charity functions.

INCOME GROWTH STALLS OUT

When Paul first joined his firm, he was making about $40,000-$60,000 a year for the first couple of years.  In his third year, he got promoted to Associate and saw his base go up to $80,000 and his bonuses rise up to $100,000.  In his 6th year at the age of 28, Paul was promoted to Account Manager and saw a base increase to $150,000 a year with bonuses up to $250,000.  By age 31, Paul got another promotion to Vice President with a new base salary of $200,000 and bonuses that could go as high as $500,000.

Paul has been a Vice President for seven years now and saw a 50% slash in his 2011 bonus to $250,000 because of a 70% decline in his company’s earnings.  Paul isn’t delusional, and recognizes that making $500,000 a year is still an incredible amount of money.  However, a part of him wonders,”why bother” working hard anymore given his pay is no longer based on merit, but on the overall health of his company, which he has no control over.

One of his buddies a couple years ago gave him a dose of reality, “Paul, software sales is a bullshit job and you know it.   Don’t you want to do something else more meaningful with your life?“  Paul has been thinking about this statement ever since.

PROGRESS IS HAPPINESS

If ever there was a case that proved “progress” is more important for happiness than “money”, this would be it.  For the years that I’ve known Paul, he’s been on the up and up.  I love him for his frugality.  He drives an 8 year old Honda Accord, buys clothes from Macy’s only on sale, and looks like just another regular guy.  I also like Paul for his generosity, always fighting tooth and nail to pay whenever we go out to eat or drink.  It’s just in his nature, and I’ve had to resort to paying while he goes to the restroom or is distracted with a pretty waitress.

Now that Paul’s income is no longer rising at a steady clip, he’s starting to lose interest in his job, yes even with his large income.  Paul enjoys working with his clients, but there’s this deep nagging feeling that he could be doing something different with his life.  Paul has always wanted to be an entrepreneur, but when he graduated, his firm gave him a job offer he couldn’t refuse.  As a result, all of Paul’s entrepreneurial dreams have been put on hold.

Paul told me that when he first started working for his software company he vowed to quit his job once he saved $1,000,000 cash in the bank.  Now that he has, he doesn’t know what to do.  For the past 16 years, Paul has only done one thing, and that’s sell.  Like Lyndon in “The Curse Of Making Too Much Money And Not Pursing Your Dreams,” Paul enjoys photography, but doesn’t have the skill to become a professional.  Like me, Paul enjoys to write, but I don’t know if he will have the discipline to write constantly and live off peanuts as he makes a name for himself online or never in the publishing world.

Maybe Paul is entering a mid-life crisis and just needs a nice new Porsche 911 Turbo?  The fact of the matter is that after 16 years, Paul is bored.

HOW MUCH DOES IT TAKE TO LIVE FINANCIALLY FREE?

With $1,000,000 spread across several banks at age 38, I consider Paul to be wealthy.  His wife has a stable job and makes around $100,000 a year.  The $1,000,000 in the bank is only the liquid portion of his wealth.  He also has about $450,000 in his 401K, $500,000 in deferred compensation, and around $800,000-$1,100,000 in real estate equity from multiple properties.  In other words, his net worth is around $3 million dollars.

If Paul quits his job, his roughly $10,000 (base) to $30,000 a month (base + bonus) in after tax income goes out the window.  He also loses $500,000 in deferred compensation that vests over 3 years if Paul can’t successful be laid off, as opposed to quitting or getting fired.  Paul doesn’t have to worry about health care because he’ll just go on his wife’s plan.  However, what’s the fun in having so much free time if he can’t spend it with her, Paul wonders.

Suggestions for those who want to quit their jobs:

* Calculate your cash burn: Paul’s total monthly expenses is around $6,000, a frugal amount considering his $10,000-$30,000 monthly after tax income.  Hence, with $1 million cash in the bank, he is covered for 167 weeks or roughly 14 years.  If Paul were to sell his house and free up $400,000-$500,000 in equity and reduce his total monthly expenditure to $4,000 a month, he’ll have 350 months of living expenses equaling 30 years.

* Calculate your total non day job income:  Paul generates about $3,000 a month from his cash savings in the form of various 3.5-4% long-term CDs he’s taken out.  Furthermore, if Paul is able to be let go by his firm, he will receive his $500,000 in deferred income over 3 years at roughly $165,000 gross a year.  If Paul maintains his $6,000 monthly expenditure, he should have no problem living worry-free for at least 3 years without having to drawn down any of his $1 million in principal.

* List out all your plans.  After calculating all your passive income, you’ve got to come up with a list of things you’d like to do that will hopefully make you money.  It is a blessing to do what you love and earn a living at the same time.  Unfortunately, few people have this terrific combination.  Given Paul has saved religiously for the past 16 years, he can now seek to do something he truly wants to do, and not worry so much about the income anymore.  Paul lists: working with disabled children, working for UNICEF, teaching, starting his own financial advisory practice, working as an animal trainer at the zoo, and writing for a travel magazine as his ideal jobs.

* Investigate what the potential income is for your new endeavors.  I can tell from Paul’s list that the most he’ll make is probably $40,000-$50,000 a year, except for his own business, which could be infinite.  If we add up Paul’s $3,000 a month in guaranteed passive income + $3,000-$4,000 a month in likely salary from what Paul really wants to do, he can’t cover his $6,000 monthly expenditure without drawing from his savings, since it takes $8,000-$9,000 in gross income to spend $6,000.  As a result, Paul needs to either downgrade his living standards, save more, or make more.

* Think about family.  Paul and his wife (33) currently do not have children.  They aren’t sure whether they do want children but will seriously think about kids over the next 3 years.  A child could literally mean a 10-20 year difference between when one can retire!  With education costs soaring out of control, one could very easily spend $500,000+ on their child through college.  Granted, many families live on much less for their kids, but Paul is conservative and would rather have more money than less money for his kids.  If Paul and his wife do have a child, his wife has to keep on working while Paul takes care of the child or vice versa.

* Put it all in a spreadsheet.  It’s easy to talk through the income and expenses, however you need to build a spreadsheet with every single line item to make sure you aren’t missing anything.  The last thing you want to do is quit your job and find out you forgot about that pesky $500 a month student loan bill!  After you’ve put everything in a spreadsheet, discount your income by 10% and increase your expenses by another 10% to add an extra layer of conservativeness.

* Check out the charts.  The following chart is my recommended savings rate and amount one should have at various stages of their working lives.  The number where I would comfortably say you can quit your job and do anything you want without any fear of going into poverty is around $3,000,000 in liquid savings, as that will throw off at least $60,000 a year in interest income at 2%.  For others, it may be more or less.  It depends on your lifestyle.

* Will a long vacation or sabbatical do the trick?  If you work at a reputable firm and have been there long enough, the firm should have a sabbatical policy.  Paul’s firm allows up to a three month, full salary sabbatical for every 10 years he works at his company.  Since he’s been there for 16 years, he’s well over due.  A sabbatical will likely affect your compensation, but it’s a small price to pay for 3 months of bliss don’t you think?  Well, it depends on how much you make.  Ironically, the less you make, the better the sabbatical!  There is a dark side to early retirement which everyone needs to read.

THERE NEVER SEEMS TO BE ENOUGH

Despite Paul’s hefty savings and assets, Paul still has doubts on whether he should call it quits in his lucrative career and become an entrepreneur that might pay nothing for years.  Even if he joined a non-profit organization that pays $50,000 a year, he wonders if he will get tired of the bureaucracy and not be able to adjust to the pay .  His promise 16 years ago of quitting once he hit $1,000,000 in savings now looks suspect.

We can do all the analysis we want and probably still not be able to make a 100% certain decision on how much one needs to save to quit their jobs.  I have a feeling the answer is different for everybody.  The real questions we should all be asking are: What do we plan to do once we quit our jobs?  What are the alternatives?  And what are our skills and interests that will allow for a rewarding experience?

The way I see it, here are Paul’s best choices:

1) Figure out how to be included in the next round of layoffs so Paul doesn’t lose his $500,000 in deferred compensation.  Furthermore, Paul gets 2 weeks of severance for every year he’s worked plus a minimum 4 weeks bonus and all his accrued vacation days paid.  We’re talking around 40 weeks of severance plus $168,000 a year for 3 years in deferred compensation as Paul figures out his next path.

2) Continue working at his job, but take it down a notch so that he’s doing just enough to stay employed, but not enough to feel frustrated if he doesn’t land that big client or fails to get recognized for good work.  This is the safest route which will allow him to continue to bank $100,000+ bonus checks, earn his $200,000 base salary and provide for his future family if he so decides.

3) Take it easy at his job and seriously develop his side business until it generates an amount equal to 50-100% of his $200,000 base salary.  This might take years, and could be accelerated if Paul decides to dedicate his efforts full-time on his side business.  But, how many people on earth can develop a side business that generates $100,000-$200,000 if they are working full-time?  Let’s be honest here.  $10,000-$20,000 sure… but 10X that?

4) Take a sabbatical for 1-3 months to recharge.  Paul still gets to earn his $200,000 base salary while he’s away, and maybe when he returns, he’ll realize just how much he enjoys his job.  He could use the 1-3 months to develop his business idea as well.

5) The worst choice is quitting his job, losing his $500,000 in deferred compensation and severance and having no side business up and running.  This move would be done out of anxiety, but a promise kept 16 years ago.

Bartender!  One more round of Guinness for the both of us please!

Readers, what is your recommendation for Paul?  Should he quit his job since he’s reached his target savings goal and has already dedicated 16 years of his life to his job? 

Could you quit a $200,000-$500,000 a year job that you liked, just because you don’t love it?  Is loving your job overrated?

Regards,

Sam

Photo: Reading Entrepreneur Magazine On The Beach. Sam.

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$180,000 by age 30, $500,000 by age 40, $1 million by age 50, and $2 million by age 60. These are the rough estimates for what I think everybody needs to have in their 401Ks to have a reasonable attempt at a comfortable retirement. If you read the comments from my “401K amount by age” article, you will notice that those in their mid-30s and below tend to disagree with these amounts, while those older generally agree, verify, and accept.

I don’t know why younger folks aren’t willing to follow along. It’s often times just rebel and justify why they aren’t saving.  ”Live life!“, they say.  True, but who says you can’t live life while saving?  The easiest way to learn, is to listen to an older person who has gone through what you will go through. Perhaps it’s immaturity, or the way things are where every generation needs to question the next generation and the status quo.

There’s really no mystery to money. The more you have, the more you can make.  It’s all about building the NUT large enough so that when you make a fortuitous 10% return, you’re pulling in an extra $50,000-$100,000 on your $500,000-$1 million portfolio.  Saying you doubled your returns from $10,000 to $20,000 due to contributions is fine, but it’s really chump change and misleading.  Build the nut, so that you can have real returns.

If you aren’t on retirement track based on my 401k age chart and disagree with my figures, just do the math YOURSELF and see whether you’ve saved enough to retire on. I don’t think you’re going to like the results.

There’s one question that kept coming up over and over again, and that’s, “How can I save so much, if I don’t make so much?” It’s a fair question that needs addressing. One commenter mentioned my table must be of “California Currency”, which made me chuckle. The problem of not making enough and therefore not being able to save enough is an honest problem which I’d like to address via a change in mindset and a chart.

HOW TO SAVE FOR RETIREMENT IF YOU DON’T MAKE MUCH

* If you don’t find it painful saving money, you’re not saving enough. If you’re not sweating at the gym and your muscles don’t feel sore the next day, you might as well go eat a double cheeseburger with a milkshake and fries because you’re just wasting your time. The same goes with saving. Since you’re in the lower income bracket, savings is not supposed to be easy. If you’re not feeling the disposable income pinch of putting away, 20%, 25%, 35%, 50% of your income into your 401K, IRA, or savings account, you simply are not saving enough. You need to feel the pain, so you are forced to change your spending habits.

* Recognize that you are not rich. For whatever reason, you do not make a lot of money. It could be by choice (messed up in school, less lucrative field) or misfortune (laid off, accident, starting over). Once you recognize you are of lower income, you’ve got to come to grips with the fact that retirement is not going to be filled with milk and cookies.  Think tasty water and crackers instead.  You’re going to be working longer and harder than others. You’ve got to save more than your wealthier friends simply because you have less.  If you only make $50,000 a year, what on earth are you doing driving a $25,000 car? That’s 50% of your gross income, and around 65% of your net income! If you guys only earn a combined $70,000 a year and have a child, what are you doing living in a 3 bedroom apartment that costs $2,500+ a month? Downsize to a two bedroom apartment and save the difference. A family of four in Tokyo live in 600 square foot, 2 bedroom apartments!  Don’t act rich, because you are not.

* Do the math. One commenter asked how he can put away $17,000 a year in his 401K and then another $5,000 in his traditional IRA if he “only” makes $70,000 a year. I told him to do the math. He did the math, and he did it all wrong!  This is what he calculated:

70k – 17k (401K) = 53k —> Fine. 
53k * 0.4 (taxes)= 31.8k —> 40% tax rate on a $53,000 income?
31.8k * 0.2 (after tax) =25.4k —> What’s this extra 20% tax?
25.4k-5k (Roth) = 20.4k —> Why contribute to a Roth after tax, when you can contribute to a traditional IRA pre-tax?
20.4k/12 = 1.7k per month. —-> Wrong.  Should be around $35,500 net = $2,960/month, 74% more than what is stated.

The effective tax rate on a $53,000 income is around 17%.  Add on 9% state tax, and at most he’s around 26%.  His Roth deduction is fine, if he doesn’t want to contribute $5,000 in a traditional pre-tax.  However, I always recommend paying less taxes than more.  I am shocked how little people understand what their effective tax rates are, and the difference between pre-tax and post-tax contribution. Do the math people. You have more than you think!

* The new normal is a lower rate of return.  Anybody telling you to input more than a 5% constant rate of return on your investments is being too aggressive.  The days of 8%+ portfolio returns are gone in an environment of 2% long-term treasury yields.  There is an inextricable link to fixed income and equities, and baking in more than a 2.5X return over the risk-free rate is a stretch.  We can increase our assumptions once we see an uptick in inflation, corporate earnings, and risk appetite, but not now.

* Realize that making more money is a choice, especially if you live in a developed country.  According to one researcher, it only takes around $34,000 to be in the top 1% of world income earners. Meanwhile, $33,000 so happens to be the middle line between the top 50% and bottom 50% of US income earners. You have a choice to work more than 40 hours a week to get ahead. You have a choice to have as many or as little kids as you wish. You have a choice to start a business and make extra income on the side. You have a choice to get in before everyone and leave last, while proposing new profitable ideas for your company.  You don’t have to be a top income earner, you just have to make enough to be happy and save.  We live in a free country, not North Korea.

* Vote for Obama.  With a ~$2 trillion dollar deficit generated under the Obama administration, the incumbent is your best bet for ensuring that social welfare programs, unemployment insurance, affordable healthcare, and low taxes continue for the middle class.  By raising taxes on “the rich”, the Obama administration is effectively redistributing wealth to lower income individuals through government programs.  Republicans are more focused on cutting spending to balance the budget, and not raising taxes given our system already has a progressive structure already.  Both systems have its merits and flaws, but if you are making under $200,000 and your retirement accounts are light, from a financial point of view, you’re better off voting Democrat at the margin.

A SYSTEM TO GRADUALLY INCREASE YOUR SAVINGS

Now that you’ve changed your mental outlook, here’s a proposed savings chart I developed to slowly turn the screws so that you get to your retirement goals.  Here are some following assumptions:

FINANCIAL SAMURAI RECOMMENDED SAVINGS RATE CHART

Assumptions for the chart:

* No matter what your income level, you are saving some money.  Develop the savings habit early and always.

* As your income level increases, so does your savings percentage rate.  Challenge yourself to save more as you make more.

* It’s important to keep your rate of spending slower than your income and savings growth.  Don’t let lifestyle inflation derail your plans.

* After you have maxed out your 401K at $17,000, the after-tax savings is simply the difference in your income X savings rate – $17,000. The after-tax savings amount is higher than reality, because you have to pay taxes on the gross income. Hence, multiply your after-tax savings by your Federal + State marginal income tax rate to get your true after-tax savings amount.

* At around $65,000-$85,000, I am assuming you should be able to maximize your 401K contribution, and save more money. In other words, try and target $65,000-$85,000 in annual income as soon as possible.

* I stop at a 35% savings rate to allow one to enjoy their income.  Furthermore, at a 35% savings rate at $100,000-$200,000, you will have more than $5,000,000 in retirement savings if you consistently save for 43 years assuming a 5% constant rate of return.

* If you can save more than 35% of your gross income, go for it! After you earn $200,000, you should gradually aim to save 40-50% of your after tax income.  We stop at $200,000, because this is the level President Obama deems rich, although plenty of people who make more have difficulty saving a well.

FINANCIAL SAMURAI 401K RETIREMENT SAVINGS GUIDELINE RECAP

CONCLUSION

The good thing about not making much money, is that you are used to living on not much money, and therefore you don’t need much money to retire on!  With the above assumptions and chart, I hope I’ve provided a guide for those who have wondered how they can save so much if they don’t earn much at all.  Savings should be an automatic way of life.  Always save money before you pay yourself.  That way, you will always operate in the confines of your disposable income.

Another good thing about retirement is that when you are retired, you do not have to save for retirement.  That 5-35% savings rate I discuss in my charts disappears, making you suddenly that much richer.  Meanwhile, you’ve hopefully paid off all your debts, and can live in your home mortgage-free for the rest of your life.  But, even if you still have a mortgage, or are renter, with the above system, you should still have enough money to support you until the end.

Please try not to make excuses for why you cannot save even just 5-10% of your pre-tax income in your 401K.  I lived in super expensive Manhattan on $40,000 a year and managed to put away $15,000 into my 401K.  $40,000 in Manhattan is like $35,000 in San Francisco, and only $25,000 in the MidWest.  You just have to make a choice whether you want to build a safety net for your retirement or not.  Hopefully you will continue to make more money the longer you work, making saving more money easier and easier.  You’ll wake up 10 years from now and amaze at how much money you’ve managed to accumulate.

It’s really up to you.  See you at the beach!

Readers, do you think my savings chart is reasonable?  What percentage of your income are you saving?  

Photo: Oahu Sunset, 2010. Sam.

Regards,

Sam

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Despite the government saying the economy is better and jobs are plentiful, you know they are lying.  How?  Because there are still grown adults living at home with mom and dad!  Furthermore, if you aren’t living at home with the ‘rents, then you certainly know people who do.  As an equal opportunity blogger, I thought it appropriate after writing, “How To Get Girls If You Live At Home With Mom And Dad“, to also write the other version.

There are several assumptions in this post.  First, you are likely under 35 years old, since there’s no such thing as a 35+ year old still living at home with their parents.  Second, you don’t look like Jessica Alba or a sexy version of Hilary Clinton or Janet Reno.  Third, you aren’t a princess with boku bucks to spend.  Finally, you are likely female who likes boys and your name is not Jerry Sandusky!

STRATEGIES FOR GETTING BOYS WHEN LIVING AT HOME WITH MOM AND DAD

1) Post on your Facebook or Twitter page you are available and looking for love.  You will immediately have all your stalker friends send you private messages declaring their love for you!  At least 50% of your male friends will have secret crushes on you.  They look at every picture album you post and every word you write on your wall.  They are waiting, like a chipmunk in heat to pounce on the big bag of potato chips!

2) Before he comes over, tell him that your father is away on business.  A boy’s worst nightmare is facing the father of the girl he’s trying to get with.  If you’re trying to seal the deal, you’ve got to seriously put the boy’s mind at ease that he will not run into your father!  Boys imagine fathers with shotguns, baseball bats, and machete knives waiting for them when they walk out of your bedroom.  Assure the boy, and you will get him to come over.

3) Tell him what your mom likes.  Boys think about wooing not only you, but your mom, but not doing your mom, let me be clear.   So, if he knows your mom likes chocolate biscuits, he will get her some.  The boy knows that if he can win over the mom, his life will be multiple times easier and can probably come over to the house without having to sneak in.  The boy also knows that it’s practically impossible to win over the father, so he’s not going to pretend to try.

4) Talk about your dreams and ambitions.  Boys really don’t care if you live at home with your parents.  We really don’t care, honest!  Boys just want to spend time with you, preferably alone to launch the love session.  You don’t have to feel embarrassed at all being a 27 year-old stay at home daughter.  Instead, the more honest and open you are, the more the boy will want to rescue you from the palace.  Boys have the damsel in distress thing wired in their brain as much as girls have the “I wanna be a princess” fantasy wired in theirs.  The more distressed you are, the more he will want to save you!

5) Be willing to go on sleepovers.  Boys love it when girls are willing to bring a backpack and sleep over at their place.  It makes a boy feel like a man, even if he does have two roomies and only one bathroom between the three.   By showing you are wiling to sleep over, you are demonstrating your trust in him.  He will respect you deeply and tread lightly before pouncing like that chipmunk in heat.  Just bring a tooth brush, facial wash, and your skimpy pajamas.

HOT OR NOT, IT DOESN’T MATTER

If you are really hot, the fact of the matter is, boys don’t really care if you live under a crickety old bridge next to the train tracks in a cardboard box.  You’ve got it made since boys don’t think about how much money you make, what you do for a living, whether you own your own place, drive a nice car and other shallow things like that.  Only girl think about that when dating a guy!  All boys care about is whether you are attractive, nice, and won’t introduce them to your father.  Beaware of the father, please!

If you aren’t really hot, there’s no problem getting boys either.  All you’ve got to do is identify those boys who still live at home with mom and dad!  You see, boys who live at home with mom and dad are pretty insecure because society has put great pressure on them to succeed instantaneously.  The pressure isn’t on getting married, it’s on getting a great job and doing something grand with their life so that one day, they will be able to get married and take care of a family.

If you just open up and say, “Hi, I find boys who live at home with their parents really attractive!” you will have a tremendous amount of pickings!  Of course, you aren’t shallow and require boys to get jobs and become men by going out on their own.  All you want is for a boy to love you back and accept you for who you are.

Readers, any other tips for how you can get boys if you live at home with mom and dad?

Photo: Janet Reno Baby!

Regards,

Dr. Sam Love

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Is it sad to say that only until I started this post did I realize Black Friday is the day after Thanksgiving?  No, seriously, I had no idea, which means that I never buy anything on Black Friday because I’m working or up in Tahoe baby!

Could there be anything more silly than taking a day off of work to go spend money?  It’s like taking yourself out of the work force for two years, losing all that lost income to go pay $50,000 a year in tuition to network and party it up at business school!  OK, maybe Black Friday shopping isn’t that dramatic.

The “spend more, save more mentality” is not good for your pocket book.  How about, “Let me look and buy what I really need.  And if I don’t really need it, I won’t buy it!”  That’s a much better mindset, and you know it!

Now that I realize Black Friday is supposed to be a special day of sales, I’ve begun to comb through a list of things that I may want to buy.  Of course by the time I get off work, none of the items will be available, and the parking lot will be a zoo.  There aren’t many things I want to buy, so maybe you guys can give some consumption inspiration.

MY BLACK FRIDAY SHOPPING LIST

* Work socks. Gotta have me some fresh socks!  Maybe I can get a 2 for 1 special!  Cost: $30.  Likelihood of buying: 95%.

* Holiday cards, books, toys: The best gifts are hand written or hand made.  Guess I’ll be writing a lot of personal cards and knitting some nice scarfs!  Good thing I got a bunch of nice ones from Santorini already made.  As adults, we don’t really give or receive any presents anymore do we?  I know I don’t.  Gifts are mostly just for the nieces, nephews, and cousins under 21 years old.  Cost: $400.  Likelihood of buying: 100%.

* Casual dress shoes. Burning through my casual work shoes like a marshmallow on a stick.  Love them soft, handmade shoes by Tod’s have to admit.  Quality and comfort over quantity and discomfort! Cost: $300.  Likelihood of buying: 65%.

* 40″ LED TV to replace my 6 year old 40″ projection TV with green spots in the living room.  About two years ago, the picture started greening out and it’s gotten progressively worse.  Its just such a PITA to replace everything since I’ll have to get a new receiver and wiring as well.  Beside, I have another TV which is fine.  Cost: $700 for the TV, and $500 for a new receiver and wiring.  Likelihood of buying: 50%.

* A 13″ MacBook Air.  I’ve got a 3 year old MacBook with upgraded 4 gigs of RAM.  The problem is I only have a 120GB hard drive which is now full after my trip to Greece.  I could get a backup drive for $150-$250 as Sydney from Untemplater sas, or perhaps I can get the $1,600 version of the MB Air with a 256GB hard drive.  Damn, that’s expensive!  Even with the supposed 10% off on Black Friday, that just saves me tax.  How do people afford such costs nowadays?  I’m probably going to use my current computer for at least another year.  Likelihood of buying: 20%.

* A trip to Hawaii.  If Alaska Air, Hawaiian Air, or United Air have a last minute special to Honolulu, I’m there!  Round-trip tickets from San Francisco cost $640 on average during the winter, and $1,000 during the holidays.  If by some miracle prices are cut in half, I will go for my final week of vacation with no guilt, no doubt.  Likelihood: 50%.

* 2012 Porsche 911 Turbo in black.  At a cost of $160,000, what a bargain!  I could gun the car over famous cable-car California St. and catch 25 feet of air.  Alas, I don’t make $1.6 million a year, so that would violate the Financial Samurai 1/10th rule for car buying.  See folks who disagree with the 1/10th rule?  It’s so easy to follow!

IN SEARCH FOR DESIRES

I just spent $395 bucks on two tennis rackets which are softer on the arm.  Meanwhile, I had to change the brakes and battery on Moose to the tune of $795.  Hence, if I were to buy everything above for $3,300, the total two month expenditure would come up to around $4,500!  What’s more interesting is that the ratio of spending on others, to spending on myself is pathetically selfish!

The reality is, I’m probably just going to get new socks, cards, and toys for the kids and that’s it.  My casual work shoes will just be resoled for $40 bucks and I’ll just live with what I’ve got.  I really, REALLY hate crowds and can imagine a scenario where I’m at Best Buy trying to save $300 on a TV, and Moose’s door gets dinged in the parking lot costing $500 to repair! I’d rather just sit at home in my pajamas and pretend to shop on Cyber Monday!

How about you guys?  Any big plans for Black Friday?  Are you spending more this year or less?  How much do you think you’ll spend on Black Friday and the entire winter holiday?

Regards,

Sam

Do you get a thrill being broke?  For some reason, I do.  I’m not sure whether it’s that motivational fire it gives me to work harder for my next paycheck.  Or, the fact that when I have no money, I appreciate having money so much more.  Remember all the fun times you had as a student with hardly any income?  That’s the feeling I love.  Every time the bank account runs dry, I go into survival mode just like the starving student and figure out a way to make things happen.

Currently, I can’t for the life of me figure out what else to spend money on for the rest of the year besides the basic necessities.  I paid for my club membership and a couple new tennis rackets earlier this year.  There’s no need to buy a new used car anymore.  The last thing I want are more clothes and shoes after going to Goodwill 12 times this year already.  Meanwhile, there’s just only one more week-long vacation I’m planning on which has already been budgeted for.

For the past couple months, I’ve been mulling over whether to pay off some more rental property mortgage which costs 4%.  I’ve been going back and forth for a while until I just said screw it one afternoon.   I’m gonna pay a slug of this sucker off!

The next step was to decide how much to throw at it.  I refinanced to a 5-year ARM last year when the 10-year yield dropped to 2.65% in 2010, and managed to lock in the investment income rate of 4%.  4% so happens to also be my bogey for a risk free rate of return I will accept for doing nothing.

In the past, I had been just dumping all my excess cash into 5-7 year CDs at 4-4.25%.  The best CD rates of the same duration are now only yielding 2.5% after doing some checking.  Clearly, the next best risk free thing to do is pay down my 4% rental mortgage.

DECIDING HOW MUCH TO PAY DOWN

After much internal debate, I decided to pay down a $50,000 slug to save $2,000 a year in mortgage interest expense.  With barely any cash leftover after ear marking funds to pay for property taxes, charity, and pay for some of my parent’s home remodeling, I’m pretty much tapped out!  Here are some things to think about before deploying all your liquidity to pay down debt or buy that third vacation home:

* Decide if there’s anything else left you need to buy.  I racked my brain to come up with bigger ticket items other than the upcoming vacation and property taxes and I couldn’t figure anything out.  I don’t want to buy a new or used car to replace Moose, but if I need to, I’ll just save for several months and buy something.  I’ll probably buy some gifts during the holidays and go on another short vacation to Lake Tahoe as well, but all that can be funded from salary.

* Decide what would happen if there was an unforeseen large expense.  I don’t believe in an emergency fund as described in my article, “The Emergency Fund Fallacy.“  Emergencies are all too frequent, and there’s no point discriminating between certain dollar bills.  Make sure you have insurance for all sorts of accidents, including disability insurance in case you can’t work.  You can always decide not to save for a while as you tend to your necessities eg if you save 50% of your after tax income, you have a 50% income buffer for “emergencies”.  Also, identify who in your family can provide you a bridge-loan in case things really hit the fan.

* Know what your savings interest rate is and calculate the spread.  My bank savings interest rate on my $50,000 was a measly 0.3%.  That’s a pathetic $150 a year in interest!  To allow my bank to only pay me $150 a year on interest for that much money kind of makes me sick.  The spread of 3.7% (4% mortgage – 0.3% savings) is HUGE, especially since I like to arbitrage things out when spreads start hitting 2%.  As a result, paying down 4% debt is a no-brainer.  What is your bank paying you?

* Know thyself and your own risk tolerance.  Some expressed worry about the sudden lack of liquidity.  I save 100% of every other paycheck (50% of after tax savings), and have interest income, dividend income, online income, rental income, and can go teach tennis and flip burgers at McDonald’s for $10/hour if I have to.  Therefore, I’m not worried about suddenly going to a razor thin cash balance.  Instead, I get super pumped to work hard to make sure my other income streams are maximized!  It’ll be a fun goal to save up a good little war chest by the end of the year.

THE THRILL OF HAVING NO MONEY

Every time our backs are to the wall, we find a way to make things better.  “Going Broke To Win Big” has been one of my financial tenets for a long time.  I love the feeling of having no money because I get so motivated to try and optimize my finances and make more.  For those who are easily satisfied with what you have, give yourself some anxiety!  Seriously, depending on where you live, who really needs much more than $50-$100,000 to survive?

I always pretend I’m poor by starting from scratch every single month.  It keeps me on my toes and provides relentless energy.  You should try going broke sometime.  You might just start loving it!

Readers, do you get a similar thrill of having no liquid cash in your bank account?  What are you doing with your savings now that interest rates are so low?

PS Don’t ask me to lend you money OK?  I’m broke!

** A month after writing this article, the 10-year yield sank to 1.8% and now I’m in the process of refinancing the mortgage down to 3.375% and maybe taking some money back out!  Who knew rates would collapse further.

Best,

Sam

Imagine waking up one morning to see a Genie at the foot of your bed with milk and cookies.  She grants you the wish of converting your future earnings or current illiquid net worth into $250,000 cash.

For example, say you were to work for 20 more years and earn a median income of $60,000 a year before taxes.  Instead of methodically saving 20% for the next two decades, you can get all that money right now.  Would you take it?  I bet most would say “yes” since it’s your money and the present value of a buck is greater now than later.

The big question is, what are you going to do with the $250,000?  The stock market is volatile, bonds are bubbliscious, and savings interest rates are less than 0.2%!  Perhaps you’ll use some of the money to pay off your debts, further your education, and help out your loved ones.  Or maybe you’ll invest the money in your start-up company and watch it grow into the multi-millions.

Finally, maybe you’ll do absolutely nothing with the $250,000 and just keep it liquid for a rainy day.  The political landscape is pretty horrific as there’s no way the Jobs Act Bill will get passed since it attacks charities and municipal bonds which fund state construction.  Massive layoffs are imminent before the holidays despite cashed up corporate balance sheets because demand is uncertain.  You might very well be in for rough times, and that $250,000 + $1,600/month in unemployment insurance will help you get through!

Genies are appearing in front of many homeowner’s beds thanks to Ben Bernanke and the Fed’s low interest rate policy.  Few people would have ever expected the 10-year yield to drop below 2%, but it has.  Cash-out mortgage refinances are tempting people night and day now, but the party can’t last forever.  Ben’s nickname is “Helicopter Ben” for making it rain money.  I prefer to call him “Bengenie.”

WHAT I’D DO WITH $250,000 OF MY OWN MONEY (REMEMBER, IT’S NOT FREE MONEY!)

* Look for attractive 8%+ yielding 2 bedroom, 2 bathroom rental properties.

* Decide which municipal bond ETFs to buy.  Examples: CMF, CXA, HYMB, INY, ITM, PVI, NYF, PWZ, PWA, SHM, SMB, SFI.

* Invest $10-20,000 into the Yakezie Network for better user experience, interface, etc.

* Look for offshore high yielding, but stable assets given the USD will likely continue to remain weak or depreciate.

* Send $15,000 to my parents to help contribute to their home remodeling project.  Good luck guys!

* Do absolutely nothing with all leftover funds and wait for a potential recession to come when Obama gets re-elected.  There could be much better opportunities in the stock markets as a result.

Readers, what are some of the considerations before accepting the Genie’s wish? 

What would you do with an extra $250,000?

Regards,

Sam

There’s only been one bank that has consistently treated me like cow poop all these years and that’s Bank of America.  When I saw its shares dip to $6.5 (-45% YTD) during our S&P downgrade meltdown, I couldn’t help but wonder whether it was just karma striking back.  Granted, Bank of America has some wonderful people working for the firm.  I guess it just so happens that I hardly encountered any of them.

During the financial crisis in 2008, I spread my money purposefully to Bank of America given that I was afraid any and all banks could fail, and the FDIC only insured up to $250,000.  Before BoA, I had been banking with Citibank, USAA, First Republic, and a little bit at Chase.  As the markets began to recover in 2010, I withdrew all my savings and expiring CDs and refinanced a mortgage away from Bank of America because I just couldn’t take how uncompetitive BoA’s rates were and how poorly I was treated.

Banks are a commodity business that takes in money and pays you a certain rate, and lends out your money at a higher rate.  It’s what banking analysts call the net interest margin, or NIM for short.  The bank should provide safety, liquidity, and access.  You know what the differentiating factor is in a commodity business?  Good service.  Someone forgot to tell Bank of America!

I HAVE FEELINGS TOO BANK OF AMERICA BAILOUT

Here are some examples of poor service and uncompetitiveness:

• I was stood up by the Bank of America mortgage refinance guy not once, but twice. For the second time, he even confirmed with me 45 minutes prior that he would be at his office waiting. When I got there, I waited for 30 minutes and his boss had to apologize on his behalf. Being late is a pet peeve of mine already. But, to actually flake on a customer after confirming just moments ago is inconceivable.
• When I successfully refinanced away from Bank of America at a rate much more competitive, Bank of America made me fill out extra forms and charge me several hundred bucks for access to my own records. I remember thinking what a bunch of crock, and unnecessary delay in paperwork because no bank had ever required this when I refinanced in the past.  I also wondered to myself why the hell they just didn’t give me a rate mod, or offer to match the refinance fee so that they could still make a spread off my loan?
• I lost my online password, and when I went to reset it, they said I needed to input my ATM card number, even though I destroyed it 18 months prior and didn’t have it. Instead, I had to call customer service for 30 minutes to retrieve.
• Their CD and savings rates were simply uncompetitive. We’re talking at least 0.5%, and often a full 1% lower than other banks at that time. You’re losing out on $1,250 to $2,500 a year on $250,000 for example. When you can simply move your money to any other bank that is offering more, you might as well, especially since the financial storm had passed.
• My personal banker was let go.  She was actually really good and responded quite quickly over e-mail.  She tried her best to push things along and get the best rates possible for me, but she was running into internal walls everywhere. When she let go of her, I decided I definitely have not one shred of allegiance to Bank of America anymore.

IS BANK OF AMERICA TOO BIG TO FAIL?

After the massive bailout, I never thought that Bank of America would get back into financial trouble.  However, with its poor service, uncompetitive rates, and more poor service, perhaps there might very well be a good old fashion bank run again.  All these settlements ($8.5 billion on June 29th with mortgage bond holders), limits on what it can do (government denied the bank could pay a dividend), and massive drag on earnings (Countrywide), make Bank of America a lame duck company to own. We all know about its empire building history, but now, the world is seeing what poor management and customer service can do to a company.

With AIG filing a $10 billion dollar lawsuit on mortgage-bond investment fraud, it’s hard to see Bank of America getting out of it’s mess anytime soon.  If an average Joe like me fled the bank 1.5 years ago when it was supposedly on its upswing, how many folks are fleeing the bank now on a downswing? There were certainly some good people at Bank of America too. But for the most part, I felt like such a second class citizen that I had to go.

Readers, any of you out there bank with BoA?  Share with us your experience.  Why don’t banks provide better customer service if the business is such a commodity and clients can walk in two seconds?

Will Bank of America need to raise capital and dilute shareholders and piss off more people?

To read an even more angry post, here’s one from Yes I Am Cheap called, “F*CK You Bank Of America!”

Regards,

Sam

According to Fidelity, one of the largest 401k providers in the world, the average 401k balance is now around $71,500.  In three not so short years, we’ve finally breached the peak average balance of $69,000 in 2007.  Hooray!  At the depths of the crisis in 2008, the average 401k balance plummeted 25% to around $50,000.

401k participation levels hover at a respectable 71% for those making $40,000-$60,000 a year.  Participating levels are therefore clearly much higher for those making more, but the exact number is unclear.  For those making $20,000 to $40,000 a year, the participation level drops to just 53%, which is understandable.

Let’s say the average age surveyed is between 30-35, you can now see how absolutely pathetic these balances are if you are actually depending on your 401K to retire.  You should consider “Treating Your 401K Like Social Security And Writing It Off“.  Don’t depend on any of this money being there when you retire.  You need to have the mindset of always maxing out your 401(k) every single year while saving at least 20% of your income after full contribution.  There really is no other guaranteed way to retire comfortably if you aren’t saving a good amount.  The power is all in your hands!

SAVING IN YOUR 401(k) IS A MUST

It may seem daunting to save $16,500 (2011 max) pre-tax dollars a year if you’re not making more than $60,000 a year, but trust me when I tell you it’s a must.  If you spread out your contributions evenly over 12 months, you will be contributing $1,375 each month pre-tax.  Hence, what’s really coming out of your paycheck is not $687.50 every two weeks or $1,375 each month, it’s more like $480 every two weeks or $960 every month thanks to not having to pay taxes.  You can do it.  Millions of people survive on much less.

I recommend not stopping at the company’s 401(k) match, which often equals 3% of your base salary or $3,000, whichever is larger.  I’ve heard many examples of a much higher contribution, all the way to a full 100% contribution match as well.  Whatever the case may be, you need to do your best to max it out.

After 10 years, you’ll have at least $165,000 given it is very rare that one loses money in a balanced equities and bond portfolio in any 10 year stretch.  Furthermore, I haven’t included any of the company matching or profit-sharing.  Doesn’t at least $165,000 in your 401(k) sound good when you are 32 (assuming you graduated at 22), and $330,000 sound good at 42?  The fact of the matter is, you’re more likely to have $200,000+ and $500,000+ if you keep maxing out your 401(k) based on average 4% returns, company matching, and profit sharing.

By 50 an 60 years old when you retire, you are well on your way to a million dollar 401(k) balance or more.  However, the sad thing is that $1,000,000 in today’s dollars certainly buys much less than $1,000,000 dollars 10, 20, and 30 years in the future.  Hence, your 401(k) cannot be depended on.  It can only be considered a supplement during your retirement.

WHEN IT GETS BIG, IT STARTS WORKING FOR YOU

Once you have a sizable portfolio, you’re $16,500 contribution will start making less of a difference.  For example, a reasonable 4% return on a $500,000 portfolio is $20,000.  If you made 20%, that’s a nice $100,000 return while you kicked back doing little.  It’s all about building your nut as large as possible so that your money just starts doing all the work for you.  Some of you gunslingers might laugh at a 4% return, but when you have millions of dollars in the bank or in your portfolio yielding a risk free 4%, it adds up!

You become more risk adverse as you get older.  It’s partly because you might have more liabilities and dependents and don’t want to blow yourself up.  But, it’s also because once you have a $500,000 portfolio, it will STILL make you sick to your stomach if you lose 10% of it, even though you are much wealthier than when you were first starting out.  Some say 10% is 10%, but trust me, when I saw my portfolios go down by $100,000+ during the downturn, it wasn’t a pleasant feeling.

HOW’S YOUR 401(k) PORTFOLIO DOING?

At some point in 2010, I noticed that finally, I had breached my 2007 highs.  I haven’t bothered to calculate my portfolio’s real rate of return given that it is quite messy with the company match and profit sharing plan.  All I really care about is how much is in the darn portfolio, and I’m pleased to say it is about 25% above its previous peak.

There’s no magic involved in the portfolio at all.  The most important thing is an asset allocation between equities, bonds, and cash which you are comfortable with, and that you keep on maxing it out!  I like the idea of keeping roughly your age as a percentage in bonds, and the rest in equities.  Charles Farrell, from Your Money Ratios goes so far as to keep the allocation balanced 50/50 for your entire life.  Whatever the case may be, do what you feel is right for you and you’ll have a multiple six-figure 401(k) before you know it!  Couple your 401(k) with your hefty savings account, you will be good to go when it comes time to no longer work.

How does your 401(k) balance now compare to your previous peak?  Care to share how much you have in your 401(k) and the number of years you’ve been saving?

UPDATE 1/26/2012: I’ve written a follow up post on How Much Should People Have Saved In Their 401Ks at Different Ages and a  comprehensive savings guide on how to get there.

Photo: Beef Wellington, Medium Rare on the New Amsterdam, Sam.

Regards,

Sam