Why Debt Welchers Are Admired

Country Debt To GDP Ratio Chart

Every country is borrowing more money

By voting “NO,” the Greek people have rejected austerity measures by the EU in order to receive bailout money to pay off their debts. It’s as if Greece gave a big middle finger to the EU!

It’s great that at least the people were able to vote on their future. You can see the jubilation in their eyes after the results were announced. However, the immediate consequence of the vote is an enormous amount of economic pain as foreign investors pull out, the stock market crashes, banks stop lending, retirement savings get trashed, and unemployment soars even further.

Unfortunately, all of us investors who have nothing to do with Greece will suffer as well. If you haven’t reviewed your asset allocation this year, I highly encourage you to do so today. The US stock market could easily correct by 10% as capital flees riskier asset classes.

The Greek people are not directly to blame for their economic woes. They simply operated in the confines of an inept government that promised too much. Voting on a politician who plans to give you a tax cut or allows you to retire by 50 with a lifetime pension makes logical sense. Politicians will always dangle the carrot.

Despite the upcoming difficulties for the Greek, we can look on the bright side. With close to a 200% national debt to GDP ratio, the Greek have been able to live way beyond their means for a very long time. And if you can get a debt haircut when it’s finally time to pay up, then all the better! Surely Portugal, Italy, and Spain are thinking of ways to gain more favorable debt terms with the EU as well. 

Creating A More Defensive Investment Portfolio With Bonds

Defensive Portfolio With BondsWith Greece and Puerto Rico on the brink of bankruptcy, stock market volatility has returned. Even US Treasury bonds have sold off with the 10-year yield moving from 1.7% to 2.4% due to a strengthening labor market and signs of inflationary pressure on the horizon. Usually US bonds rally and yields decline during times of uncertainty.

Due to such headwinds, it’s getting incredibly difficult to make healthy returns in the stock market. We’re going through an adjustment period as we always do when the Fed plans to raise interest rates. Yet, should they raise soon given the unrest abroad? The US Dollar has already strengthened to 1.10 USD:Euro from 1.4 USD:Euro in 2014.

If I were Fed Chair Janet Yellen, I’d wait to raise interest rates until 2016 at the earliest. Europe will hopefully get their act together by then! This post will review my Motif Investing portfolio and discuss what I plan to do next. Feel free to chime in.

Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rat Race

Living Paycheck To Paycheck On $500,000 A Year

Help! I’m drowning from all my money!

I’ve highlighted in a previous article how living off $200,000 a year in an expensive city is really just an average lifestyle. In this article, I’ll discuss how one couple is living paycheck to paycheck while making a combined $500,000 a year.

$500,000 a year is a level which I think is considered rich. Anybody who thinks otherwise has no concept of financial reality. Even the government almost agrees after compromising by raising the income level for when the highest marginal tax bracket kicks in to ~$400,000 from $200,000.

Although making $500,000 a year may sound like a Herculean task, you’ll be surprised to know there are plenty of regular folks who hit the half million mark every year. This article will discuss how many folks who earn a large income won’t be retiring any time soon. 

New Retirement Planning Calculator By Personal Capital

Retirement Life Infinity Pool, Bali Indonesia

Hanging Gardens Resort Ubud, Bali

Do you really know how much you need to retire? A lot of people like to throw out random numbers without really doing the math. One million dollars is a nice round number that often gets brought up for retirement. Unfortunately, $3 million is the new $1 million thanks to inflation in rent, property prices, tuition, automobiles, and food.

Even if you come up with a retirement number, chances are high that your number will change due to unanticipated life events. Maybe you’ll become unemployed for a year and draw down most of your savings. Or maybe you’ll find an amazing new job with a 50% pay raise. Maybe you’ll end up having triplets due to the latest $20,000 IVF procedure when you were hoping for just one baby. Who knows? Life has a great way of keeping us on our toes.

What we need is an interactive retirement calculator that is dynamic, has multiple adjustable variables, and also incorporates real data. Let’s first have a look at some current retirement concerns by the public at large. 

The Digital Nomad Lifestyle Is Worth Living

Digital Nomad Lifestyle, Pulau Redang, Malaysia

Taaras Resort, Pulau Redang, Malaysia

When the world seemed to be ending between 2008-2010, the digital nomad movement took off. Without strong job prospects, people took to the internet to earn a living half way around the world in cheaper locations like Thailand, The Philippines, Malaysia, and Vietnam. For $1,500 a month, you can live like a King or Queen!

So what can digital nomads do to make money online? They can work as a freelance writer, designer, or techie. They can run a drop shipping business that doesn’t hold inventory. They can run an online course or come up with a product to sell. Or they can run an online media company that generates advertising revenue. In short, there are endless ways to make money online. And if your target revenue is only $1,500 a month to live a great lifestyle, then the possibility to live such a life style is higher than you think!

For almost four weeks, I pretended to live the digital nomad lifestyle while traveling to South Korea, Malaysia, Cambodia, and Taiwan. All I needed was internet, and thank goodness internet was everywhere to be found. Over some scrumptious mangoes, I hosted our semi-annual board meeting in Kuala Lumpur, and got to discussing all the takeaways about running a business abroad.

The Health Benefits Of Early Retirement Are Priceless

Game OF Thrones Mance Rayder

One stressed out King Beyond The Wall

Mance Rayder, The King Beyond The Wall once said, “The freedom to make my own mistakes is all I ever wanted.” After three years of being away from Corporate America, his words have never rung more true.

If I wanted more money, I would have stayed in my investment banking job for the rest of my career. But I longed for the freedom to choose after my 13th year. Being absolutely free is priceless. Unless you love what you do, it doesn’t matter how much money you have if you’ve still got to take direction from someone else.

But besides glorious freedom, there are also incredible health benefits I’ve noticed after leaving the permanent workforce. Let me share some with you.

Can Financial Samurai Be The Next Billion Dollar Financial Technology Company?

Financial Samurai LogoDo you know what’s fun and free? Dreaming BIG! As kids, we use to daydream all the time. I fantasized about being a professional tennis player who’d compete in tournaments around the world via a private jet until I realized I couldn’t even make it to All-State, just All-District. It was only until the age of 32 did I start dreaming again.

When Ariana Huffington sold The Huffington Post to AOL for $315 million in 2013, The Smoking Gun, and several other sites reported that Ariana only received $21 million, or ~6.6% from the sale. $21 million isn’t chump change, but that’s a far cry from the original sale price.

Meanwhile, Michael Arrington, founder of TechCrunch sold his site to AOL in 2010 for only $40 million (includes incentives). 2010 was a bad time to sell anything – stocks, real estate, businesses, you name it. But because he owned an estimated ~80% of the site, Mike walked away with around $32 million, or 50% more than Ariana even though TechCrunch sold for 85% less than HuffPo!

It’s amazing how two vastly different sales prices can result in two surprisingly different windfalls due to company ownership structures. It often takes an army of employees and capital to build something massive. I’m not looking for fame, but I’m starting to wonder whether it’s time to once again rekindle the dreams of great fortune.

Whether you know it or not, you the FS community, is instrumental in the continued content production here. I struggled for years not wanting to do anything but travel and play because years ago I finally found “enough.” But thanks to your continued support and encouragement, I’ve kept on going. People keep asking whether I will ever run out of material to write. The answer is always “never,” because there’s an endless amount of things to talk about. If you can speak forever, you can write forever.

A new adventure on Financial Samurai may begin by the end of 2015, and I’d love to get your input once more. I’ve been seriously thinking about this topic since the beginning of the year. In fact, I’ve been sitting on this post since January, going through things in my head.

Example Of A Good Rental Lease Agreement

Rental AgreementA detailed rental lease agreement is imperative for both landlords and renters alike to minimize headaches down the road. The more thorough the lease to account for any issues that may arise, the better.

I’ve spent the past 10 years refining my residential lease agreement based on all past experiences. Now my residential lease agreement is posted here for all to use at your own discretion. Feel free to run it by a lawyer or other property professionals before use, and make suggestions on how to make it even better.

There’s always a feeling of excitement on both ends when a lease is first signed. Both parties go in with a leap of faith, hoping everything will work out. But conflict is inevitable in any sort of relationship. “Understandings” that are agreed upon with a handshake tend to mean nothing if they aren’t written out when problems arise.

As a Financial Samurai landlord, your goal is to achieve maximum tenant occupancy with minimum ongoing headaches in order to enjoy your freedom. Freedom is what having money is all about. If one of your assets is giving you more headache than freedom, then something must change.

Provide a good product with good service and clear terms, and I’m confident you will reap great benefits down the road.

Who Spends Over $100,000 A Year On Rent? Apparently All Types Of People!

Burning Money On RentBack in 2001, I rented a crappy two bedroom, one bathroom apartment at the edge of Chinatown in San Francisco. The garbage truck would wake us the hell up at 4:30am twice a week. The paper mache walls couldn’t deaden the incessant arguing sounds of our Cantonese neighbors.

At $1,800 a month for two, the rent was cheap compared to the $2,100 a month studio + alcove apartment I rented with a colleague in Manhattan earlier. $300 less a month and 25% more space. What a steal in the world’s cheapest international city.

Unfortunately, I think my roommate was a little schizophrenic. About once a week at around 10pm, I’d hear his head banging on the wall as he screamed nonsense for about 30 minutes in a row. I was too afraid to see if anything was wrong so I stayed in my room.

One evening, my roommate came home from his night shift at In N’ Out Burger all bloodied.  He had been whacked in the head with a bottle by assailants who stole his wallet as he traversed the Tenderloin district, at that time, the most dangerous neighborhood in San Francisco.

The trail of blood he left on our hallway floor jolted me into making a lifestyle change. Was the sacrifice to save as much money as possible putting me in danger?

How To Minimize Tenant Vacancy To Zero For Maximum Rental Income

Breakfast In BedPop the champagne! I recently celebrated my 10 year anniversary of being a landlord. There have been plenty of headaches along the way, but I realized everything is fixable with time, money, and compromise.

The one thing I’m very proud of is going 120 consecutive months without a single vacant month for my first rental. I’m on my fourth master tenant, and so far so good. The rent started off at $2,150 in June, 2005 and is now at $4,000 with this latest one year rental renewal. If all goes to hell, perhaps I can find a job as a rental property manager!

I also started renting out a single family home in June 2014 after purchasing my latest house. This rental has proved to be a challenge in its first year given the higher price point of the house, and the multiple roommate scenario. One had a dog who damaged several doors and cabinet sidings. One tenant needed to break the lease early for a job move. But in the end, it all worked out thanks to a lot of scrambling.

As a landlord on a quest to achieve financial freedom, your goal is to maximize rental income and minimize costs. One month of vacancy will cut your annual income by 8.4%. Two months of vacancy will cut your annual rental income by 17%. And if you’re at three months of vacancy or more per year, you might as well hang up your boots or hire a property manager because you are doing a piss poor job being a landlord!

As I discovered in my mortgage refinance rejection, banks ascribe a 25% discount to all rental income when calculating your debt to income ratio. In other words, banks have a default assumption that each landlord will on average, have three months of vacancy. Banks were crushed during the mortgage default crisis, hence it’s hard for anybody to blame banks for being so conservative. But if you’re reading this post, you won’t be any typical landlord. You will be a Financial Samurai landlord!

Living In An Expensive City Can Make You Richer, Happier, And More Diplomatic

Chrysler Building, NYCWhen asked about career advice, I always recommend people just follow the money. New York City has all the financial firms. San Francisco has all the tech, internet, and venture capital money. While Washington DC and the surrounding suburbs have all of our tax money to spend on massive government contracts!

I’ve lived in all three areas for extended periods of time, and I’ve seen massive fortunes made in multiple ways. If you want to “get lucky,” then you might as well go where there’s opportunity. Because twiddling your thumbs in a dying town, complaining why you can’t get ahead doesn’t make sense when you live in a free country with no state border controls.

The biggest push back I get for my “follow the money” advice is that such places are just so damn expensive. It is absurd that the median rent in San Francisco is now around $4,000 a month. But the only reason why rent is $4,000 a month is because incomes are high enough to afford such levels! If there weren’t, rent would fall.

The market is efficient. Capital is fluid. Everything is rational. Only an idiot with an online business would NOT try and geo-arbitrage his way to a lower cost area of the world. Oh wait, that’s me. 

How Much To Spend On A Hotel While Traveling Abroad – Calculate Your Adjusted NHER©

Gyeongbokgung Palace, Seoul, Korea

Gyeongbokgung Palace in Seoul

Before leaving for Asia I told myself I’d live it up by staying at only the finest 5-star hotels. Compared to America, Asia ex-Japan is relatively cheap. I had just finished paying down $100,000 in mortgage debt seven months earlier than expected and felt like I deserved to be rewarded. Billing 60 hours a week for three months in a row as a consultant in order to expedite my mortgage payoff was also the antithesis of being an “early retiree.” 

All excited to start booking my hotels, I clicked the 5-star only search option on Hotels.com for Seoul and Kuala Lumpur. But instead of booking four nights at the Shilla Hotel in Seoul for $350 a night, I decided to book the Centermark Hotel in Insadong for only $120 a night after taxes and fees. The Centermark Hotel was rated four stars and had free wifi. It was walking distance to all the major palaces and the Buchchon village. A $1,320 savings could easily pay for all food, transportation, and attraction tickets while in South Korea!

Then it was Kuala Lumpur’s turn to book a hotel. Originally I was going to stay at Villa Samadhi, a 5-star resort in the heart of Ampang where I used to live as a kid. The hotel looks like an oasis, perfect for a honeymoon retreat. At $250 a night for a suite with a private pool, breakfast, and wifi, it’s pretty good value compared to the prices you’d find for a similar suite in San Francisco.

But here’s the thing. My personal finance brain took over. The GDP per capita in Malaysia is only about $24,500 vs. $35,400 for South Korea and $78,000 for San Francisco! What business do I have spending $250 a night for a 5-star hotel in Malaysia as that would be equivalent to spending around $850 a night in San Francisco, something I’d never do! Instead of booking Villa Samadhi for $250 a night, I decided to book the four-star Impiana Hotel in KLCC for $120 a night. It just felt right.

Can Cash Be Considered An Investment? Or Is Cash One Big Drag?

Cash As An InvestmentThere’s a debate going on between Charles Schwab, who recently launched its Charles Schwab Intelligent Advisors service (robo-advisor), and robo-advisors, Wealthfront and Betterment about whether Charles Schwab’s robo-advisor service really is free. Because Charles Schwab wrote that it will recommend a 8-30% cash weighting for its clients depending on market conditions, Wealthfront and Betterment have gone on the offensive to point out that investing such a huge weighting in cash is not only costly in a hypothetical market return scenario, but irresponsible as well.

Charles Schwab can make money off its client’s cash by paying practically no interest, and reinvesting the cash in higher income producing investments. In other words, Charles Schwab can act like a bank, with a much lower funding cost. This may come as a surprise to many, but those who know how the finance industry works know it’s a simple spread business. The more money that can be cheaply procured, the more money can be deployed for hopefully higher profits.

It’s good that Wealthfront and Betterment have pointed out how Charles Schwab can actually make money from its free robo-advisory product. But here’s the thing, when was there ever a free lunch? Furthermore, although Wealthfront and Betterment keep their clients fully invested at all times, Betterment still charges a 0.15% – 0.35% fee and Wealthfront charges 0.25% on money after $10,000. There are also underlying ETF fees, averaging ~0.15%, which the client ultimately pays for their robo-advisors to build their portfolios.

Charles Schwab is charging 0.00% in fees for their robo-advisory service. Yes, if Charles Schwab also charged a 0.15% – 0.35% fee to manage money like Wealthfront and Betterment, while recommending 8%-30% cash, that would be odd. But Charles Schwab isn’t.

Let’s not debate which business model is better. Instead, let’s discuss whether cash can be considered an investment through a logical discussion.

The Best Of Financial Samurai eBook: Invest In Your Future And Give Back!

The Best Of Financial Samurai eBookAfter six years of writing over 1,000 personal finance articles, I’ve compiled 35 of the best Financial Samurai articles into one eBook to help you achieve financial independence sooner, rather than later. Financial Samurai is one of the largest personal finance sites with roughly one million organic pageviews a month. I write from experience as someone who received his MBA from UC Berkeley, spent 13 years in the financial world as an Executive Director at a couple major investment banks, and retired from Corporate America at the age of 34 with a very healthy financial nut to focus on living life on my own terms.

For some reason, there is a dearth of personal finance education in our school system. Yet, what is more important than securing our financial future? The goal of the book is to empower you with the knowledge to make better financial decisions. I’ve learned from my money mistakes (e.g. 401k, job, real estate mistakes) to help you avoid the same land mines. Money can be intimidating, but it shouldn’t be so complicated as to cause paralysis.

For long-time readers, the book acts as a terrific reference guide to review some of the most important personal finance topics in one place. You can even purchase the book for a friend or loved one as a gift. For new readers, The Best Of Financial Samurai will teach you new financial concepts and new ways of thinking to solidify your financial future. Many of the articles have been featured in major publications such as The LA Times, Kiplinger, The Wall Street Journal, The Chicago Tribune, and more.

Stocks Versus Real Estate: It Depends On Your Luck

Fortune (fu) in Mandarin

Always Lucky

I’ve written a pretty detailed post about analyzing whether it’s better to invest in stocks or real estate. Check it out if you’re wondering where to put your money. I tried to be unbiased in my analysis, but due to my experience investing in both asset classes for over a decade, I came to the conclusion that real estate was my preferred choice to building wealth.

Once acquired, real estate is pretty straightforward. Maximize rent, minimize expenses, let inflation take its course, and keep tenant turnover to a minimum. You are the King or Queen of your asset. Stocks, on the other hand, require constant re-balancing, trust in management, trust in a fund manager if you buy an active fund, and careful analysis of competitive forces that may hurt your investment. Think about how many great companies have disappeared over the years. This is why I recommend keeping most of your equity investments in low-cost index funds and focus on asset allocation instead.

One commenter pointed out the reason why I prefer real estate is because I was lucky to have bought in San Francisco in 2003. In this post, I’d like to address his beliefs and see if we can all just get lucky with our investments. After all, it’s always better to be lucky than good!

Strengthen Your Brand By Registering Your Name Online

Strengthen your brand online by registering your name

Strengthen your brand!

Do you know what one of the first things an employer does before interviewing a prospective employee? They Google your name to learn all about you. If they happen to forget searching your name beforehand, if you’ve made a good impression, they’ll certainly search afterwards.

Sites like LinkedIn and Facebook flourish because people have decided to provide these sites massive amounts of content for free. Unlike Financial Samurai, where I’m the main creator of content. 

If you don’t have a LinkedIn account and are interested in employment opportunities, you best open one up ASAP. LinkedIn has become the defacto source for all employers today. You can look for jobs, login to various applications with your LinkedIn profile, and so forth.

A good resume is still standard to go along with any employment application. But I’m going to argue that in addition to a LinkedIn profile, you should also register your own domain name and create a dynamic site.

Candid Advice For Those Joining The Startup World: Sleep With One Eye Open

Eyeball

Sleep w/ one eye open

Ever since college graduation in 1999, I’ve had equity ownership in every single company I’ve worked for. When you get equity, no matter how small it is, you tend to pick up the litter in the hallway, champion your company outside of work, and work harder than the actual value of your total compensation. In short, having equity makes you care more!

Pride of ownership is important for maximizing employee production. There’s just one problem: sharing. If you’re a founder, you’ve got to have the generosity and foresight to let your employees share in your company’s equity. Giving up equity is one of the hardest things a founder can do because we are all naturally greedy. We want everything for ourselves despite the need for great people to make our company a raging success. Sometimes, we’d rather fail and hold onto everything than give up equity in order to succeed. Irrational.

As an owner of an online business and as a consultant/advisor for startups, I straddle both sides of the fence. And, for the first time in 16 years, I’m doing some work with no equity. Sure, it’s rare for consultants to gain stock options or RSUs, but that’s exactly what I got from my first client after 1.5 years of service. In this culture of moving around every 1-3 years, why shouldn’t a consultant who’s stuck around longer than some employees also deserve something similar?

Working with no equity feels off. It makes me want to do only 101% of what is expected, not 130%. I wonder if this is how much of the workforce feels where they don’t have any stake in the organization they are working for? Please let me know.

This post offers up some candid advice for people looking to join the startup world, either as an employee or as a founder. It’s the sexy thing to do nowadays given people want more excitement, more purpose, more control, more money (?!?) and more flexibility. Be forewarned. This post is a 2,700 word beast that will make you see the world a little differently by the end. 

Mortgage As A Forced Savings Account To Build Wealth

Ship in a storm - Money leaking everywhere

Our journey with money

Back in 2000, many investors were cocky, much like investors today with the stock market at record highs. I remember asking my Director at the time what he thought about the concept of the mortgage as a forced savings account? At the time, as an investor, it appeared he could do no wrong.

He said, “I don’t need no forced savings account. Only irresponsible people who don’t have the discipline to save every month would consider their mortgage as savings. I’d rather have as big of a mortgage as possible so I can make money in the stock market!

My Director ended up losing millions when the dotcom bubble collapsed. He no longer looked down on people who slowly grew their wealth. At least, unlike most people, he had millions to lose!

If you have a traditional mortgage that pays down principal and interest, the mortgage “forces” you to save because you are forced to pay your mortgage every month if you want to keep your property. A percentage of each mortgage payment goes towards principal, which can be considered savings.

I’m also in the camp that it’s better for most people to receive a tax refund, even though it’s like giving the government an interest free loan, because most people can’t save for crap!

Mortgage Payoff Fees And Procedures To Know

Mortgage Payoff Letter Sent

Final mortgage payment!

“Work a lifetime to pay off a house. You finally own it, and there’s nobody to live in it.” – Death Of A Salesman

After twelve years of methodically refinancing my property whenever rates dipped, and consistently paying down principal every month, I finally own my two bedroom condo in Pacific Heights, San Francisco free and clear!

The condo originally cost $580,000, which I thought was relatively good value for a 2/2 with parking and a park view in 2003. I had relocated from Manhattan two years earlier where all park view condos cost a bloody fortune. Go watch Millionaire Dollar Listing New York to see for yourself. My condo is nothing fancy, but it has everything one needs to live a comfortable life in my favorite city in America.

According to Zillow, USAA, and a one bedroom sale in the same building last month, the value of the condo could be worth double its purchase price with a little bit of updating. Whatever the real value is, I don’t plan on ever selling because it is an income generating engine. Real estate is “forced savings” at its finest.

The Top 1% Net Worth Amounts By Age

Mega Mansion - What Is Considered Rich?

Tom and Gisele’s mansion

People like to throw around random net worth figures all the time when asked how much is considered rich or how much they would need to never work again. Often, the figures just sound nice, like saying “one meeeeleon dollars” without any mathematical justification.

This post puts some numbers behind ascertaining how much wealth one needs to be in the top 1%. Remember, having a large net worth is better than having a high income. The government goes after income more than it goes after wealth. For example, you can live in a $8 million mansion and get Universal Healthcare subsidies if you make less than ~$94,000 a year with a family of four.

So what do we know?

Based on my Top 1% Income Earners post, we know that in order to be in the top 1%, you’ve got to earn at least $380,000 in gross income a year. The data comes from the all-knowing IRS.

Based on my Net Worth For The Upper Middle Class post, we learn that the net worth range for the top 15% of all Americans between the ages of 45 – 74 is around $700,000 – $830,000.

Finally, I’ve shown numerous examples as to why earning roughly $200,000 – $250,000 gross a year per person and $300,000 a year per couple is the ideal income for maximum happiness. Being rich is sometimes a state of mind, and I’ll use these income figures in my analysis as well.

Given these data points, I’d like to construct two simple models to demonstrate what I think should be considered top 1% rich. All wealth and no income is not ideal. Similarly, all income and no wealth is not ideal either. There needs to be a balance.

Social Security Will Make Us All Millionaires In Retirement

Social Security Makes Us All MillionairesWhen I was driving home from San Mateo one day I took a wrong turn and ended up at Hillsdale Mall. There I saw an amazing relic, a Barnes & Noble bookstore! Before 2011, I used to spend an hour every week reading personal finance books at my local San Francisco B&N. It was a lot of fun, but like the trees in Dr Seuss’s story, The Lorax, the stores began disappearing.

There’s nobody I know under the age of 40 who believes Social Security will be paid in full when it’s time to collect. Maybe half of what’s owed, but certainly not 100%. As a result, many have smartly decided to write-off Social Security from their retirement plans in order to focus on accumulating enough assets on their own. Depending on an inefficient government during our golden years is dangerous. Instead, we must max out our 401ks and IRAs, while investing even more into after-tax investments.

Out of all the books on the Personal Finance bookshelf, I decided to pick one up on Social Security because it’s been off my financial radar screen for years. Here are some important bullet points we should all know about a program that will make us all millionaires if we work long enough!

Which States Are Best For Retirement?

Retiring In Hawaii

Hawaii, obviously?

America is amazing because we’re free to relocate anywhere in the country that suits our desires. A lot of people scoff at the idea of just moving because of family and job responsibilities. But when you can take a plane anywhere in the continental US in under six hours, telecommute from home, and FaceTime with people you care about, why wouldn’t you at least give moving to a nicer place a shot? There are even plenty of flexible job opportunities by the sharing economy that can help pay the bills during a transition.

The best states to live in have a combination of low taxes and incredible weather. California is awesome, but our taxes are horrendous and we’ve still got a budget deficit! Hawaii is also amazing, but food and housing are also costly. At least Hawaii’s sales tax is only 4-4.5% and pensions are state tax-free.

I’ve been to a large majority of the 50 States and spent 10 years on the East Coast before moving out West in 2001. I’m totally biased for California and Hawaii so I enlisted FS reader, Steve from Green Diet to help me put together an unbiased assessment of our country based on cost of living to see which states are best for retirement. 

What Type Of Investment Property Should I Buy? Single Family Home, Condo, or Multi-Unit

Amazing Property Overlooking The Ocean

Buy property for lifestyle

For years, I sort of regretted buying a single family home in San Francisco instead of a multi-unit property.

Even though the idea was to grow into this four bedroom home, it felt wasteful during the meantime with only the two of us. So I finally decided to rent out the ground floor bedroom to a middle school teacher for below market rent. I’ve always had a soft spot for teachers, and it felt good helping someone who made less than $36,000 a year find a place in a good neighborhood within walking distance from work.

With the money I spent on buying the house in 2004/2005, I could have bought a two-unit building with a 1,300 sqft, 2/1.5 apartment upstairs and a similar size 2/1.5 apartment downstairs. I could have lived in one unit and rented out the other unit for maximum efficiency and profits, perhaps to the tune of an extra $150,000 – $300,000 over 10 years. Furthermore, having smaller units would provide more flexibility to accept new job opportunities – like the large offer in NYC I turned down – because of my perception at the time that it would be easier to rent out a 2/1.5 condo vs. a 4/3.5 SFH.

Then I rented out my whole house and had a change of heart.

Are We In Another Financial Bubble? Valuations Look Stretched

Stock Market and Real Estate Market Bubble PoppingOf course we are in a bubble! When you’ve got people with no professional financial experience giving investment advice, you better believe we’re in a bubble. Online investing advice by non-finance professionals is the modern day version of shoe shine boys giving stock tips prior to the crash of 1929. Always understand the background of those who give investment advice before considering their counsel.

Even after 20 years of investing and working in the finance industry, I always feel uncomfortable giving any sort of investment advice because I’ve had way too many losses partly thanks to multiple boom and bust cycles. Furthermore, everybody’s risk tolerance and money making abilities are different. The best thing we can do is have an appropriate asset allocation to ride out the waves.

The good thing about bubbles is that the greater fool game can last for much longer than expected because we humans are GREEDY, GREEDY, GREEDY!

The largest criers of the word “BUBBLE!” are those who have the least amount at stake. Perhaps they sold their real estate, stocks, or businesses before 2012 and are now kicking themselves. Maybe they are still graduate students with a lot of student loans to repay. Or maybe they are retirees or early retirees who can no longer take full advantage of a heated economy. Whatever the case may be, when the largest complainers of a bubble start getting back in, you know danger is imminent.

Let’s at least all agree that we’re in the second half of a bull market and the bubble will eventually burst. Maybe we’ll only correct by 15%-20%, unlike 2009’s 50% ass-kicking. But eventually, that year or three of pain will come!

How To Invest And Profit In A Rising Interest Rate Environment

Rising Interest Rates, Raygun Rocketship, by Nan Palmero

Rising Rates? Photo of Raygun Rocketship by Nan Palmero

After 34+ years of declining rates, you now believe that interest rates are finally going to start increasing. After all, the Fed Funds rate is at 0.25% and the 10-year yield is at ~2%. How much lower can they go?

I’m in the camp that interest rates will stay low for years to come because of the following reasons:

* Information efficiency
* Economic slack
* Contained inflation
* Coordinated Central Banks
* The growth of China and India and their continued purchasing of US debt
* The growing perception that US dollar denominated assets are the safest assets in the world
* A 30+ year trend of declining rates that is telling us we’re more adept at managing inflation with each new cycle that passes

But let’s say I’m wrong. Let’s say rates start rising aggressively? Where should one invest? What else should one do? To answer these questions, let’s first look back at history and get smart!

Motif Investing Investment Portfolio Review 1Q2015

Volatile Stock Market

Hang on for the rest of the year!

On January 30, 2015, I finally opened up my first Motif Investing portfolio with $10,000. I waited until the end of January because I felt there was a lot of uncertainty in the market (there still is), and I was also taking my sweet time doing research on the 30 companies and ETFs I wanted to purchase.

Goals For Investing

1) To fully experience the Motif Investing interface to know about the good and the bad as an investor and as a consultant to make suggestions for further improvement.

2) To deploy $10,000 worth of cash that was just sitting in my bank account in order to make more than a lousy 0.1% interest. I’ve made it a habit of investing some amount of money in the stock market through my SEP IRA, 401k, Solo 401k, private wealth management account, or online brokerage account every month for over 10 years. I suggest doing the same as you’ll be surprised how quickly your balances add up!

3) To finally build a legitimate portfolio in an after-tax brokerage account, instead of just speculating on one to three stocks at a time. The portfolio is a comprehensive growth-oriented, special situations portfolio which is supposed to be diversified enough where rebalancing more than once a quarter is NOT necessary. I’m no longer actively looking for home run stocks because I’ve already built my financial nut. Instead, I’m looking for moderate growth in the 7%-12% range for my overall portfolio.

4) To follow the financial markets more carefully. From 1999 – 2012, I spent 5 – 10 hours a day reading investment research, watching financial news, reading financial news, following global politics, monitoring economic indicators, dialing into conference calls, and speaking about companies with clients. Then I’d start going for days without checking anything at all because I was so focused on building my online business. Having an active investment portfolio helps keep my mind sharp so I can make more intelligent investments, and be more knowledgeable when talking to others in the industry.

5) To create a community based investment portfolio. Back in 2010, I actually created a fictitious fund called The Samurai Fund made up by stocks picks from the community. It was fantastic fun that blew away the S&P 500 index thanks to crowdsourcing. For example, my pick was ticker symbol SAM of course, the Boston Beer Company that produces Samuel Adams beer. I bought the stock at $46.60, when the market cap was at $668. The share price is now at a whopping $272 with a market cap of $3.54 billion for a return of 483%!

There are plenty of investment enthusiasts reading Financial Samurai, and I’d love to engage all of your thoughts about the markets, the current positions in the motif, and what trades should be made, if any. Perhaps we can all become better investors and make more money if we put our heads together because it’s hard to keep track of everything, all the time. We can essentially create an investment club with ongoing discussion in the comments section of these quarterly posts. 

Ranking The Best Passive Income Investments

Passive Income Streams Allows You To Be Free

In order to relax, you must first work very, very hard!

After about the 30th day in a row of working 12+ hour days and eating rubber chicken dinners at the free cafeteria down at 85 Broad Street, I decided I had enough. There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. I became obsessed with generating passive income starting in 1999.

We’ve discussed how to get started building passive income for financial freedom in a previous post. Now I’d like to rank the various passive income streams based on risk, return, and feasibility. The rankings are somewhat subjective, but they are born from my own real life experiences attempting to generate multiple types of passive income sources over the past 16 years.

The passive income journey is a long one. But thanks to innovation and technology, the ability to generate meaningful passive income is accelerating!

Sweet (Or Sweat) Dreams Of Becoming A Millionaire Again

Daydreaming by Brynja Eldon Flickr CCIn 2013, my income took a big hit. The glow of a six figure severance paid out in 2012 was no more, and I didn’t have a job to pay my bills. All I had was my passive income and a tiny salary I drew from my online media company. I had no desire to pay the employee and employer’s FICA + Medicare tax of 12.4% as an employer employee. Instead, I’d rather take distributions, which are free from such taxes with an S-Corp. Unfortunately, the IRS isn’t stupid and wants to see a balanced income/distribution ratio.

I’ve always thought I was way too lucky to deserve the income I earned during my career in finance. All I did was study hard, get on a 6am bus to a career fair in Washington DC, and interview well enough to land a job that paid well. Nobody from The College of William & Mary, a non-target state school, gets a front office job at Goldman Sachs WHQ. Luck can be the only explanation.

No matter how many times you hear of high income earners going bankrupt, if you are making at least $100,000 a year, it’s relatively easy to become a millionaire. Working in finance almost felt like cheating. You not only gain extensive knowledge to make better financial decisions for yourself, you are also paid handsomely.

When I began looking for other employment opportunities outside of finance, I realized just how good the finance industry pays. It’s very hard to find jobs in tech/internet that pay over $250,000 a year. But in investment banking, practically every 27 year old Associate makes such an amount. Many CEOs in other industries doesn’t even get paid that much.

How To Make Six Figures A Year And Still Not Feel Rich – $200,000 Income Edition

Luxury home on the water

Earning Six Figures Is Not Enough To Buy This Home

One of the great things about America is freedom. Tired of feeling like death living in Chicago or Boston during the winter? Why hello San Diego, Miami, and Honolulu! Not feeling there are enough job opportunities for advancement in Detroit? Then come on down to New York City! Tired of eating healthy food in San Francisco that costs an arm and a leg? No city can beat the wonderful soul food of New Orleans.

Geo-arbitrage is a term where one can earn and save money in one place and move to a cheaper location to maximize their money. I highly recommend it. If you happen to own an internet business, then your ability to geo-arbitrage is greatest. I’ve often thought about just relocating to Thailand for several months at a time given friends say they live extremely well off $2,000 a month for two. Given one of my goals is to take 100 hours of intensive Mandarin lessons, I may very well be writing to you from some lower cost country in the future.

75% of the audience comes to Financial Samurai through a search engine like Google. They have a financial problem they are trying to solve. This is huge because it takes initiative to come to grips with one’s finances. But what I’ve noticed over time is that besides the middle class getting pissed off about the widening wealth gap, upper-income earners are also feeling some angst as well.

Over 50% of singles readers and 74% of household readers make over $100,000 a year based on my Financial Samurai income poll. As a result, I’d like to delve into analyzing how a “typical” $200,000 a year household spends their income. A six figure salary can range from $100,000 to $999,999, so I figure I’d start on the low end for two people. $200,000 is a comfortable household income, but I don’t think it can qualify as rich.

Median Income By Age And Sex In America

median-salary-by-age-and-sexDo Americans have an earnings problem or a savings problem? Unfortunately, I think we’ve got both. Take a look at the median salary by age and sex compiled by Motley Fool from the Census Bureau.

The obvious points are 1) people make more the older they get and 2) men make more than women at every single age group. Making more as you age is nothing insightful. What is insightful is how the difference between men and women’s salaries really start to grow in their 30s. A 25% pay gap is huge!

So what’s going on here? The answer must be biological (life). For example, I have a female friend who was the most gung-ho worker ever. She was an Electrical Engineer in college (one of the hardest majors) and told me that she planned to work “forever” after Harvard Business School. Two years after HBS, she was pregnant, and when I asked her whether she still planned to go back to work she said, “No way! Raising my children is the most important thing in the world to me.”

It’s been five years since she’s been out of the work force. If she decides to return at age 37, it’s logical to assume that she will have to start at a lower pay and title than colleagues who kept working while she was away. Regarding finding a solution to the gender wage gap for equal pay for equal work, the fix I’ve come up with is to have equal paternity leave rights for men and women. With equal paternity leave rights, employers are more blind to discriminate.

What’s interesting is that women have more money in their 401k on average up to the $150,000 income mark, according to a 2014 report by Fidelity Investments with 13 million tracked accounts. Women earning between $20,000 and $40,000, for example, have saved an average of $17,300 in their 401(k) compared to $15,200 for men in the same income range.

How To Cheaply Build A Diversified Investment Portfolio If You Don’t Have Much Money

Diversity by Kongaline.com

Diversity by Kongaline.com

The rich get rich by buying appreciating assets like stocks, bonds, real estate, and fine art. The people who don’t get rich spend their money on depreciating assets like cars they can’t comfortably afford, and clothes that are never worn more than a few times a year. It takes discipline doing research on investable assets, which is probably one of the reasons why many people don’t even bother.

One of the biggest push backs I hear from readers who want to get rich, but don’t have enough disposable income to invest, is that investing costs too much and is too complicated. This post eliminates one more excuse people have for not building additional wealth.

It’s been a while since I’ve had to carefully watch my cash position, but since I spent a lot of money buying a fixer last year, cash flow is tight. I have a goal of rebuilding my liquid cash hoard to $100,000 in 2015, while also paying off roughly $85,000 in rental mortgage debt. It won’t be easy because I don’t want to cheat by selling assets to pay off debt.

Despite my debt elimination and savings goals, I want to continue investing in stocks and bonds when I see opportunity. With the recent volatility in the market, I see A TON of opportunity right now. Oil and energy stocks have gotten crushed, but aren’t going to zero. Market darlings such as Tesla, Pandora, GoPro, Yelp, and Lending Club have all taken a beating, and I love all their products and services. Interest rates have collapsed, providing a tailwind for a couple industries. I want to invest!

The only problem is, I’ve only got about $10,000 I can spare in this market volatility vs. a normal investment of $50,000 if I want to reach my savings and debt pay down goals.

How To Get The Lowest Mortgage Interest Rate Possible

Time to refinance a mortgage once againI must be mad, because after multiple mortgage refinances, I’ve decided to take my own advice on improving my cash flow further by trying to refinance my mortgage again! I say “trying” because getting a mortgage or refinancing a mortgage is still not a slam dunk like it was pre-2007.

Lending standards are strict with ~729 being the average credit score for denied mortgage applicants. Furthermore, my debt-to-income ratio could be a problem because 100% of my 1099 (freelance income) won’t count for 2014 because banks require two years of 1099 income, and I’ve only got 14 months worth.

Can you believe that? Even if I made $800,000 in freelance income over the past twelve months, big banks would still disavow all of it and likely reject even a small mortgage refinance amount if I had no other income. Banks should discount 1099 income by some amount, but not by 100%. There’s a growing misconception now that full-time income is more stable. A full-time employee is betting on one horse. An independent contractor can bet on multiple horses.

Now is absolutely the time to refinance because the 10-year treasury yield has fallen below 1.8% (1.68% as of 2/2/2015). We’re back to all-time lows. Volatility is up, collapsing oil prices are stoking fears of weak global consumer demand, and chaos reigns once again in Europe. I’m glad there isn’t anymore US government shutdown drama at the very least.

I’ve got two years left on a ~$1 million dollar jumbo 5/1 ARM at $4,338 a month at 2.625%. My goal is to refinance this puppy down to a 2.25% 5/1 ARM at $3,822 a month, for a cost of less than $3,000. The annual interest savings is $3,750, and the monthly cash flow increase is $516 or $6,192 a year. That’s a good move towards my unwavering quest to generate $200,000 a year in passive income. 

Recommended Net Worth Allocation By Age And Work Experience

Squaw Valley USA, Lake Tahoe With the average savings rate below 5%, a median 401(k) of only $100,000, and an average 401(k) balance at retirement age 60 of around $230,000, most Americans are financially screwed in 2014. Just do the math yourself. Add the average Social Security payment per person of $18,000 a year to a 4% withdrawal rate on $230,000 and you get $27,200 a year to live happily until you die at 85.

Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate? Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.

We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are poop out of luck. Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.

We also found out that the median net worth for 2010 plunged to $77,300 from a high of $126,400 in 2007. Surely the median net worth has recovered since 2010, but such data from the government only rolls around every three years. The main nugget of information is that from 2007 to 2010, the median home equity dropped from $110,000 to $75,000. In other words, the median American’s net worth almost ENTIRELY consists of home equity! What another bad idea.

Finally, despite a 120%+ rebound in stocks since the bottom of the crisis and savings interest rates of only 0.1% due to a dovish Fed, a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear. Billionaire hedge fund manager David Einhorn is suing Apple for hoarding their $134 billion in cash due to a “grandma depression mentality.” Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.

The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance. I will attempt to address this question based based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run. I’ve spent over 10 hours writing this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.

THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION

How To Reduce 401K Fees Through Portfolio Analysis

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

401K Fees Add Up!

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

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

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

The Average Net Worth For The Above Average Person

The average net worth for the above average person is largeEverything is relative when it comes to money.  If we all earn $1 million dollars a year and have $5 million in the bank at the age of 40, none of us are very wealthy given all our costs (housing, food, transportation, vacations) will be priced at levels that squeeze us to the very end.  As such, we must first get an idea of what the real average net worth is in our respective countries, and then figure out the average net worth of the above average person!

According to CNN Money 2014, the average net worth for the following ages are: $9,000 for ages 25-34,  $52,000 for ages 35-44, $100,000 for ages 45-54, $180,000 for ages 55-64, and $232,000+ for 65+. Seems very low, but that’s because we use averages and a large age range.

After a 13% rise in the S&P 500 in 2014 and a continued increase in 2015 so far, surely the average net worth has increased even further.

The Above Average Person is loosely defined as:

1) Someone who went to college and believes grades and a good work ethic do matter.

2) Does not irrationally spend more than they make.

3) Saves for the future because they realize at some point they no longer are willing or able to work.

4) Takes responsibility for their own actions when things go wrong and learns from the situation to make things better.

5) Takes action by leveraging free tools on the internet to track their net worth, minimize investment fees, manage their budget, and stay on top of their finances in general. Once you know where all your money is, it becomes much easier to optimize your wealth and make it grow.

6) Welcomes constructive criticism and is not overly sensitive from friends, loved ones, and strangers in order to keep improving. Keeping an open mind is critical.

7) Has a healthy amount of self-esteem to be able to lead change and believe in themselves.

8) Enjoys empowering themselves through learning, whether it be through books, personal finance blogs, magazines, seminars, continuing education and so forth.

9) Has little-to-no student loan debt due to scholarships, part-time work, or help from their parents. Our parents have saved and invested through the largest bull market in history. It’s understandable that parents want to help their children out.

Now that we have a rough definition of what “above average” means, we can take a look at the tables I’ve constructed based on the tens of thousands of past comments by you and posts I’ve written to highlight the average net worth of the above average person.

How To Retire Early And Never Have To Work Again

Beautiful Sunset In MexicoThere’s nothing better than being free to do whatever you want. However, unless you’re born with a multi-million dollar trust fund, you’ll unfortunately have to work for your freedom.

You can follow my savings guide to increase your chances of a wonderful retirement by 50-65. But, what if you want to retire earlier? Say at the age of 40 or 45? You’re in luck, because I have a very simple, yet effective plan for you. This is something I’ve been following for the past 13 years to allow myself the option to retire as early as 35-4-. I think you’ll like the option as well!

What’s important is recognizing your inner frugality, your Herculean discipline, the government’s generosity, and your enormous hustle. There’s nothing better than taking action and seeing results!

How Much Should People Have Saved In Their 401Ks At Different Ages

Saving Jar Colleen Kong

Art by Colleen Kong at KongSavage.com

The 401k is one of the most woefully light retirement instruments ever invented. The worst is the IRA which limits you to contributing only $5,500 only for individuals making under $60,000 a year and married couples making under $116,000 a year. Meanwhile, you have to make less than $114,000 a year as a single or $181,000 as a married couple for the privilege of contributing after tax dollars to a Roth IRA, which I do not recommend before maxing out your 401k.

Give me a pension that pays 70% of my last year’s salary for the rest of my life over a 401(k) any time! With the government only allowing individuals to contribute $18,000 a year in pre-tax income into their 401ks in 2015, once again, our politicians fail us with their regulations.

The average 401k balance as of May 2015 is around $92,800 according to Fidelity’s 12 million accounts, thanks to an incredible 30% rise in the S&P 500 in 2013, followed by another 13% increase in the S&P 500 in 2014. We’re at new record highs in 2015, and balances have basically doubled since the depths of the financial crisis.

Even so, $92,800 is an incredibly low amount given the median age of an American is 36.5. As an educated reader who is logical and believes saving for retirement is a must, I’ve proposed a table that shows how much each person should have saved in their 401ks at age 25, 30, 35, 40, 45, 50, 55, 60, and 65.

We stop at 65 because you are allowed to start withdrawing penalty free from your 401k at age 59 1/2. Meanwhile, I pray to goodness you don’t have to work much past 65 because you’ve had 40 years to save and investment already!

Gay Marriage Rights, Financial Benefits, And Tax Penalties

White House In Rainbow Colors Celebrating Gay MarriageHere are Justice Anthony Kennedy’s words after the Supreme Court voted on June 26, 2015 that same sex couples have a constitutional right to wed. Justice Kennedy was the swing vote.

No union is more profound than marriage, for it embodies the highest ideals of love, fidelity, devotion, sacrifice, and family. In forming a marital union, two people become something greater than once they were. As some of the petitioners in these cases demonstrate, marriage embodies a love that may endure even past death. It would misunderstand these men and women to say they disrespect the idea of marriage. Their plea is that they do respect it, respect it so deeply that they seek to find its fulfillment for themselves. Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions. They ask for equal dignity in the eyes of the law. The Constitution grants them that right.

When Did Being Rich Become So Evil?

Evil eyes. When did wealth become so evilWith good intention, I proposed one way to help level the playing field through a Wealth Identification Program run by our all-powerful government. By identifying wealthy people who got wealthy through 100% luck (born into wealth), we could empower decision makers to make more informed choices when deciding between equally qualified candidates. Whether a decision maker chooses to help the less lucky is entirely up to their discretion.

The Wealth Identification Program could also put pressure on life’s lucky winners to use their finances to give back to those who need help the most, while pushing themselves to see what they can achieve on their own. Imagine being born with the gift of Mozart, but never realizing your full potential because you didn’t have to. Having money from the start can limit motivation!

With a public wealth ID program, the fortunate will tend to give more and try harder to maximize their potential. After all, when the the boss is not around, why do anything at all?