Is It Better To Be A Full-time Employee Or Contractor (Freelancer)?

The freedom of being a contractor is enticingAccording to a survey conducted by independent research firm Edelman Berland and commissioned by the Freelancers Union, more than one in three workers – 53 million Americans – is now freelancing. By 2020, more than 40% of the American workforce, or 60 million people, will be freelancers, contractors and temp workers, according to a study done by Intuit in 2013.

Chances are high that you are currently a contractor or have thought about giving up your full-time job to be a contractor. When I left Corporate America in the Spring of 2012, I thought I’d never return. But in November 2013, I received an opportunity to contract for 25 hours a week, and here I am 18 months later! The X Factor I did not anticipate about building a large personal finance blog is that other companies would be interested in hiring me for my knowledge and services.

In this post, I’d like to discuss the differences between a full-time employee and a contractor. Some of you have told me that you never want to be a contractor because you don’t want to be treated poorly; like an outsider. While it’s true that as a contractor, you might not be treated as one of the team, there are plenty of other benefits that make the decision to contract or go full-time surprisingly difficult.

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. 

Buying Structured Notes For Downside Investment Protection

Hedged Upside With Structured Notes

Are your investments hedged?

We could be in another financial bubble, but nobody really knows when a correction will take place. You might not even care if your investments decline by 20% or more over a year time frame if you are looking to invest over the next several decades. But alas, none of us will live forever, and nobody really likes to experience downside volatility. Sooner or later, we’ll have to deploy our capital for life, leisure, and charity. Not everybody wants to leave a financial legacy to raise spoiled kids!

One of the strategies I’ve taken to protect against downside risk is to buy various structured notes based on different indices like the S&P 500, Euro Stoxx 50, and the Russell 2000, or buy single stock structured notes of specific companies. Not only do I regularly rebalance my portfolios, I also consistently dollar cost average every month. You’ll be surprised how big a fortune you can create after just 10 years by methodically applying these two financial practices.

Structured notes are derivative products that usually provide hedged returns. In this post, I’d like to explain to you another recent structured note I bought to help illustrate how structured notes work. I buy all my structured notes through a Citi Wealth Management account. My other investment portfolios include: a Rollover IRA, a SEP IRA, a Self-Employed 401k, and a Motif Investing portfolio. 

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!

Is Buying A Stock Coincidentally Before An Acquisition Insider Trading?

Insider Trading Jail CellOn Saturday, July 16, 2014 I played in a tennis tournament with a partner that worked at Trulia, an online real estate company. He just got his job and was explaining to me how the company makes money through its ad placements for Realtors. If you’ve ever wondered why companies like Trulia and Zillow have done nothing to lower selling commission rates from 5%, it’s because real estate agents are their clients. Asking how a company makes money or plans to make money is always my number two question after understanding what the company does.

We had a really fun time playing against Berkeley Tennis Club across the bay. After getting home, I decided that I was going to buy Trulia stock because I liked their business model, the stock had corrected somewhat, I was bullish on the real estate market, and it seemed like a prime takeover target. I was set on buying $50,000 worth of the stock on Monday, July 18.

For some reason, I got too busy that Monday and didn’t execute my order before 1pm PST. Mondays and Wednesdays were my consulting days for one of my ex-clients. I forgot about buying Trulia that entire week until I saw news after the close on July 28, 2014 that Zillow was acquiring Trulia for $3.5 billion in stock at a 25% premium! Damn! I could have made $12,500 in just a couple weeks!

What a shame. Or how fortunate. Let me explain.

Does A Good Credit Score Really Matter Anymore?

Does a high credit score matter anymore? Most don't careA couple mortgage refinances ago, I almost screwed myself because I had an $8 judgment against me from my local utility company that crushed my credit score by ~100 points. I thought I had an excellent credit score of 780, and I did, when I first started my 100 day refinance hell. But when my refinance bank pulled my credit report again around the 90th day, my TransUnion score plummeted to 680.

My mortgage refinance was delayed by another 10 days as my bank investigated the situation. Thankfully, everything turned out fine in the end. Since that time, I decided to regularly check my credit score once a year like I check my latest insurance coverage and health coverage. It’s good practice given it’s estimated about 5% of credit reports have errors as well.

Given I finally got rejected from my latest mortgage refinance attempt by Chase, I’ve begun to question whether a credit score has any meaning anymore. You see, I never missed a mortgage payment on this particular mortgage, and my latest credit score showed a 787. Anything above a 740 is considered excellent, and good enough for the best rate by major lenders.

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!

Property Sellers: Only Accept All Cash Offers To Maximize Profits And Happiness

Mountain Of Cash

Skylar And Walter’s Mountain Of Cash

Almost every Sunday I go for a walk, jog, or hike around a neighborhood to check out open houses, speak to Realtors, get some exercise, and find inspiration for interior design. Open house hunting is seriously my new favorite free past-time. My previous favorite past-time was test driving new cars at various dealerships. What a blast that costs nothing!

I went to see a particular condo in Pacific Heights, San Francisco the other day because it was a close comp to one of my rentals in the same building. This particular property was only a one bedroom compared to my 2/2, but at 610 square feet it had a nice southern facing deck and private parking. The asking price? $690,000.

The open house was absolutely packed with couples under 35 years old as well as many retirees. Who knew one bedrooms were so popular?

Mortgage Refinance Failure: Lending Standards Remain Very Tight

Mortgage Refinance Failure

Mortgage Refinance Failure

It’s official. I’ve failed in my attempt to refinance a $1 million 5/1 ARM mortgage from 2.625% down to 2.25%. Am I disappointed? Yes. But am I surprised? Not really. Bank lending continues to be extremely tight post the financial crisis. I wish all freelancers, contractors, and folks looking to minimize their debt only the best of luck!

Financial failure is great because it allows us to learn from our mistakes, make better decisions, and get wealthier over the long term. I’ve got a whole list of financial mistakes I’ve made in the past if you care to take a look.

I’m of the belief we should always take action to improve our finances. Letting the housing market increase or decrease in value doesn’t take any effort once a property is purchased. But imagine experiencing an effortless increase in property values while putting some legwork into reducing mortgage costs. That’s a winning combination.

This post offers up some plain truths as to why I failed, and what I plan to do about it. Maybe you’re having a tough time refinancing yourself? This post may offer some comfort, hope and direction.

Changing Jobs Or Industries? Take A Pay Cut And Swallow Your Pride

Taking A Pay Cut To Change Jobs Or IndustriesOne of the funniest things I’ve come across are those people who want to gain experience, but who aren’t willing to intern at a company for free. If you don’t know jack shit, shouldn’t you get paid jack shit in return?

Several years ago, there was a lot of debate regarding employers taking advantage of their free interns. So, like any good Big Government would do, the US Department of Labor stepped in to establish the Internship Programs Under The Fair Labor Standards Act to protect these poor interns.

The “unintended consequence” of course is that there may be fewer opportunities for eager beavers to gain experience since employers might as well hire qualified, full-time employees if they have to pay!

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. 

Tax Penalties For High Income Earners: Net Investment Income, AMT, Medicare

Tax Penalties For High Income EarnersTax refunds are nice. Unfortunately, I won’t be getting one given I didn’t pay quarterly estimated taxes in 2014 despite my freelance income. So why didn’t I pay quarterly estimated taxes given there’s a likelihood I’d pay a penalty if I did not?

Uncertainty and certainty.

I was uncertain whether I’d freelance for the entire year. After spending most of 2012 and 2013 working on my own business, adding 25 hours a week of freelance work was a new endeavor. But I enjoyed freelancing so much (and didn’t get fired) that I decided to commit to at least a whole year. Furthermore, my consulting client was kind enough to offer stock options, so I had an added incentive to stay for at least the one year cliff.

What I was certain about was earning a higher W2 income since my online business kept growing. When it comes to estimated taxes, my accountant suggests following the safe harbor rules and paying 10% more than the previous year’s tax liability. By doing so, even if you earn a much higher percentage in the current year, you’re safe from having to pay penalties and fees of any underpayment. If you’re unsure about your business outlook, to be safe, it’s advised to pay at least 90% of your prior year’s tax liability.

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 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.

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.

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 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. 

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

Financial Samurai Passive Income Update 2014-2015

Financial Freedom Through Passive Income

Earning passive income in Santorini, Greece 2015

Welcome to my annual passive income update. I don’t do these updates more often because nothing changes too much on a month-to-month or quarter-to-quarter basis. Do you really want to see that I increased or decreased my passive income by $1,000 from the month before? I think not.

Here are some immediate reasons I can think of for why building passive income is a good idea:

1) You likely won’t want to work forever, no matter how much of an eager beaver you now are.

2) Unfortunately bad things happen all the time e.g. layoffs, financial meltdowns, theft, etc.

3) It’s nice to provide as solid a financial foundation as possible for your family and loved ones.

4) You broaden your knowledge and expertise across various topics so you can seem erudite but remain a little dumb.

5) You’ll reduce financial stress and feel happier that not all your income is tied to one main source.

6) You will decrease your chances, your spouse’s chances, and your children’s chances of ever having to depend on the government to survive.

7) You will have more freedom to do things you truly want to do. This feeling becomes more intense as you grow older given you become more aware of the finality of life.

8) You can push yourself financially beyond what you think could ever be possible. Who doesn’t love a good challenge except for the people who have everything handed to them?

This is my third annual passive income report where I have a goal of making $200,000 in relatively passive income by mid-2015 after leaving my job in early 2012. I started off with roughly $78,000 a year and I’m currently up to a projected ~$150,000 a year if all goes well after renting out my old primary residence. Life is uncertain, and I’m sure things will change.

To clarify the meaning of passive income, I do not include income from consulting, freelancing, asset sales (stocks, bonds, real estate, baseball cards etc), and business income. I’ve got other targets for these revenue streams that I might discuss in a future post, but probably not. The goal of passive income is to have the income largely come in without doing much work at all. But in order to not do much work for money, we’ve first got to work very hard for our money!

One thing to note is that I started my passive income journey before writing about Stealth Wealth. $78,000 a year is roughly the median income in SF, so it wasn’t a big deal. But I promise that if I ever breach $200,000, I will go dark and never write any specific figures again. If I do, you’ll know that I’m lying to blend in because that’s what Stealth Wealth is all about. 

How To Improve Your Credit Score To 800 And Higher

805 Credit Score Financial SamuraiIt took 14 long years and many false hopes, but I finally broke 800 on my credit score back in September, 2013! It’s 2015 now and my 800+ credit score has remained steady.

The last time I checked my credit score before 9/2013 was when I refinanced by primary home mortgage in the spring of 2012 before I left my job of 11 years. My TransUnion credit score actually came back at a dismal 697 because there was a late $8 electricity bill charge my tenants did not pay from three years ago. As a result, my bank said they would not go through with my refinance after I had waited for 80+ days already.

I was able to fix my credit score in 10 days after I told my local utility company to write a “clear credit letter” to my bank. My credit score thankfully jumped back to 797 within three months and my refinance was complete. What is scary about the whole thing is that I had successfully refinanced another property in 2010 with no signs of an impending hit due to the $8 late payment. This is why I urge you to check your credit score once a year to make sure there no errors, especially if you are planning to refinance or take out a significant loan.

My latest credit score check came due to my application for the Discover credit card I plan to use for all my travel related expenses. I’m on a 10+ weeks a year travel mission from now on and it just makes sense to sign up for a card that provide bonus miles and points for every dollar spent. So it was with great surprise through the application process that my credit score is now 805.

In this article I’d like to highlight the main attributes of determining one’s credit score and my thoughts on how I was able to finally break 800. Hopefully this post will give you helpful first person insight.

Which Is A Better Investment: Real Estate Or Stocks?

Classic San Francisco Victorian In Haight DistrictWe’ve got real estate tycoons and we’ve got stock market tycoons. We’ve even got wealthy bond investors such as PIMCO’s Bill Gross who pulls in over $100 million a year, but let’s forget about bonds for now. Now that everything is heading up, I’d like to have an open discussion on which asset class provides the the most amount of wealth over the long run.

With my net worth split roughly 40/30/30 between real estate, stocks, and CDs, you might assume that I like all three asset classes somewhat equally. The fact of the matter is I would much rather have 60% of my net worth in real estate, 35% in stocks, and 5% in CDs at this present time. Unfortunately, shifting one’s net worth around isn’t as easy as snapping one’s fingers. (See: “Recommended Net Worth Allocation By Age And Work Experience“)

It’s important to realize there are no renter or cash tycoons. The return on rent is always -100% every single month. Meanwhile, the return on cash averages a paltry 0.1% nationwide. You can certainly be a wealthy renter with tons of cash in the bank. But your wealth was accumulated through other means so don’t get confused. Having a money strength grade of F– is no way to go.

In this article I will explain to you why I have a preference for real estate over stocks (equities). Both have proven worthy of building great wealth over time, however real estate is going to provide the most return over the next 10 years in my opinion. I’ll do my best to make the case for both asset classes.

REASONS WHY REAL ESTATE IS BETTER THAN STOCKS

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 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, 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 $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 January 2015 is around $113,000 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.

Even so, $11300 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!