The State Of The Union Address 2015 Cheat Sheet

State Of The Union President Obama 2015When President Obama gave the State Of The Union Address at 6pm PST, I had just left the office to go eat some yummy butter chicken and garlic naan at Amber Restaurant in downtown San Francisco. I assume many other hard-working West Coasters missed the SOTU address as well. Alas, living through an East Coast centric TV schedule is something we’ve grown used to.

But as any true patriot would do, I DVRed the SOTU address, watched the one hour long speech, took notes like a good student, and spent several hours putting together this 2,000 word article to help others think about our nation’s issues.

It’s important we all know and have an opinion about the main topics our nation faces. We don’t have to all agree, but having the knowledge helps us make choices about how we want to live, what occupations we should pursue, the type of investments we should make, and how others might view Americans on a global stage.

Knowledge is what will set us all free!

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 2% (1.85%) at the time of this post. 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. 

Who Is The Middle Class? We Are All Middle Class Citizens!

Something very interesting happened the other night at around 6pm PST. The traffic on Financial Samurai more than doubled for one hour between 6pm and 7pm PST. See the chart below.

State Of The Union Online Traffic Chart

I took a look to see whether some major media publication had highlighted one of my ~1,000 previously written articles. Nope. I searched over social media to see whether any of my publications were trending. Double nope. And then I finally went to see which keywords people were searching for, and what article they were landing on to provide this 100% organic bump in traffic.

Keyword search: Middle Class Income

Article stumble: Definitions Of A Middle Class Income: Do You Consider Yourself Middle Class?

Bingo! Traffic began surging after President Obama began giving his State Of The Union Address at 6pm on January 20, 2015. I never knew Financial Samurai attracted more Liberal readers given a strong focus on making an income that Conservatives like to promote. Or maybe traffic just rises when a SOTU address is made, regardless of political side. We shall see if a Republican ever becomes president again.

The coolest thing about having a a personal finance site that has a reasonably significant amount of traffic is that I can play political scientist with real-time proprietary data in my boxer briefs while watching the Aussie Tennis Open at 5am. Over 40,000 visitors in one day is statistically significant, especially when compared to Gallup polls who often survey just 1,000 people to extrapolate a conclusion.

What Is An Accredited Investor And Is The Definition Fair?

Accredited Investor, Wall St. Bull In The United States, an accredited investor is someone who has a net worth of at least one million dollars, excluding the value of their primary residence, or has income of at least $200,000 a year for the last two years or $300,000 together with a spouse, with the expectation to make at least as much every year going forward.

Once you become an accredited investor, you’re now allowed to invest in certain types of private investments, which are usually less liquid, potentially more risky, and sometimes more complex than public equities and bonds. These investments include: private equity, venture capital, angel investing, limited partnerships, and hedge funds.

I’ve written consistently about how I think an adjusted gross income of roughly $200,000 – $250,000 is the ideal income for maximum happiness due to the maximum you can put away in a SEP-IRA or Solo 401k, a more agreeable federal tax level, less persecution by the government, a more digestible AMT, and enough income per individual to survive happily anywhere in the world. Now we can include being an accredited investor as yet another reason to shoot for $200,000 – $250,000 in income.

Should I Get A Divorce? Weighing The Pros And Cons Of Separating

Mending a broken heart by Nicolas RaymondAfter reading Sam’s How To Prevent Your Wealthy Man From Straying, I’ve been thinking a lot about my own situation. You see, I’m the mother of three boys, and I’m the wealthy one in the relationship. As a government employee, I make about $78,000 a year, but my wealth really comes from my parents, who left me about $2 million dollars in real estate and investments when they passed away last year.

My husband is a finance professional who has floundered around in the finance industry for the past 15 years. He’s never worked for the larger, more prestigious banks, but always the lower tier financial institutions that never got any respect from clients. My husband isn’t the most handsome or the smartest man in finance, but he is very gregarious and sociable. Clients like him, they just don’t take anything he has to say seriously, if you know what I mean.

Let’s call my husband Jim. Part of Jim’s job is to travel around the country to wine and dine clients and make sure they are receiving the service they need. He usually goes for a couple days. One trip, I noticed his clothes smelled like female perfume. I’ve got a keen nose and knew it was Eternity for Women.

When I asked Jim why he smelled like CK’s Eternity, he shrugged. He said that the perfume probably rubbed off on his clothes after hugging his female client goodbye. He explained they all went to a bar after dinner. Fine, whatever.

Is Company Loyalty Costing You A Fortune? Here’s How I Lost $500,000 In Three Years

loyalty

Loyal dog. Woof

One of my regrets between 2007-2012 was not aggressively entertaining other job offers. By 2007, I had been with my previous company for six years and felt tremendous loyalty to the firm. How could I hop to a competitor for more money when my company first gave me a chance here in San Francisco? I now wonder whether the reason why I stayed at my firm for 11 consecutive years is because of my predisposition to feel guilty whenever something good happens.

Instead of leaving for another firm, I simply asked my boss in a nice way what I should do if they were me when I was getting aggressively courted. They always told me to stay and simply offered me a raise between what I was getting paid and what I was being offered by a competing firm. I never pushed them to match because I didn’t want to create a hostage scenario of resentment. Wall Street income is relatively absurd compared to practically every other industry, so I found it always distasteful when people complained about their bonuses.

But if I managed my career perfectly, I could have made $400,000 more after tax if I had accepted a juicy, two-year guaranteed income offer at another firm in NYC from 2010-2011. I left Wall Street in 2012 anyway, so it didn’t matter that I was going from a bulge bracket firm to a lower tier firm because I was never going back to finance.

Even after a four-hour interview with the interested company’s CEO in NYC, who so happened to be the eldest son of China’s former Premier, I still couldn’t take the leap out of loyalty to my firm. If you were a fly on the wall during our interview, you would have thought that I was some type of superstar based on the praise he gave. I stood stubbornly strong like a patriotic soldier and politely declined multiple times after.

NYC is a great place to visit, but pretty much sucks in terms of cost and work/life balance. Besides entering a much more stressful lifestyle for two years if I took the job, I was also hesitant to sell my house in 2010 given the real estate market was still depressed. Another concern was whether or not the courting firm would actually pay the second year guarantee if the first year performance results were not up to expectations. I heard stories of companies luring employees in with great promises only to welch during the second year. What was the new employee supposed to do after getting screwed in the second year but suck it up, sue his employer, or find another job. It’s not as easy finding another job if you’re coming from a small shop.

Although I missed out on some heavy dollars, at least I was able to negotiate a severance package from my firm of 11 years that lightened the blow. It would have been impossible to negotiate a severance if I quit after a two-year guarantee at the new firm. Manhattan is a wonderful playground if you have money. Alas, I’ll never know.

Increase Your Savings By Identifying Specific Reasons To Save

save money for freedom. Jamaica panorama

Save money so you can live a free life! Jamaican sunset

I was invited to join the TaxACT How I Save blog tour which shares ways to keep more money in your pocket. Last year, TaxACT saved America over $240 million on tax preparation. 

One of my main goals for 2015 is to save $100,000 in new liquid cash after spending too much money on remodeling in 2014. I got down to around $25,000 in liquid savings towards the end of the year and it just didn’t feel enough for me. Each person’s desire for liquidity is different given our living expenses and risk tolerance levels are all different.

The reasons why I want to have roughly $100,000 liquid at all times is as follows:

1) Minimum private equity investments generally are around $50,000, at least all the ones that have been presented to me. The last thing I want to do is only have $25,000 and not be able to invest in the next Uber.

2) It’s always good to have cash on hand when the stock market throws up. The general long-term trend is up and to the right. I want to implement my own advice on how to better dollar cost average with $5,000 – $10,000 investment increments at a time.

3) I have a goal to pay down my first rental property mortgage within 12 months. There is roughly $85,000 left in principal from this 11.5 year old mortgage (started at $464,000), which is starting to annoy me. I will be averaging roughly $7,000 a month towards paying down extra principal along with my usual monthly mortgage payment that pays down $1,100 in principal in order to achieve my pay down goal. Having $100,000 allows me the flexibility to pay it all off in one go, or give me the confidence to keep on my $7,000 a month plan.

Always Work On Improving Cash Flow For Financial Independence

Cash Flow For Financial Independence

Cash Flow by Jo Z-Sunny

The other day I asked a very wealthy entrepreneur about his main financial concern. He’s probably worth anywhere between $50 million to $75 million dollars. Given he has so much money, I thought his answer would be more philosphical, like “making sure my kids appreciate the value of money,” or “how to create a lasting legacy.”

Instead, the entrepreneur responded, “My biggest concern is making sure I have enough cash flow to maintain my lifestyle.”

I initially thought the answer was odd because why bother measuring cash flow given he can simply draw down principal to fund his lifestyle forever. $500,000 here, $1 million here, who cares? He’s still left with tens of millions of dollars left over! But maintaining a lifestyle that is meaningful to you is what having money is all about.

Many people with tremendously high net worth figures don’t have nearly as much LIQUID net worth as one would assume. People mistakenly think that just because someone has a $10 million net worth, that they can withdraw 10 million $1 dollar bills and make it rain. Instead, high net worth individuals likely have much of their net worth tied up in equity stakes that could disappear if a downturn like 2008-2009 ever happened again.

Just look at the guy who founded CNET, the technology online review site. He was worth $2 billion dollars, but after a divorce and leveraging up in 2007, he filed for bankruptcy. Every super wealthy person I know is well aware of how ephemeral wealth is. This is why buying real assets, like property or fine art is so attractive to many equity millionaires.

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. 

How To Save More Than $100,000 A Year Pre-Tax: Open A SEP-IRA Or Solo 401k

SEP-IRA by American Advisors GroupOne big goal on Financial Samurai is to highlight to readers what is financially possible. Once you know what is possible, you minimize your limiting beliefs and tend to strive much farther. Through close to eight hours of research and production, this post will explain how you can add more than $100,000 every year pre-tax to your retirement account if you have the right employer and proper strategic money making mindset.

The 401k maximum contribution for 2015 is $18,000. The increases will likely continue by $500 increments every year or two to keep up with inflation. Contributing $18,000 pre-tax a year for 30+ years will most likely make you a millionaire by the time you retire. Unfortunately, $3 million is the new $1 million, and in 30 years, $7 million will likely be the new $1 million if we assume a 3% annual inflation rate!

The 401k is not enough for most people to retire on. Sure, we potentially have Social Security to help us when we reach, at the earliest, 62 years of age. But I wouldn’t count on the government to properly manage our money until then. Beyond maxing out a 401k every year, I encourage everyone to also invest at least 20% of their after-tax, after-401k money into a diversified investment portfolio.

As a contractor over the past year, I’ve discovered something that will really supercharge one’s pre-tax retirement savings. The discovery still seems too good to be true, so for any of you tax gurus out there, please speak up and correct me if I’m wrong. We are going to crowd source this post into one of the best maximum pre-tax retirement posts around. The research I’ve done is based off the IRS website, my own experience, and speaking to Fidelity’s small business retirement department where I have a rollover IRA, SEP-IRA, and Solo 401k.

Maximum Taxable Income Amount For Social Security (FICA)

Uncle Sam The Tax ManFICA stands for Federal Insurance Contributions Act and consists of a Social Security tax and a Medicare tax. This tax is very important for everyone to understand because so often we only think about federal tax rates and state income tax rates. The FICA tax is a big percentage of your total tax bill, especially for those making under six figures a year.

When I was making big bucks in finance, the tax bill was equally big bucks. The only saving grace was seeing my after tax paycheck increase after the maximum taxable income threshold for Social Security was breached each year. The tax amounts were jolting based on how inefficient the government was and still is with regards to spending our money.

For 2015, the maximum amount of taxable earnings for Social Security rises to $118,500 from $117,000 in 2014. In other words, an employee must pay 6.2% of any income up to $118,500 for 2015 = $7,347. But any dollar you make above $118,500 is free of the Social Security tax. Hence, a good goal for everyone is to make as much as they can over $118,500 as possible, right?

Not so fast. Given we have a progressive tax system in America with Alternative Minimum Tax (AMT) and deduction phaseouts, I’ve calculated that the optimal Adjusted Gross Income is roughly $250,000, +/- $50,000. At $250,000, $131,500 of the earnings is free from the 6.2% Social Security tax. Meanwhile, you still get most of your mortgage interest deduction, and only have to pay a slight amount of AMT, depending on the person. A $250,000 income is also high enough to live relatively comfortably in any part of the world.

Some might argue that the Social Security tax is regressive because it caps out at $118,500 in 2015. Why shouldn’t rich people pay more? Here’s the thing people might not understand. Social Security benefits cap out based on the maximum amount of Social Security tax contribution as well. It’s not like someone who is making $500,000, and not having to pay the 6.2% Social Security tax on $381,500 of his earnings is getting extra benefits based off his $500,000 income. He’s just getting the maximum Social Security payout amount when it comes time for him to collect based on the maximum taxable income amount he contributes.

The $500,000 income earner is already paying the highest marginal federal tax rate of 39.6% plus state taxes, if applicable. 

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

Big Goals by Sergiy MatusevychHappy New Year Everyone!

I hope everybody is locked and loaded to get… loaded again in 2015! It’s somewhat arbitrary to set goals at the beginning of each year, but there’s no use fighting the power. The beginning of the year is when a large amount of assets get deployed into various investment classes. The beginning of the year is also when companies aggressively hire and spend their budgets. And the beginning of the year is when everybody is full of hope.

You want to be front and center!

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

Pay Down Debt Or Invest? Implement FS-DAIR

Financial Freedom In AmericaThe decision to pay off debt or invest is a personal one that depends on a lot of factors: risk tolerance, your number of income streams, liquidity needs, family expenses, job security, investing acumen, retirement age, inflation forecasts, and bullishness about your future in general. I’ve had hundreds of people ask me this question over the years, and I’ve also struggled to figure out a good guideline for myself.  As a result, I’ve been racking my brain to figure out a viable solution that can be used by many.

The solution I’ve come up with is called, “Financial Samurai’s DAIR” or “FS DAIR” for short. The idea is to come up with something easy to remember, challenging, logical, and effective, much like the 1/10th rule for car buying to help folks maximize their wealth. Even though plenty of people have objected to my 1/10th rule for being too restrictive, I strongly believe the rule has helped people minimize financial regret and boost the incredible feeling of progress and financial security.

Since we are all CFOs of our finances, we need to figure out the most efficient use of capital. My goal is to make personal finance simple so ACTION can be taken. All talk and no action leads to nothing. I’d like to “DAIR” you to follow my debt pay down rule to achieve financial freedom sooner, rather than later.

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

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) A person who went to college and believes that grades do matter.

2) Does not spend more than they make because that would be irrational.

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

4) Largely depends on themselves, as opposed to mom and dad or the government.

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

6) Has an open mind and is willing to look at the merits of both sides of an argument.

7) Welcomes constructive criticism and is not overly sensitive from friends, loved ones, and strangers in order to keep improving.

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

9) Understands the mental to physical connection in everything we do so that that a healthy mind corresponds with a healthy body.

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

11) Has little-to-no student loan debt due to scholarships and part-time work.

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!