How To Maximize An Umbrella Policy Like A Champ

Large umbrella policyIf you have assets that amount to more than what your car insurance and home insurance coverage provides, then you should probably get an umbrella policy for protection. The amount of umbrella policy coverage you should have is an individual choice. If you want to be safe, get an umbrella policy equal to your estimated net worth.

I’ve personally taken a “riskier” approach by getting an umbrella policy less than my net worth. I figure, I’m not doing anything particularly offensive or risky in day-to-day life, nor is my business putting anybody in physical danger. If I was running a roller coaster amusement park on the other hand, you bet your buns of steel I’m getting maximum coverage!

How To Get Hired If You Are Overqualified Or Don’t Need The Money

Overqualified For A Job, Occupy Wall StreetConvincing your spouse to allow you to go on a trip with friends to Vegas is easy compared to convincing an employer to hire you if you’re overqualified, too old, or don’t need the money. Finding any type of work is like dating. The older you get, unfortunately, the harder it seems to find a match.

But just like dating, finding that perfect someone is often hilarious, frustrating, expensive, and sometimes painful. Let me share with you a short story about one company I met with a while ago where I failed to find a connection.

Clarifying The $250,000 / $500,000 Tax-Free Home Sale Profit Rule

Tax Free Profits For Homeowners

Who doesn’t love free money?

The Financial Samurai community rocks. There’s just so much collective knowledge from each of you that ensures the content published here (posts and comments) is as accurate and helpful as possible. As the conductor of the site, it’s my job to highlight as much good as possible.

In the post, Buy Real Estate For Capital Appreciation, Rental Income, or Lifestyle, I responded to one reader by mentioning potentially moving back into his rental for two years in order to take advantage of the $250,000 in tax free profits for a single person, or $500,000 in tax free profits for a married couple if he/they then sell within five years of moving back in.

Here’s a great response from reader, Yetisaurus,

Can Anyone Be An Accredited Investor? The Government Can’t Tell

Accredited Investor Equal AccessOne of the questions I asked in my accredited investor post is whether the current definition of accredited investor is fair or not. 61% of you voted that the Securities And Exchange Commission (SEC) should not dictate who can and cannot invest in private offerings. Only 31% of you said the definition is currently fair, while the other 8% voted the SEC should raise the income and net worth limits.

As expected, some people shared their frustration in the comments section.

Invest In Real Estate For Capital Appreciation, Rental Income, Or Lifestyle?

Park View PropertyDespite real estate ranking second to last in my Passive Income Rankings, don’t worry real estate fans, real estate still is my favorite asset class to build wealth.

One of the reasons why I love real estate is because of the utility it provides. I don’t buy real estate for rental income or capital appreciation. I buy real estate for improving my lifestyle first. If the property so happens to appreciate in value while I enjoy the place over the years, fantastic. If not, it doesn’t matter because I’ve derived tremendous satisfaction from all the property brings: location, view, amenities, and memories. Capital appreciation is just a bonus.

Money earned is best spent on improving your lifestyle. It may be fiscally prudent to hoard as much cash as possible for a rainy day. You might grow your wealth faster by buying multiple rental properties while you rent a piece of crap place to save money. But I find that to be a waste. There has to be a better balance when it comes to spending money. If you can spend money on an asset class that provides a better lifestyle and a chance for capital appreciation and rental income, you’re hitting triples and home runs!

How Low Interest Rates Increase The Value Of Income Producing Assets

Multiple Streams Of IncomeThere was surprisingly little debate regarding my passive income investment rankings. Figuring out the five factor scores for each of the seven investments took about 10 hours to produce, so perhaps I was thorough enough to address all the points. Everybody agreed that dividend investing is one of the best ways to generate passive income. The two main investments that had the most discussion were Real Estate and Creating Your Own Product.

The pushback on real estate investing is that it feels too much like work. When you’re trying to find the perfect tenant and keep up with property taxes, real estate can feel like a bear. Meanwhile, nobody disagreed with Creating Your Own Product as being a top passive income generating asset. However, I just didn’t get the sense that anybody really got motivated to start creating something.

In this short post, I want to demonstrate via some charts and logical reasoning the power of purchasing rental property and creating a product.

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 Measure Fiscal Responsibility: Calculate Your FS-FR Score

FS-FR Score For Fiscal Responsibility

FS-FR Score Of 50

We’ve got the Financial Samurai Debt And Investment Ratio (FS-DAIR), which provides a logical framework for deciding how much to invest and how much debt to pay down every time you have some disposable income. The acronym smartly “dares” people to take action with their finances.

I now announce the Financial Samurai Fiscal Responsibility Score (FS-FR) for measuring each individual’s fiscal responsibility level in a fun and easy way. I expect some of you who have a low FS-FR Score will probably not be very happy with the concept and bash the crap out of it. But, that’s part of the fun!

Financial concepts are usually quite dull and hard to comprehend. As a result, they are never followed. But if you come up with something simple like the 1/10th Rule For Car Buying, it might just catch on and save thousands of people from spending more than they should on a depreciating asset.

Before publishing this post, I researched the internet and found nothing similar to the FS-FR Score. Therefore, I’m pleased to report that once again, a new concept is born that may revolutionize our finances! 

The Largest Tax Refund Request Ever! Plus Tax Tips For Small Business Owners

Tax ScamIn what could be the most amazing tax move ever, a Georgia woman filed a $94 MILLION tax refund! You have to make over $1.6 billion dollars in income to pay $94 million taxes with Georgia’s 6% state income tax rate. Sure, it’s possible to make $1.6+ billion dollars, but probably not by this woman.

So how on Earth did she get caught pray tell? Investigators asked the woman to come to the supermarket to pick up her $94 million refund check. That’s when she was arrested.

Supposedly the woman kept calling in to the Georgia tax department asking when her tax refund would be ready. I guess if I was really expecting to get a check that big, I might not be able to help myself either! But a smarter person might have hired an impersonator instead for $500,000 to pick up the check for her and bounce. I mean, what’s paying 0.5% of your tax refund to drastically improve your chances of not getting caught anyway?

Stupidity can’t be the reason why this tax fraud happened. Greed must be the main reason wouldn’t you agree? Have a look at the video clip below.

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.

Career Advice: If You Fake It, You Will Probably Not Make It

Fake Ice Cubes: Can you tell?

Fake or real?

There’s been a huge trend towards joining startups and fast growing tech companies ever since Wall Street blew up between 2008-2010. The top companies to work for no longer are dominated by the Goldmans, Mckinseys, and Bains of the world. The Googles, Facebooks, and thousands of startups you’ve never heard of are the employers of choice now.

One of the biggest realizations I’ve had going from an enormous investment bank to consulting for various startups is that if you fake it, you probably won’t make it for very long. When you’re at a huge organization, it’s easy to hide behind bureaucracy, layers of middle management, and massive amounts of inefficiencies. If you stop coming into work for a month at a large organization, chances are high the business will continue as usual. The extreme example is an Indian government employee who called in sick for 24 years!

At a small company, you must know your stuff and produce. Small companies generally have tighter budgets, less people by some definition, and a time limit to expiration given many startups are loss-making. If a company burns $10 million a year and only has $12 million left in the bank, the pressure is on!

There’s no room for holding meetings about meetings on what to do. There’s no room for people telling others what to do without doing anything themselves. Everybody must pitch in to produce something valuable.

Now think about the dichotomy between small companies and large companies from an investor’s point of view. Do you want to invest your money in ex-growth companies where people have a tendency to come in late, leave early, and do the bare minimum? I don’t. The hustle, drive, and innovation is why I’m a big fan of investing in growth companies and private startups. The problem now is that the private equity market is richly valued.

How I Earn Over 10% Passive Income With P2P Lending

Stack of money cash

Want some cash money?

The following is a guest post from my friend Jeremy Johnson who was kind enough to help me out with a random WordPress question issue when I first started back in 2009. I’m pleased to say he jumped head first into P2P lending when we spoke a couple years ago about diversifying his savings, and is doing well. 

Peer to peer lending is one of the most simple and effective ways I’ve ever found to make passive income. It has outperformed my stock picks, selling old baseball cards, my own business ideas – everything. I’ve earned more money through it than I’ve earned at anything else except my day job. This is pretty powerful for me. I’ll share a walkthrough of how this works for me and you can use/adjust for yourself.

Is A Backdoor Roth IRA A Good Move For Higher Income Earners?

Backdoor Roth IRAThere are three primary types of retirement plans in the U.S. today: Traditional IRAs, 401(k)s, and Roth IRAs. Although there are some other plan options out there such as SIMPLE IRAs, SEP IRAs, for the most part when people are talking about their retirement funds, they are referring to one of the three main types mentioned above.

It is often debated which of the two IRA options is better: the Traditional IRA that is tax deferred, or the Roth IRA that is funded after tax. Hypothetically speaking, if your earnings and tax rates went unchanged for your entire life, both types of IRA plans would net you the same amount of money in the end – it’d just be a matter of either paying the taxes up front or deferring them until later. However, it’s unlikely you’d actually be in a situation where those two variables would stay constant for your entire lifetime, since earnings and income tax rates regularly fluctuate.

I’ve been a staunch opponent of the Roth IRA because it’s never a good idea to pay taxes up front to a government who excels at wasting money. So long as you have your money, you can figure out ways to shelter your money from the government in a myriad of legal ways.

But what if you are a super pessimist who believes taxes have to go up because the budget is so poorly managed? Furthermore, you’re inept at navigating the many legal tax savings rules. In such a scenario, even those of us in the lowly 25% and under federal income tax brackets are probably not safe.

Should I Invest In Oil Stocks? Learn About Oil Price Fundamentals First

Oil price collapseOil is a popular topic due to its surprising ~50% price drop from June 2014 to early 2015. Nobody could have imagined such a quick collapse in oil. I certainly didn’t when I decided to buy a Honda Fit instead of a Jeep Grand Cherokee Limited last summer! If I had known I could pump my rolling 4th bedroom for less than $2.90 a gallon, I might very well have opted for the bigger car.

Given knowing what the hell is going on in the world is part of being a functioning citizen in today’s society, I decided to do some research into what happened. After all, I did purchase the oil ETF USO, a couple major integrated oil companies, an airline stock, and some auto stocks in my newest diversified investment portfolio for 2015 to try and make some money.

So what caused this significant drop, and how does this affect businesses, the economy, and our everyday lives? Is oil poised to rise once again? Let’s explore these questions and more.

Does Remodeling Pay Off? Probably Not!

Property Renovation

Manhattan Brownstone Living Room

In “How To Make A Lot Of Money In Real Estate: Focus On Expansion,” one of the questions was on whether remodeling really recoups the cost and provides such a large return.

One of the biggest fallacies homeowners have is thinking whatever they spend on remodeling will automatically bring them great returns when it comes time to sell. I used to think this way as well until I started remodeling and property expanding myself.

Let’s be clear. Almost all property remodeling does not recoup the cost spent remodeling based on national averages. Only in super expensive cities does remodeling sometimes bring in extra value to a sale because time is more valuable to higher income buyers. In such cases, home buyers in places like San Francisco, London, or New York may be willing to pay a premium to avoid the hassle of remodeling.

In order to create more value, remodeling (renovation) must include expansion. Do not confuse remodeling with expansion!

How To Make Lots Of Money In Real Estate: Focus On Expansion

Remodeling and Expanding

Building The FS Hot Tub!

In 2014, I bought a fixer for about $714 / square a square foot in the Golden Gate Heights neighborhood of San Francisco. Nobody really knows where the neighborhood is, and that’s just the way I like it because everybody eventually will! Golden Gate Heights is just several blocks west of UCSF and has homes facing the Pacific Ocean.

Real estate is my favorite asset class to build wealth because it is tangible, inflates with inflation, has preferential tax benefits, and provides an income stream if rented out. When I buy real estate, I’m the CEO of the property. When I buy a stock, I’ve got to trust the CEO and his or her management team to execute. Sometimes the CEO is great, sometimes the CEO sucks wind, yet still gets a multi-million dollar exit package that makes me sick.

Nobody cares more about your money than you. Hence, the goal for wealth builders is to own investments where you can better control the outcome. And if you can’t own investments that you control, let someone you trust manage your money if you don’t have confidence in managing your money yourself. I trust myself to work harder and scrutinize expenses and revenue more than anybody. My bottleneck is time.

In this post, I’d like to point out a very important rule before buying any single family home. If you follow this rule, I’m confident with the right execution, you will be able to make far more money than if you didn’t.

Should I Buy Bonds? Wealthy People Don’t

Stocks and James Bond 007 by Marc Tavenier

Stocks and James Bond

Wealthier people in America do not follow the conventional asset allocation model of buying bonds, i.e. age equals your bond percentage allocation or a 60/40 equities/fixed income split. How do I know this? Personal Capital has over 800,000 users of their free financial dashboard to help manage your money and I’m a consultant who is privy to some of their data to share with all of you. Data geeks, rejoice!

Out of 800,000+ Personal Capital financial dashboard users, roughly 165,000 of them have linked investable assets of between $100,000 to $2 million. We call this the mass affluent class, or upper middle class if you’re so inclined. The mass affluent are generally regular folks with mainly W2 income. They save and invest in order to provide for their family, pay for expensive tuition bills, take a couple nice vacations a year, and hopefully achieve a comfortable retirement when all is said and done.

Let’s do a quick review of my proposed stocks and bonds asset allocation model before moving on to the big data. 

How Investing In A Hedge Fund Saved My Retirement Portfolio

Retirement is lounging in an infinity pool by Jalon Burton

Reducing volatility from investing with hedge funds in order to relax

One of the benefits of working at an investment bank is gaining access to a variety of investment opportunities that retail investors normally wouldn’t have access to. For example, if Goldman Sachs decided to create a special opportunity fund for institutions because they saw opportunity in the Argentinian debt market, employees would have the opportunity to invest alongside some of the world’s largest money managers like Fidelity, Capital, and Franklin Templeton. Random investment opportunities came up all the time.

After two years as a financial analyst at GS in NYC, I knew my days were numbered as the NASDAQ dotcom bubble burst in March 2000. I remember optimistically telling my VP in May 2000 how I was still bullish on the markets and he sternly told me, “We’re in a bear market. Stop kidding yourself.” Three years later, more than half of my analyst class was let go.

By June 2000, it was clear the NASDAQ was not getting better. I can’t remember exactly how things played out, but I think management sent out an internal e-mail to all employees about how we should keep focusing on our clients – that now was the best time to give them a call or take them out because nobody else was. In the employee memo, management also indicated they had added some new options to our 401k retirement plan, namely several hedge funds that looked to profit from the downturn.

Given some of our smartest and most profitable clients were hedge funds, I decided to do some research and invest half of my 401k into a technology hedge fund, Andor Capital Management, founded by Daniel Benton. Andor was one of Goldman’s largest clients, and they formed some type of partnership where they would let employees invest without needing the $1 million+ minimums. The flagship Andor technology fund ended up returning 35 percent in 2000, net of fees, and my 401k actually inched up in 2000 and 2001 as a result of the hedge fund investment instead of getting slaughtered.

I kept my GS 401k until 2003, despite moving to a new firm in June 2001, due to the investment selection. But after it felt like the markets were out of the woods, and since I could no longer contribute to my GS 401k hedge fund as an ex-employee, I consolidated my 401k balance at my new firm to keep things streamlined. 

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.

The Top One Percent Income Levels By State

A top 0.01% income earner's yacht

A top 0.01% income earner’s yacht

The Economic Policy Institute came out with a interesting report that chronicles the top one percent income levels by State. To save you the hassle of reading the whole report, let me share with you some of their charts, and my own thoughts on the subject for your review.

The EPI is a liberal, non-profit think tank based in Washington DC, which has been around since 1986. The entire goal of their report is to highlight the rising income inequality between the rich and poor over the decades. I think they’ve succeeded in making a point that the government should do more to redistribute wealth to make society more equal. We all know the wealthy have gotten really wealthy during this bull market given they hold the majority of stocks and real estate in our country. The middle class and poor have fallen behind because income growth has gone nowhere over the past 45 years.

Let’s have a look at the top one percent income levels by state and discuss five key takeaways.

Managing A Complicated Net Worth: How Messy Is Your Money?

Antique Chinese Coin Collection Part Of Net Worth

Started collecting Chinese coins in 1997

A blogging buddy of mine named J from Budgets Are Sexy publishes his net worth figures every month. Although I generally advise against sharing all of one’s financial details, if the figures are reasonable, then that’s probably fine. Otherwise, the pitchforks will be focused on those who brazenly display obnoxious amounts of wealth with no regard for others. May Stealth Wealth live on in us all.

Remember, it’s more about what you have to show for your income, not so much about how much you make. Your net worth figure should be carefully protected as it grows.

J is in his early-to-mid 30s and has a family of four with a very respectable net worth of ~$470,000. Given he has around $37,000 in cash, the next time I see him at a conference boondoggle, of course I’m going to let him buy me a steak dinner! Instead of letting his cash earn nothing in a money market account, he might as well take care of his friends right?

What I noticed about his net worth picture is how pleasantly streamlined it is. He has no more than 10 financial accounts to track. Have a look.

Net Worth Chart

After seeing J’s net worth chart, I got to thinking about how complicated my own net worth picture is. I used to track my net worth with an Excel spreadsheet every single month since 2000. It was pretty fun for a personal finance enthusiast like me, but it started getting a little cumbersome after my account total grew. By the time I aggregated my accounts online in 2012, I had 25 accounts to track. I felt relieved when I no longer had to write everything down and update figures every month. Now everything just gets updated automatically thanks to technology.

But something funny happens when you just leverage technology to track your net worth. You stop being as analytical with your finances as you used to because you just rely on technology to do everything for you. In other words, you start getting a little lazy. Laziness is a net worth killer because it prevents you from taking action when opportunities arise, e.g. refinancing a mortgage.

My net worth has grown since 2012, like I’m sure most of your net worths have. What I’m curious to know is how many financial accounts I have now, because I haven’t checked in over a year! Perhaps you’ll share your count as well.

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. 

It’s Impossible To Stay Retired Once You Retire Early

Retired couple by Sebastian Flickr Creative CommonsIn the spring of 2012, I hung up my sword after working in finance since 1999. There was actually a hiccup the very last day of work, a Friday. When I was e-mailing some personal files from my work account to my personal account (pictures, tax docs, etc), I inadvertently e-mailed a five year old client file that was caught by compliance. I was warned this was a violation of company policy and that I would be hearing from them about any repercussions the next week. I apologized for the mistake and waited nervously about the fate of my severance check.

To allay my worries, I actually went to a free Hastings School Of Law community service event where law students and professors helped those with legal questions. They just so happened to host the event on what I thought was the first free weekend of the rest of my life. It was great to see the school give back to literally hundreds of people regarding questions about divorce, employment, accidents, theft, trusts, and more.

My question to a professor and to a law student was simply, “Can my firm take away the agreed upon severance contract due to a five year old company file that I inadvertently sent to myself?” Financial companies are notoriously strict about ex-employees transferring sensitive client documents that can be advantageously used against their old employer if they join a competitor. I told my company that I was retiring from the finance business altogether, but how could they know I was really telling the truth? In our business, few people voluntarily walk away from such paychecks.

After getting comforting council saying that I should be fine, I promised that day to NEVER go back to work in finance if I could still get my severance and deferred compensation. My new manager was in from New York City that day and was already busting my balls for the incident. I went a step further and promised to never go back to working for anybody. Hundreds of thousands of dollars were at stake and I was worried.

HR called me the following Tuesday and told me everything was fine in the end. They agreed the client file was irrelevant given it was five years old, and accepted my e-mail apology for the mistake. Once I got my severance check several weeks later I felt like I had sheepishly won the lottery. Instead of spending it all, I sat on it like I would any financial windfall. By the summer of 2012, the market had taken a little dive and I finally invested the entire amount in the stock market so as to make it disappear. I wanted to stay hungry and pretend I received nothing. 

Make More Money, Save More Cash, Grow Your Net Worth Now!

Big Goals by Sergiy Matusevych

I hope everybody is locked and loaded to get… loaded again! The bull market is now in its sixth year and we probably don’t have too many good years left until a lot of volatility returns. We’re already seeing signs of demand weakness with oil prices down 50% from 2014.

Let me first discuss five basic and important financial goals everybody should achieve this year and every year. I’ll then highlight my personal goals for 2015.

IMPORTANT FINANCIAL GOALS EVERY YEAR

What Does Early Retirement Feel Like? The Positives And Negatives Of Not Working For A Living

Retirement Travel In SantoriniFinancial independence and retirement are used interchangeably, but there are some subtle differences. Financial independence is usually applicable to people across their entire lifespan. Those who cashed out $5 million dollars worth of Facebook stock at the age of 30 are financially independent just like those who saved $5 million in their retirement funds by the age of 65.

Retirement, on the other hand, is a term often used to describe someone in the last quarter of their lives e.g. ages 65 and up. This is why some folks get so hot and bothered if you aren’t in the upper ages but say you are retired. They don’t think you deserve retirement because you’re not old enough! If you don’t want unwanted attention as an early retiree, just say you are unemployed, on sabbatical, or an entrepreneur.

The reality is all of us would rather be financially independent earlier, so we have more time to enjoy our wealth. When the director of admissions at Berkeley asked why I was applying so early (25), I told her it was because I knew what I wanted to do and felt it best to leverage an MBA degree sooner, for a longer period of time. Little did I know I’d be done 10 years later.

The older we get the more we are willing to trade money for time since we have less of it. Given I’ve already described what financial independence feels like, I’d like to now describe what life is like once you no longer have to report for duty. I’ll be as candid as possible so you can get a realistic understanding.

THE CHANGED LIFE OF A RETIRED MAN – THE POSITIVES

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

The Proper Asset Allocation Of Stocks And Bonds By Age

Proper Asset Allocation Of Stocks And Bonds by Andrew MacGill Flickr Creative commonsTo start, there is no “correct” asset allocation by age. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between. When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio. Meanwhile, you can have another portfolio in an after-tax brokerage account like E*Trade that is much smaller where you punt stocks. If you blow up your E*Trade account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.

I ran my current 401K through Personal Capital to see what they thought about my aggressive asset allocation. To no surprise, the below chart is what they came back with. I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

portfolio-analysis

I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai. We will talk through each model to see whether it fits your present financial situation. Your asset allocation will switch over time of course.

Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes. Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.

How To Better Manage Your 401K For Retirement Success

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

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

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

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

CONSERVATIVE 401K PORTFOLIO SCENARIO

How Tax Collectors Like The IRS Cleverly Rob You Of Your Money

Action Figure In HKEvery IRS person I’ve spoken to has curiously been kind. Yet, despite their kindness, I still feel my heart drop every time I get a letter from them. I’m not sure whether it’s because the movies always portrays the IRS agent as a bad man in a rain jacket, looking to shake down individuals for all they are worth. Or, perhaps it’s the fact it’s little ‘ol you vs. the omnipotent government that presents a no way out scenario. Whatever the case may be, dealing with the IRS sucks.

Those who work at the IRS or State Tax Collectors agencies are actually on your side. Sure, some have mandates from higher ups to milk you dry. However, most are willing to help you resolve your issues because they know how complicated taxes are in America. Perhaps this is one of the reasons why so many citizens have decided to just call it quits and not work!

One acquaintance I know worked for the IRS so of course I peppered him with questions to extract all the juicy details. I am against anybody paying more taxes than they need to. It’s just not right for the government to tax more than a typical person saves a year. If the government could show they can efficiently spend our money, then fine. But, they can’t even come up with a darn budget so forget it!

For all you conspiracy theorists out there, I think you’ll really enjoy this post.

AN INSIDER’S VIEW OF THE IRS

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, surely the average net worth has increased even further for 2015.

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 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 $17,500 a year in pre-tax income into their 401ks in 2014, once again, our politicians fail us with their regulations.

The average 401k balance as of January 2014 is around $99,000 thanks to an incredible 30% rise in the S&P 500 in 2013. Let’s add another 13% increase for 2015 given the S&P 500’s performance and we’re at roughly $112,500. Even so, $112,500 is incredibly low 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!