Financial Samurai Passive Income Portfolio Update 2018

2018 Financial Samurai Passive Income UpdateEver since landing my first job post college in 1999, I’ve been determined to build enough passive income in order to not have a job. A future that included getting into work by 5:30am and leaving after 7:30pm each day for decades seemed too brutal to endure.

In 2010 I decided that if I could earn about $80,000 in passive income, I would leave my job permanently and work on Financial Samurai while traveling instead. So I left work in 2012. Then once Financial Samurai started growing, I decided to shoot for $200,000 in passive income with the funny money I was earning online.

With $200,000 a year in passive income, I would have enough income to provide for a family of up to four in San Francisco or Honolulu given that my housing costs in either city would be low due to low purchase prices. Now that we have a son, I’m happy to say that $200,000 indeed does seem enough, especially if you don’t have to save for retirement.

Almost Took A Big Passive Income Hit

In 2017, I sold my San Francisco rental home which had been generating roughly $60,000 a year in cash flow after expenses, but before taxes. Selling the house brought my passive income down to roughly $150,000 a year, which was a significant 28% step backwards.

Within six months of selling, however, I had reinvested the proceeds from the home sale and brought total passive income for 2018 back up to an estimated $203,724. Without a clear plan for reinvesting the proceeds, I’m not sure I would have sold the house since I’m bullish on the SF housing market long term. However, because I did have a plan and the challenges of raising a newborn and dealing with rowdy tenants left me feeling a bit stretched, I decided to simplify and sell.

Financial Samurai Passive Income Report 2018

Interest Income ($7,620/year, 3.7% of total)

I’ve got a $185,000 CD generating 3% interest coming due this summer. Although the return is low, it’s guaranteed. The CD gave me the confidence to investment more aggressively in risk over the years. My online interest income has come down since I aggressively deployed some capital at the beginning of the year and again during the February market correction. You’ll see these figures in my quarterly investment income update.

Don’t underestimate the value of your cash and risk-free income, especially during times of uncertainty. The last thing you want to do is be a forced seller in a downturn because panic will be everywhere. Cash allows you to take advantage of corrections, pay for unexpected expenses, and worry less about your risk assets.

Related: How Much Savings Should I Have Accumulated By Age

Stocks & Bonds Income ($103,344/year, 50.7% of total)

In 2017, I ended up deploying roughly $611,000 into stocks and $604,327 into municipal bonds. The stock allocation should boost dividend income by ~$12,500 a year and the municipal bond portion should boost income by ~$18,000 a year after tax ($26,000 pre-tax). Therefore, total passive income gets a ~$38,500 lift, which recovers over half of my $60,000 loss from selling the house.

A good portion of my stock allocation is in growth stocks and structured notes that pay no dividends. The dividend income that comes from stocks is primarily from S&P 500 index ETFs. Although this is a passive income report, as I’m still relatively young, I’m more interested in building a large financial nut through principal appreciation rather than through dividend investing. As an entrepreneur, I can’t help but have a growth mindset.

With interest rates reaching two-year highs, I will be allocating more cash flow to bonds for the remainder of the year, thereby boosting passive income. In fact, I will probably reinvest 70% of my $185,000, 3% CD into municipal bonds that now pay 4.5%-5% gross yields.

Real Estate Income ($43,080/year, 21.1% of total)

I’ve now only got a SF rental condo and a Lake Tahoe vacation rental in my real estate rental portfolio. Although I miss my old house, I certainly don’t miss paying $23,000 a year in property taxes, another mortgage, dealing with leaks and managing terrible tenants. I drove by the other day and couldn’t believe how much noisier and busier the street was than where I currently live. I wouldn’t be comfortable raising my son there.

In January 2018, I missed my chance of raising the rent on my new incoming tenants because it didn’t come to mind until very late in the interview process. I didn’t write about my previous tenant’s sudden decision to move out in December 2017 after 1.5 years because they provided a relatively seamless transition by introducing their long time friends to replace them. I didn’t miss a month of rent and didn’t have to do any marketing so I felt I’d just keep the rent the same.

After these tenants move out, I’m thinking of just keeping the rental empty with furniture. It sounds stupid to give up $4,200/month, but I really hate dealing with the HOA, move-in/move-out rules, and maintenance issues. Given the condo doesn’t have a mortgage and I have to pay taxes on some of the rental income, I’m not giving up that much. The condo can be a place for my sister, parents, or in-laws to crash when they want to stay in SF for longer than a week or two.

The Lake Tahoe property continues to be 100% managed by a property management company. It feels amazing not to have to do anything. I can’t wait to bring up my boy this coming winter to play in the snow! I could go up this winter, but I want him to be able to walk and run comfortably before he goes. I’ve been dreaming of this moment for over 10 years now. The income from the property is highly dependent on how much it snows. Summer income is always very strong.

Alternative Income ($49,680, 24.4% of total)

Book sales ($36,000/year): Sales of How To Engineer Your Layoff continue to be steady. I don’t see book sales really taking off unless I start pitching the book hard on TV or radio or speaking at conferences or writing a lot of guest posts about the subject. I just have no interest promoting it heavily, probably because I don’t like selling anything to anybody. The only way book sales will go up drastically without me doing anything is if the economy starts weakening. People often wait until the very end to do something about a bad situation. Only the smart ones will read the book before they feel they need to make a change.

I did get this pretty cool e-mail at the beginning of the year from one of my newsletter readers:

Hey Sam, just wanna say thank you for “How To Engineer Your Layoff.”
I wasn’t one of those amazing cases where I negotiated a $60,000 settlement, BUT thanks to your book, I…
…figured out how much my severance package would total
…waited until they offered me to relocate
…turned it down, knowing very well what my severance package was worth
The grand total was $13,000, which is nothing compared to some of your case studies, but listen what happened next. I took $9k of that and put it into Bitcoin when it was $3,000. Bitcoin itself has now 5x’d, while my portfolio has done 10x. That $9k has effectively become $90k of unrealized gains, which will keep growing for a long time…
The $13k is not much, but your book gave me the confidence and tools to prepare for the layoff. I am eternally grateful for your book. 

What’s crazy is that my book income is more than my SF rental condo income. Yet, I didn’t have to come up with $1,200,000 of capital (minimum cost to buy my condo) to create my book. All I needed to create my book was energy, effort, and creativity. I truly believe developing your own online product is one of the best ways to make money.

Venture Debt ($12,240/year): The first venture debt fund has returned almost all my initial capital so I decided to invest $200,000 in the second fund. I took a risk investing $150,000 in my friend’s first fund, so I’m hoping there’s less risk in the second fund given he has four more years of experience on top of his 12+ years experience running a venture debt portfolio for another company.

The whole idea of investing in venture debt is trying to get a mid-to-high teens annual return with less risk than private equity. Venture debt lends money to well-funded private companies with a 1-3 year terms. They go in and out, collect their interest and sometimes gets a warrant. They’re higher on the capital structure as well.

P2P Lending ($1,440/year): I’ve lost interest in P2P lending since returns started coming down. You would think that returns would start going up with a rise in interest rates, but I’m not really seeing this yet. Prosper missed its window for IPO in 2015-16, and LendingClub lowered its growth estimates for this year. I won’t be putting in new capital until I see returns go back to the 10% range versus 6%-7% for top rated loans. I hate it when people default on their debt obligations, which is why I haven’t invested large sums of money in P2P.

Real Estate Crowdfunding ($9,600/year)): Once I sold my SF rental, it was natural to reinvest some of the proceeds into real estate crowdfunding to keep sector exposure. I didn’t invest a lot in some of my favorite REITs like OHI and O because I felt a rising interest rate environment would be a stronger headwind for REITs. But if I could be more surgical with my real estate investments by identifying specific investments in stronger employment growth markets, I thought I could do better.

In the summer of 2017, I first reinvested $250,000 into a RealtyShares Domestic Equity Fund. I already had $250,000 invested with them and I liked the projects they were choosing. After spending the rest of the year making low ball offers on SF real estate and losing, I invested another $300,000 in the fund in December 2017. Given 100% of my real estate crowdfunding are equity investments, there is no set monthly dividend. Each of the 12 investments in the fund have different timetables and objectives.  I’m simply estimating that I’ll earn $9,600 for the year.

Financial Samurai RealtyShares Investment

$800K invested in an equity fund and $10K in a PA commercial property equity deal. 

If the RealtyShares fund achieves its objective return of 15% a year, I could earn a compounded $70,000 – $120,000 a year, which would really boost my passive income returns. However, I don’t expect them or any fund to achieve their target. Instead, I’m hoping for a solid 8% a year return instead.

Feels Good To Simplify In 2018

It was easier recouping the lost $60,000 in rental income than I expected. For so long, my primary mindset for passive income was rental income. Having $815,000 less debt, but still generating roughly the same amount of passive income with a much larger cash balance feels great. Meanwhile, having less debt during the 10%+ February 2018 stock market correction and all the recent natural disasters also made me feel more at ease. Finally, my passive income portfolio got even more passive, which is good to a newly minted father.

I’m no longer interested in generating much more passive income because of my marginal tax rate, even though it has come down due to tax reform. Hopefully when I do my 2018 taxes in 2019, there will indeed be a cut in small business pass through income as promised, but who knows until then.

In a sense, I’ve been trying to throttle back my income or at least shift the income to the future through equity investments when my energy and business income fades. So far they hasn’t, but it’s always good to plan for the future.

If you want financial freedom, you must get your passive income squared away. Once you’ve done so, you’ll be able to comfortably do anything you want.

Related: Ranking The Best Passive Income Investments

Readers, how is your passive income portfolio coming along? With the rise in interest rates, are you finding higher income opportunities? Note: the top picture in this post was taken in November 2011 at the top of Santorini. It was then that I finalized my plan to negotiate a severance and leave work for good.

The post Financial Samurai Passive Income Portfolio Update 2018 appeared first on Financial Samurai.

What’s In A Home Insurance Policy: Know The Details Before Your House Burns Down

Sam asked me to write this post after we lost our home overnight to the Tubb’s Fire in Northern California. We were living a good doctor’s life. A $1.2 million dollar home with a killer sunset view. Life was good, but with my mortgage and student debt I was still quite stressed. The kind that affected me not only internally, but also externally. Affecting both work and relationship with my wife.

Crazy to think that stress and a mortgage can be that powerful, but it was. In fact, I would walk around my home and think about how we had about 1,000 square foot of home more than we needed. It was 3,300 square foot and I determined that 2,000 to 2,500 square foot were a much better fit for us.

But here we sat, 11 months after buying a big home without many financially reasonable options. Then overnight… POOF! It all went up in a flash. We were lucky. Someone knocked on our door at 2 am waking us up. We left with our lives and health, although not much more. Others were not as fortunate and I have seen and felt the impact of those losses in our community. So I write this post knowing how lucky we are. And I am thankful for that.

Interesting points from EJ’s guest post:

  1. Why being a homeowner may be better than being a renter when disaster strikes
  2. How home insurance can make you much wealthier
  3. Know exactly what is covered under your home insurance plan
  4. Itemize everything in a spreadsheet and a picture catalog
  5. It may be better to have a complete loss rather than partial damage

Breaking Down A Home Insurance Policy

Our home before the fire

Here’s a home insurance primer on what is important when purchasing a policy. We lost our home, but by being well insured we are covered for not only our possessions and rebuilding, but also for our rental.

After the fires, both home prices (for sale) and rental prices sky rocketed. Classic market supply and demand with a steroid boost of large amounts of insurance money. So not really classic market supply and demand.

That is why Loss of Use Coverage is so important and the first thing we talk about today.

Coverage D: Loss of use and rental

Renters Get Squeezed

In the land of fire and mass chaos, owning is way better than renting (seems counterintuitive, but true). I talked to many people who are renters who have been evicted since the fire. The landlords asked their tenants to leave so that either the landlord or one of their family/friends who lost a home can move in. 

This puts the tenants in a bad position because now they are stuck in a town with a housing shortage and now a high price point. They have no choice, either pay more for a similar rental in town or move further out of town. Plus, unlike those who are insured and lost their home, tenants being evicted have no insurance to help them through this. Lose lose.

Many Owners With Insurance Came Out Fine

For owners it is better, but it is only as good as the home owners insurance purchased. I am well insured. My insurance pays for my rental up to two years because the Tubb’s Fire was a Federally declared disaster. If it was just a run of the mill house fire, I would still be covered for 1 year. There is no monetary limit to my rental. Insurance covers an equivalent rental to my home.

So I was able to get a nice rental and not worry about the monthly rent. I will potentially be living in my rental until October 2019. While insurance is paying a lot for my rental, it still is not as much as one friend who has insurance paying $34K a month…yup, $34,000 a month. On the other end is one of my friends, who has a maximum cap of $14,000 for her rental. That means that her insurance will only pay a total of $14,000 for the entire 2 years. Ouch.

First lesson of insurance – make sure you are well insured for not only dwelling and personal property, but also loss of use. This will make your housing situation much better after the loss of your home. Clarify how much coverage you have.

What Type Of Home Insurance To Get?

We have determined that being a owner versus a renter at the time of a disaster likely puts you in a better financial situation with insurance, but what insurance should home owners (and renters to some extent) obtain?

I personally am insured by a large, reputable insurance company who is always on your side. Thus far they have gone by the books and been quite helpful. In fact, by the end of this process I will likely own my land out right, have no mortgage, and have increased my net worth by about $600,000. Granted, I have to replace all of my possessions but that can be done deliberately and slowly. Oh, but I don’t own a home anymore.

But still, a massive increase in net worth is quite the silver lining from this tragedy. Plus all the stress from owning a massive house with a massive mortgage is now gone.

Onto the insurance policy

Insurance coverage is broken down into various coverages.

  • Dwelling: Coverage A: Dwelling
  • Other structures: Coverage B
  • Personal property: Coverage C 
  • Loss of use: Coverage D 
  • Personal liability: Coverage E 
  • Medical pay each person: Coverage F

The limits for these items are visible on the insurance policy declaration page.

These are each important, but Coverage A is the most important.

Coverage A: Dwelling

This is the most important part of the insurance coverage. Coverage A dictates how much the insurance company pays for rebuilding a home. By law, if I rebuild they have to give me at least my Dwelling maximum to rebuild.


There are also extensions to this coverage. For instance, I had a 125% coverage extension. This means that they will pay an additional 25% of my maximum if I rebuild. This is an additional $200k for me to rebuild. I even realized after the fact that I could have purchased a “guaranteed replacement cost extension”.

If I had purchased a guaranteed replacement cost extension, then there would be no question about rebuilding as insurance would cover it all. There are 3 companies I know of that have guaranteed replacement cost: Chubb’s, Nationwide, and AIG. If insured with one of these insurers, it may be worth switching to guaranteed replacement cost.

The payment

I thought that insurance will pay out all 100% right off the bat, but unfortunately that is not the case. The insurance company will come up with their own build estimate and from that depreciate the cost of things such as paint, roofs, flooring, etc.

It is not as bad as it sounds. For instance, in my case they depreciated about 1.5% of the home. Once I rebuild, they will pay the full amount.

Also remember that this initial payout is a starting/negotiation point. Right now I have received one big check but am coming back to the insurance company with my builders estimates which are higher than what the insurance company estimated. Time to negotiate!

Coverage A (i.e. dwelling) is the most important part of the insurance coverage. This needs to be enough to rebuild an equivalent home and it is up to you to make sure it is adequate. Generally, increasing the limit leads to only a small increase in the overall annual policy premium.

Another important part of Coverage A is to be insured for “Replacement Cost.” Some insurances offer “Actual Cash Value.” Actual cash value only pays the depreciated cost of the home, meaning the insurance company will only pay for a 20 year old roof and not the cost of a new roof. The difference in reconstruction costs will be covered by out of the owner’s pocket. Not so good if you ask me.

With a “replacement cost”policy, the insurance company may depreciate the home for the initial payout, but will pay that actual replacement cost once the item is built or purchased. This can lead to thousands of dollars when rebuilding.

Coverage B: Other Structures

Another reason the price point of Coverage A is important is because all of other Coverage limits are set by the Coverage A limit.

For instance, I am covered for Other Structures via Coverage B. This includes patios, external fireplaces, fences, and the outdoor kitchen. The maximum insurance will pay me for Other Structures is 10% of my Coverage A. So if I have a $1,000,000 Coverage A limit, I get $100,000 for Other Structures. If my Coverage A limit is $500,000, then I only get $50,000 for Coverage B.

Coverage C: Personal Property

Coverage C or Personal Property coverage is the amount given for all of the items lost. T-shirts, speakers, kitchen appliances…all that stuff we accumulate over a life time. Another way to think of it is that if I took my home and turned it upside down, anything that falls out is paid for by Coverage C.

Getting the insurance company to pay Coverage C can be a bit painful. While they paid a portion of the money up front, I. Had to itemize everything in my home to receive full payment. From underwear to Q-tips. Rugs, couches, and stuffed animals. We spent approximately 75 to 100 hours to itemize every single item.

This was probably the most painful part of the process. We had lost  our home and now had to revisit each item again for the insurance company. This was accompanied by a 3 hour recorded interview. Brutal. Please take pictures and itemize all your belongings in a spreadsheet before you need to. 

The insurance company will take the list and depreciate it based on age and condition. They will pay out the depreciated cost. Again make sure you are insured for “Replacement Cost” and not “Actual Cash Value”. If you have “Replacement cost” coverage you can submit receipts as you buy items for the insurance company to pay the difference.

Side note, to be able to claim casualty losses in my 2017 taxes, I had to itemize. For the IRS I can deduct the difference between my depreciated value of items and what insurance paid me for these items. Unfortunately with the 2018 tax overhaul I believe this deduction goes away in the future.

Once again, Coverage A (Dwelling) limit dictates the Coverage C limit. For us it was 60% of our Coverage A limit and I think that is fairly standard.

Other coverages

There are also other coverages that come with good insurance.  We had coverage for Debris Removal (10% of Coverage A), Landscaping (5% of Coverage A), and Building Code Upgrade (20% of Coverage A).

There is also coverage for Personal Liability (Coverage E) and Medical Pay for Each Person (Coverage F), and these limits can be adjusted as needed.

Deductible Cost

I am actually surprised as to how cheap good insurance is. My insurance cost approximately $1,300 annually with a $1,500 deductible. After this experience I would happily pay $2,000 annually for a higher coverage amount. Nothing is worse then being underinsured after loosing a home. Insurance has by far been the best return on investment I have ever made.

Fire coverage?

Finally it is worth noting that I did not have additional insurance. I had my regular old home insurance and it covered all of the loss. This is not like an earthquake or flood that needs an additionally purchased insurance policy.

My policy covered the fire whether it was a natural disaster or a house fire. Some of the additional protections I received were due to this being a Federally declared disaster and living in a consumer protection state like California. But no, I did not need fire insurance.

This is good, because I would never have thought to ask separately for it. In fact, when I went to bed at 1 AM I saw a red glow over the hill and did not even realize it was a fire.

If there is going to be a fire though, in many ways it is best to have a complete loss like we did. Total destruction so that the insurance company can not argue about what is salvageable.

My neighbor was not so lucky. His home is standing between 2 burnt homes. He had a lot of smoke damage and is house is not habitable currently. He is fighting tooth and nail with the insurance company about his coverage. The insurance company is arguing everything should be cleaned. He has  two young kids and is arguing that the home needs to be stripped to the studs.

It is brutal to hear his stories of the back and forth discussions he is having. Not a fight I want to have. He did loose everything, but because his home is still standing receives much less support. I am moving forward while he is still arguing with insurance.

house burns down after fire

home after tubbs fire

Our home after the fire

Home Insurance Is A Life Saver

It pays to be well insured. I will not claim I knew much about property insurance when I bought my home. In fact, my insurance broker set this policy up for me and has been working with me throughout the claims process. I never even read the entire policy before this. I was by no means an expert, but now have a lot of first hand experience.

This is what I recommend:

  1. Call the insurance company and ask for a copy of the full policy. This document should be 50 to 70 pages long.
  2. Make sure to have an adequate Coverage A (Dwelling) limit. This is the coverage that will dictate all of the other coverages. It should be high enough to cover rebuilding a equivalent home.
  3. Purchase “Replacement Cost” insurance and not “Actual Cash Value” for both Coverage A (Dwelling) and Coverage C (Personal Property).
  4. Consider an extension for the Coverage A limit. My extension was for 125%, but other’s have 150%, 175%, or even guaranteed replacement cost. It is worth the small increase in annual cost if ever needed.
  5. Jump through the hoops that the insurance company lays out. I am impressed by my insurance company thus far. As long as I am doing what they ask, they have been quick and reasonable with payments.

There you have it. One man’s experience with insurance after a major fire.

Sam’s note: Hopefully everyone calls their respective home insurance companies this week and asks what their coverage entails. Although it’s terrible to lose a home to a natural disaster, what a silver lining to be $600,000 wealthier thanks to a mandatory home insurance policy that only cost $1,500 a year in premiums. Further, EJ was in his house for less than a year, so the sentimental attachment wasn’t as great compared to someone who had owned their home for 20 years. His story about the night the fire came is a gripping read that will spur you into action.

A natural disaster destroying my home was always in the back of my mind. Only after I sold my rental house in 2017 did I feel a sense of relief that I was able to get out unscathed since my rental house was in the Marina, an area prone to liquefaction during a large earthquake. It’s very interesting how our minds insulate us from potential disaster risk by making us forget. 

Related: Reinvestment Ideas After A Big Home Insurance Payout

The post What’s In A Home Insurance Policy: Know The Details Before Your House Burns Down appeared first on Financial Samurai.

Getting Rich Is About Willpower: Why Give Up When You Can Keep On Going

In the 1960s, Columbia University psychologist Walter Mischel conducted an experiment on children that is now often referred to as The Marshmallow Test.

Walter invited various aged children into a room individually and asked them to sit down in front of a table with one marshmallow. He told the preschooler that he could eat the marshmallow right now if he wanted, but if he waited for five minutes, Walter would return with another marshmallow and the preschooler could eat two.

Here’s a short video that highlights the delightful reactions these kids display as they do their best not to eat the marshmallow. Watch them close their eyes, tilt their heads, and come close to eating the dessert before pulling away.

Walter observed that of the kindergarteners (age 5), 72% caved in and ate the marshmallow. If they’re in the fourth grade however, only 49% yielded to temptation. By the 6th grade, the percentage dropped to 38%. Such improvement is rational given five minutes is a short time to wait for double the spoils.

More interestingly, Walter discovered in subsequent studies that children who delayed gratification by 15 minutes scored 210 points higher on their SAT’s than children who lasted one minute. And even more importantly, children who are able to demonstrate self-control have a higher Executive Function, which is responsible for controlling planning, foresight, problem solving, and goal setting. 

The Importance Of Self-Control

I must have come across Walter’s test back in psych 101 as a freshman in college, but I was probably too hung over to remember the details. I’ve been reading the national best seller, Brain Rules For Babies: How To Raise A Smart And Happy Child From Zero To Five, and the author John Medina brought Walter’s test up on page 103.

Self-control is vital for building wealth over time because spending now involves giving up potential gains in the future. Here are some examples where delayed gratification can help build great wealth.

An Automobile

The classic example is spending money on a new car you don’t need. The median price for a new car in the US is now $34,000. $34,000 is equal to roughly the median income per person in America after tax. Yet Americans are spending like no tomorrow on the latest and greatest vehicles.

As soon as I graduated from college in 1999, the first thing I did was buy a car in Manhattan of all places. After I bought a car, I bought a racing motorbike! Talk about a wasteful spending after all those years of having no money. I should have just stuck with the subway.

After realizing the error of my ways, I came up with The 1/10th Rule For Car Buying to encourage folks to either buy a cheaper car or make lots more money. What I found was that if you are able to finally make 10X more than the value of the car you’ve been eyeing, you tend to no longer want to spend so much on a car because you realize how much effort and taxes it took to get there.

Years later, readers are still justifying their reasons to me for spending way more than 1/10th their income on their current car (YOLO, bad public transportation, safety, etc). Meanwhile, they could have made a small fortune in the stock market and retired much earlier if they didn’t spend so much on a depreciating asset.

Historical stock market corrections

A Home

Everybody knows that real estate has been one of the easiest ways to build wealth since the founding of our country in 1776 since everybody took American history in high school.

A 10% increase in a median priced $500,000 house would require someone earning $50,000 a year to save an impossible 100% of their gross salary just to stay even. Therefore, it is only logical to try and buy real estate as young as possible to prevent yourself from getting left behind.

The desire for owning real estate was why I lived so spartanly for the first four years after college. But I knew that buying in an expensive city like New York or San Francisco would require sacrifice. I didn’t have the bank of mom and dad to lend me a downpayment, so I lived in a studio with another guy for a couple years instead in order to save 50%+ of my after-tax salary.

The 20-something and early 30-year old folks today who’ve bought their first homes all either lived at home with their parents after school, took on side jobs to make more money, lived like monks for years, or figured out a way to convince their parents to hook them up.

If you’re spending money on fabulous vacations, going out to the finest restaurants, renting your own apartment instead of renting a room, and insisting on buying your first property in the best neighborhood, you’re likely going to have a very difficult time getting neutral real estate.

US And San Francisco Real Estate Home Price Index Case-Shiller

Graph by Paragon Real Estate Group

An Online Business

Do you know why most businesses fail after five years? It’s because most people don’t bother to grind for more than five years! Too many businesses shut down right before things start getting good.

For example, did you know that it sometimes takes two years for an article to be ranked on the front page of Google? Yet many sites run out of publishing steam after year two. It’s always something that gets in the publisher’s way: work, a baby, relocation, whatever.

I told myself before starting Financial Samurai that I would publish three times a week for five years, no matter what. And if after five years I saw no progress, then I would shut the site down. But after five years, there was progress. And even if there was very little progress, it didn’t matter because it costs so little to keep the site up.

Willpower means working for a couple hours on your side hustle before going to work at 7:30am for years instead of sleeping in. Self-control means not spending three hours watching TV or going down a social media rabbit hole and producing work instead. Do this for at least three years and be amazed at how much you can accomplish.

How much can a food blogger make

Who knew blogging about food could be so lucrative

Related: The 10 Best Reasons To Start an Online Business

Relaxing Is Fine Too

At some point, we’ve got to figure out when it’s time to live it up. We can’t delay gratification forever since we can’t live forever. Therefore, I believe the time to start letting loose is after we’ve put in at least 10 years of intense work. I define intense work equivalent to giving 50% more effort than normal e.g. 60 hours a week.

After 10 years of intense work, you will have much more wealth and many more options to live your dream life than if you just did the average.


The Average Net Worth For The Above Average Person

The Best Financial Move I Made Is Something Everyone Can Do

Readers, what are some of the things where you’ve demonstrated willpower or delayed gratification? What causes people to fall off the wagon before things start getting good? Why give up when you can just keep on going? BTW, besides self-control/willpower, the other attributes that make up a child’s intelligence are the desire to explore, creativity, verbal communication, and interpreting nonverbal communication. 

The post Getting Rich Is About Willpower: Why Give Up When You Can Keep On Going appeared first on Financial Samurai.

Five Steps To Improving Productivity: A Quora Case Study

5 Steps To Improving ProductivitySince making money from our investments might be getting more difficult, it’s good if everybody figures out how to improve productivity. During a downturn, corporations try to squeeze employees to do more after letting go of a bunch of people.

But working more is not my definition of being more productive. Working the the same and generating more output, working less and generating the same output, or working less and generating more output is a much better definition.

We often get stuck in a rut, doing the same thing and expecting things to improve. We’re also creatures of habit despite knowing there are better ways to get things done.

One example of being inefficient is tracking your net worth on an excel spreadsheet despite the proliferation of free net worth tracking software. Another example of inefficiency is vegging out in front of the TV instead of also doing something brainless at the same time, like folding laundry. Another example is watching a terrible movie on a 5-hour flight instead of doing some work on a laptop.

In this post I’d like to introduce my 5-step productivity framework using writing answers on Quora as a case study. 

Step #1: Identify The Pain Points

Since running out of energy last year, I needed to figure out what were the things that were sucking up my time or causing unnecessary grief. I zeroed in on three things:

1) Responding to comments without getting acknowledgement or a response back when I ask for follow up.

2) Responding to questions when the answer is clearly in the post.

3) Debating about a topic with a reader only to discover they don’t have the relevant experience.

At one point, I was seriously deliberating disabling comments or responding to nobody since all these activities takes around three hours a week. Given I try to keep my work load to no more than 25 hours a week, I was wasting 12% of work time.

Step #2: Replace Wasted Time With Potentially Useful Time

Since identifying my pain points, I’ve stopped responding to obvious questions, included a warning in my comment system about not approving low value commentary, and decided to use the remaining time answering questions on Quora, a Q&A platform with roughly 80 million users who don’t follow Financial Samurai.

My goal is to encourage FS readers to become more involved in the community by providing their own thoughts to other readers’ comments. Further, I want readers who have questions to improve their self-sufficiency by typing their questions into my search box or typing “XYZ Question Financial Samurai” in Google. As I’ve been writing about personal finance since 2009, I’ve covered most financial topics.

Here are the main benefits I thought of writing on Bay Area-based Quora.

  1. Tap a new audience that is unfamiliar with Financial Samurai.
  2. Build link backs to key pillar articles on Financial Samurai.
  3. Build my reputation in Personal Finance, Real Estate, Investing, and San Francisco
  4. Meet potentially interesting people online outside of the personal finance blog echo chamber
  5. Have fun and be intellectually stimulated

Step #3: Establish A Short Window For Testing

I gave myself 30 days to focus on building my profile on Quora.

In one month, I was able to generate 1.1 million answer views, or 33,333 views a day on average. I answered 70 questions in the 30 day time frame. I’m not sure how good this is, but I think the median number of views a user gets is around 1,000 a day.

The summary shows I answered 84 questions. The additional 14 are answers I wrote years ago when Quora first started. Back then, I thought it was a waste of time since it wasn’t very popular and they made you earn credit in order to ask question, which I thought was stupid.

Sam Dogen Financial Samurai Quora Profile

Step #4: Come Up With Specific Goals You Want To Achieve In The Testing Window

Without specific goals, you’ll end up going down a rabbit hole. Improving productivity requires laser focus.

My goals were to:

  1. Become a “Most Viewed Writer” on the subjects I cared most about: San Francisco, San Francisco Bay Area, Personal Finance, and Real Estate.
  2. Try to achieve 1 million views
  3. Stay consistent for 30 days
  4. Build some repertoire with SF media

I became a “Most Viewed Writer” in all subjects I focused on. I’m pleased with my results in the Real Estate section where I achieved the #1 spot with only 13 answers versus the #2 guy with less views, but with 1,242 answers! 1,242 answers is ridiculous and clearly shows an addiction or a lack of efficiency! I don’t even know how he finds the time to eat and go to the bathroom answering 41.2 answers a day on average.

Financial Samurai Most Viewed Writer in San Francisco Quora

Most Viewed Writer in San Francisco

Financial Samurai most viewed writer in Personal Finance Quora

Financial Samurai most viewed writer in Personal Finance

Financial Samurai most viewed writer San Francisco Bay Area on Quora

Financial Samurai most viewed writer San Francisco Bay Area

Financial Samurai most viewed writer on Real Estate Quora

Financial Samurai most viewed writer on Real Estate. 13 answers versus 1,242 answers for the #2 guy

In the beginning, it was fun to answer the questions. They kept notifying me that my answers had been sent to their Quora e-mail digest of over 1,000, 2,000, and sometimes 100,000+ people. Positive reinforcement felt great.

But over time, Quora started making me feel like a slave to their system until I finally told myself I had had enough and stopped answering every question I had detailed knowledge about. I became pickier. I turned off Quora notifications on my phone as well. As a result, I became happier, much the same way people who use Facebook become happier when they delete it from their phone.

Never ending annoying Quora notifications to ask me to answer questions

Endless bombardment of annoying Quora answer requests

Step #5: Thoroughly Analyze The Results Of Your Efforts

After 1.1M views, I only received around 20,000 visits from Quora to Financial Samurai. That’s only a 1.9% click through rate.

Think about all the time spent answering questions to only get 1.9% of the traffic while Quora gets to keep 98.1% of the traffic. Further they get to control and reuse your content. I can easily spend $500 in advertisement on Facebook to get 20,000 visitors to Financial Samurai instead.

Do note that having a large site does not preclude you from being able to also generate 1.1M views in a month either. If you can generate 1.1M views on Quora and have a site that gets just 20,000 visitors a month, you will likely double your traffic. Unfortunately for me, traffic only increased by ~2% because I already generate about 1M visitors a month on Financial Samurai.

The only immediate positive I experienced with Quora seems to be a boost in online revenue. Although Quora boosted my online January traffic by only ~2%, my online revenue improved by 10% because of new visitors. Further, there will probably be some long term benefit  for now having ~1,700+ followers on Quora and 84+ answers on their platform for their users and search engines to find and read.

Why I No Longer Plan To Focus On Quora

On the 23rd day of Quora answering, I got a notification out of the blue that one of my answers, which I had spent at around 30 minutes to write and had 220K views and 2,277 upvotes was deleted due to a “violation of their writing policy,” which I had not read. It was odd because the answer was no different in format from all the other answers I had written.

You would think that an answer with this many upvotes and views would be a good thing for the community, but somehow it was flagged, probably by a competing answerer to the question. Quora didn’t even ask me if I could edit the post to comply with their policy. They just outright deleted my work. See below:

Quora randomly deletes answers

My initial reaction was not anger that I lost the view count, but annoyance that I had wasted my time and lost my content. After all, my month long goal was to save time or improve my use of time. As a writer, good content should not be wasted.

Luckily, I was able to click a link to view what they deleted, copied the answer and created a new page on Financial Samurai with my deleted answer: Do Wealthy People Think About Retiring At A Young Age? Phew, it feels so good to have saved my work and add my own recommendations at the end without fear of deletion.

Know this. If you are writing on Quora, you are making Quora rich. You are improving their content and traffic. Instead, you should be writing on your own platform and making yourself rich. I recommend everybody have their own website to own their own brand and own their own content and traffic.

You would think they’d treat someone who was able to write 70 answers in a month and generate 1.1M views better, but they haven’t even bothered to respond to my appeal.

If I knew Quora wouldn’t delete my answers, I would continue to give Quora a go. But their apparent random deletion of a popular answer with no response makes spending any significant amount of time on their platform risky and inefficient. Therefore, the smarter move is to first publish on Financial Samurai and then use some of my content to republish shorter answers on Quora if I have nothing else to do with my life.

I plan to now write little to nothing on Quora for the next 30 days to see how much organic views and traffic I achieve from my existing answers.

Productivity Steps Review

I hope my case study gives you an idea of how to improve productivity in something you care about. If you’ve been doing anything for several years, I’m pretty sure there’s a better way of doing it today.

  1. Identify the pain points
  2. Replace wasted time with a potential better use of time
  3. Establish a short window for testing your new use of time
  4. Come up with specific objectives for your new use of time
  5. Thoroughly analyze the results and make logical next decisions

Having a productivity mindset is also important for reaching financial freedom. With such a mindset, you will focus on how to generate more passive income streams to buttress your active income streams so that you might one day be free. It is amazing once you can get your money working hard for you, so you don’t have to.

Readers, what are some pain points you’ve experienced and how did you go about improving your productivity? Any readers out there spending their time making Quora rich instead of themselves? 


How Much Can You Make Blogging For A Living?

The 10 Best Reasons Why Everyone Should Start Their Own Online Business

Why Blogging Is The Best Business In The World

The post Five Steps To Improving Productivity: A Quora Case Study appeared first on Financial Samurai.

The Marriage Penalty Tax Has Been Abolished, Hooray!

Marriage Penalty Tax DisappearsIn the past, I used to wonder why two individuals with high incomes or two individuals with a large income differences would ever want to get married. Paying thousands of dollars in marriage penalty taxes didn’t make sense. It seemed obvious that the government wanted one spouse to give up his or her career to stay at home, even if there were no children to raise.

Otherwise, why would the top tax rate of 39.6% for a married couple not kick in starting at a combined income of $836,802+?  For 2017, married folks begin paying at the 39.6% tax rate once their combined income surpasses only $470,701.

In the eyes of the government, 1 + 1 literally only equaled 1.12. This is blatant anti-marriage discrimination. Discrimination is not OK even if you aren’t being discriminated against. Below are examples that demonstrate the marriage penalty tax that used to occur under the old tax structure. I used the Tax Policy Center Calculator.

Example #1: Marriage Penalty

Each person makes $200,000. They don’t own a home, and have two children. The results are the same if they have no children. They pay a whopping $15,162 marriage penalty tax.


Example #2: Marriage Penalty

One person makes $500,000, the other person makes $80,000. They own a home with a mortgage and have one child. Lucky for the person making $80,000 to marry the person making $500,000. Not so lucky financially for the $500,000 income earner.

After 20 years, this person will have paid $270,000 more in taxes than if he or she had stayed single or unmarried. Marriage forced this person to pay an average of $13,434 more in taxes a year. Think about what this couple can do with all this money!


Example #3: Marriage Tax Credit

One person makes $60,000, the other person makes $40,000. There is no mortgage and zero kids. We have a winner! Because the combined income is under $110,000, the couple can decide to have a kid and claim $1,000 per child to lower their taxes even further to $10,638 from $11,638.


Example #4: Marriage Tax Credit

Here is the real home-dinger. One person makes $300,000 and marries another who makes $0. They pay $35,000 in State taxes, $25,000 in mortgage interest, $2,000 in charity and have a child. The $300,000 a year earner saves $11,162 a year in taxes. I tried higher than $300,000 a year and the marriage tax credit starts to decline.

Marriage Tax Credit Huge

Based on the above examples, from a tax perspective it seems clear that you should only get married if your contemplated partner makes a similar level of income up to around $100,000 a year or you anticipate your spouse having zero income. If both of you made much more than $100,000 a year, you paid a marriage penalty tax.  How much you paid depended on the number of kids and deductions you had. And given most $100,000+ a year jobs are located in high cost of living cities where housing, education, and taxes are already high, paying a marriage penalty tax was infuriating.

Related: Scraping By On $500,000 A Year: Why It’s So Hard To Escape The Rat Race

There’s Hardly Any Marriage Tax Penalty Anymore

With the passage of new tax reform for 2018 and beyond, the marriage penalty tax is now practically abolished. Based on the new federal income tax brackets below, there is tax EQUALITY up until $300,000 per person. In other words, two individuals who make $300,000 and get married for a combined income of $600,000 will pay roughly the same amount of tax (35% marginal tax rate) as if they were single. Not bad given in the past, they had to pay a 39.6% rate on any income above $470,701.

New Federal Income Tax Rates 2018

There are many income permutations to consider when calculating whether or not there is  a marriage penalty tax or bonus. However, the key math to consider is at the 10%, 12%, 22%, 24%, 32%, and 35% tax brackets – there is a logical doubling of income thresholds if individuals get married. Therefore, there is no tax penalty for any individual making up to $300,000 a year or married couple making up to $600,000 a year.

I no longer have to spend hours coming up with different married income permutations to figure out when tax penalties start hitting. I can just tell based on looking at the graph. Perhaps this is why the tax industry is so afraid of streamlining the tax system. When things are easier to understand, they lose business.

The only visible marriage penalty tax comes in the form of two individuals making over $500,000 a year. In this case, the marriage penalty tax is 2% X $100,000 = $2,000, which is not much for a $1,000,000+ income family, especially since the past married income threshold was only $470,701+ at a 2.6% higher income rate.

In other words, a $500,000 income earner can always pay a maximum 35% marginal income tax rate. But once that $500,000 individual marries someone who makes $100,000 or more, all income over $600,000 gets taxed at 37%. If the $100,000 income earner stayed single, s/he could have only paid a 24% marginal income tax rate.

Almost Everyone Should Rejoice

Given we know that the top 1% income earner makes roughly $400,000 a year, it’s safe to say that less than 1% of Americans will still pay a marriage penalty tax. Therefore, if you’ve been holding off on getting married until the tax situation gets sorted out, now is the time! If the marriage penalty tax ever gets reinstated, you can always get a divorce.

The only clear financial benefit I see for getting married is Social Security survivor benefits. Under current law, if your spouse dies, you get to keep all the accrued benefits. If you are not legally married, then the government gets to keep all the taxes you’ve paid into the system if you have no children. Talk about a bad deal for the American people.

Since everyone believes in equality, everybody should be rejoicing at our new federal income tax rates. I personally believe that a married couple earning up to $315,000 after deductions is the ideal income for maximum happiness. You’re paying a 24% federal marginal income tax rate and can pretty much live a comfortable life anywhere in our great country.

Readers, why do you think people were willing to pay thousands of dollars in the past for the privilege of having a marriage certificate? Wouldn’t you rather save all that money to buy a house, pay down some debt, go on a great annual vacation, or invest? Is there an married income level that is paying a marriage penalty tax that I missed?

The post The Marriage Penalty Tax Has Been Abolished, Hooray! appeared first on Financial Samurai.

The Key To Living Longer: Fear Being Alone Far More Than Going Broke

The key to living longer: fear being aloneI’ve always told my wife that if all goes to hell, at least we’ll still have each other. After all, we met during college when neither of us had any money. We were happy just spending time together between classes in the Sunken Gardens at The College of William & Mary. Having to start over with nothing wouldn’t be so bad.

I’m convinced part of the reason why some couples choose to have so many children despite the cost, the stress, and the time commitment is because they too, fear being alone one day. Having nobody visit you in the hospital when sick is depressing. Having to play children’s games at a nursing home is no way to live out your remaining years.

For me, being alone is far scarier than going broke. When you lose someone, there’s no guarantee you’ll ever be able to find someone as good. But if you lose all your money, there’s a good chance you’ll recover through some ingenuity and hustle. 

The Risk Of Social Isolation

I truly believe the key to living longer is having someone to love, something to do, and something to look forward to. Having close personal relationships and a strong community to interact with are the top findings why certain communities have longer lifespans than others. Check out the chart from Susan Pinker’s TED Talk.

How to live longer

Living to 100 and beyond. Click to watch the Ted talk

I’m thankful for all the detailed comments left on Financial Samurai, even the unpleasant ones, because they share windows into different people’s souls and promotes new topics of discussion.

Here’s a comment left by JD on my uncontroversial post entitled, Things Worth Spending Max Money On For A Better Life that is incredibly insightful about why someone people are alone. If you read the post, you know it simply provides suggestions, not commandments, on where you might want to pay a premium to live a better life.

Why not just put anything down? Couldn’t disagree more. With this advice you’d go from frugal to broke in no time at all. You could justify buying anything and everything.

Mattress at the top? My mother was conned into buying a pricey new one by her brother. When you’re old and in pain the bed you’re lying upon in immaterial. I’ve tried it from time to time. It’s okay but not worth $1,000+ but when I’m tired I can sleep anywhere on anything. The people pushing beds are making killings on TV because people are foolish to believe their hype.

Home Appliances & Home Theater systems are Scams. They’re built cheaply designed to break down–All of em! The more money you pump into them doesn’t guarantee quality or quality or longevity anymore. A crap movie is still a crap movie regardless of how big the screen or high the resolution. Maybe you’d like to push Kueric coffee machines too. Fear and Status sell. Means nothing.

Dental Care is overrated and relies upon Fear to sell. A magical sonic toothbrush? Really? They pay you a few bucks to hype this? Just basic brushing, a minimum of once a day is all that’s needed. Even flossing has been proven to be excessive if not dangerous.

Work clothes & shoes – Hint: if you’re Retired (i.e. Not Working!) it matters not!
Especially if you’re not a socialite and enjoy doing things by yourself.

Food – Some of us Enjoy the Simple pleasures of Simple food. I’m surprised you’re not hyping caviar here as well! Junk food is only bad for you if you thrive on it excessively and make meals of it. For some of us it’s what makes life worth living.

Car Safety is another one of those things relying on Fear to scare people into shelling out money. Once upon a time frugal sites said the same thing. All cars made today are basically safe but it is the Drivers behind the wheels one must watch out for. You’re safer driving a stripped-down basic car than one loaded with electronics so you drive while watching a DVD and yelling on a phone while studying a schematic of your car!

Such detailed intentional objection. I figured there must be more to JD’s story so I asked him to share more about himself, and he did.

I’m frugal, and the real deal. I’m financially independent with a high net worth. I’m also not a hypocrite. The simple things in life are free and once you get used to them, luxury living is rather petty and obviously to impress the masses. Furthermore, everything I’ve typed up there is true and I can back each and every statement up.

I’m not negative, I’m real and honest. I’ve also debated people to death and I don’t intend to waste my time doing so online again. Everyone lives in their own realities with their own priorities, petty as they may be. It’s why my personal relationships have never worked out. My own preferences have been exotic and queer to most people at times. I’ve turned down steaks for Big Macs, for instance. Because they taste better to me.

If you want me to reiterate a few. Planned Obsolescence pretty much wipes out the need to buy “the biggest, best, most popular, and coolest” of appliances (in conjunction with the “bathtub” curve regarding breakdowns). A $300 refrigerator will last as long, if not longer than a $3,000 one with a ridiculous touch-screen and wi-fi system, and certainly require less maintenance and make life.  Easier for you. Oh, sorry, no bragging rights with an Ordinary refrig.

That’s what it’s all about: Status; impressing the guy next door. Maybe you need such recognition, but I do not. The bottom line is that I saved $2,700 which is more money in the bank making interest. Plus, I’m not pulling my hair out over a touch screen that’s malfunctioning and a unit that needs software updates etc. I could extend this analogy to include all manner of modern “smart” tech which makes live miserable in the long-run, including fancy thermostats which need their batteries replaced constantly and maybe even recalibration. All for Look At Me I’m Better Than You gratification, and a cumulative drop in wallet dough. If you’re secure in Yourself you care not about appearances to project upon others. You are indeed Comfortable and truly at peace. I’ve splurged in the past and I almost invariably feel guilty afterwards. Because the outcome simply was never worth it. Maybe I just need a shrink.

Frankly, I’ve found this website a disappointment. Your early articles were generally good, but you’ve changed over the years. Perhaps this wife of yours has had an influence on your psyche. It’s why I’m not married. If you want real financial know-how, checkout Bell’s Living Stingy blog. Not 100% in agreement of course but I do tend to agree mostly with his lifestyle (minus the BMWs and his sometimes quirky politics).

Although JD said a lot of unflattering things about me and this site, it’s good he followed up with details about his beliefs. Here are some of my observations:

1) There may be some self-esteem issues because he thinks having a nice TV, refrigerator, bath tub and wi-fi system is for showing off to your neighbors instead of for the owner’s personal satisfaction. I’m not sure how our neighbors will ever know about our nice equipment unless we invite them over to a bath tub or online gaming party.

2) Guilt for spending money despite having a high net worth. Many of us have this problem because part of the reason why we got to a high net worth is by being frugal. Old habits are hard to quit.

3) JD is alone. By comparing things with others, bringing up my wife, his shrink, and his failed relationships, it seems he either enjoys being alone or desperately wants to find someone.

How Not To Be Alone

If you want to live longer and happier, then it’s probably beneficial to find someone to go through life with according to the research. To be loved and accepted is all we can ever ask. Although there is no guarantee of finding someone, we can at least improve our odds by doing some of the following:

1) Ask whether you’d be happy hanging out with yourself for hours. Pretend you’re stuck for five hours at an airport due to a computer system malfunction. Would you enjoy your company? Or would you not be able to stand yourself? The airport test is one of the key determinants every applicant must pass when applying for a job that demands rigorous work hours and plenty of travel.

2) Find ways to look at the positive. JD decided to look at my post as an offense to his frugality. Even though my post wasn’t forced upon him or cost him anything to read, he got triggered by my suggestions. Meanwhile, most other people decided to see the positives of the post and share some of the things they value the most. The more you can see the good in things, the more people will start seeing the good in you.

3) Turn on your grateful switch. Whenever I sprain my ankle, I’m thankful I didn’t break my ankle. Whenever my wife is feeling tired after a long night, she is thankful she has a son to be tired for. In the very simplest terms, if we can be grateful for just being alive, our world will change for the better.

4) Smile. Nobody can resist a big toothy smile. Strangers will automatically smile back at you for no reason. A smile is like a powerful magnet that draws people to you. The next time you’re zooming down fresh powder, dancing to your favorite tune, or riding a jet ski, notice how sore your cheek muscles get after the session is over. It’s because you’ve been smiling nonstop without anybody noticing. The more you can smile, the happier and healthier you will feel.

5) Focus on solutions. Problem solvers don’t just accept a bad scenario, they find a way to go around the wall. There is no greater turn-off than the person who complains why life isn’t fair and then sits on their ass all day. The water cooler gossipers at work invariably are the first ones fired. One of the reasons why blogs have taken off is because journalists only report the news, while bloggers not only share the news but also offer actionable steps. When you can build some credibility by consistently doing what you say, attracting others is an inevitability.

6) Take care of your mental and physical health. Nobody will love you if you can’t love yourself. Loving yourself starts with taking care of your mental and physical well-being. You don’t have to look like a swimsuit model or have the mind of the Dalai Lama, you just have to consistently work at reaching your healthiest potential. Stay active. Keep an open mind. Read voraciously. Practice what you’ve learned. Forgive yourself and others.

7) The more people you meet, the higher your chances. Meeting someone you can connect with is a numbers game. Sharing a common interest is the easiest catalyst to start a meaningful relationship. I have one friend who is always on a date despite not being particularly attractive. He’s not afraid to ask every person he meets for their contact information because he’s not afraid of rejection.

8) Stay hygienic. For the love of God, shower, wash your face, brush your teeth, and floss no matter what JD says about not buying a Sonicare tooth brush! If you smell and are dirty, nobody will want to come close to you, let alone kiss you. Ask your friend(s) if you smell, because some people do and have no idea. Let your natural pheromones attract other people in ways that only science can explain.

9) Develop emotional intelligence. If you’re clueless, it’s dangerous because you may not know you’re clueless. This is also called the Dunning-Krueger effect. An emotionally intelligent person understands another person’s viewpoint and works to socialize in a manner that’s agreeable. An example of an emotionally unintelligent person is one who asks things like, “can I pick your brain” without first developing a relationship or providing something of value. Communication skills are key to a high EI.

10) Be generous and kind. Showing generosity and kindness is one thing if you have everything. Showing generosity and kindness when you have nothing is next level humanity. A woman by the name of Kate McClure raised over $360,000 for a homeless man through a GoFundMe campaign after she ran out of gas on an interstate in Philadelphia. Johnny Bobbitt Jr., walked a few blocks and bought her some with his last $20 and asked for nothing in return. Johnny has a second chance in life after drugs and alcohol derailed his plans.

We Are Programmed For Companionship

Having a lot of money is pointless if you have nobody to share it with. During my days in finance, I met plenty of wealthy, but lonely folks who had let their desire for wealth consume them. Every single one of them regretted working so much in their 20s and 30s, and not working more at finding someone they could come home to.

There’s no denying that luck plays a role in finding a companion. But I’m certain we can all do more to increase our chances at finding someone if that’s what we want.

Relationships are hard to maintain because we tend to take each other for granted. Marriage is constantly a work in progress. But I say it is better to have loved than to never have loved at all.


The Average Net Worth For The Above Average Couple

Marrying Your Equal Is Better Than Marrying Rich

Financial Dependence Is The Worst: Why Each Spouse Needs Their Own Bank Account

Readers, why do you think some people remain alone? What are some other ways to improve our chances of finding the one? You can read more of JD’s comments on love and life in the post, The Best Financial Move I Made Is Something Everyone Can Do. They are fascinating to me because they are the opposite of my beliefs. 

The post The Key To Living Longer: Fear Being Alone Far More Than Going Broke appeared first on Financial Samurai.

Silver Linings Of A Stock Market Correction

With the S&P 500 down over 10% from its high in 2018, we’ve officially entered correction territory. If the S&P 500 closes down over 20% from its high, then we will be officially in a bear market.

Whenever the stock market goes through a rapid retrenchment after long periods of stable growth, it always feels bad. Although its never fun to lose money, it’s good to face the situation head on and focus on the positives and what we can learn. 

The Positives Of A Stock Market Correction

1) A catalyst to finally learn about risk management. If you’ve only been investing since 2009, the path towards building stock market wealth has been relatively straightforward. I argue its been too easy for the 35 and under generation to build wealth, thereby creating a false sense of security. Being overconfident in your investing abilities can be devastating once you’ve accumulated a large nest egg. See: Recommended Net Worth Allocation By Age

Historical stock market corrections

2) The ability to accumulate stocks at lower valuations. The keyword is “valuation,” and not price. If the price is lower by 10%, but earnings are cut by 10%, then you’re paying the same valuation for a stock. But if prices move 10% lower and earnings come out the same, then you’re getting yourself a deal.

The consensus 2018 S&P 500 earnings estimate is ~$155 (+17.8% from 2017).  Therefore, at 2,500 on the S&P 500, the market is trading at a reasonable 16.1X. The consensus earnings expectation for 2019 is for earnings to grow by another 10% to $171, or 14.7X 2019 earnings. The trillion dollar question is whether earnings will grow as expected, fall short, or exceed expectations.

Except for the rise in the 10-year bond yield to 2.85%, there was no other fundamental news that wasn’t already out there that could drastically affect earnings. Therefore, at the moment, it looks like investors are getting a valuation discount. And from a bond investor perspective, you’re receiving higher yields.

3) It takes time for corrections to play out. According to analysis by Goldman Sachs, since WWII the average correction is -13% over a course of four months. It then takes an average of four more months before the S&P 500 recovers all its losses. In other words, don’t use all your dry powder all at once if the stock market is down 10%+ in just a couple weeks. Rather, leg in through multiple tranches because timing the market is too difficult.

If you have a long-term mentality, you’ll be able to better contain your rush to sell and rush to buy.

Historical stock correction averages

4) A return to humility. Every time I write an article about investing, without exception, there will inevitably be someone who comments or e-mails saying how much money they’ve made in the stock market or how they timed a trade perfectly. Over social media, we witnessed a phenomenon of older folks bragging about their $1,000,000+ 401(k) balances. And younger folks love to shout from the top of their lungs how much they make every month online. After a while, this starts to get old.

Financial writers, like yours truly, will also begin to write with more humility. A downturn helps remind me that the focus of Financial Samurai is on learning so we can become better investors, better partners, better citizens, and ultimately happier thanks to the freedom money buys. My finances are used for illustrative purposes only because nobody should give a damn about my wealth except for my family.

As investors, it’s important to constantly remind ourselves that over the long run we are not smarter than the market. We must not confuse brains with a bull market, nor should we confuse stupidity with a bear market.

5) A chance to finally build your long shot. If it wasn’t for the 2008-2009 financial crisis, Financial Samurai would never have been born. Without Financial Samurai, I wouldn’t have been able to have as much carefree freedom as I have today.

The downturn made me fear for my job and my wealth so badly that I finally decided to do something about my fear. We’re nowhere near financial crisis-level panic today, but the correction that began in February 2018 reminded me of the stress I felt 10 years ago.

If you depend on only your job and your investments to keep you financially secure, a violent correction is the perfect time to start brainstorming new ways to make money. Yes, it helps to whip your spouse into working harder and longer so you can just relax, but spouses sometimes also could lose their jobs and investments.

For most people, investments should be considered a tailwind for financial growth. Building a business where you own most of the equity, performing so well at your job that you get regular raises and promotions, and aggressively saving and investing for a long period of time are what really make you wealthy over the long term.

A Refocus On What Matters Most

If you are not careful, money can suck up all your time and make you a little crazy. During one of the -4% days I realized I was already on my computer for 2.5 hours straight watching the markets burn. I was reading everything I could about the why, the what next, and what to do.

Once I realized my glued obsession, I shut my laptop, went downstairs to see my wife and son, gave them both big hugs and kisses and started to play. After all, the point of financial freedom is to not worry about money.

In 20 years, this correction won’t make a lick of difference. Don’t forget to enjoy your life during the process. If you need me, I’ll be finish up my underground bunker just in case the world comes to an end.

Related: Investment Strategies For Retirement Based On Modern Portfolio Theory

Readers, what are some other silver linings due to a stock market correction?

The post Silver Linings Of A Stock Market Correction appeared first on Financial Samurai.

Contingency Plans For A Digital Bank Run

When the S&P 500 futures were pointing to another -5% opening on February 6, 2018 I got excited. After all, the S&P 500 closed down 4.5% on February 5. I get aggressive whenever the stock market corrects by 10% or more because history has shown positive returns in subsequent days and months.

History of stock market corrections

The initial down 5% move was blamed on the 10-year bond yield jumping to 2.85%. But since the 10-year bond yield declined from 2.85% to 2.75% after the 5% stock market drop, and futures were signaling another 5% drop in the stock market, I figured it was time to deploy some significant cash. Fundamentally, corporate earnings growth and economic indicators were still sound.

Armed with $200,000, my plan was to use $100,000 to buy the morning gap down and deploy the remaining $100,000 throughout the day just in case the stock market panicked even further (you just never know). I set my alarm clock for 6:15am just in case, brushed my teeth, sat on the toilet, and fired up my Fidelity account to put in my $100,000 buy order.

Preventing A Digital Bank Run

Tried to log on between 6:25am – 7:30am and couldn’t

Of course, when I tried to log onto Fidelity, I couldn’t! I remember this happening to me several times in the past. So, I just kept on trying, all to no avail. While all the previous times, failure to be able to log on immediately was simply annoying, this time it was important because I had some serious cash to put to work compared to my usual $5,000 – $20,000 buy orders.

As you probably already know, the market went from down ~4% at the opening to finish up ~2% that day. We’re talking a 1,000+ point swing on the Dow. My inability to place timely buy orders caused me to lose out on potential gains of up to $16,000. Once I finally got online, I ended up investing only about $20,000, or 10% of my original plan for that day as prices were not as attractive.

I wondered whether other people had the same issue of not being able to log onto their online brokerage account. From the feedback I got over social media, it looks like Fidelity, Merrill Lynch, TD Ameritrade, and some robo-advisors went down as well.

Could it be that financial institutions are purposefully shutting their digital doors to prevent a bank run? I run a website and have had many talks with my system administrator on how to keep Financial Samurai up 99.9% of the time. You would think with multi-million dollar technology budgets, online brokerage firms wouldn’t have frequent outages anymore.

The only time Financial Samurai was down for more than several hours was when a construction worker accidentally sliced a main internet cable underground. Whenever there is a traffic surge or anticipated traffic surge on Financial Samurai, we have proper caching in place. I could tap some keys to shut down my site as well, but I won’t.

If the online brokerage firms are not purposefully shutting their digital doors, then there is some serious incompetence going on because people’s livelihoods are being affected.

Merrill Lynch trading downIf you are an investor, you’ve got to ask yourself this question: during a large and sustained market correction, will you be able to place trades or access your capital?

Based on the historical track record of online brokerage accounts, it’s hard to say yes with full confidence. Therefore, it’s important to develop a contingency plan in anticipation of the next bank run.

Please note I’m not a trader. I’m a long term investor who is trying to build a risk-appropriate portfolio to provide a financial tailwind for my family. Given I have dependents, I need assurances my money will be there if truly needed. If you are a trader, having a contingency plan is important as well because you could miss out on big gains or get wiped out if you cannot exit.

Contingency Plans When Market Freaks Out

1) Have two or more investment accounts. During the Fidelity outage fiasco, I kept trying to log on to their site for 45 minutes until I gave up and decided to do something else. I could have bought stock in my Citibank wealth management account, which was accessible, but by the time I remembered to do so, the stock market was already in the green and I didn’t want to chase. Therefore, the next time there is some huge market move, have all your investment accounts ready to go at once. Unless there is some type of online brokerage conspiracy, hopefully at least one of your accounts will work.

2) Create staggered limit orders before the market is open. I could have potentially bought the gap down on February 6, 2018 if I had put in staggered limit orders the night before or way early in the morning. For example, if the futures were portending to a 5% gap down, I could simply put a limit order on a S&P 500 index fund 5%, 4%, and 3% lower. The same goes for buying individual securities, but their opening prices will be harder to gauge. I just don’t like putting in large limit orders because things change so quickly.

3) Make a phone call. It never occurred to me in this digital age that I could just call Fidelity to place a trade. Perhaps they would have jammed me with a 10 minute hold period, but I don’t know for sure. Again, everything was moving so fast that by the time I could have gotten hold of a live person, the markets would have moved. Therefore, the strategy is to call before the market opens to deliver the trading instruction before things get too hectic. It’s just hard to know exactly what the market will do because the futures market isn’t a 100% reflection of normal market trading.

Dow Jones intraday chart during Feb 6, 2018 panic

Feb 6, 2018 DJIA intrada day chart. Tried to buy the open but couldn’t, then the Stocks app on my iPhone froze, hence the straight line.

If There Truly Is A Bank Run

So far, we’ve just discussed three no-brainer things we can do if we wanted to make a trade, add, or withdraw capital. You’re never going to get your timing right, even if you are a full-time trader, so don’t beat yourself up too badly if you miss things. But if you can envision things getting really bad, then it’s probably a good idea to spread around your capital across various banks, and limit each account to $250,000 per person.

The standard FDIC deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.

For example, a revocable trust account (including living trusts and informal revocable trusts commonly referred to as payable on death (POD) accounts) with one owner naming three unique beneficiaries can be insured up to $750,000. This is straight from the website.

If you shorted volatility, you got taken out on a stretcher

During times of uncertainty, everybody needs to do a thorough rundown of their cash holdings. It’s cash that allows you to survive a prolonged downturn without having to sell anything at fire sale prices. It’s cash that allows you to take advantage of panic selling. And it’s cash that allows you to sleep better at night so you can be energized to take care of your family every day.

As for the future of the stock market, I’m still relatively bullish if the 10-year bond yield doesn’t breach 3%. I don’t want to see another 5%+ gap down again, but if there is, I’ll be ready to buy.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Related: Things To Do Before Making Any Investment If You Don’t Want To Lose All Your Money

Readers, have you ever been blocked from accessing your online investment account? Do you think these financial institutions purposefully deny access to stem any large transactions? How do you protect yourself from a digital bank run? Is this the beginning of the end of the bull run?

The post Contingency Plans For A Digital Bank Run appeared first on Financial Samurai.

It’s Time To Start Worrying About The Housing Market Again

Housing bust fearsDespite publishing cautionary posts about investing in the stocks, bonds, and alternatives at current levels, the biggest caution I should be writing about is taking out massive debt to buy property at record highs.

If you lose 50% on your stock and bond portfolio, you’ll be upset, but fine. If your property loses 20% of its value, however, this means you’ve lost 100% of your 20% downpayment. In this scenario, you’ll also probably still be fine – if you don’t have to sell. But when property prices correct by 20% or more, many people become forced sellers because they’ve also lost their jobs.

I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I’ve highlighted below should you proceed with a property purchase today. 

Things To Know Before Buying Property in 2018

1) Rents have softened from peak levels in many of the most expensive cities. Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods. For example, research whatever comparable New York property you want to buy today that was sold for in March 2016 and aim to buy at a 14.8% discount to the March 2016 price because that’s how much rent prices are down.

In 2017 I experienced softening rents first hand when I tried to find replacement tenants for my SF rental house at  a similar rent of $9,000 a month. After 45 days of aggressive marketing, I only got two offers, both for $7,500 (-16.7%). I even hired a rental listing agent for two weeks to find people for at least $8,000 and he failed. As a result, I sold. Pricing pressure starts at the most expensive markets and works its way down. The large supply of condos in many expensive cities has really put a damper on rents and housing prices.

Buying at peak prices when rents have fallen from peak levels means you are paying a higher valuation. This is a dangerous scenario when prices are at record highs.

Rental prices softening around the country

Rents in 12 of the most expensive markets as of January 2018

2) Mortgage rates are rising. With the surge in the 10-year bond yield to 2.85%, mortgage rates are following suit. My last mortgage refinance was in 2016 when I locked in a 5/1 Jumbo ARM at 2.5%. This same mortgage is now 3.58% based on the latest rates. In other words, if I were to take out the same mortgage today, my monthly payment goes from $3,951 to $4,535, a 14.8% increase. A 14.8% increase is significant because average income only increases by ~2% a year.

5/1 ARM Rate Chart 2018

5/1 ARM Mortgage Rate Breaking Out

While 3.58% is still relatively low for a 5/1 ARM, everything is relative, especially since property prices in some cities have risen by double digits since 2012. If the average interest rate for the 5/1 ARM were to rise to recession levels 10 years ago, a $1,000,000 mortgage payment would go to $6,321, a whopping 60% increase.

5/1 ARM 10 Year Historical Chart

10 year history of the 5/1 ARM mortgage rate

Here are the latest mortgage rate averages as of February 2018. You can check for a free quote hear with LendingTree, a stock I should have bought for under $100 a share when I first met up with senior management a couple years ago. TREE has tripled in price.

Latest mortgage rates 2018

3) Prices have blown past their previous peaks in many cities. While every city is different, if you look at the prices in Denver and Dallas, you’ll find that the prices are roughly 45% higher than they were in 2006-2007. This price performance is similar to San Francisco’s. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.

The US median existing home price is about 12% higher than its previous peak, which is a modest rise since over 10 years have passed. As a real estate investor, your goal is to invest in markets that have both underperformed and have the potential to catch up.

San Francisco historical home price and home sales by year

Do you think you should be selling or buying at these prices?

4) Tax reform takes time to negatively impact housing prices. Conceptually, we all know that limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets. Until homeowners file their 2018 taxes in 2019, however, no financial pain will be felt.

Some will argue that lower income taxes will offset these deduction limitations. Perhaps. But nobody really knows for sure until 2019 tax returns are filed and accepted. Tax reform is a headwind, not a tailwind for coastal city property price appreciation.

5) It takes a while to recognize a peak. The housing boom that began in January 1996 ended in March 2006. But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked. Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2009, people started to panic. Then Lehman Brothers went under on September 15, 2009, a full two and a half years after the housing market peaked. And things got even worse!

Below is a great chart that shows how badly housing prices corrected in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. We’re now going into the 8th year of a bull market.

US housing price boom bust by city

Keep Your Unbridled Enthusiasm For Housing In Check

The mass media and the real estate industry will focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2018 and beyond. If you look at property nationwide as a whole, prices will probably continue to go up in the low single digits percentage-wise.

However, if you look at individual markets, you are beginning to see cracks in the foundation. I don’t recommend leveraging up to buy expensive coastal city real estate as an investment at this point in the cycle. Look to the heartland instead, where valuations are much cheaper and net rental yields are much higher.

If you’re dying to buy a primary residence today, make sure you can withstand a 20%+ correction over a five year time frame, if history is any guide. If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn.

Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. I doubt we’ll have a correction as violent as the last one given lending standards became far tighter after the housing crisis. All the same, please buy and borrow responsibly.

Related: Buy Utility, Rent Luxury: The Real Estate Investing Rule To Follow

If you are buying property in this market, what are your reasons for buying? What are your reasons for not buying earlier? What are some bullish and bearish anecdotes you’ve observed in your respective property markets? When do you think the peak of the real estate cycle is? What are some worries you have about the property market?

The post It’s Time To Start Worrying About The Housing Market Again appeared first on Financial Samurai.

Here’s When You’ll Become A 401(k) Millionaire

401(k) MillionaireThanks to the unrelenting rise in the stock market since 2009, there’s now a trend on social media to share your 401(k) balance, especially if it’s over a million bucks. Despite the distastefulness of bragging, just the fact that more people are talking about saving for retirement via their 401(k) is a good thing.

Make no doubt about it, being a 401(k) millionaire is very impressive given the maximum contribution limit has never been higher than 2018’s contribution limit of $18,500. When I was first able to contribute to a 401(k) in 1999, the maximum contribution limit was only $10,000. Check out the chart below for details.

Historical 401k Contribution Limits Up To 2018

Here’s When You’ll Become A 401(k) Millionaire

Given we know the various portfolio returns based on asset allocation in my post, How Much Investment Risk You Should Take In Retirement, one can simply do a little math to figure out roughly when someone will become a 401(k) millionaire if they are starting with $0, max out their 401(k) this year and every year after, and return the average annual return of the portfolio composition since 1926.

100% Equity Allocation (10.2% historical return): 401(k) millionaire in 18 years.

80% Equity / 20% Fixed Income (9.5% historical return): 401(k) millionaire in 19.5 years.

70% Equity / 30% Fixed Income (9.1% historical return): 401(k) millionaire in 19.7 years.

60% Equity / 40% Fixed Income (8.7% historical return): 401(k) millionaire in 20.5 years.

50% Equity / 50% Fixed Income (8.3% historical return): 401(k) millionaire in 21 years.

40% Equity / 60% Fixed Income (7.8% historical return): 401(k) millionaire in 21.5 years.

30% Equity / 70% Fixed Income (7.2% historical return): 401(k) millionaire in 22.2 years.

20% Equity / 80% Fixed Income (6.6% historical return): 401(k) millionaire in 23 years.

100% Fixed Income (5.4% historical return): 401(k) millionaire in 25.5 years.

100% Cash (1% assumed return): 401(k) millionaire in 44 years.

Of course, historical returns cannot guarantee future returns, but after a 10-20 year period of investing in your 401(k), your average annual portfolio return will likely begin to mimic the historical averages. Further, if your company provides a generous 401(k) match or profit sharing plan, then it is likely you will become a 401(k) millionaire sooner.

For those readers with more than $0 in your 401(k), simply find an online compound interest calculator and input your data for your specific results. The good thing is, all the numbers above can be considered the maximum longest amount of time it will take to get to 401(k) millionaire status in a normal market.

Let’s say I’m 40 years old with $500,000 in my 401(k) and will max it out every year. I’ve got a 70% Equity / 30% Fixed Income portfolio and expect to earn 9.1% a year based on historical averages. Using a compound interest calculator, I’ll simply input my current principal, annual addition, interest rate, plus a guess number in the Years to Grow field. When the future value equals roughly $1,000,000, you’ll know about how long it will take for you to achieve 401(k) millionaire status.

401k Millionaire

The Key To 401(k) Millionaire Status Is Longevity

I worked for 13 years for two employers and got my 401(k) balance up to ~$400,000. But once I left my job in 2012, I rolled over my 401(k) to an IRA. If I worked for seven or eight more years, I probably would achieve a $1,000,000 401(k) balance due to strong returns and great company profit sharing. But alas, I’m not a 401(k) or even a rollover IRA millionaire.

The key to 401(k) millionaire status is being able to work at an employer with a great 401(k) plan for as long as possible. The year before I left my employer, I was receiving ~$20,000 a year in company profit sharing.

Before you decide to leave your cushy job, please first calculate what you are forgoing in company benefits. The same goes for people who are contemplating leaving higher paying, stable jobs to go work for startups which may have no 401(k) plan or most definitely have no 401(k) matching benefit since most startups are loss making.

Let’s review my 401(k) savings targets by age and see when various age groups of savers may become 401(k) millionaires if they are able to work at a job with a 401(k) plan for several decades.

401k savings targets by age

Click to learn more about the methodology

Based on my 401(k) by age estimates, older age savers (50+) should be able to become 401(k) millionaires around age 60 if they’ve been maxing out their 401(k) and properly investing since the age of 23. If not, then best of luck with Social Security, a paid off house, and hopefully after-tax investment accounts.

Middle age savers (35-50) should be able to become 401(k) millionaires around age 50 if they’ve been maxing out their 401(k) and properly investing since the age of 23. I’m expecting to be a 401(k) millionaire when I turn 50 in 2027 by contributing to a Solo 401(k) plan.

Younger age savers (20-34) should be able to become 401(k) millionaires around age 40 if they’ve been maxing out their 401(k) and properly investing since the age of 23.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Treat Your 401(k) As An Insurance Policy

According to Vanguard, the average 401k plan balance was ~$100,000 in 2017 and the median 401k plan balance was ~$27,000. If you get to 401(k) millionaire status, pat yourself on the back.

The funny thing about your 401(k) is that it doesn’t really matter if you have millions in your account. You can’t tap the funds without paying a 10% penalty before age 59.5 anyway, so it’s more like a retirement insurance policy. What you should really be doing is building up your after-tax investment account aggressively so that you can retire well before you are 59.5.

As you’ve only got one life to live, you might as well figure out a way to escape the grind sooner, rather than later. Not a day goes by where I’m not thankful for aggressively building a portfolio of non-401(k) investments in my 20s and 30s to have the courage to leave my 401(k) behind.

Readers, when do you plan to become a 401(k) millionaire? Are you aggressively building your non-401(k) investment balance?

Recommendation: Run your 401(k) through Personal Capital’s 401(k) Investment Fee Analyzer to see how much you’re wasting in fees. I ran mine through and found out I was paying $1,748.34 a year in fees I had no idea I was paying. After discovering how much I was wasting on actively managed mutually fund fees that didn’t have a perfect track record for beating their respective benchmarks, I switched to low cost index fund ETFs. Their Investment Checkup tool also allows you to analyze your investment risk exposure and make appropriate adjustments. 

401(k) Fee Analyzer By Personal Capital

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