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How To Invest In Speculative Investments Like Bitcoin Without Losing Your Shirt

How to invest in speculative investments like bitcoin without losing your shirtIn 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 right time, I sat on the cash for a couple years, watching the NASDAQ implode before finally getting the guts to use all my after-tax proceeds to buy a $580,000 condo in San Francisco with a $464,000 mortgage in 2003.

In retrospect, I should have kept hunting for new VCSY’s every year. However, while my wealth continued to grow, I was too afraid to lose even small amounts of money. The dotcom crash had scarred my investing psyche because I personally knew many people who lost both their jobs and their paper fortunes. The subsequent housing bubble crash was even more devastating because so many more people were affected.

If only there was a system I could follow that would give me the confidence to consistently swing for the fences without losing my shirt.

Investing In Speculative Investments Without Losing Everything

We know we can get rich by gaining Maximum Exposure to risk assets in a bull market. We also know we can get rich by building a business where we own all the equity. The downside with leveraging up to buy property and stocks or forsaking a steady paycheck to start a company is the potential to lose A LOT of money and time.

What if there was a way to strike it rich without taking any risk? I never really thought about this possibility until a reader brought it up. Previously, I’ve always just allocated between 5% – 10% of my investable assets and swung for the fences.

Here’s what DoneAt53 wrote to another reader who is worried about current market valuations:

Start going to cash. Find a long term CD that pays 2.5% or toss money into savings bonds. With the proceeds buy S&P500 options. With 100K, you can use the $2,500 – $4,000 interest, depending on your risk free choice to purchase Dec 2018 265 options for 1400 each. Two will cost you $2,800 and you’ll have a 53% participation ratio, buy a third for a total of $4,200 and sell 2, Dec 2018 295’s for $200 credit each. You’ll have a 78% participation ratio up to 295 (11%) and 26% participation ratio above that and it will cost $3800 of your interest.

If the market tanks, you lost the interest on your money and very little of if any of the principle. If Mr. Market keeps going up, you get a nice percentage of the gain designed at your comfort level with (almost) none of the risk.

Understanding the options jargon is less important than understanding this concept:

With your risk-free investment income, invest in the most speculative investments that have the potential to give you the highest returns. Even if you lose your entire investment, you will never go to the poor house because you will never lose principal.

Examples Of Speculative Investments

* DoneAt53 discusses buying out-of-the-money options that provide higher returns on a specific stock or index versus buying the actual stock or index. The downside is that if your options expire out of the money, they are worthless.

* Cryptocurrencies like Bitcoin, Ethereum, and Litecoin are the hottest speculative investments at the moment and finally attracting mainstream capital. Bitcoin could easily collapse by 80% next week, but it could also continue to go up multiple times because of a surge in liquidity and world-wide adoption. You can by your slice of Bitcoin on an exchange like

Bitcoin versus other asset classes performance

* Internet and tech stocks in emerging markets. Buying the Googles, Facebooks, Ubers, Apples, of XYZ emerging markets is a straightforward investment thesis. Buying the next “Yahoo of China” was my investment thesis in 1999 when I bought VCSY. I continued this thought process in 2013 when I wrote, Should I Buy Chinese Stocks? Sina, Baidu, and RenRen have all done really well since.

* Angel investing where you provide seed stage capital is another way to earn massive returns. The problem with angel investing is that companies often have a minimum of $25,000 – $100,000. That’s unaffordable for most people, especially if you need to make $25,000- $100,000 in risk-free income. I’m no longer angel investing partly because of bad experiences. But if the minimums come down, I might do so again.

* The crappiest small cap IPO that has gotten bludgeoned since going public for whatever reason. One example is Blue Apron that IPOed at $10 and fell all the way down to $2.97/share. I decided to pick $10,400 worth up at $3.15 a share. They found a new CEO, lowered guidance, and fired a bunch of people since. The bar is low now and the stock shot up to $4.15 at one point. I hope they get bought out.

Blue Apron purchase price

Another example is Snapchat. It went IPO at $17, got foolishly hyped up to $27/share and then disappointed repeatedly in its quarterly results and fell to $12 a share. The problem with my SNAP purchase at $12.24 is that even at current levels, it’s still valued at $18 billion. It’s harder to move rapidly or get purchased for a large premium when the company is already huge.

Snapchat purchase

The recent crap IPO I missed was Funko (FNKO), a maker of toys. They priced the stock at $12, gapped up to $19.93 and closed that week at $7, all before reporting results. Now the stock is up 40%. You’ve really got to pay attention if you want to capture such opportunities.

* Original works of art from unknown artists who you think have the potential to go mainstream. If they don’t go mainstream, at least you can enjoy the work.

Speculative Investing Framework Example

To provide clarity, I’ve created a Speculative Investing Framework. The person below has $650,000 of low-risk capital returning $28,000 a year, or 4.3%. He proceeds to invest $28,000 in various speculative investments with a potential return of -75% to +625%.

The example has several assumptions that should be noted: 1) the low risk income is not required for survival, 2) rental income may or may not be considered low risk, 3) the time frame for the potential returns is unknown or up to the investor to decide, and 4) to deploy such a strategy, you must save aggressively and stop spending like a knucklehead, and 5) it’s up to you to figure out what else beyond CDs and muni bonds are considered low risk and invest accordingly.

Speculative Investing Framework Financial Samurai

Even if this person loses his entire $28,000 of low risk income in speculative investments, he’ll be fine. The key is to not get carried away by cutting into principal, much like a gambler does when he pulls out his wallet or goes to the ATM machine for more cash.

It’s Hard To Get Rich Quickly Investing In An Index Fund

Although earning a 16%+ return on your S&P 500 index fund in 2017 is excellent, it’s a relatively slow way to earn a fortune since the stock market averages around 8% – 9% a year long term. After all, one of my motto’s is achieving financial freedom sooner, rather than later.

If you want to get rich quicker, it’s worth carving out 5% – 10% of your investable assets and/or reinvesting your risk-free income into speculative investments that complement your plain vanilla investments each year. Just make sure your risk capital is capital you can afford to lose, because you will lose quite often. Also make sure you have a comfortable cash buffer to provide for you and your family in case Armageddon strikes again.

Because I hate losing money, I decided to invest time in my 30s building a lifestyle business. I figured worst case, I’d become a better communicator and learn something about the online publishing world. I knew I would not regret putting in an extra effort while I still had the energy.

My problem now is that at age 40 I’ve hit an inflection point where time is much more valuable than money. The desire for more time is why I’m happily farming out my capital to people who want to spend their careers looking at investments. It’s the same reason why I’m highly amenable to hiring a property manager the next time my tenants give me hell.

If you are lucky enough to strike it rich with a speculative investment, do your best to turn the funny money into a real asset that generates stable cash flow. If not, use some or all of your lucky winnings to pay for a better life.

Barring a natural disaster, the $580,000 property I bought in 2003 with my VCSY money will still be there generating $4,000+/month in rent forever. And if not, maybe I’ll make it into the Financial Samurai office or have my parents or sister live in it for free one day.

Remember: You only need to get rich once! Turn your lucky break into a gift that keeps on giving.

Related: Investment Ideas At The Top Of The Market

Readers, how much of your capital do you allocate to highly speculative investments? Do you have any big wins? If so, how did you spend or reinvest the proceeds? Note: On 9/25/2017, a condo unit next to mine with a similar layout sold for $1,360,000. 

The post How To Invest In Speculative Investments Like Bitcoin Without Losing Your Shirt appeared first on Financial Samurai.

How To Get Financial Aid Making Multiple Six Figures A Year

How to get financial aid making multiple six figures a yearDespite 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 $200,000, $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 looked the same and came 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 can go to public school for free. Further, I’m not sure if too many folks decide to have four children if they can’t afford to raise them. Sure, one or two children may be unplanned. But having four is definitely intentional.

Because the dad and mom could not afford to continue paying $120,000 a year in after-tax tuition for their kids, they moved their family to the suburbs to attend free public school. Ah hah, at least they decided to take action instead of complain why life was so hard making $500,000 a year!

Financial Aid While Making $500,000 A Year

Despite finding a solution, the dad seemed a little bitter about not being able to get financial aid for his kids because he asked me the following,

Is it better to provide financial assistance to underrepresented minorities and lower income households whose kids have a much higher probability of dropping out after several years at the school because they don’t have enough parental support? Or is it more worthwhile to help families like mine who make just over $100,000 a kid, but whose kids will likely graduate from school?

His argument was that social engineering in private school wasn’t working, just like how the lottery system for public schools in San Francisco is arbitrary and a waste of property tax dollars. In San Francisco, living in a neighborhood where you want your kids to go to school gives you no edge.

Part of every private school’s wish is for as many of its students as possible to graduate so the school can score higher marks when rated. The higher the marks, the greater the school´s demand, prestige, and tuition revenue. Further, the more successful the graduate, the higher the donation rate, which over time has grown in importance.

I still believe trying to diversify the student body to better reflect the makeup of the city is a more worthwhile goal than trying to help families who make just over $100,000 a kid, but who all look the same. Diversity is worth it because the real world is diverse. If you spend your entire life in an un-diverse bubble, you will have a tougher time getting ahead.

Before taking out the pitchforks, let’s take a look at why this $500,000/year family could no longer afford sending their four kids to private school. A recent divorce might also have something to do with it.

Budget Breakdown For A $500,000 Household

Financial Aid For $500,000 A Year Household

Based on a 36% effective tax rate, the couple needs to earn $203,125 a year just to cover the cost of private school tuition for four kids. What I haven’t included are the additional givings every family is pressured to offer each year.

Although a $1,700,000 home sounds like a lot, the median home price in San Francisco is $1,500,000. With a six person household, you need at least four bedrooms and preferably three bathrooms. The median house size in San Francisco is closer to three bedrooms, two bathrooms.

I’ve gone through the budget in detail, and there is very little left to cut, except for contributing less to their respective 401ks for 2018, taking one less vacation a year, and donating less than 2% of their gross income to charity.

Even if they donated $0 to charity and spent $0 on vacation, they’d still be $3,620 a year in the hole without lowering their 401k pre-tax contributions.

The problem with this family is that they are not accumulating any liquid savings to pay for any emergency expenses. With six people in the household, something always comes up. In other words, this family was scraping by on $500,000 a year and now has $130,000+ of breathing room by sending their kids to public school.

If this family is ~$23,620 in the hole each year on a $500,000 household income, then a family making only $390,000 a year is certainly going to be hemorrhaging money if they send their four kids to private school. Let’s take a look at their budget.

Why A $390,000 Household Qualifies For Financial Aid

Financial Aid for A $390,000 A Year Household

As you can see from the chart above, even after lowering the student loan debt, donating less to charity, spending less on vacations, and lowering their effective tax rate by 4%, this household is $70,440 in the red every year. From a school administrator’s point of view, financial aid is warranted.

Kids Are As Expensive As You Want Them To Be

A quality education is becoming the biggest contention point between the rich and poor. I know many ultra wealthy parents who donate heavily to every level of education to increase their child’s chances of getting in. And then there is a whole swath of multiple six figure income parents who feel downright middle class because they can’t get any assistance.

The great thing about the internet is that it makes knowledge accumulation free. And when something can be obtained for free, the value of anything that requires payment declines.

For those who like to plan, it’s good to realize the $100,000 income per child threshold for financial aid is becoming more common among private grade school and universities today.

If you’re making $199,000 a year and have two kids, it might not be worth the extra hours and stress to make $50,000 more. And if you have kids under five, it’s probably best to spend as much time with them as possible anyway.

At the same time, if you’re making $380,000 a year and are considering adopting a fourth child, knowing you’ll be eligible for tuition assistance may make helping a little one easier.


How To Make Six Figures At Almost Any Age

Career Or Family? Data Says You Only Need To Max Sacrifice For Five Years

Readers, what are your thoughts about being eligible for financial aid when earning multiple six figures a year? Should financial aid be focused more on underrepresented minorities and lower income families instead? What do you think the right income per kid threshold is when financial aid kicks in? Should the government do more to subsidize parents who decide to have a lot of kids?

The post How To Get Financial Aid Making Multiple Six Figures A Year appeared first on Financial Samurai.

The Main Types Of Risk Exposure To Be Aware Of When Investing

The main types of risk exposure when investingI’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 I still have roughly $1,000,000 in mortgage debt, meaning that with a current cash balance of ~$900,000, I’ve got maximum exposure + $100,000 in leverage to risk assets.

The Definition Of Maximum Exposure

Maximum Exposure is not just investing everything you have in risk assets like stocks and real estate. Having Maximum Exposure is investing everything you have in risk assets AND borrowing as much as possible to also invest in risk assets.

With real estate, banks will generally lend your household up to 5X your annual household gross income. With stocks, brokerage accounts may let you borrow up to 50% the value of your stock holdings in the form of margin. For the record, I’m not a fan of going on margin buying stocks or taking a HELOC out to buy risk assets.

The time to have Maximum Exposure to risk assets is when there is blood in the streets. That time period was most recently between 2009 – 2010. The problem is that nobody can properly time their Maximum Exposure to perfection. It can only be done in hindsight.

Given perfect timing is impossible, one must raise and lower their exposure during a cycle. The long term trend is luckily up and to the right. But the desire or ability to work is finite, and so is life itself. There’s no point dying with boatloads of money, especially if it’s going to be taxed at 40%.

I did a reasonably good job getting Maximum Exposure from 2003 – 2007 with investments in stocks and two San Francisco properties and one Lake Tahoe property. Total mortgage indebtedness was roughly $2,200,000 as a 27 – 30 year old. Then I went backwards for several years until the market started stabilizing in 2010, and ultimately recovering.

I wanted to de-risk by $1.1M in 2012 because I had just left my job, but nobody wanted to buy my property at the asking price. By the time 2014 rolled around, a 4.1% CD came due and I had the fire power to buy another property to gain Maximum Exposure again.

It’s strange how quickly my mindset changed from de-risking to increasing risk in two years, but I decided to take on $1,000,000 more in debt to buy a fixer in Golden Gate Heights because my online revenue was growing, my net worth had rebounded, and I strongly believed buying a panoramic ocean view home on both levels for $720/sqft was a no brainer.

The Definition Of Full Exposure

After selling my rental house this summer, I’ve now only got Full Exposure. This is exactly what I want after a ~60% rise in San Francisco property prices since 2012, an ~82% rise in the S&P 500 since 2012, and a ~130% rise in the NASDAQ during the same time period. Further, given my site’s size and the fact that I’m still a one man band who now has fatherly responsibilities, I’m expecting online revenue growth to slow.

Full Exposure is defined as investing all your cash flow and having all your assets tied up in risk assets plus a comfortable buffer. The comfortable buffer is up to each individual. For me, I like to have at least $100,000 in cash for emergencies or investment opportunities.

Full exposure also requires one not be leveraged to a risk asset, or have cash equal to the amount of mortgage or margin exposure. Given I have about the same amount of mortgage debt and cash, I’ll further refine my definition and describe my exposure as Synthetic Full Exposure.

Because I’m not sure how long the bull market will last, I’m concurrently paying down mortgage debt and investing in stocks, bonds, and cheaper real estate investments around the country each month. The goal is that by the time a bear market arrives, I’ll have less debt, additional gains in risk assets to buffer for a downturn, and plenty of cash to take advantage if things get really ugly.

The Definition Of Reduced Exposure

I define Reduced Exposure as investing less than 70% of your regular after tax, after all expenses income and having more than 30% of your net worth in risk-free assets like cash, CDs, treasuries, and municipal bonds. Reduced Exposure is great leading up to a bear market and for at least the first year of a bear market. Eventually, you’ll want to switch from reduced exposure to Full Exposure once there are indications that the bear market has bottomed.

Again, it’s impossible to perfectly time the market. Therefore, it’s important to do your best to manage your risk exposure at various points of the cycle. It’s not bad to sell a little too soon or buy a little too early. You don’t want to be selling when everyone is selling, nor do you want to buy when everyone is buying. The herd mentality destroys pricing rationality.

I’m not in Reduced Exposure mode yet because corporate earnings are still very strong, interest rates remain low, and the government is trying to be accommodative to businesses with tax reform. Although it feels like 2007 again, it also feels like the party could continue for a couple more years.

Little-To-No Exposure = Misery

You can have little-to-no exposure to risk assets, but that type of exposure will likely leave you bitter at life because you’ll have to work forever or experience endless envy towards those who bought a home. Read any real estate section in any major city newspaper and you’ll feel the angst of the writer talking about how unaffordable prices are. The same goes for the stock market section where journalists regularly make fun of the meteoric rise in certain stocks and cryptocurrencies. You can bet your bottom dollar all the authors have been left behind.

Don’t get left behind.

In 20-40 years, your children will ask you why you didn’t take advantage of today’s low prices. We all wish our parent’s bought as much ocean front property and unhealthy McDonald’s stock when they were young. My grandfather could have bought beach front land in Waikiki during the 40s for nothing, but he didn’t want to be next to a butcher. Darn it.

One thing I will note is that after you achieve your stretch net worth goal, you can’t help but want to run up the score even more in a bull market. One reason why is because you know the bad times will eventually come again and you want as big of a buffer as possible. Another reason is simply because you can afford to take risk with money you didn’t think you’d ever obtain.

To achieve financial freedom, more than half the battle is to simply have enough risk exposure for as long as possible. The exact type of exposure you have is secondary. You can read endless articles and books about why such and such an asset allocation is best.

Here’s my take on the proper asset allocation of stocks and bonds by age and my recommended net worth allocation by age and work experience.

My hope is that everyone who reaches their stretch net worth goal uses the money to buy themselves time. Time is always running out, which is why I encourage everyone to retire by a certain age and not a certain financial figure.

Readers, what type of risk exposure do you currently have? How do you plan to adjust your exposure in the coming years? 

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Destroy Debt Quicker In An Easy And Painless Way

A fun and easy way to pay down debt quickerIf 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 the interest rates are usurious.

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 how I plan to get there relatively painlessly that I recommend you follow as well.

Paying Down Debt The Easy Way

To start, everybody needs to total up their debt and set a time frame for when they want their debt to be paid down. You have to have a deadline or else you will more than likely not take your debt payoff seriously. By 2027, I will be 50 years old. There’s absolutely no reason to still be in debt at this age given my income and current liquidity.

After you’ve decided when you want to be debt-free, set up bi-weekly or monthly calendar reminders to pay down some debt. For example, I have a calendar reminder on the 25th of each month to pay down extra principal. Because I set up autopay for both my mortgages, if I try to pay down principal during the first 16 days of the month, the system will think that I’m trying to pay my mortgage, which consists of interest and principal. But by paying an additional amount after the 16th, I ensure that I’m paying down principal only.

Once you’v established your calendar reminders, establish new debt pay down reminders that correspond with days of consumption. For example, Valentine’s Day, Memorial Day, Labor Day, Thanksgiving, and Christmas are all popular holidays that encourage us to spend. Here’s a calendar of the upcoming holidays you can choose from.

Public Holidays USA 2018 To Pay Down Debt

Paying down debt when you usually would be spending is the key to achieving a huge sense of financial gratification that will keep you paying down even more debt.

If you’re a football fan, you know the devastation of being on the 5 yard line and seeing your quarterback throw an interception that gets run all the way back for a 12 point swing. If you are a basketball fan, you know the pain of seeing a layup blocked and the opposing team breaking away for a slam dunk for a 4 point swing.

The goal is to be the opposing team which emerges victorious after what looked like a sure thing – spending money. Embed in your head that each day that promotes consumption is actually a day where you will pay down debt. As soon as you turn the equation around, you will realize how ferociously consistent the message becomes to always pay down debt.

You Won’t Regret Paying Down Debt

Over two years have passed since I paid off my rental condo in Pacific Heights and I have no regrets, despite the mortgage rate only being 3.35%. I still remember paying off about $40,000 in business school debt in 2008 when the rate was around 3.5%. No regrets here either. I experienced tremendous satisfaction paying down low interest rate debt. I suspect paying off expensive credit card debt would prove even more satisfying.

There’s something amazing about no longer being indebted to any one or organization. You feel more free. When it comes to making a higher return on an investment, the satisfaction is ephemeral because the money usually just sits in an investment account and provides zero utility. Whereas once a debt is paid off, there’s the satisfaction of simplifying your life with one less reoccurring bill payment.

For the financially savvy, I do recommend following my FS-DAIR investing / debt pay off framework to get the maximize return on your money. We are after all, in a bull market where it’s best to take full advantage until the music stops.

Pay Down Debt Or Invest Framework - FS-DAIR

As for my wife and I this Thanksgiving week, we paid off $16,000 of mortgage debt. We were only going to pay down an even $10,000, but while in line at the bank I got bombarded with six e-mails telling me to buy something I didn’t need. Therefore, it was only right to pay down an extra $1,000 in principal for each annoying e-mail.

Readers, what are some fun and easy ways you pay down debt? Have you ever thought about turning the consumption cycle around to your advantage? Have you ever regretted paying off debt? If so, what was the circumstance?

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Things Worth Spending Max Money On For A Better Life

Things Worth Spending Maximum Money OnIt’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 comfortable, most supportive mattress you can afford. Go top of the line so each day you are fully rested and rejuvenated for the grind ahead. Just be aware that mattresses have massive markups, which is why there’s been a plethora of mattress startups over the years.

* Vision. Vision may be our most important sense. Therefore, it’s absolutely worth buying the most comfortable contacts or glasses. If you wear glasses, go for the thinnest lenses with anti-reflection and a scratch proof coating. Buy daily wear contacts that contain the latest breathable technology. Stop reusing your disposable contacts beyond their recommended usage. Get sunglasses with UV protection.

* Dental care. Throw away your $5 manual tooth brush and buy the best sonic tooth brush with UV sanitizer that brushes hundreds of times faster per minute. You can’t grow back your teeth or your gums. Floss and brush at least twice a day. Your older self will thank you.

* Work clothes & shoes. Instead of buying a lot of mediocre quality clothes and shoes, buy only a few items– as if you were building a boutique of high quality items. Purchase only the most finely woven fabrics for your suits and the finest grain leather for your shoes. Sure, you may have to pay 2-3X the average price, but the items will last longer, and you’ll have less clutter.

* Baby care products. Babies are helpless. Buy the most comfortable, waste absorbing diapers possible. Get the right creams for diaper rash. Feed them only the healthiest food. Why risk anything when they are developing their foundation.

* Sports equipment. If you’re serious about performance, then you might as well give yourself the best chance to perform by buying the best equipment. You’ve already got enough to worry about trying to improve your physical fitness and skill.

* Prime property. You want to buy property in the most prime location possible. Prices hold up better in a downturn and rise faster in an upturn because there is only a limited supply. Think about prime property as being located at the apex of a triangle under which there’s a huge base that’s always looking to move up.

Related: Housing Expense Guideline For Financial Independence

* Home appliances. Given it costs the same to install a $500 shower head and a $100 shower head, you might as well get the best shower head possible. The same goes for tiles, toilets, bath tubs, hot tubs, cabinets, faucets, floors, molding, and paint. The worst is when a home seller remodels on the cheap. This causes the savvy home buyers to offer low purchase prices because they know they will be ripping everything out again.

* Home theater system. Buy the highest definition TV and most enriching surround sound system and you’ll never want to spend money going to the movies ever again. Given you’re never going to the movies again, you’ll make back your home theater system cost in no time.

* Mobile phone. The average person checks their phone 80 times a day. Some of us who have internet businesses check a whole lot more. Given the data plan costs the same regardless of the quality of phone, you might as well get the best phone possible.

* Wellness. Massages, physical therapy, acupuncture, therapy, medicine, and coaching are all things worth spending top dollar on. Thanks to technology and globalization, life has become grossly complicated and stressful for many people. Physical and mental health are priceless.

* Vacations. The average private sector U.S. worker receives only 16 paid vacation days and holidays a year. One in four Americans does not have a single paid day off. Therefore, if you plan to go on a rare vacation, you might as well make it the best adventure or enjoy the best amenities possible. If you want 30 or more paid vacation days and holidays a year, work in New Zealand, Italy, Belgium, France, Spain, Germany, Portugal, or Austria.

* Food. Your body is your temple. If you eat junk, you’re going to start feeling and looking like junk.  Your energy, mood, and outlook are all affected by the food you eat. It’s worth paying a premium for fresh fruits, vegetables, and fish.

* Car Safety. According to data compiled by the National Highway Traffic Safety Administration (NHTSA), in 2016, 37,461 people were killed in 34,436 crashes, an average of 102 per day. There are supposedly over five million crashes in the US per year. If you have a dependent or a small child, it’s worth buying the safest car you can comfortably afford – even if it means breaking the 1/10th rule for car buying.

* K-12 Education. If your public grade school system has low marks, then either move to an area that has high marks or pay up for a private grade school with high marks. Education is one of the most valuable gifts you can give your child. It was only after I graduated from business school that I realized how valuable a good education was for my career and beyond. Knowledge, confidence, and connections are integral parts to achieving a happy and financially independent life. As for university, highly ranked public universities offer better value if you are paying rack rate.

* Web hosting. Not only do you want to buy a private domain name such as versus to make your site legit, you should also pony up for at least shared web hosting to make your site run faster. Bluehost is offering a a sale for shared hosting as low as $2.65/month, and I’m sure many other hosting companies are as well. If your site starts gaining traction, you can always upgrade your services. After three years of using basic shared hosting services, I’m now paying a guy about $160/month for a private dedicated server because you guys are worth it. Up time and security are paramount when it comes to running a large site.

Identify The Things Most Important To You

It’s important we identify things that are most important to us and spend accordingly. Don’t cheap out on everything on your path to financial freedom! For the most part, I always recommend buying less and focusing on quality over quantity. Having a house full of clutter doesn’t do anybody any good. Further, I’ve never regretted spending up on an experience. Great experiences tend to appreciate with time.

It’s strange, but despite a rising net worth thanks to a raging bull market, I don’t have a desire to buy anything new. I’m content with our cozy home, our one family car, and the scrumptious food we eat every day. Being able to see the best healthcare providers at UCSF for my family is one of the things I’m most happy about. Where I do plan to spend more money on are services to help save time at home. But that will be a topic for another post.

What are some things you value that are not on my list? What are some things on my list you don’t agree with? Any holiday blockbuster deals you’ve seen that are worth taking advantage of? I think I may just buy more Amazon stock instead. 

Related: When Is It OK To Forsake Stealth Wealth And Spend Up?

The post Things Worth Spending Max Money On For A Better Life appeared first on Financial Samurai.

Be Unapologetically Fierce About Pursuing Your Dreams

Be unapologetically fierce about pursuing your dreamsRemember 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 for a better life. But due to the fear of being ridiculed, they hesitate to pursue something different or to put themselves out there for the world to see or read. Even Andrew decided to shut down his website once I visited his site to understand where he was coming from. It’s probably a good idea because his employer would be none too pleased reading his article about how laziness was helping him reach retirement sooner.

It’s OK to be unapologetically obsessed with the things you care about. It doesn’t matter how whacky your goals may be. The people criticizing you are too afraid to try themselves. They wished they had your courage. They’re fearful that one day you might succeed, making them regret their lack of effort.

Here are four examples where I was widely panned, but due to an unwavering desire, I was able to prove my detractors wrong. I’d love to hear your stories as well.

(audio version)


Overcoming The Naysayers

Tennis: There was this arrogant, overweight guy named Chris 10 years ago who captained a 4.5 level team I was on. He seldom let me play because he thought I was weak, even though I was beating the other starters on the team. Every time we’d get on the court reporter for practice he would make fun of any mistakes I made.

One day, I had enough and told him to play me in a singles match or shut up. He accepted the challenge and I ended up beating him 6-4, 4-6, 6-3 on a cool evening over a two hour time period. The next day he went to the hospital for pneumonia and stopped playing for five months.

Wanting to prove him wrong for not playing me during the playoffs where we eventually lost, I joined a different team a year later and ended up beating them during the playoffs. No victory tasted so sweet. I credit Chris for keeping me motivated to keep practicing and keep eating right. He’s still a 4.5 level player today while I was bumped to 5.0 three years ago.

Blogging: I told one of my colleagues, Robert, about my new blogging endeavor back in 2009. Instead of being cool about it he made a funny face and started typing on an air keyboard in mockery. What kind of idiot makes fun of a senior colleague who will be interviewed by the promotion committee to determine his fate?

Not only did he not get promoted that year or the next year, the firm shipped him off to NYC in a different department that is being crushed due to electronic trading. He’s still at the same firm doing the same miserable job, but for less pay.

This site, which he made fun of, is now the financially best thing I’ve ever done. It earns at least 2X more than his job with 70% less work and 90% less stress. If I one day want to sell it and do something new, I can. If he wants to sell himself one day, he can’t, unless he wants to try the black market for body parts.

Then there was this other blogger from Canada who kept bagging on a blogging network I started in 2010. Although it didn’t take off like I planned, it still made over $10,000 a month for a couple years and still makes $1,000 – $2,000 a month today without any work since I only post there maybe once a quarter. Meanwhile, he gave up on his site and decided to be a grocery store manager. It’s a head scratcher why he was so critical, but I wish him the best.

Ongoing criticism by random readers and the occasional blogger gets me fired up each week. So please keep it up!

Related: The 10 Best Reasons To Start An Online Business

Writing a severance negotiation book: When I first published, How To Engineer Your Layoff, I heard an endless cacophony of doubters from readers and other bloggers who said the idea was stupid. The most frequent things mentioned were, “why would anybody pay you to get laid off,” and “that sounds sketchy and not something I’d do to my company.” Today, I still hear the doubters.

Five years later, I’ve received dozens of personal e-mails telling me how the book helped liberate them from a bad job situation. One woman told me this summer she walked away with a $65,000 severance, when she would have just quit with nothing. Another guy told me he not only walked away with what I’m guessing is at least one hundreds thousand dollars because he was a co-founder of the company that got acquired, he also sent me a glowing article an online publication wrote about his transition to angel investing.

One doubter confessed he was let go with only two months of severance after eight years of work. I had to break it to him that his two months of severance was not severance, but mandatory WARN Act pay. He sadly got zero severance and would have known this had he opened his mind.

Although the book has not changed my financial life with only about $3,500 a month in sales, it has helped everyone who sent me a thank you e-mail, which is incredibly rewarding. Further, if there’s ever a downturn, sales for this book will take off and help even more people.

Related: The Inside Scoop On How One Man Negotiated His Freedom

Early retirement: The natural transition after negotiating a severance is to take some time off, find a new job, change industries, start a business, or retire. I decided to permanently leave corporate America at 34, live a simple life, and just write. Writing is what I’ve loved to do ever since I was a middle schooler writing international pen pal letters from Malaysia.

Of course I had my naysayers. Leaving a high paying job before your highest earning years sounds foolhardy. But the funny thing is, many people in the finance industry wanted out as well. They just didn’t have the courage or the plan to leave. If I later realized I needed more money, I’d just go back to work.

Given it was my financial well-being I was putting at risk, I was my biggest naysayer. You can see every early retirement stone I turned over in the post, The Dark Side Of Early Retirement. But thanks to publishing this post two years before making a move, I was able to face my fears and gain some perspective from hundreds of people who had made the same move. If Andrew and Li were around back in 2010, they’d probably also think this amount of planning was obsessive and crazy.

Thinking about the downsides of early retirement was the catalyst for coming up with the idea to negotiate a severance. Negotiating a five year severance package enabled me to try new things without fear of financial ruin. Since leaving full-time work in 2012, I’ve been able to consult in a new industry, travel extensively, and grow this site 10X by simply being consistent.

Not a day goes by where I’m not thankful for extricating myself and my wife from the matrix. If I listened to people who told me I was stupid for leaving banking, I’d probably be incredibly unhealthy, stressed, and unhappy right now.


Early Retirement Five Years Later: Reflections On Life After Work

Achieving The Two Spouse Early Retirement Lifestyle

You Will Regret More The Things You Don’t Do

The #1 reason why more people don’t do the unorthodox is because society has a terrible way of accepting the unusual. People able to pursue freely their interests are the luckiest people on Earth. Conversely, people who not only don’t pursue their interests, but also try to take others down are the saddest people who will forever wonder why they never made an effort.

To all the dreamers out there who want to do something different, please go for it. Don’t let the naysayers deny your dreams. As the saying goes, “the people who are crazy enough to think they can change the world are the ones who do.”

Related: Perpetual Failure Is The Reason Why I Continue To Save So Much

Readers, what are some things you want to do that you’re hesitant to try? What is one thing you decided to go for despite all the naysayers? Given many things today were once whacky and new, why don’t more people experiment with different things? What became of those annoying kids in grade school who made you feel bad about your efforts? 

The post Be Unapologetically Fierce About Pursuing Your Dreams appeared first on Financial Samurai.

Winter Is The Absolute Best Time To Buy A House

Winter is the best time to buy a houseI’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 least an asking price offer. This is when desperation starts setting in.

The effects of over-pricing your property

Lesson: Don’t over price your property. It will back fire.

It is much more emotional and worrisome to sell a house than to buy a house. I know this first hand after spending 45 days trying to sell my house to a guy who took out a $2,000,000 loan and another $300,000 loan. So many things can fall through from the buyer’s side including: failed inspection, failed loan, cold feet, further negotiations and more. Once a deal is broken, people start wondering what’s wrong with the property.

Despite all the reasons I listed why house hunting during the winter is the best time and listing during the winter is the worst time, there’s one more reason I came across that is super important: seeing whether the house can hold up to the harshest elements!

Here in San Francisco, it doesn’t get below 40 degrees in the winter. But what we do get is plenty of rain for the entire winter season. At least when it rains in San Francisco, it tends to dump snow in Lake Tahoe.

In January 2017, I got a text message from my old rental house tenant saying his bedroom ceiling was leaking. We had just experienced three consecutive weeks of rain and apparently there was leakage from the light well above his room. I was completely stressed out because identifying where the leak comes from can often be a mind bending task.

Water proofing leaking light well

Water proofing leaking light well of my rental

On the next sunny day, I went over with four cans of FlexAll to seal the entire light well and all the seams of the roof. I also cut out a hole where the leak was coming from so I could let it air out and re-patch after making sure the leak was fixed.

Thankfully, my easy fix worked, and the leak stopped. But it was then that I started really considering selling the place due to maintenance headaches. Who knows how long the sealant would hold up. The roof was 10 years old and a new one would cost over $20,000. Further, my wife was in her third trimester and I really didn’t have time.

After successfully selling my house this summer, I forgot all about the leaky roof and maintenance stress until this winter.

The Opportunity

Because I still have about $940,000 in cash sitting around from my home sale, I continue to check out ocean view properties in San Francisco. It’s just habit after so many years. I stumbled upon a house that fell out of contract and slashed its asking price from $1.5M to $1.4M. Even at its new lower asking price, nobody has made an offer for a month. Perfect!

I saw the property in the evening and I wanted to see it during the day for the ocean view. Unfortunately or fortunately, the day we arranged for the second visit so happened to be raining. When I got there, I was surprised to see a massive leak where the vent attached the ceiling in the garage.

Check out the video and tell me this ain’t a disaster for the seller who must now not only disclose the problem, but fix the problem and then prove to prospective buyers the problem has indeed be fixed. I’m sure they’ll also probably have to offer at least a one year warranty to fix anything in the house since they advertise the home as “95% new.”

If I had seen this property when it was first listed during late summer, there is no way I ever would have caught the leak. If I bought the property, I would have found tenants and three months later, they’d be texting me with this video showing. Then I’d be pissed at the seller for not disclosing the leak or making sure everything in the house was in good standing. My stress level would be through the roof and I’d probably take on an entirely different tone with this post.

But thankfully, I didn’t re-invest all my home proceeds immediately. I took several months investing a little over half the proceeds and am now actively hunting for great property deals in the middle of rainy season when fewer people are looking.

With this new leaky information, the listing agent disclosed to me they had a buyer at $1.5M a couple months ago, but he fell through because his loan approval failed. They rejected a $1.35M cash buyer in favor of the buyer with the loan. Given it’s been over a month at the new lower asking price of $1.4M, and the $1.35M cash buyer is nowhere to be found, I’m thinking a $1.25M offer might be in order.

Unlike the stock market, where it’s hard for the average person to get an information edge, real estate provides a lot more opportunity for those who are willing to hustle. If you must buy property at the current top of the market, then winter is the time to look your hardest.


Every Consideration Before Selling An Investment Property

The Real Estate Investing Rule To Follow: BURL

Which Is A Better Investment: Real Estate Or Stocks?

Readers, anybody out there also love to house hunt during the winter? Have you bought a house during the winter for a great deal? If so, I’d love to hear about it. Why do you think sellers list during the worst time of the year?

The post Winter Is The Absolute Best Time To Buy A House appeared first on Financial Samurai.

It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak

It feels a lot like 2007 againReflection helps us appreciate how far we’ve come. Reflection also helps us learn from our mistakes. In this post, I’d like everybody to reflect on several key items: Career, Finances, Health, Family, and Happiness. See if you can tie the five together and weave a story about who you are today.

The one thing I know for sure is that 2017 feels a lot like it did 10 years ago. But this time, every asset class is expensive. I’ve got folks asking me about investing in cryptocurrencies when they haven’t even invested in stocks. Other folks are asking whether they should use their HELOC to buy another property with an 80% loan-to-value ratio. Everybody has maximum investing FOMO right now!

It’s an exhilarating time, but it’s also a perilous time for those who don’t have perspective. 

Life In 2007

Career: I was finishing up my third year as a VP at a large investment bank in San Francisco. 2007 was also the year I turned 30. Given my boss recently departed to become a client, I was left to take over the west coast business. Knowing my worth, I asked for a raise and a promotion and got them. If they lost me to a competitor, they would have been screwed for at least six months as they scrambled to find and train my replacement.

30 years old was a significant age because I finally felt like I could be taken seriously. Getting my MBA in 2006 also gave me a confidence boost. I was loving my career because I was finally my own boss in San Francisco. Sure, I had to work with the head of the office and a more senior colleague in a different department, but for the most part, I was free to control my own schedule. So long as the business was coming in, nobody could complain.

In 2007, I thought I could easily work for 10 more years and then call it quits for good. Little did I know the financial crisis would crush my industry and cause me to pursue a different path just four years later.

Related: A List Of Career Limiting Moves To Blow Up Your Future

Finances: I received the biggest bonus of my life in 2007 due to a negotiation I had with my big boss in Hong Kong. It was a handshake agreement, so you never know until the end of the year when bonuses are paid. But he delivered as promised. From that day on, I decided to be loyal until the very end.

Although the stock market was booming, I was still hesitant to go all-in due to the dotcom bubble that began to collapse in 2000. Instead of investing everything I had in the stock market, I decided to invest most of my savings in real estate. At least with real estate, if all went to hell, I’d still have something to sleep in.

I bought my first SF property in 2003, lived in it for two years, and was renting it out to a couple in 2007. In 2005, I decided to take out a $1,200,000 mortgage and buy a single family house in the Marina district for $1,523,000. It was the cheapest house for its size in the neighborhood because it was on a busy block next to the busiest street.

Because my real estate investing experience was positive, and I had just received a big bonus, I decided to buy a $718,000, 2/2 vacation condo at The Resort At Squaw Creek, Lake Tahoe in 2007. I loved the place because that’s where I took my girlfriend on our first getaway date back in 2001.

I was delirious about my financial luck and felt I just couldn’t lose. I was imagining that my compensation would continue to grow by 10-20% a year for the next five years. There were some warning signs about the stock market and real estate market getting ahead of themselves, but I didn’t listen carefully. Instead, I myopically focused on my fortunate career situation. I wish someone with decades of experience sat down with me to run through the pros and cons of buying more property then.

Notice the frequency. Nobody know when the next downturn will begin.

Health: Work was stressful given the 60-70 hour work weeks. But at least my chronic back pain from 2000-2003 was gone. But what replaced my chronic back pain was teeth grinding and TMJ. It hurt to speak for more than an hour. I remember paying $700 to a specialist dentist who ground down parts of my molars so I could get some relief when I closed my jaw.

I was in OK shape because I started aggressively playing tennis again. But of course, I suffered from occassional tennis elbow pain that kept me from swinging freely. I weighed between 162-165 lbs, which was a normal weight for someone 5’10” tall.

Now when I look back on my diet, I realize I ate extremely unhealthy due to frequent client entertainment. I’d often take clients to fancy steak restaurants and nice lounges. The wagyu beef and Moscow Mules tasted especially good thanks to a corporate card with a $200/head budget.

I remember telling myself that no matter what, living in San Francisco was healthier than living in Manhattan.

Family: My girlfriend graduated college in 3.5 years and came out to live with me in December 2001. She was 27 in 2007, and I was unsure whether starting a family was a good idea yet. Work was extremely busy and I had all this pressure to keep the ship afloat given my boss left.

But I knew she was the one, so I proposed during the heart of the financial crisis in 2008. We got married in Hawaii in December 2008.

If the financial crisis didn’t hit, I would have been more confident to start a family by 2010. It would have been nice to get parental leave and company benefits. Further, since our son is the best thing that has ever happened to us, he would have been in our lives for seven years longer.

It’s so difficult to figure out when is the best time to have children. Even if you decide now is the time, it might take several years to conceive.

What I do know is that having a life partner through my entire post college journey has been priceless.

Related: When Is the Best Time To Have Children? A Physical And Financial Decision

Happiness: I was ecstatic about getting a raise and a promotion. Part of my happiness stemmed from having gone to public high school and public university. Never in my wildest dreams had I thought I’d have a job at a respectable investment bank and earn a healthy income. If I had gone to an elite private school, I’m not sure I’d be as happy because I would have expected all these things and more.

It’s funny, but the memories that stands out most from this time period were figuring out what ring to buy and the cozy little wedding on our favorite beach in Hawaii the next year.

My happiness level has never really fluctuated much since graduating from college in 1999. It’s always been about a 7-8 out of 10. The happiness of getting recognized at work only lasted for maybe three months. The pressure to deliver took over.

San Francisco home price forecast 2018 and historical chart

Life in 2017 And Beyond

The most important thing I learned from 10 years ago is thinking that I couldn’t lose, and then losing big when the financial crisis hit in 2008. I remember swearing to myself in 2010 that if my investments ever came back to pre-crisis levels I would take some money off the table. I tried to do so in 2012 by selling my primary residence in order to pay off a ~$1,000,000 mortgage and live in a small two bedroom, one bathroom apartment. But nobody wanted to buy my four bedroom house.

The difference with 30 year olds in 2017 versus my 30 year old self in 2007 is that I went through the dotcom collapse in 2000. I saw paper millionaires end up with nothing within a couple years. They had to start all over, like the guy who made my breakfast croissant each morning. As a result, I tried to diversify as much as possible.

It’s hard to really know how scary recessions can be if you’ve never been in one with significant money at stake. Everybody likes to say they’ll hold on to their investments and buy more during a downturn. But when your investments are down 30%+ and many of your colleagues are getting fired, the first thing you do is think about survival, not dumping every last cent you have in the stock market.

I’m praying that I’ll finally be satisfied with what I have today and no longer grind as hard. My health depends on it. Staying in San Francisco and being surrounded by so many success stories has finally taken its toll. My recent bout of chronic back pain reminded me not to forget the point of financial independence and owning a lifestyle business: a better life.

Some Final Thoughts

* It’s easy to extrapolate explosive growth in your career and net worth in a bull market. The problem is, nobody wants to work forever and things always change. Be more conservative with your expectations. Don’t confuse brains with a bull market.

* No matter how much money you make or have, your steady state of happiness won’t really change. Stop thinking that if you get to X amount you will be happy. Retire by a certain age, not a financial figure. There will always be something that will give make you feel bad. But the good thing is, you’ll likely revert back to your steady state.

* If you’re relatively young (under 40), it’s worth swinging for the fences during the good times. It’s worth allocating some funny money to chase unicorns. Money is abundant and cheap. Once the spigot shuts off, dumb ideas no longer get funded and silly job offers are no longer given.

* Learn when to cash in your chips by setting goals. You made these goals because you decided how much was enough. If you’ve somehow found yourself way beyond your goals, then absolutely focus on using your profits for a better life. The saddest thing is losing a massive lead.

* Even if you buy at an inopportune time, if you wait long enough, you’ll likely eventually get back to even. Just look at us now.

* The next 10 years will go by faster than the previous 10 years. Make the most of it.

Related: Recommended Net Worth Allocation By Age Or Work Experience

I’d love to hear about where you were 10 years ago, and what you learned about yourself then that you will apply to your life now? Time truly accelerates the older we get. Let us not waste a single minute. 

The post It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak appeared first on Financial Samurai.

What Every Home Seller Should Do Before Listing A House On The Market

What every home seller should do before listingFor a guy who likes to thoroughly analyze things, I made a mistake when selling my house that could have cost me hundreds of thousands of dollars. Before accepting the final offer, I failed to do a thorough analysis of what similar homes bought at a similar time for a similar price sold for most recently. Instead, I just looked at current listings, recently sold homes no matter when they were purchased, looked at how the overall median price point moved, took my realtor’s guidance, and went with my gut.

In other words, I extrapolated the overall trend of the real estate market and applied it to my house without finding apples-to-apples comparisons. If the SF housing market was up 50% since 2012, so was mine! I now realize after writing this post why I wasn’t more thorough. I was afraid I wouldn’t like what I found. My house was on a busy street near one of the busiest streets in San Francisco (three lanes each direction). I didn’t want to relive the disappointment when I tried to sell the house in 2012 and failed.

To refresh, I bought a 2,070 sqft, three bedroom, two bathroom single family house with an unwarranted room and bathroom on the ground floor on a 2,300 square foot lot in February 2005 for $1,525,000. I tried to sell the house for $1,700,000 in 2012, but didn’t get a single offer. Finally, I sold the house in June 2017 for $2,740,000 because I no longer wanted to be a landlord.

In this post, I will now do the exercise I should have done before I listed my home. This is an exercise you should do too if you are planning on selling your home. If you don’t want to do it, make your real estate agent do it! You will be amazed at your findings.

Example 1/3: 5 beds, 5 baths, 4525 sqft, asking $2,295,000

This house blows my rental house out of the water in terms of livability, interior quality, house size, and lot size. I’m a big fan of brick facade buildings because they remind me of homes back in Virginia where I lived for eight years.

This house sits on a half acre lot in a gated community with a pool, two outdoor hot tubs, and a gourmet kitchen. The house is located in the town of Moraga, a lovely suburb 22 miles east of San Francisco where the temperature hovers around 70-85 degrees throughout the year. Unfortunately for the seller, the town of Moraga declared a fiscal emergency in 2017 because they’ve got a management crisis.

The public schools in the area are good, and there’s also a nice country club in the town for swimming, golf, and tennis. Every year I come out here to watch for free the Heritage Bank Tennis Open, where ex-pros and college players compete for $100,000 in prize money. This year, I finally started visualizing what the possibilities of suburban living now that I have a son.

On the financial front, this house sold for $1,843,000 right around the time I bought my SF home for $1,525,000. Now the home is for sale for $2,295,000, after going without an offer at $2,395,000 since April 1, 2017. At the time of this post, the house went into contract August, but then fell out in November 2017.

In other words, this perfectly beautiful home cost the buyer $328,000 more to buy and will net at least $445,000 less than my house IF it sells for $2,395,000. That’s a whopping $773,000 profit difference. Such a difference is astonishing given Moraga is a sought after location where many working professionals who have jobs in San Francisco want to live. All this time I thought the entire Bay Area was inflating at a similar pace. Not so.

Some takeaways: There are relative value opportunities all the time if you look beyond what you are used to. If you can’t afford to buy in the most prime neighborhood, that’s OK! You can probably get way more for the same or less if you’re willing to look. That’s what I did in 2014 when I decided to look for panoramic ocean view homes in the western part of San Francisco. That said, the returns may definitely not be as good.

Before buying, it’s also important to analyze the fiscal health of the town, city, and state. It never would have occurred to me to check a municipality’s finances when its median home price is over $1,000,000. If you have a government that mismanages its finances, you can expect tax increases and/or a cut back in services. See Chicago as a model city for fiscal mismanagement.

Home price sale history

Example 2/3: 3 bed, 2 bath, 1,700 sqft condo in the Marina district, SF

Some of you are thinking it isn’t fair to compare a home in the suburbs with my old rental home in San Francisco even though both homes fit similar demographics. Fair enough. It’s hard finding a home that was purchased at a similar time (late 2004/early 2005) at a similar price point ($1,525,000), but I found another one.

Here’s a lower full-floor condo in the same neighborhood as my house. With three bedrooms, two bathrooms, and 1,700 sqft, the condo is similar in size to my 2,070 sqft home I sold. The target buyer is definitely the same as well. The condo looks to have been remodeled maybe 20 years ago based on the bathroom and kitchen pictures. It’s in a prime block, unlike my house.

Marina Condo

Marina Condo

The home was purchased for $1,500,000 in October, 2005. Because the market went up about 10% in 2005, let’s say the apples-to-apples cost was $1,410,000 if they had purchased the condo when I closed in March 2005. After being on the market for $1,795,000 since April 6, 2017, the seller lowered the price to $1,750,000 on June 16, 2017 and finally accepted an offer for $1,720,000.

In other words, during the same time period, the property owner only made $220,000, or $1,020,000 less than I made on my home.

One takeaway: Condos, even in better locations, may underperform single family homes because they are more susceptible to large supply increases. We’re now seeing a surge of condo construction in San Francisco that is putting a damper on rental and property prices. New condos are not only competing with older condos, they are also competing with single family homes in a similar price point as demographics shift towards simpler living.

Price history

Example 3/3: 3 bedroom, 2.5 bath, 2,100 sqft single family home in the Marina, SF

OK, so now you’re thinking it’s unfair to compare my single family home to a condo in the same area, even though the size and type of buyer is similar. Fair enough!

I stumbled across a home that is basically my same house, just on a super prime block with little traffic, and very close to the Palace of Fine Arts and the Bay. I spoke to the realtor and he mentioned they put “a good amount of money” into renovating the two bathrooms. They also painted the entire interior, refinished the top floors, and staged the home as well. Based on my home renovation knowledge, I’m guessing they spent about $50,000 fixing everything up, plus $15,000 on staging.

Marina SF home

Marina SF Home

Marina SF Home kitchen

Marina SF home bathroom

Charming house right? Back in 2004 when I was looking to buy a single family house in the Marina, this was the type of house on a quiet street I wanted to buy. But they were all going for about $1,000/sqft already, which meant this home would have sold for roughly $2,100,000. I couldn’t afford this price point, so I bought a similar house, but on an inferior street for 29% ($600,000) less.

With the way the house was finished and the location, I was guessing the house would go over its $2,995,000 asking by $100,000 – $200,000. This is San Francisco after all, where homes are purposefully priced below market to ignite a bidding war.

What transpired was odd. The home went into pending at $2,995,000 within 14 days of listing, giving me confidence that my pricing assumption was correct. But a couple days before the home closed, the listing price changed to $2,799,000.

I was wondering why this would be the case given the pending status, and I realized why after the home was finally sold for $2,807,000. By changing the asking price to $2,799,000, the realtor and the seller could officially say the home was sold for over asking. Tricky stuff!

I’m honestly very surprised about the final selling price. If you are to use my 29% pricing discount when I bought in early 2005, the home should have sold for closer to $3,800,000 since I sold my home for $2,740,000. Even with a narrowing of the pricing gap to a 15% premium for the far superior location, the house should have sold for at least $3,150,000.

The seller had put in ~$65,000 to prepare the house for sale, while I spent only $4,000 refinishing the floors, fixing the yard, and buying a fancy kitchen faucet. Granted, I did spend eight hours painting two bedrooms and touching up all the moldings, but still. The prep work cost differential along with the 1% higher realtor commission fee the seller had to pay is a lot.

Some takeaways: Be careful over prepping your house for sale. I’ve seen so many cases where the buyer just comes in and rips everything out, like this buyer is doing after I spoke to the contractor who so happened to be outside when I was walking by after sale. Painting, refinishing the floors, updating fixtures, cleaning, and staging is probably good enough if you can sell the dream.

I was told by a top producing realtor that if I spent $50,000 – $60,000 prepping my home I could get “maybe $2,500,000.” He wanted me to paint over my natural brick facade to a dark grey too. Crazy! I then got his opinion on the floor staining color and he told me a dark grey as well. But then he called his interior designer who said a white oak color. Then I talked to another top producer who said to make the stain clear to show off the original floor. Everybody had a different opinion.

Finally, although realtors are absurdly expensive, the right realtor can make all the difference based off his or her connections. There’s only a ~45 day window to sell a property before it becomes stalefish, and the right realtor will be able to maximize exposure to the right agents. All it takes is one perfect buyer to get the deal done. My buyer loved the brick facade of my house because it reminded him of the colonial homes back at UVA, where he went to school. He didn’t mind the vicinity to a busy street and liked that one floor had three bedrooms and two full bathrooms given he has a girlfriend and toddler.

price history

So Many Variables To Buying and Selling A Home

Here are some common recommendations before buying: 1) not buying the most expensive house on the block, 2) buying in the best location possible, 3) buying during the middle of winter, 4) buying from a couple getting a divorce, 5) offering all cash, 6) buying in a fiscally sound area with tremendous job growth, and 7) buying below a certain valuation.

Now that I’ve sold my house, I realize there are more variables that go into getting the best price possible, including a well-connected real estate agent who can find the right buyer and good old fashioned luck.

If I wasn’t fearful of losing my job in Manhattan during the dotcom collapse, I never would have moved to San Francisco in 2001. If I never attended an open house for a three bedroom condo for $1.2M in the winter of 2004, I never would have parked my car next to the house I ended up buying and selling this year. If my rowdy tenants never decided to move out in May 2017, I never would have had the opportunity to test the market. If I never met my realtor at a house she was listing a couple blocks away from new new house a year and a half prior, she never would have found the agent with my ideal buyer.

Luck is easy to find in a bull market. The key is to recognize whether we are in a bull market or not and press if we are and de-risk if there are signs of a slowdown. Don’t forget that often times, money is made on the purchase, not on the sale. To their long term detriment, I see too many emotional buyers pay irrational prices because they just love the kitchen or have been outbid one too many times (examples #1 and #2). A good realtor should be able to walk you off the ledge.

Although it’s best to hold onto your property forever, if you want to sell, you should sell when you don’t have to sell. It’s when you have to sell that you might be screwed because you won’t have as much courage to negotiate and everybody else might want to sell too. Once a downturn hits, the bottom drops out and you’ll see vultures offer way below asking. I experienced this during my unsuccessful listing in 2012 when I was getting whispers for $100,000 below asking.

Finally, all it takes is one buyer to fall in love with the place and pay top dollar. Therefore, it’s worth spending a little longer searching for that one if you can afford to wait.

All it takes is a $500,000 household income to afford a $1.5M median priced home in the SF Bay Area

My final realization is that if I did this exercise before getting my initial offer of $2,600,000, I would have gladly taken it and not countered to $2,788,000 before finally settling on $2,740,000. Example #3 selling for $2,807,000 would have implied my house was valued at ~$2,400,000 using a 15% discount.

I’m sure 20 years from now I’ll look back and realize how cheap I sold my home. There’s no doubt in my mind the house will be worth $4M+ by the year 2037. But for the next 12 months at least, I’m feeling good about my sale, especially since I’ve reinvested the proceeds in truly passive investments that take zero of my time and may provide higher returns now that the SF market is cooling.

Readers, any lessons you’ve learned from selling your house? What are some surprises you found out before or after selling? What are some other things home sellers should consider before listing? 

The post What Every Home Seller Should Do Before Listing A House On The Market appeared first on Financial Samurai.

Reduce Emotional Stress By Seeing Life Through A Different Perspective

Reducing emotional stress by seeing life through a different perspectivePerfect happiness is an illusion.

You would think life is a piece of cake being a stay at home and work from home dad with a stay at home spouse. But I recently went through two weeks of intense lower back pain due to emotional stress. The last time I went through this type of pain was during the dotcom collapse between 2000 – 2003 because I was constantly fearful of losing my job.

After reading Dr. Sarno’s book, Healing Back Pain, I became back pain free for 14 years until recently. If you are suffering from chronic pain, you must read this book.

So what’s the issue today? It’s simply adapting to the loss of 100% freedom, being a new parent, receiving judgmental comments, getting bombarded with endless requests over e-mail, keeping up a regular posting schedule, and being the sole provider for my family.

Something had to give. And that something was my back. Chronic pain is the mind’s way of distracting us from emotional stress.

My back pain is a reminder that health is more important than wealth. It doesn’t matter how much money you have if you can’t take care of your physical AND mental well-being. Do not be embarrassed to seek help, especially for mental health issues.

Now that I’ve recovered, I’d like to share some thoughts on reducing emotional stress in order to appreciate life more. Might as well turn a bad situation into something useful for those who currently suffer. 

Do What You Can

I’ve always believed that so long as you do your best, nothing else matters. The worst is being gifted at something and not taking full advantage.

Can you imagine being a talented singer and never bothering to audition for your high school musical? Can you imagine being 6′ 10″, but never practicing any sports? Or how about if you are a brilliant academic who decided to skip university despite getting a full ride in order to go vagabonding for years? We need champions by our side to guide us in the right direction.

Because I’m neither physically nor mentally above average, I took it upon myself as a teenager to try my best at every opportunity I was given. It was important to maximize my potential because my potential was never that great.

To not take full advantage of my opportunity would be an insult to those who didn’t have the same luck. It was hard with missing so much poverty growing up in emerging markets. So I toiled and toiled until I finally decided after a couple decades I no longer felt guilty anymore. The growth stage of my life was over. It was time to focus on taking care of my family and volunteering some time to help others who could use some help.

But if I was truly content, why would I experience chronic back pain again? I got angry at myself for not being more thankful.

Then I met someone who helped put things in perspective.

The Gift Of Seeing Clearly

Roughly 15% of the world’s population, or 1.2 billion people have a disability. Disabilities range from seeing, hearing, movement, learning, neurological and more. Don’t assume that just because someone looks normal, they aren’t dealing with some sort of impediment.

Sonya, one of the girls I met at a foster home had two visual impairments called ocular albinism and nystagmus. You can have one without the other, but often times they go together.

Ocular Albinism and NystagmusOcular albinism is a genetic condition that reduces the pigmentation of the iris, which is the colored part of the eye, and the retina, which is the light-sensitive tissue at the back of the eye. Many folks with ocular albinism have difficulty seeing outside without sunglasses and transitioning from outside to inside.

Nystagmus is a condition in which the eyes move in an involuntary and repetitive way. Sometimes the movement is slow and horizontal. Other times the movement is fast twitched, vertical, and rotary. There are supposedly 49 different subtypes of nystagmus with varying degrees of severity. These movements often result in reduced vision and depth perception. The condition tends to improve until about age 10, and stabilizes for the remainder of the person’s life.

Due to her visual issues, Sonya’s best corrected visual acuity is 20/200, the cut off point for legal blindness. In other words, even with glasses or contacts, she can only see something clearly from 20 feet away that other people can see clearly from 200 feet away. Most people who are near-sighted or far-sighted are able to correct their vision to 20/20 with glasses, contacts, or laser surgery. Sonya cannot.

Sonya didn’t say much to me about her family life or visual impairment at first, but she slowly opened up about how she was having a difficult time at school. She always had to sit in the front of the class, and even then, it was often hard to see what the teacher had written on the white board. But she said she always did her best to keep up.

Despite her family situation and her visual impairment, Sonya showed me a great attitude that made me proud. Although she said she had her fair share of bullies, she also told me wisely how she wasn’t bothered because she knew the bullies were going through their own difficulties. The sister of one of the bullies died in an accident a year ago. Another bully’s father was sent to prison. The kids in school found out and made fun of the bully as a result.

Sonya also mentioned how she’s become an expert listener as her hearing makes up for her vision loss. “Sam, I’m like Daredevil in the comics!”

Sonya displayed the one trait I long to instill in my son: empathy / compassion. Empathy comes from understanding about other people’s situations before making any judgement. Empathy allows people to listen and connect without making any judgement at all. Even if spite is hurled their way, the compassionate person is able to forgive and show kindness.

The other trait Sonya possesses that I hope all of us embrace is an indomitable spirt. No matter what our challenges, we will find a way to overcome. Whether it’s trying to reach financial independence early or getting through middle school without too many emotional scars, an indomitable spirit is important. “What I see is all I know. I’ll be fine,” she said when she sensed my worry.

Snapping Out Of A Funk

Sonya reminded me that I took my situation for granted. Feeling stressed about losing temporary freedom was silly because I had freedom to give up. What about all those who are still stuck in the salt mines, unable to ever get out? Feeling the pressure of having to constantly write on Financial Samurai is self-induced pressure that’s unnecessary. Taking a week off won’t change a thing.

Sonya also reminded me that no matter what challenges my son faces, he has two loving parents who will give all their time to help him lead a normal and happy life. She told me that all she’s ever wanted was for her parents to stop fighting so they could go to the park like her friend’s families. As a foster kid mentor, I hope to help fill some of that gap.

We will all go through emotional stress. Some of you will burn out and decide to quit your job, quit your marriage, or go down some deep dark path. I encourage you to take a good amount of time feeling angry and sorry for yourself. Afterward, get up and see life through the perspective of others.

Changes Are On The Way

I hope all Financial Samurai readers can embrace empathy in your day to day lives. The next time someone doesn’t look you in the eye when speaking, don’t get annoyed. Maybe it’s because they literally can’t due to their nystagmus. The next time someone seems cold, don’t feel insulted. It may be because they have Aspergers, which sometimes makes socializing a little more difficult.

In addition to being mindful about different perspectives, I plan to reduce stress further by deleting spiteful comments, aggressively filtering e-mails, and writing freely without concern. I will remind myself that doing something is better than doing nothing at all.

I leave you with an inspiring TED talk by Caroline Casey who might just very well be the adult version of Sonya. You’ll enjoy the clip because it talks about everything we talk about here: belief, self-esteem, courage, finding a purpose, and helping others. Try not to take what you have for granted.

Please enjoy and share your thoughts about how you reduce emotional stress in your life. What are some of the walls you’ve faced and successfully climbed over? Who have you met that changed your perspective?

Related: The Source Of All Stress Is Giving A Giant Crap About Everything

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