One of the common beliefs I’d like to overturn is the idea that one shouldn’t count their primary residence as part of their net worth. This belief is propagated by the wealth management industry because wealth managers only earn fees based on your liquid net worth. Ideally, wealth managers would also like you to believe that your 401k, IRA, and any tax advantageous retirement account are not part of your net worth either.
Interestingly, the other group of people that believes a primary residence shouldn’t be included in one’s net worth is the socialist who looks to protect the feelings of renters who don’t own any property. Their logic is: if renters can’t include their place as part of their net worth, neither should anyone who perhaps saved for years to come up with a down payment and took some risk to buy. In the socialist’s mind, it’s OK to discount completely a $200,000 down payment or a 100% increase in home equity.
Let’s analyze a simple example to illustrate my contention that all savings and equity you’ve accumulated in your lifetime should count towards your net worth.
Let’s say you own three, paid off properties worth $200,000, $500,000, and $1,000,000. You also have $300,000 worth of stock. You have no liabilities, no savings and no other assets to keep things simple. Your net worth is clearly $2,000,000. According to the wealth manager and the socialist, however, it is not.
Wealth Manager’s Point Of View
If you live in the $1,000,000 property, the wealth manager will say your net worth is only $1,000,000 ($200,000 property...
I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth. In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!
Check out the chart below.
If you have no investments outside of your primary residence, I’m not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.
I’m not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. Let’s say you were “fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You’d still only be getting a maximum Social Security check of ~$2,700 a month in today’s dollars.
The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one’s net worth. When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn’t have enough cash or defensive bonds or even commodities to protect them from selling at fire...
Reaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the various levels of financial independence. That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living.
Contrary to what you may think, financial independence is not all about having enough money to cover all your expenses and then some. Financial independence also means being able to overcome your psychological fears to truly live free.
For example, I have peers who have millions in net worth, yet still make their respective spouses work because they do not feel 100% financially secure. Common reasons include the need for health care coverage or their spouse’s “love” for their job even though they’d rather be doing something else.
Here are the three levels of financial independence I’ve come up with. All three levels of financial independence should meet the following basic criteria:
1) No need to work for a living because investment income or non-work income covers all living expenses
2) Net worth is equal to or greater than the number of years left in your life X living expenses e.g. $3 million with 30 years left to live is FI if your living expenses are no more than $100,000 a...
Before you read my investment outlook for 2018, you must first understand my financial situation and my biases. Our biases often warp our reality by anchoring us to past situations.
With this background information, I believe 2018 will be the last year of “easy money,” where assets remain relatively stable as they track historical returns. Let’s discuss each asset class in a little more detail.Stock Market Outlook: One Last Hurrah
According to the U.S. Small Business Administration, small businesses account for 48% of national employment. In number, they represent 99.7% of all businesses in the country. In other words, it is the guy with the plumbing store or the gal with the digital online marketing agency who make up the heart and muscles of the American economy.
Based on my interactions with other small business owners, everyone I’ve talked to is extremely excited about lower taxes and potentially less red tape. It’s really less...
My biggest disappointment in 2017 was pushing my mind and my body past their limits. At the age of 40, I no longer have the energy to do what I’ve been used to doing all my life, yet I worked more than I ever had before. I was a stubborn mule who couldn’t accept the fact that I had aged. As a result, I injured my ankle, back, elbow and quads.
I also had a breakdown one evening when I couldn’t put my son to bed after the third try at around midnight. Hearing my baby cry is a heart-stinging experience. After an hour and a half of singing and cradling, I gave up on giving my wife the rest she needed and texted her to relieve me.
I felt like such a failure. I had spent years building a lifestyle business in order to be able to be a good father. Yet I lost it because I was working way too much on the business instead of storing up energy reserves for the late night shift.
It was at this moment I realized that going down the path of full-time caretaker with my wife while also keeping Financial Samurai going at a fervent pace wasn’t going to work out. I was no longer my happy go lucky pleasant self. Here are some goals that will make life better in 2018!
1) Return to early retirement life....
Happy 2018 Everyone!
Since the year doesn’t really start until the second week of January, I’ve decided to spend more time reflecting. Hopefully you will too on a tropical island somewhere.
Before 2017, the best year of my life was when I got married on a cozy beach in Oahu. It was a simple wedding with only 16 family members in attendance. There was a gentle breeze that rustled the palm leaves while a ukulele player played Somewhere Over The Rainbow. The ceremony was simple, yet so beautiful.
No moment ever topped that day until our son was born last Spring. The birth went smoothly and I could finally breathe a sigh of relief both mama and baby were safe and healthy. We feel so blessed to have him in our lives.
Despite all my preparation, I still underestimated how difficult it would be to work 15 hours every day for months on end. I worked in banking where 15 hour days were the norm. But even in banking, we got at least one day off a week. Further, nobody works every single minute they’re at work. With parenthood, one look away could spell disaster.
Constant sleep deprivation killed my mood. No longer did I have the desire or creativity to spend several hours writing a post. No longer did I have the patience to deal with annoying people. Yet we had to...
At the beginning of the year, I decided to track my investments with a detailed spreadsheet because my cash flow was increasing and I wanted to make sure the money was being properly deployed based on my risk tolerance. If I force myself to think for hours about how to invest my money, hopefully I won’t rashly spend it on completely wasteful things such as a sports car that can’t fit a baby seat or a vacation property I’ll hardly ever use.
On the flip side, ever since the housing crash I’ve had a heightened fear of losing money, especially since I haven’t had a job since 2012. It takes around three years as an entrepreneur to feel confident you won’t starve on the streets, especially if you become a parent during the process. As a result, I tended to hoard cash, which is suboptimal in a bull market.
This post will go over my investment thought process by category for 4Q2017 and conclude with some investing lessons learned about the year. The goal of tracking our investments is to try and take full advantage of a bull market in a risk appropriate way.Financial Samurai 4Q2017 Investment Review
In summary, I mobilized a total of $2,263,319 into various investments in 2017. $750,000 of the $2,263,319 was invested in conservative investments (bonds, mortgage pay down, and home improvement) that should return 4% or more gross a year. The remaining $1,500,000+ was invested in riskier assets with a target return of between...
Merry Christmas and Happy Holidays Everyone!
The best thing about hard work is when it’s over. Once finished, you can basically sit back and enjoy all of the rewards if you wish. And if you hustle long enough, you might positively change your life forever.
In 2017 I wrote 175 posts, averaging 3.3 posts a week. In addition I also published 173 pages, consisting of product reviews, random thoughts, and different spins on existing topics. Pages are public, they just don’t hit the homepage or got out in my feeds. Finally, I’ve got 36 pending posts in the queue waiting to be unleashed. All in, I averaged 7.3 posts a week.
My goal was to do as much as possible before our baby was born to buy time in the future to take care of him. It’s like saving all your tax cut money to inevitably pay for a tax cut in the future! Even though I don’t have a day job, writing a comprehensive article is easier said than done. Further, the average stay at home parent spends 97 hours a week taking care of their little one.
Here are the most popular posts written in 2017 by traffic and some of the the most popular posts by traffic regardless of when they were written. My #1 goal is to help readers reach financial independence sooner, rather than later. Every single post was written based on first-hand experience...
I firmly believe tax policy changes behavior. The higher your taxes go, the BETTER your life becomes! Why? Because at the margin, the less money you keep, the less motivated you’ll be to work. Since the love of money is the root of all evil, the less time you spend chasing money, the happier you will be.
One of my catalysts for leaving work in 2012 was because the finance industry was in a structural decline. We were working longer hours for less pay. At the same time, we faced a progressive tax system where we had to pay a 39.6% Federal tax rate plus a 3.8% Net Investment Income tax plus a 0.9% Medicare tax plus an Alternative Minimum tax plus a 13% State tax plus Social Security tax plus Sales tax plus retroactive State taxes to pay for government overspending. Instead of complaining about paying a 60%+ marginal tax rate, I just negotiated a severance to make no money as a writer.
My life since leaving work has never been better, all because I decided to focus on maximizing freedom instead of maximizing net worth. When you’re in the grind, it’s hard to fathom the benefits of giving up a steady paycheck. But the benefits truly are incredible.
For those of you who naturally like to work more when...
Personal Capital, a digital wealth advisor with over 1.5 million users of its free financial tools, released its 2017 Affluent Investor report with some interesting data. I used to consult with them between 2013 – 2015 and have been using their tools to track my net worth since 2012.
The biggest surprise from one of its surveys is that folks with more than $500,000 in investable assets are most worried about a financially secure retirement. Think about that for a minute. With the median retirement savings for 56 – 61 year olds in America at only ~$20,000, Americans with 25X that amount cite financial security as their top worry!
With $500,000+ in investable assets alone, one can presume that most survey respondents have net worths in excess of $1,000,000. After all, about ~85% of the typical American’s net worth is tied up in their primary residence. Check out the survey results.
I bet most people in the world would consider having $500,000 in investable assets plus a home to be a financial life well done. Therefore, we can conclude that affluent investors have to be one of the most paranoid demographics around, especially since 38% said they are...
Would you rather be perpetually happy for the rest of your life with no guarantee of great fortune? Or would you rather have great fortune for the rest of your life with no guarantee of ever being perpetually happy? Choosing money is obviously the answer! Just kidding.
Today if I were to rate my happiness on a scale of 1 – 10, 10 being deliriously happy, I would give myself an 8. Historically, I’d say my happiness probably fluctuated between a 5-7 during my high school years, a 7-9 in my college years, and a 6-8 in my 20s and early 30s.
High school was stressful because I knew so much of my future was riding on getting good grades and SAT scores. Combine academic pressure with athletic demands and peer pressure to be “cool,” I wonder why more kids don’t fall into the deep end, especially with absentee parents working all the time.
College was pretty exhilarating due to all the sudden freedom. Food was plentiful and the parties outrageously fun. Being able to date so many people was a blast. Oh yeah, and learning new subjects was a nice benefit too. The only real pressure came from the expectation of finding a good job. Spending four years of time and lots of money only to end up with nothing would be a great disappointment.
The relief of actually getting a full-time job catapulted my happiness to a 9....
On one of my winter open house rounds I stumbled upon a beautifully renovated Edwardian with three bedrooms and two bathrooms on the top floor, a full bathroom on the first floor, and a bonus room on the bottom floor. It looked a lot like my rental house I sold this summer, but brand new.
At 2,500 sqft, I thought the house would list for ~$1.8M and sell for closer to $2M. But instead, it was listed for $1.49M and had been on the market for several months already. I immediately wanted to buy the place given the ~$500,000 pricing discount.
Upon further investigation, however, I learned from the new listing agent there was a terrible fire back in September 2013, hence the gut remodel. That’s fine, so long as the new construction was done up to code. But then the listing agent went on to tell me there was not one, but three deaths as the result of the fire: a 33-year old father, his one year old daughter, and her grandfather.
As a new father, my heart sank to the deepest depths of the ocean. I could not imagine losing my son so early. My only wish for the Grim Reaper is that my...
One of the downsides of putting yourself out there is that you open yourself up to misinterpretation or criticism. Fear of ridicule is one of the biggest reasons why 97% of people don’t do anything to change their life. It all starts with getting bullied at school or admonished by our teachers or parents for doing something different. Is it no wonder why we all get in line once we graduate?
For some reason, I was always the kid who fought back against bullies, no matter how big or how menacing they were. I figured, even if I got pounded to a pulp, before I did, I’d be able to at least get in one blow and it’d be worth defending my honor.
Because of my defiant behavior, I went to the principal’s office plenty of times. I was suspended from school twice for fighting and my parents were none too pleased. It didn’t matter who started the fight, if you fought back, you were equally punished. I thought this was a terrible system, which gave me my first clues into a rigged society.
Despite the discomfort of doing something new, I’ll continue to experiment in order to grow. But sometimes, I’ve got to recognize failure by being honest. Here are a couple examples. I’d love for you to share some of your...
In late 1999 I had my Bitcoin moment. I was a 22 year old first year analyst working on the international trading floor at a major investment bank. The internet boom was peaking and I had just gotten my year end stub bonus of $20,000. Although the $20,000 magically turned into $12,000 after paying New York City taxes, for the first time in my life I no longer felt poor.
I took $3,000 of my bonus proceeds and invested in a company called Vertical Computer Systems Inc (VCSY). I didn’t know much about it. All I remember was that it was a China internet play with a telephone dial pad as its home page. I was on the Emerging Markets team and spent all my time looking at Asian and Eastern European plays. Surely, VCSY was going to be the next Yahoo!
In a couple weeks, VCSY went from around $3 to $6, did an inexplicable 20-for-1 stock split and then went up to around $9. In other words, within six months it went from $3 to $180 pre-split and I had 1,000 shares.
The stock’s 6,000% move was ridiculous as everybody I knew on the Street started piling into the name. I eventually got out of the stock at around $156 a share, netting a cool $153,000.
Realizing VCSY was 95% luck and 5% being in the right place at the...
Despite earning a six figure household income, many parents struggle to pay for their children’s education without going into debt. This post highlights how you can qualify for tuition assistance despite making $300,000, $400,000, or even $500,000 a year.
I was talking to a parent of four who used to send his kids to a private grade school K-8 about the makeup of families who pay $30,000+/year in tuition per child. I cherished my time growing up in Africa and Asia up until middle school and enjoyed my experience attending a public high school in Virginia. To have my son attend a homogenous school where everybody looks the same and comes from similar economic backgrounds would be a shame.
The dad mentioned the school tried to diversify its student body through financial aid. When I asked how the school determined which families got financial aid, he said something surprising.
“Households qualify for financial aid if they don’t make at least $100,000 a year per child.”
In other words, if you have four children, you qualify for financial aid if you make $390,000 a year. Financial aid consists of low interest rate loans, but mostly free grant money. I thought this was a high threshold because $390,000 is right around the top 1% income level in the country.
Nobody needs to send their kids to private school given every child...
I’m not sure if homebuyers truly realize how much concentrated risk they are taking when they buy property. I’m particularly concerned about first time buyers putting less than 20% down because they can’t afford a larger downpayment. Given they can’t put at least 20% down, it’s likely they also don’t have any meaningful investments in stocks, bonds, or private ventures. In other words, they are all-in and then some with real estate.
Just in case it’s not obvious, mortgage debt is also considered investment risk exposure. You’re basically leveraging up to make a concentrated bet on a single asset that hopefully goes up. If it goes down and you need to sell, you’re screwed. During the last downturn in 2008-2009, the average American’s net worth got destroyed because over 80% of the average American’s net worth was in real estate.
Some people have asked me why I’m not in a bigger rush to reinvest 100% of my house sale proceeds (~$1.8M) in this bull market. If I did, I’d still have $815,000 less in risk exposure because I paid off the mortgage.
The first reason why I’m not in a rush to reinvest the proceeds is because it’s a lot of money and I don’t want to lose it. I’ve redeployed about 60% and am slowly re-investing the balance each month. The other reason I’m in no rush is because...
If you haven’t noticed, we live in a consumerism society where we are bombarded by advertisements that compel us to spend on things we don’t need. Some things are definitely worth spending up on. But for everything else, save your money.
Like many people, I have debt. Although my debt is tied to property, which tends to appreciate over time, it’s still debt that I plan on getting rid of by 2027. I don’t have any revolving credit card debt because their interest rates are absurdly high.
Earlier this year, I got rid of $815,000 of debt by selling a rental house for roughly 30X annual gross rent. I don’t miss the rental income because I don’t miss the $3,400 monthly mortgage, the $23,000 in annual property tax, the $3,000 in annual maintenance, the $2,000 in annual insurance, and pain in the ass tenants.
Despite the large pay down, I still have about $1,000,000 in debt spread between my primary residence and my vacation rental in Lake Tahoe. Simple math states that if I can pay down $100,000 a year, I will be debt free in 10 years. Here’s an easy strategy for how I plan to get there relatively painlessly that I recommend you follow as well.
It’s good to be frugal. If you are, you’ll likely never get into financial trouble. I was very frugal saving between 50% – 70% of my after tax income until about age 35. Then I decided there was no point saving so much money if I wasn’t going to live a little.
Instead of trying to walk the entire city of Budapest, I ponied up 30 Euros like a baller to get on the Hop On Hop Off bus. Instead of just having lemon water with my rib-eye steak, I started ordering a nice glass of Cabernet Sauvignon. As I pushed the spending envelope a little more each year, I gradually realized I didn’t miss the money. My lifestyle actually got better.
The root of my frugality stems from watching how my parents spent their money. My father always drove a beater and my mother utilized things until the very end. When you’re gunning for early retirement, every single dollar counts. And once you’ve left the work force, there is a lingering fear of running out of money that’s hard to elude until after about the third year.
If you suffer from frugality disease, here are some things worth spending a premium on for a better life.Things Worth Spending Max Money On
* Mattress. You spend a third of your life sleeping. It makes sense to get the absolutely most...
Remember that annoying kid in school who made fun of you for getting a good grade? The goal was to make you feel bad at doing well so he wouldn’t feel so terrible about himself. I had plenty of encounters with such kids growing up at my public high school. In the end, I brushed their mockery aside and decided to be the best student possible to get out of Dodge.
I thought the mockery would slow down as I got older, but it seems to have amplified due to the internet. Most recently, I was criticized for my idea of starting and keeping a business going to provide options for my son when he graduates from school. Andrew in Vancouver, who is 28 with no kids said I was obsessed, among many other things. Another guy named Li from Asia, who is also 28 with no kids, called me crazy over e-mail.
Why is planning ahead and offering an idea to help other worried parents considered obsessive and crazy? In my mind, it is stupid not to plan for the future due to globalization increasing the competition for jobs and technology taking away jobs. Andrew and Li are the same annoying kids in high school who are now adults.
There are a lot of dreamers who read this site looking...
I’ve checked out open houses every weekend for the past 16 years.The idea is to blend exercise with remodeling ideas and property knowledge into a one to two hour window. I’ll usually visit three to four open houses within a two mile radius.
The knowledge gained from open house hunting helped me remodel a couple houses without the use of an architect and gave me confidence to go all-in in 2014 when I bought a fixer in SF, despite already have multiple properties and two large mortgages.
Without a doubt winter is the absolute best time to house hunt. The simple reason is that anybody listing in the months of November through January is probably desperate. During the winter, the weather is at its worst, many people are away during the holidays, most people don’t move until the summer due to school, people tend to front load their spending, and anybody who can’t wait until spring to list must be having financial issues.
If you plan to sell your house, please don’t list during the winter! You will have bargain hunters like me trying to terrify you into selling at a below market price.House Hunting During Winter
If you pay close attention to your local property listings, you will notice the most amount of price reductions during the winter. These price reductions are largely the result of the properties being initially overpriced and sitting on the market for more than 30 days without at...