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In Search Of FIRE: Financial Samurai Retirement Portfolio Review

It hit me the other day that I’ve got to get my act together if I plan to retire a second time soon.

The first attempt at retirement lasted for just under a year until I started feeling too sheepish telling anyone I was retired at 34. Although my retirement portfolio was generating about $80,000 a year in passive income at the time, I started itching for more.

Seven years later, I’m running out of steam. I’ve already conducted multiple calls with boutique investment banks, private equity shops, and larger media companies on the potential sale of Financial Samurai after its 10-year anniversary mark in July 2019.

I’ve also tentatively convinced my wife to go back to work once our son turns two years and five months old this Fall. Spending 29 months as a stay at home parent should be long enough to feel like a parent did the best he or she could without feeling too guilty for going back to work. But we shall see when the time comes.

The final thing I need to do is make sure our after-tax retirement portfolios are generating enough income to cover our desired living expenses just in case Financial Samurai is sold and my wife can’t get a reasonable job in a field of interest.

I feel blessed to be able to do all the things I love since leaving full-time work in 2012 – coaching high school tennis for the past three years, writing almost daily on Financial Samurai, traveling around the world, and spending time being a stay at home dad since early 2017.

But all good things come to an end. We must frequently adjust in order to keep the good times going for longer.

How To Build A Healthy Retirement Portfolio

Before discussing my retirement portfolio’s latest income figures, I’d like to share five tips for everyone to follow to build their own healthy retirement portfolio.

1) Save until it hurts each month. Most people think that saving for retirement in their 401(k) or IRA is enough, but it is not. In order to have the optionality of retiring early or ensuring a healthy retirement at a more traditional retirement age, it’s important to max out your 401(k) while also contributing at least 20% of your after-401(k), after-tax income to an after-tax investment portfolio.

The after-tax retirement portfolio really is the key to early retirement since most people can’t access their pre-tax retirement accounts without a 10% penalty before age 59.5.

2) Focus on income producing assets. After you’ve had your fill of high octane growth stocks as a young person, it’s time to focus on income producing assets as you get closer to retirement. Dividend generating stocks, certificates of deposit, municipal bonds, government treasury bonds, corporate bonds, and real estate should all be considered in your retirement portfolio.

When I was younger, my favorite type of semi-passive income was rental property income because it was a tangible asset that provided reliable income. As I grew older, my interest in rental property waned because I no longer had the patience and time to deal with maintenance issues and tenants. Instead, my interest in REITs and real estate crowdfunding grew since the income generated is 100% passive.

3) Start as soon as possible. Building a large enough early retirement portfolio takes a tremendously long time largely due to declining interest rates since the late 1980s. Gone are the days of making a 5%+ return on a short-term CD or savings account. You need to save early and often to make compounding work most for you.

I knew I didn’t want to work 70 hours a week in finance forever. As a result, I started saving every other paycheck and 100% of my bonus starting my first year out of college in 1999. By the time 2012 rolled around, I was earning enough passive income to negotiate a severance and retire early.

4) Calculate how much retirement income you need. It’s important to have a retirement income goal. Otherwise, it’s too easy to lose motivation and focus. A good goal is to try and generate retirement income to cover all basic living expenses such as food, shelter, transportation, and clothing. Once you hit that goal, focus on covering your wants.

If your annual expense number is $50,000, divide that figure by your expected rate of return or comfortable withdrawal rate to see how much capital you will need to save. If you expect to earn a 4% rate of return, then you would need at least a $2,000,000 after-tax retirement portfolio, and closer to $2,200,000 – $2,500,000 due to taxes.

5) Make sure you are properly diversified. The first rule of financial independence is to never lose money. We saw a lost decade for tech stocks between 2000 – 2010 after the first dotcom bust. For NASDAQ investors, it took 13 years to get back to even.

You always want to be moving forward on your journey to early retirement. Please do not confuse brains with a bull market.

Financial Samurai Retirement Portfolio Review

Since retiring the first time around in 2012, I have yet to stress test my after-tax retirement portfolios because I received a severance that paid out enough money to survive for five years.

While I was living off my severance income, my wife worked until she negotiated her own severance at the end of 2014. She is three years younger than me. Having her work and provide healthcare was very comforting and allowed me to reinvest 100% of our after-tax retirement portfolio income.

Then once both of us weren’t working full-time jobs in 2015, Financial Samurai started generating a livable income as well. This positive sequence of events is why planning is so important. It’s frankly why quitting your job to retire early is a suboptimal move.

Ideally, we want to live on between $15,000 – $18,000 a month in after-tax income to live our best lives while raising one or two children in expensive San Francisco or Honolulu. Using a 28% effective tax rate, we’re talking a target $250,000 – $300,000 a year in annual gross retirement income.

Here’s our latest source of income streams to fund our second retirement.

As you can see from the chart, we generate about $16,300 a month in after-tax retirement income if we use a 20% effective tax rate. The effective tax rate for investment income is lower than W2 wage income. This is something to think about when forecasting your own retirement income needs from investments.

$16,300 a month or $195,600 a year in after-tax retirement income should be more than enough to provide for our current family of three as our all-in housing cost is less than $6,000 a month. Once all our housing cost is covered, our costs for food, transportation, and everything else aren’t too bad.

$16,300 a month will also allow us to continue saving at least 30% a month for a rainy day (~$5,000). Because we’ve been in the habit of saving at least 50% of our after-tax income since graduating from college in 1999 and 2001, it would feel foreign to not continue saving in retirement.

The main anticipated increase in cost is preschool tuition starting this Fall at $1,800 a month. The other potential increase in cost is if we are blessed with another child. Ideally, we’d love to have two, but once you hit your late 30s or early 40s, the chances of a natural birth are only about 5%. Hence, we will consider fostering or adopting as well.

If we stay in San Francisco long term, our goal is to send our boy to public school after preschool if he can win the SF public school lottery system. If our son does not get into a reputable public school close by, then we’ll be forced to spend about $3,000 a month for elementary school and likely $5,000 a month for high school when the time comes.

These potential grade school tuition costs are the main reason why I’m striving towards $18,000 a month in after-tax retirement income, or ~$2,000 a month higher than current levels. I’ve got three years to make this goal a reality.

Below is an analysis of the major retirement income categories.

Risk-Free Savings: $1,045/month (5% of total)

I love risk-free savings, especially after the Federal Reserve hiked interest rates multiple times since the end of 2015.

To be able to earn ~2.45% risk-free after making massive gains in the stock market and real estate market since 2009 sparks joy! Gone are the days of pitiful 0.1% savings interest rates.

My target is to always have between 5% – 10% of my retirement income and net worth in risk-free investments. You just never know what might happen in the future.

Stocks & Bonds: $7,560/month (37%)

After a tremendous rebound in the stock market in 2019, I decided to asset allocate more towards 3-month treasuries in my main House Fund portfolio.

As of now, my House Fund portfolio is roughly 20%/80% stocks/bonds because my plan is to buy another property within the next 6-12 months.

The House Fund portfolio had a $400,000 swing (-13%, then +23%) and I want to ensure that I protect the principal going forward. My other main public investment portfolio is closer to 60% stocks / 40% bonds. I plan to gradually shift the weighting closer to 50%/50%.

Below is my public stock and bond portfolio performance +9.2% vs. the S&P 500 +15.9% year-to-date according to Personal Capital’s performance tracker. With the income from my existing bond holdings, I should have relatively no problem closing out a 10-11% total return for the year.

As I edge closer towards retirement, my main goal is to minimize volatility and try and achieve a 5% – 7% total return equal to 2X-3X the 10-year bond yield.

The rise in short-term interest rates has really been a boon to my bond portfolio income stream. I plan to continue actively investing in 3-month treasury bonds and saving about 80% of my monthly cash flow.

Real Estate: $6,550/month (32%)

Real estate used to dominate my retirement portfolio income (~60%) until I sold a significant SF rental house in 2017 for 30X annual gross rent.

I ended up reinvesting $600,000 of the proceeds in mostly dividend-paying stocks, $600,000 of the proceeds in mostly municipal bonds, and then $550,000 of the proceeds in real estate crowdfunding ($810,000 total) in order to not lose too much real estate exposure.

I did get a surprise $45,598.04 distribution on 4/16/2019 from the RS DME fund where I have a total of $800,000 invested. The fund has 17 investments, across 12 states, and 6 property types. My Class A Austin Multifamily property was sold for a 24.6% return over two years.

So far the fund is returning a 10% cash-on-cash return net of fees. I’m hoping the end IRR is much higher after the equity investments are sold within the next 2-3 years.

For retirement portfolio calculation purposes, although I received $45,598.04 in distribution, I’m only inputting the profits as passive income to stay conservative. Perhaps there will be another significant distribution later in the year.

Once about half my RS DME fund distributions are returned, I will look to reinvest about $300,000 in a couple Fundrise eREITs and around $100,000 in individual RealtyMogul sponsored commercial real estate investments. I already have a decent sized position in OHI and O, two publicly traded REITs.

So far I like the simplicity of investing in a real estate fund versus spending time trying to pick the best deals. But if I’m going to retire again, I’ll have more free time to do due diligence.

My goal is to always have at least 30% of my net worth exposed to real estate as it is my favorite asset class to build long term wealth.

I haven’t raised the rent on my SF 2/2 condo in almost three years. At $4,200 a month, the property is now under market value by $300 – $400 a month. But I plan to just keep the rent below market rate because they’ve been good tenants. I’ll wait until one or both decides to move out before raising the rent.

Our Lake Tahoe property is coming back to life! We’ve had a fantastic winter in 2018/2019, which has resulted in a roughly doubling of net rental income over last year.

As the storms have subsided, we plan to finally take our boy up to the mountains. Spending time with my own family has been a dream of mine since I first bought the property in 2007.

Alternative Income: $5,220/month

Online books sales for How To Engineer Your Layoff has steadily increased each year since the first edition was published in 2012. I wrote a new foreword for 2019 and updated some data.

My wife has spent the past four months updating the book for a 3rd edition launch in 2H2019. The 3rd edition will have even more case studies and strategies to guide people to better negotiate a severance. We will likely raise the book’s price by 15% as well.

The amount of positive feedback we continually get from readers who’ve successfully negotiated their severance has been tremendous. If you plan to retire early, it behooves you to try and negotiate a severance. You have nothing to lose.

To generate $50,400 a year in almost passive online income from a book would require amassing a $1,008,000 portfolio generating 5%. Not needing to have capital is why I’m so bullish on building online real estate as well. There is almost no risk except for putting your education and creativity to use.

There’s not too much to report on my venture debt fund investments. I’m still waiting to get paid in full for my first venture debt fund from five years ago. The second venture debt fund just did a 25% capital call for a total of 92% of the capital committed.

Finally, I invested in my first venture capital fund. I did so because I believe in the main general partner who has a good investing track record. This is a 10-year fund by Kleiner, Perkins, Caufield, & Byers, where I don’t expect to see any income until perhaps year five.

Enough To FIRE

Based on this deep-dive analysis, my wife and I should have enough to live a comfortable retirement lifestyle in San Francisco or Honolulu.

Keeping lifestyle inflation at bay while steadily growing our investment income has been key to building our retirement portfolio. For example, we have the ability to buy a house 3X the cost of our existing house which we purchased in 2014 but have chosen not to do so, despite the addition to our family.

What I find most interesting is that even though it’s clear that mathematically I shouldn’t have a problem retiring, I still have trepidation about selling Financial Samurai and retiring from my second career.

Change is always hard, especially after you’ve spent a decade doing one thing. Giving up a steady income stream is also scary when you’ve been through the 2000 dotcom bubble and the 2009 financial crisis and now have a family to support.

Eventually, we’ll need to start spending our retirement portfolio income. But as of now, we plan to continue reinvesting 100% of the investment proceeds and saving 80% of our active income until a retirement decision is made.

Related: Ranking The Best Passive Income Investments For Retirement

Readers, any of you planning to retire within the next 12 months? If so, what type of deep dive retirement portfolio analysis have you done to ensure that financially everything will be OK once you retire? Do you see any holes in our retirement portfolio we need to work on shoring up? Featured art by Colleen Kong-Savage.

The post In Search Of FIRE: Financial Samurai Retirement Portfolio Review appeared first on Financial Samurai.

from https://www.financialsamurai.com/in-search-of-fire-financial-samurai-retirement-portfolio-review/

[ronaldmrashid]

Reflecting On Being A Stay At Home Dad For Two Years: Eight Takeaways

I still remember the day my son was born like it was yesterday. After only about an hour of labor he joined us in this world at 11:58 pm. It was the greatest moment of both our lives.

From that time forward, we pledged to care for him as best we could. In a big way, all the years of saving and investing were to prepare for this moment that we could both be stay at home parents.

As first-time parents, we didn’t know what to expect. So we figured having both of us care for our boy would be the optimal way to go.

Here’s my personal reflection as a stay at home dad for the past two years. I’ve sent this post to his e-mail account for him to read when he’s a little bit older.

Reflecting On Being A Stay At Home Dad For Two Years

1) Losing income is hard, but losing time is harder. Due to being a stay at home dad for two years, I’ve lost out on between $400,000 – $1,000,000 in income. With 18-20 years of experience in finance and online media, getting a $200,000 – $250,000 a year job + restricted stock units is very possible in the SF Bay Area. If I were to go back to banking, my base salary would be $250,000 a year + bonuses equal to 0% – 200% of base salary.

Although losing out on so much income is hard given we now have more expenses taking care of our son, I wouldn’t miss out on the first two years of my son’s life for any amount of money.

You could give me a billion dollars, and if I had to be away from home for 14 hours a day to make that money, I would decline. I’ve spent time with billionaires before, and they are just like you and me, except they fly private everywhere.

Over the past two years, I have witnessed his every milestone: his first smile, his first rollover, his first crawl, his first steps, his first words, and so many more. Each milestone witnessed felt like a blessing. I hope due to all the time both of us have spent with him, we will have an even stronger bond as he grows up.

I know I would have regretted pursuing more money over time with my son. The guilt would have consumed me.

I’ve gotten to know a couple of nannies over the two years and they have told me how they won’t tell the parents about new milestones so that the parents can think they are first time witnesses.

I knew I could always make more money but I could never create more time with our son.

Related: Career Or Family? You Only Have To “Sacrifice” At Most 5 Years

2) Hardest job in the world without a doubt. For all the stay at home parents out there, I salute you! And for all the single parents out there, you have my deepest admiration.

Working 14 hours a day in banking where there’s constant pressure to produce is a walk in the park in comparison to full-time fatherhood.

With full-time fatherhood, you are on 24/7 due to risk of injury or death by the child. The first year of life is the most fragile, which is why you’re always on high alert for choking, suffocation, tumbles, running into a corner, and so forth.

I kept reading stories about Sudden Infant Death Syndrome (SIDS), which were all so incredibly heartbreaking. For the first year, this paranoia wouldn’t let me sleep uninterrupted for more than 3-4 hours. Back is best and get rid of all the blankets and pillows in the crib please.

Once your child starts to verbalize his or her desires, it’s all about repetition. My son loves garage doors and will say the words “garage door,” “double-wide garage door,” “quadruple wide brown garage door” etc over and over again. He’ll then open and close garage door toys a hundred times in a row. I’ve got to repeat the words and open and close the doors with him. Otherwise, he knows I’m not paying attention.

I’ve also heard whines, screams, and crying 3 – 6X a day for 730+ days in a row. In the beginning, this was quite a shock to the system because we never had any of this since my wife and I started shacking up in 2001. Our boy is a top 1% chatterbox and super determined individual. If he can’t do something or doesn’t get what he wants, he definitely makes himself heard or felt!

Over time, things are getting better as he’s able to verbally communicate his needs and desires. He’s no longer as frustrated because he can tell us he’s tired, thirsty, hungry, sad, and so forth.

And here’s the kicker. My wife did around 70% of the care-taking largely due to nursing needs, and I still felt being a stay at home dad was the hardest thing I’ve ever done. One must develop incredible patience and endurance to survive.

3) Have children and the money will come. Although both my wife and I gave up healthy salaries to raise our boy full-time, we were somehow able to make more money each year after he was born.

When you have a child, your mind and body go into overdrive to try and provide as much care and support as possible. As a result, you gain even more energy to find ways to financially support your family.

In my case, instead of waking up between 5:30 am – 6:15 am to start the day and work on Financial Samurai, I began waking between 3:30 am – 4:30 am to try and get more done before our son would wake up between 7 am – 8 am.

I did not quit because I knew I could not. My family depended on me.

If he has had a particularly poor sleeping night, I would try and take over for a couple hours to allow for my wife to sleep in or decompress. I’d also try to nap as many times as possible during his mid-day nap so that I too could recharge for the afternoon and evening sessions.

After our boy went to bed, usually between 7:30pm-9pm, it was often Netflix, catching up on work stuff I’d postponed during the day, and preparing myself for the next day.

Once he turned 24 months old, our son now has the ability to go from 6:30am – 7:30pm non-stop with no naps several days a week.

Just the other day I took him on a 1 hour 20 minute walk in the morning around our hilly neighborhood. I would have bet anything he’d take a two hour nap after lunch. But he just kept right on going until 8pm!

Overall, we are talking about 4:00am – 10pm days on average with a 45 minute nap in the middle of the day.

As the saying goes, “the days are long and the years are short.”

4) Easy to gain weight and get sick. When all you’re doing is caring for your baby at home, it’s extremely easy to gain weight. I went from around 168 lbs to 173 lbs, even though I was consciously trying not to overeat.

But after about the 18th month, I started losing weight and am back down to about 166 – 169 lbs. The main reason why is because I’ve started to take my boy on almost daily walks. I also went back to playing tennis three days a week.

For men who are looking to have a baby and stay at home, I suggest trying to lose 5 – 10 lbs before your baby is born. That way, you’ll have a 5 – 10 lbs buffer for the inevitability.

Another downer is the increased frequency of getting sick after the first year. Our boy got his first cold at 12 months old. Then he started getting sick about once a quarter as we interacted more with the public.

His sickness spread to us, and we found ourselves frequently battling colds as well. Luckily, neither my wife or have have been sick at the same time.

Ideal Weight Chart For Men

5) Nannies aren’t paying close enough attention. I’m really sad to report this but after spending over 150 sessions in a public setting (park, museum, playground, etc), the vast majority of nannies (90%+) are on their phones the entire time they are supposed to be watching over your child.

Every time I play chase with my boy, there will inevitably be 2-3 kids who will play along because their nannies are not playing with them. I’ve seen countless falls by 11-16-month-olds just learning to walk because their nannies are not paying attention.

I often wonder whether one of the reasons for slow speech development is because the nanny simple does not spend enough time speaking to their child or describing things to the child as they happen. We parents should be verbally describing everything our children are doing and seeing to help them learn. But with nannies, what I’ve observed is largely silence.

If you are having difficulty deciding whether to return to work or staying home to take care of your child, I recommend you chose to stay home if your can afford to. Nobody will care more about your child than you. It’s not even close.

Many of us are addicted to our mobile phones. The nannies I’ve seen take it to the next level. It’s like they’re getting paid for being on the phone!

If you go the nanny route, I would explicitly tell them to stay off their phones during play time. Whether they do so or not is up to them. But at least you’ve voiced your desires and there’s a greater chance your nanny will follow your instructions.

It is completely sad and a wee bit alarming to have a little one come up to me, a stranger, and ask me to play with them because they are being completely ignored.

6) There was no discrimination. You sometimes hear stories about moms excluding dads from conversations or moms whispering mean words about dads being stay at home parents.

Out of all my outings, I have never once been discriminated against or been made to feel embarrassed or bad for being a stay at home parent. None of my friends have taken jabs at me either.

Maybe it’s because I live in San Francisco, where we’re very accepting of people. Maybe it’s because my wife was also with me during most public settings. Or maybe it’s because I’m a proud dad who is more impervious to the disapproval of others.

Don’t let our insecurities run amuck.

Once I went with a moms group walk around Golden Gate Park and we decided to take a break under a large tree. All the moms started to breastfeed their children, but only one had a shawl. It frankly felt weird to be around the group, so I decided to take a short walk instead.

For all the stay at home dads out there who would rather say you retired early, are a freelancer or entrepreneur, you don’t have to be ashamed that your wife or partner is bringing home the bacon.

Embrace your occupation as a stay at home dad. It is the most important job in the world!

7) Wish I started sooner. I find that men are a little to relaxed about when to have children because we don’t have the same biological deadline as women do. We like to avoid the subject for as long as possible. But this is not fair to women who want to have children. Have a mature discussion early in your relationship.

Physically, I’m still holding up pretty well. But I’m definitely not as limber as I used to be and it takes me longer to recover from a cold or a sports injury. After about age 45, I’m not sure if my body would be able to handle all the necessary bending over and carrying any more.

Having one kid makes me want to have a second. Therefore, it’s good to plan as much as possible. Even if you plan, it might take longer than expected to have a child.

If you know you want to have children, it’s better to have them sooner rather than later. Not only will your body be able to better handle childcare, but your kids might also be able to spend more time with their aging grandparents.

See: When Is The Best Time To Have A Baby

8) You never feel like you’re doing enough. I’m constantly in awe of my wife because of her patience, kindness, and ability to naturally feed our boy when he was a baby.

As a stay at home dad, my son and I have a close connection, but it’s not as close as the connection he has with his mom. As a result, I used to feel a little sad when he cried out for mommy while I was right there playing with him.

What am I, chop liver or something? I’d sometimes think to myself.

Because I’m unable to nurse our boy, I try to make up for my deficiency in other ways: cleaning, driving, grocery shopping, playing, washing dishes, ordering food and so forth. I’d throw myself deep into my work in order to feel the power of being a provider.

Slowly, I’m starting to feel more worthy of being a father. As he gets older I hope all he’ll want to do is play with his old man. It’s just such a weird feeling to never feel like you’re doing enough no matter how hard you try.

Proud To Be A SAHD

After two years of being a stay at home dad, I’m firmly on the side of the rest of the world that provides 6 – 12 months of parental leave after having a baby.

For a woman to return to work within three months seems cruel, especially if a C-section is involved. All a baby wants to do at that age is be with his or her parents.

One doctor said it best, “Nine months to create, nine months to heal.“

Unfortunately, companies aren’t in the business of subsidizing our personal life decisions regarding having children. My hope is that American institutions will soon start to offer some type of token paid parental time off for at least the first child.

At the end of the day, I know my wife and I have tried our very best to raise him so far. Looking back, the two years went by quickly. Looking forward, I’m hoping for many more wonderful experiences.

Are there any stay at home dads out there who would like to share what it was like for you? Stay at home moms feel free to share your thoughts and also how your husband or partner has helped or how we dads can do more.

The post Reflecting On Being A Stay At Home Dad For Two Years: Eight Takeaways appeared first on Financial Samurai.

from https://www.financialsamurai.com/eight-takeaways-on-being-a-stay-at-home-dad-for-two-years/

[ronaldmrashid]

A Stealth Wealth Solution For Real Estate Investors With Kids

If you want to raise better adjusted kids, you probably want to practice some level of stealth wealth so that they don’t grow up spoiled and unable to recognize prosperity.

A couple readers have pointed out that I was raised rich given I had two parents with stable jobs. Instead of having to walk, I got to ride a bicycle to school. I even got a 486 desktop computer my junior year.

Yet, I wasn’t unable to recognize I grew up rich because my parents drove an 8-year old Toyota Camry and we lived in a modest townhouse for the four of us.

Thanks to my parent’s frugal ways, I was highly motivated NOT to mess up my life by slacking off in high school and college. My parents simply did not have a large enough financial buffer to overcome a deadbeat son.

Being unable to recognize their wealth also pushed me to attend a public university, which turned out to be a financially sound choice. If I had attended a private university, I would have felt too much guilt and pressure to prove the expense was worth it.

I still wonder to this day whether my parents are actually much richer than they’ve led me to believe.

My dad still drives a Toyota he bought in 1997. My parents still live in the same old house since 1980. They also never buy any new clothes or luxury items. If there is an early bird special at 4:30pm, my parents are first to get in line!

The Easiest Ways To Stealth Wealth

The easiest ways to stealth wealth are to drive an old economy car and never wear anything expensive. By doing so, you can still send your kids to private school, join country clubs, and go on nice vacations without raising too much suspicion from the outside world.

But what if you are a strong believer in real estate as an investment, don’t like stocks or any other type of asset class as much, and also want to protect your children from spoiling? You’ve also got enough capital to buy a luxury home.

The answer is simple: own a modest primary residence that is no larger than the median-sized home in your city. With your excess capital, buy a second residence as a rental home, second home, or office.

For example, let’s say you live in Austin, Texas where the median home price is ~$370,000. You have the ability to buy with cash one very nice $800,000 home to live in a better neighborhood and gain more real estate exposure. After all, you believe Austin is going to be the next San Francisco.

But if you buy a 6,000 square foot mansion, your kids will obviously know you are rich. Your kids will start asking for larger allowances and nicer things since they’re rational. They’ll probably stop doing chores too. Most of all, they will lose their motivation to work hard because they’ll assume someone will always take care of them.

Instead of buying the $800,000 mansion, buy the average three bedroom, two bathroom, $370,000 home. With your surplus capital, then buy another $370,000 – $430,000 home and turn it into a rental.

This way, you’ll not only increase your child’s chances of having a normal sense of money, you will also better allocate your capital for potentially higher returns and less cash drag.

When your children grow up to be well-adjusted adults, you can then surprise them with a modest home of their own to live in or manage one day while also getting to stay in your primary residence.

You won’t have to go through what a couple of my neighbors go through and have your adult children live back at home with you for many years.

The only “downside” is that you are living in a smaller or less ideal location than you can comfortably afford. But I strongly believe large homes with unused rooms are a waste of money. They are purchased more for ego purposes rather than utility.

Further, if you buy two median priced homes, you own property that is affordable to more people. There is less risk of being stuck with an unsellable property if you one day decide to sell. The market is much more liquid at median price points than at luxury level price points.

A House Is The Most Obvious Wealth Indicator

If your kids return to a luxurious home every day, it doesn’t matter if you dress like a hobo and drive a beater, your cover is blown.

Further, there are plenty of poor people who wear nice clothes and drive nice cars because credit is readily available for such things. Therefore, not everybody will automatically think you’re rich if you have a penchant for Gucci and BMW.

But with your primary residence, it’s just too hard to explain away a mansion. Unlike buying a $200 t-shirt with a credit card, getting a mortgage has much more stringent requirements given the dollar amount and leverage.

With my latest mortgage refinance, even though I’ve showed them liquid assets equal to 3X my refinance amount, I still feel like I’m under interrogation by the CIA. My mortgage officer said he hasn’t worked with anybody with under an 800 credit score over the past 24 months.

At the end of the day, it’s best to own a modest home that comfortably houses your family without a single wasted room. Use the capital you saved by your modest purchase and invest it in another property or asset class of choice to build your net worth over the long term.

Being able to grow your wealth in a low key manner and raise grounded kids is a wonderful combination.

Eventually your kids will realize you’ve been a stealth wealth grandmaster for decades. By then, they’ll be so inspired they’ll follow your lead and instill in your grandkids a healthy relationship with money as well.

Readers, what are some strategies you’ve taken to grow your wealth while minimizing the risks of your children spoiling? Besides being a good role model who walks the walk, what are some other things we can do to help our children create a healthy relationship with money?

Related:

The Ideal House Size And Layout To Raise A Family

Don’t Let Ego Make You Buy A Bigger House Than You Need

The post A Stealth Wealth Solution For Real Estate Investors With Kids appeared first on Financial Samurai.

from https://www.financialsamurai.com/a-stealth-wealth-solution-for-real-estate-investors-with-kids/

[ronaldmrashid]

Cashing Out Of Stocks To Buy Real Estate: Analyzing The Temptation

One of the wealth tenets I’ve followed since the first dotcom crash in 2000 is to always convert funny money into real assets. My definition of funny money is an investment that makes an irrational return in excess of fundamentals. There are obviously various levels of irrationality.

Some friends and colleagues went from huge stock market returns in 1999 only to lose everything and more in 2000. Going on margin was partly to blame. While some stocks like Webvan and Pets.com literally went to zero.

Over time, I noticed those who turned their dotcom fortunes into Manhattan or San Francisco real estate during the early 2000 era were able to extend the value of their fortunes and do quite well. As a result, young Samurai followed suit.

Of course, many homeowners ended up getting slaughtered during the 2008-2009 financial crisis buying too much home, just like stock investors who went on margin in 2000. But those who bought responsibly and were able to refinance and hold on save their gains return.

The question I have now is whether we should cash out of stocks and buy real estate since the S&P 500 is already up 16% YTD April 2019 and back to an all-time high.

I’d like for everybody to thoughtfully pitch in with their opinion. Everybody’s circumstance is different, which is why it’s important to listen to as many different perspectives as possible.

There is no perfect answer.

Cashing Out Of Stocks To Buy Real Estate

The reasons why I’m wondering whether to cash out of stocks and buy real estate are due to the following:

1) We’ve recovered all our funny money gains. My House Fund, consisting of stocks and bonds, went from about $1.95 million down to $1.7 million during the 2018 correction (-13%) and now is back up to $2.1 million (+23%) for a $400,000 swing. I’m sure many of you have seen similar percentage magnitudes of recovery if you calculate recent trough to peak levels in your portfolio.

2) Real estate was weak in 2018. San Francisco median home prices went down ~11.5% from its 2018 peak. We’ve seen similar weakness across many major cities in America and around the world. The weakness provides some solace that some steam has already been let out of the real estate market.

3) Affordability increasing. With lower median prices and declining mortgage rates, interest in real estate is increasing. There’s also a strong demographic trend as Millennials are the largest home buying demographic and are starting families.

4) Tech IPO spillover. Uber finally filed its S-1 and I know the tech IPO hype is only going to grow over the next two years. While I’ve written there is a chance the hype will awaken a slumbering supply bear, my experience post-Facebook’s IPO is that it will take about one year for the wealth effect to spillover into real estate.

5) A strong desire to create utility out of stocks. Stocks provide no utility, whereas real estate does. It is a wonderful feeling to make money in stocks and convert gains into something tangible. To be able to use real estate as a second home, an office space, or as a new primary residence for an expanding family to enjoy for decades is a win.

Living Our Best Lives Now

The entire purpose of achieving FIRE is so that we can live our best lives now.

When we invest in stocks, our hope is to generate profits so that we can live better lives in the future. Of course, we can also invest in stocks to produce dividend income to live off of today.

But if we really wanted to generate income to live our best lives today, there are more prudent, better ways to earn higher amounts of steady passive income with lower volatility.

The downside to cashing out of stocks and buying real estate is that one might be jumping out of the frying pan and into the fire. With rising inventory and a slowdown in the economy, real estate prices could continue to soften in the coming years. Leverage up too much and financial pain could ensue.

I just keep going through what played out during the 2000 dotcom bubble. As stocks crumbled in between 2000-2002, real estate picked up steam because mortgage rates began to decline. Stock investors started seeking shelter in real estate and REITs in particular performed the bestbetween 1999-2018.

The $400,000 recovery in my House Fund portfolio feels like funny money to me. It’s like buying a $2 million property for only $1.6 million or a $500,000 property for only $100,000. What a bargain!

Further, the real estate market generally lags the stock market by around six months in terms of recovery or declines. Therefore, with the stock market up so strong YTD, it feels like there’s a window of opportunity to buy property right now before prices catch up.

Finally, depending on how much wealth you have, you don’t have to cash out 100% of stocks to buy real estate. You can consider rebalancing your net worth more towards real estate while still investing a good percentage in stocks.

As of now, I am 70% leaning towards cashing out of stocks to buy more real estate. What do you think? Is this a good or bad move and why? How are you adjusting your net worth allocation if at all?

Related:

2019 S&P 500 Wall Street Targets

Which Is A Better Investment: Real Estate Or Stocks?

The post Cashing Out Of Stocks To Buy Real Estate: Analyzing The Temptation appeared first on Financial Samurai.

from https://www.financialsamurai.com/cashing-out-of-stocks-to-buy-real-estate/

[ronaldmrashid]

How To Fail At Getting The Lowest Mortgage Interest Rate Possible

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Originally, I was going to entitle this post, How To Get The Best Mortgage Interest Rate Possible. But after a couple weeks of battling, I failed to do such a thing due to a lack of convincing skills, bait and switching, and poor timing.

Before I tell you about my failure, let me tell you how I recommend getting the best mortgage rate possible. I’ve refinanced eight times across four properties over 16 years.

I never thought I would refinance again given we were in a rising interest-rate environment. The Fed decided to kill our expansion in 4Q2018 when they signaled a couple more rate hikes in 2019 and beyond.

It also felt good when I paid off my last property in 2015. With rising cash flow since then, I figured I would just pay off my 5/1 ARM that was set to adjust this summer to 4.5% from 2.5%.

But since the Fed backtracked, mortgage rates have collapsed in 2019. I figured it was worth refinancing again, especially if I could get a reasonable rate with all closing costs baked in.

In the end, I locked in a 10/1 ARM for 3% with -3.75 points equal to a $3000 credit towards closing.

This rate is pretty good, but I could’ve gotten better terms. In fact, I helped several readers lock in below 3% while I was busy negotiating my own refinance.

How To Get The Best Mortgage Rate Possible

The key to getting a better price is to always generate competition. For example, the more employers compete for your services, the more you will get bid away for a higher salary.

I still remember sitting in the living room of a house I wanted to buy back in 2004. The asking price was $1.55 million and it had been sitting on the market for two months. I was tempted to offer $1.45 million, which is unusual in a market like San Francisco.

I had made up my mind to low ball the sellers when in walked a doctor couple at the open house. They sat in the dining room and marveled at the wainscoting, crown molding and high ceilings.

Suddenly, my desire to low ball faded away due to perceived competition. Instead, I offered $1.525 million, or $75,000 more than I had planned. Although I ended up being the winning buyer, I still wonder to this day if my emotions got the best of me. It all worked out in the end.

Here are the steps I take to get the best mortgage rate possible. Miss one step and your failure rate will go way up.

1) Get written official quotes from competing lenders. I usually just fill out my mortgage request with LendingTree because they are an affiliate partner and are listed on the New York Stock Exchange with a ~$4 billion market capitalization.

Their lenders aggressively contact me over phone and email after I input my criteria, and then they send me written offers that I use for my next step. Quicken is also another good online source for written quotes. But I haven’t used them in years.

2) Contact your relationship bank. Your relationship bank is the key to getting the best mortgage rate possible. They have a lot of your money and you probably have multiple accounts open with them. They certainly don’t want to lose your business.

If you have competitive written offers, you need to present those written offers to your banker or mortgage loan officer and tell them to beat your written offers, not just match. If you have uncompetitive written offers, then you need to continuously search for better offers to get your relationship bank to beat.

One strategy is to scour the internet and take snapshots of teaser rates some lenders or marketplaces offer if you just can’t get anything official in writing. Teaser rates are often filled with onerous terms, but you can use them to your negotiating advantage.

Through the Financial Samurai community and through the FS Forum, I was able to crowdsource what other people got when they refinanced as well. In other words, it’s good to leverage a financial community whenever you’re doing something financially related.

3) Promise more assets. A bank wants its customers to have as much money with them as possible. Further, they want you to open up as many different accounts as possible to keep you as a sticky customer.

Examples of different accounts include: checking account, business checking account, savings account, mortgage account, wealth management account, home-equity line of credit, and a personal line of credit.

The more money you can bring over to the bank and the more accounts you can open, the more attractive your mortgage interest rate offer will be.

Banks have different tiers based on how much you have. For example my bank has one tier if you have at least $250,000 in assets with them. The next tier is if you have $500,000 – $1,000,000 in assets with them. Their highest tier is if you have over $1,000,000 with them.

4) Be ready to transfer funds away. Moving funds is a hassle, but you’ve got to be willing to move your assets if your relationship bank does not match or beat a competing offer.

You don’t have to close all your accounts. You just have to be willing to open up a new account with a different bank and go through the process of electronic funds transfer.

How I Failed At Getting The Lowest Mortgage Interest Rate

The best mortgage rate I could have gotten was 2.75% for a 7/1 ARM with no refinancing costs at Wells Fargo if I transferred over $1 million. If I transferred over $500,000, I could have locked in a 2.875% 7/1 ARM with no refinancing costs.

This rate was introduced to me by a Financial Samurai reader. The reader took a couple days to get back to my e-mail requesting for the lender’s contact information. As soon as I got the information I showed the rate offer to my existing relationship bank of 18 years, Citibank, to see if they could match.

I had just locked in my 3% rate with Citibank, which I thought was pretty good after the 10-year yield declined to 2.45% from 3.2%, but had not given them approval to start the process yet.

Important: Know that you’ve always got time to make a final decision after you verbally agree to lock. Nothing is official until you sign an “approval to proceed” document. Do not let banks bully you into proceeding right away. Instead, use this window of time to see if you can get a better rate or see if the mortgage rates decline further.

Surprisingly, Citibank told me they could not match the rate even though they said I could probably get 2.875% with minimal closing costs if I locked with them when I did at 3%. When I verbally agreed to 3%, they said they were likely going to have a special promotion the following week to get me down to 2.875%.

I was led on.

I told them I was going to move over $1 million in assets to Wells Fargo if they didn’t at least match the 2.875% rate. The mortgage lender said he’d go to the head of mortgage lending in San Francisco to see if he could get me down to 2.875%.

I waited another day, and the Citi mortgage head said he, unfortunately, still couldn’t match 2.875%. At least he gave me another seven days to decide whether I should refinance with Citibank at 3%. Now I was much more motivated to work with Wells Fargo.

It took about another day and a half for the Wells Fargo mortgage officer to get back to me. We spoke at around 5:15pm. He said I could absolutely refinance to 2.75/2.875% if I brought over $500,000/$1,000,000 in funds. But first, I had to send him some common documents such as my W2, 1099s, rental statements, K-1s and so forth.

I got back to Wells Fargo at around 7:30pm, and he said he’d review the documents and continue our dialogue the next morning. He believed we didn’t need to rush because rates looked unchanged that evening. I agreed.

When he called me the next morning at 10am, he told me the bad news. His bank informed him as of that morning, they decided to discontinue their special mortgage rate promotion! There was just too much demand.

Do I have terrible timing or what?

But of course, if I wanted to refinance with him I still could. The rate would no longer be 2.75/2.875% with no fees but 3%/3.125% with no fees. Now I was really annoyed.

No thank you! I got bait and switched again. If I’m going to get bait and switched, I might as well do business with my OG bait and switcher bank.

Luckily, I didn’t waste too much of my time because the documents I gathered for Wells Fargo were necessary for my refinance with Citibank. I simply forwarded them over.

The Refinance Rate Is Good Enough

So there you have it. While I was busy writing articles encouraging readers to refinance during a flat or inverted yield curve, I wasn’t spending enough time aggressively trying to refinance my own mortgage.

I put too much faith in Citibank to match the better offer. This cost me time and motivation with the competing bank. Nor did I pounce hard enough on the 2.75%/2.875% offer with Wells Fargo because I admittedly didn’t want to move my funds.

Wells Fargo’s offer was a special situation because their CEO had just resigned due to a lot of financial shenanigans that went on under his watch. They needed to drum up business and regain some faith in the community.

Also, I got a 10/1 ARM instead of a 7/1 ARM. Therefore, I have three more years of peace of mind, which also makes me feel slightly better about my higher rate.

If I pay off my new 3% mortgage in five years, my blended 10-year mortgage rate will be 2.75%. Not bad. Further, my monthly payment declines by $800, which is a nice cash flow increase in case the economy turns south.

Finally, I’m happy several readers e-mailed in saying they succeeded in refinancing to a lower mortgage rate after I published my series of articles. Helping readers save money is the best!

Related: The Anatomy Of An Adjustable Rate Mortgage Increase

Readers, anybody refinancing now? What mortgage rate and terms did you get? What mortgage refinancing battle stories do you have to share?

The post How To Fail At Getting The Lowest Mortgage Interest Rate Possible appeared first on Financial Samurai.

from https://www.financialsamurai.com/how-to-fail-at-getting-the-lowest-mortgage-interest-rate-possible/

[ronaldmrashid]

The Definition Of American Prosperity Needs An Adjustment

There’s a common joke here in the SF Bay Area.

How do you know someone went to Stanford? They’ll tell you within the first couple of sentences.

We Americans have a tremendous desire for status and prestige. When we work hard for something, it’s our second nature to tell everybody about our achievement.

You do it. I do it. We all do it. No big deal if we aren’t incessant about it.

But at a certain point, it becomes concerning when we start complaining about our struggles despite being in an extremely fortunate situation.

Let me share one public example and then my own as case studies to illustrate how unaware we truly are about our good fortune.

Being Unable To Recognize American Prosperity

Charlotte from Time magazine sent out this tweet she wrote about everybody’s favorite politician, Alexandria Ocasio-Cortez. It’s a good in-depth piece about how and why AOC came to power.

What is strange about her tweet is that she claims people her age (20s and 30s) have never experienced American prosperity in their adult lifetimes.

How could this be when the parents of people her age have been able to save and invest in the biggest bull market in history! If only we were able to rewind time and invest as Biff did in Back To The Future III.

Before rushing to judgment, I did what any rational person would do and tried to understand why Charlotte has had such a difficult time in her life so far.

Maybe she grew up in a poor single-parent household in a difficult neighborhood. Maybe she didn’t even go to public college because her parents couldn’t afford the tuition. Or maybe she has a disability.

Lo and behold, it was easy to understand her background because her parents have their own Wikipedia pages! I thought only rich and/or famous people have their own Wiki page? Silly me.

Here are some tidbits.

Jonathan Alter (father): A graduate of Phillips Academy (private prep school) and Harvard University. American journalist, best-selling author, documentary filmmaker and television producer who was a columnist and senior editor for Newsweek magazine from 1983 until 2011, and has written three New York Times best-selling books about American presidents

Emily Jane Lazar (mother): A graduate of Hotchkiss School (private prep school) and Harvard University. Co-executive producer of the former Comedy Central show The Colbert Report;three children: Charlotte (b. 1990), a writer for TIME Magazine, Tommy (b. 1991), a producer for HBO Sports, and Molly (b. 1993), who works in venture capital.

Then, of course, there’s Charlotte, who also went to Harvard University and is a staff writer for Time Magazine. I don’t know whether she went to an elite private prep school or not. But I assume so based on her parents’ backgrounds.

Most would agree that if you went to private grade school, private university, and have rich and accomplished parents, you’ve probably experienced some American prosperity in your life. Some might even conclude that all you’ve ever experienced is American prosperity.

Yet, I believe Charlotte and other wealthy people like her truly do not feel they have experienced American prosperity because their life is all they know. I’m sure Charlotte is a fine and nice person. She’s just a little unaware about how good folks like her truly have it.

As a parent, this lack of appreciation for prosperity is one of my worries of raising myself in a comfortable environment. He’ll have a warm home, food whenever he wants, and mostly prosperous friends. When life is so easy, you don’t end up pushing yourself to make something of your own.

The lack of struggle is one of the reasons why we considered moving back to Virginia instead of to Hawaii. Just look at how UVA turned it around in the NCAA tournament by losing in the first round last year to winning it all in 2019. Hardship creates hunger and growth! In Virginia, we could send him to a public school and let him experience more racial altercations.

Whereas in Hawaii, we would send him to likely a private school where more classmates looked like him. We’d also probably buy a nice house on or near the beach and finally start living it up in retirement.

But if you start with a Ferrari, how can you ever appreciate any other car when it’s finally time for you to buy one on your own?

If you’ve spent your entire life in a luxurious home, good luck feeling good about renting or buying a place with your own salary.

Financial Samurai Case Study

Now let’s look at my own lack of recognizing American prosperity. In the post, The Wide Implications Of The College Admissions Scandal, one of the points I write about is:

The middle class may become wealthier and happier. As college becomes less important in finding a job, there will be fewer people spending four years and borrowing tens of thousands in student loans. With more time and less financial baggage, more people will be able to aggressively save to buy a house, start a family, and save for retirement.

I thought this was a good thing. However, what I didn’t realize was that by writing the words “middle class,” based on my current position as a financially independent person, it could be construed as insulting to the “true middle-class” American.

Here is a response from a regular Financial Samurai reader,

Let me start by stating that I love your blog and your views on general and I salute you for your consistent approach. However, one area I repeatedly roll my eyes as is when you describe your upbringing as “middle class”.

Based on your posts, your parents had jobs as foreign service officers for the US Government. That is about as secure a job and lifestyle as one could expect (all living expenses comped by taxpayers). I’m not saying it is a cushy job or easy, as I respect those who do it, but it is an elite job.

Your views are warped and you seem to want to cast yourself as middle class struggle when in reality you had a huge advantage over most of the country.

Maybe not compared to your Wall Street buddies, but compared to most you had a silver spoon. This doesn’t discount any of your success, or the impact of racism that you said you faced which I agree is a challenge, but you need to get real on your upbringing and your parents jobs – not middle class.

This is fantastic feedback that shines a huge blind spot on my lack of awareness that I didn’t grow up middle class, even though I wasn’t writing about my own upbringing to begin with.

All this time, I thought I grew up in an average American household. Here are some data points from my upbringing that made me believe so. My dad verified the numbers.

Went to public high school (free) and college ($2,800/year in tuition at The College of William & Mary)

Dad went to the University of Hawaii (public), Mom went to National Taiwan University (public)

Parents drove an 8-year-old Toyota Camry (bought for $5,000)

Worked at McDonald’s, worked as a mover, and did random jobs as a temp during the summers

Lived in a ~1,700 sqft townhouse that was purchased for $190,000

Parents worked at the US State Department and my mom made between $25,000 – $55,000 and my dad made between $15,000 – $119,000 after a 30+ year career after serving in Vietnam

Here is the actual townhouse I lived in from Google street view. Ah, the fond high school memories. I had the room with the balcony.

It’s now becoming clear that I didn’t grow up middle class, but upper middle class or some would say rich. For example, while some classmates had to walk a couple miles to school, I got to ride a bike. As a result, I could get more sleep and do better in class.

During my time growing up in the Philippines, Zambia, Taiwan, and Malaysia before high school I witnessed a lot of poverty. In comparison, my family was definitely rich. Who gets to live abroad as a child while his parents get to honorably serve their country building foreign relationships? Not many.

Further, being born Asian seems to have given me a leg up in America because how could it not when elite private schools require a higher hurdle rate for admission? Surely these universities must have scientific data behind their decision. Otherwise, that would be discrimination.

For those who have been offended by my belief that the middle class will benefit from the college admissions scandal by helping level the playing field, I apologize. I really didn’t mean any harm and will try to only write about wealthy people stuff going forward.

Why We Can’t Recognize American Prosperity

Here are four reasons why I think some of us don’t recognize our prosperity.

1) Our government and think tanks arbitrarily define middle-class income and status for us nationally instead of locally. Pew Research, for example, believes that a middle-class income ranges between 67% to 200% of the median household income. While some in government, in order to raise the income tax rate at lower income levels, believe rich means earning income over $200,000, regardless of location.

2) Life’s struggles. No matter how rich and powerful you are, you will always experience some sort of hardship growing up. Common hardships include divorce, fights, bullying, rejections, mental illness, loneliness and deaths. These negatives are very real and make us feel less prosperous than we really are.

3) Our desire to always compare and want more. Even though my family drove a perfectly fine 8-year-old Toyota Camry during my upper class upbringing, I was envious of my rich friend whose family drove a new Honda Accord. I still remember that new car smell.

Even though AOC attended Boston University for $70,000 a year in today’s dollars, she might be envious of Charlotte Alter who attended higher ranked Harvard University for only $65,000 a year.

Conversely, Charlotte might be envious of AOC because AOC, with a less prestigious degree, is the second most popular politician in America. The comparisons go on and on and can make us miserable.

4) We’re simply ignorant about how the rest of the country and the world live. We need to travel more. We also should strive to learn another language to immerse ourselves in another culture. If we do, we will better appreciate how good we have things and get along with more people.

Let’s recognize our prosperity while trying to remain humble. If we can help others become more prosperous, all the better.

Always attribute most of your success to luck rather than to hard work. You can still secretly work hard behind the scenes, but never let anybody know. Saying you worked hard in today’s environment is gradually becoming an insult.

Finally, recognize the growing anger in America towards those who have more and adapt. When in doubt, be respectful towards those who denigrate your efforts. And if you feel that a respectful dialogue cannot ensue, then move on. There are so many better things to do with your time.

Remember, “talent is universal, but opportunity is not.” It is up to those of us with opportunity to help those who do not.

Related posts:

Spoiled Or Clueless? Try Working A Minimum Wage Job As An Adult For Goodness Sake

Your First Million Might Be The Easiest: How To Become A Millionaire By 30

Readers, anybody out there think they grew up middle class, but who actually grew up upper middle class or rich? Why do some people who grow up wealthy not recognize their prosperity? What is your definition of American prosperity? How can we get people to recognize and appreciate their prosperity more?

The post The Definition Of American Prosperity Needs An Adjustment appeared first on Financial Samurai.

from https://www.financialsamurai.com/the-definition-of-american-prosperity/

[ronaldmrashid]

Annualized Returns By Asset Class From 1999 – 2018

Before I show you the 20-year annualized returns by asset class between 1999 – 2018, I want you to guess the following four things:

1) Of the following asset classes, the S&P 500, a 60/40 stock/bond portfolio, Bonds, a 40/60 stock/bond portfolio, REITs, Gold, Oil, EAFE (Europe, Asia, Far East), national real estate, which performed best?

2) What was the annualized return for the best performing asset class +/-0.5%?

3) What was the annualized return for the worst performing asset class +/- 0.5%?

4) What was the annualized return for the average active investor +/- 0.2%?

If you can guess two out of the four correctly, I’ll give you a gold star and might even take your child’s SAT or ACT exam for you.

If you only get one out of four right, you need to go run five miles immediately. If you get zero right, then you need to run five miles, do 100 sit-ups, and 100 push-ups.

There’s no way any of you are getting four out of four right.

Now that we have a deal, let’s take a look at the results to see how reality compares with your biased beliefs.

Performance By Asset Class Between 1999 – 2018

Below are the results compiled by J.P. Morgan, one of the largest traditional asset managers in the world that charge clients 1.15% – 1.45% of assets under management, based on $1 – $10 million.

Asset managers like J.P. Morgan are the reason why digital wealth advisors like Wealthfront were created during the last financial crisis. People wanted to pay lower fees (0.25% by WF) and weren’t satisfied with active management results.

As you can see from the results, REITs is the #1 performer with a 9.9% annualized return. I bet less than 20% of you guessed this one right.

The S&P 500 only returned 5.6% a year between 1999 – 2018. I think most of you would have guessed a higher return. On a relative basis, Bonds, at 4.5%, doesn’t seem too shabby given the lower volatility and risk.

Gold is a real surprise at 7.7% since gold doesn’t produce any income and whenever gold is mentioned, it’s usually in a negative light unless you’re a gangster.

Meanwhile, Homes returned the worst at only 3.4%. The national home price index generally tracks close to inflation (2.2% in this time period). Therefore, a 1.2% outperformance is not bad.

What’s most interesting to me about this chart is how REITs have outperformed Homes by 6.5% for 20 years. This goes to show that professional real estate managers can add tremendous value.

The outperformance also partially explains why experienced individuals who know how to bargain, remodel, expand, and predict demographic changes often prefer real estate as well.

Finally, it’s no surprise to me that the average active investor has only returned 1.9% a year during this time period. Trading in and out of investments is a losing proposition long term due to timing errors and fees. Figuring out when to buy is hard enough. Having to figure out when to sell and then get back in consistently is impossible.

The inability to consistently outperform the market is the reason why the vast majority of us should stick to a proper asset allocation model based on our risk tolerance and our goals in life.

Our core tax-advantaged retirement portfolio(s) should be mostly left alone. I’m talking about our 401(k), IRA, Roth IRA, SEP-IRA, 403(b), and so forth.

For our after-tax investments, it’s worth adjusting our strategies based on a purpose e.g. getting more conservative if buying a house within the next 12 months. See: How To Invest Your Down Payment

Why I Chose 1999 As The Starting Point

In addition to the fact that J.P. Morgan had already crunched the numbers for me, 1999 as a starting point is significant for me because it coincides with my graduation from college and when I started to aggressively invest my savings.

I actually started investing money during my sophomore year in 1996, but I only had about a $2,500 portfolio at the time so it was insignificant. Hooray for making $4/hour at McDonald’s though to learn about work ethic!

Given my vintage year is 1999, my outlook on various asset classes is shaped by the performance of these asset classes during most of my working career.

From 1999-2000, we had a tremendous internet stock bubble followed by a 2.5-year decline. Then we had a nice 5-year run in the S&P 500 followed by another 2-year collapse.

Now we’ve had a nice 10-year run that has surpassed the previous peak by almost 100%. Therefore, readers have to forgive me for not overweighting stocks at this point in time.

Given my working career has only been limited to living in New York City and San Francisco, I have personally witnessed closer to a 6% annualized growth in property from 1999 – 2018.

6% is not much greater than the stock market’s 5.6% annualized return. However, once you add leverage, 6% becomes a significant amount. We’re talking 12% – 30% annualized returns on a 50% – 80% loan-to-value ratio.

When I calculate my compound annualized net worth growth rate since 1999, the number is between 12% – 14%, depending on how I value some of my assets. This is fine since my annual net worth growth target has always been at least 10%.

However, I would attribute more than 50% of my net worth growth to aggressive savings and building a business rather than to returns. In other words, what you do may matter more than you think.

Lower Your Return Expectations

One of my main goals of this article is for readers to keep your return expectations reasonable over the next 10-20 years. If you do so, your risk exposure will likely be more appropriate. You’ll also likely work harder to build your net worth through action.

The second goal of this article is to compare your overall net worth growth to your various investments of choice and see how they stack up. You should try to figure out how much of your net worth growth was due to savings versus returns.

Finally, I want everybody to recognize their biases. I’m biased towards real estate because real estate has performed best for me since 1999. Whereas some of you will be biased towards stocks or other asset classes because they have performed best for you since getting your first real job.

Past performance is no guarantee of future performance. It is likely we will experience some performance leadership changes in the future and will have to adapt accordingly.

For our tax-advantaged investments, including our son’s 529 plan, I plan on leaving them alone. We’ve still got between 16-20 years before we want to access the funds.

For our after-tax investments, I’m reducing exposure to stocks, increasing exposure to cash and short-term treasuries, diversifying our real estate exposure across non-coastal cities through speciality REITs and crowdfunding, and constantly looking for ocean view fixers in San Francisco.

I’m sure I’ll be kicking myself 10 years from now if I don’t buy at least one more ocean view fixer today. I just love the combo of identifying high growth potential investments and boosting returns through rehabbing.

Readers, did anybody get three or four questions right? What are some of your biases? What asset class do you think will perform best in the future? Where are you overweighting your net worth today?

The post Annualized Returns By Asset Class From 1999 – 2018 appeared first on Financial Samurai.

from https://www.financialsamurai.com/annualized-returns-by-asset-class-from-1999-2018/

[ronaldmrashid]

A Legal Way To Profit From The College Admissions Scandal

A good investor always looks for opportunity no matter the circumstance. If you can identify and invest in a winning long-term trend, your returns could be quite lucrative over time.

Some long-term trends that have or will likely make investors a lot of money are:

Investing in the next Silicon Valley

Investing in the aging of our population

Investing in artificial intelligence

Investing in mobile applications

Investing in personal finance sites that have long operating histories

Investing in opportunity zones that improve over time

What I realized after the college admissions bribery scandal is that my effort to assuage the public to not spend so much time and money going to college, let alone an incredibly expensive private school is a losing battle.

It is so obvious to me that paying record high tuition for a depreciating asset is not a wise financial move. Give me a $1 million check at age 22 over attending private grade school and university any day.

Further, still spending 4-5 years to get a college degree when learning has become much more efficient thanks to the internet also doesn’t make sense. Two years should be enough to get a degree. Google makes doing research much quicker and easier than going to the library pre-internet days.

Despite the obvious, when you hear about already rich and powerful parents spending hundreds of thousands of dollars to bribe their kid’s way into college, you know demand for college is inelastic no matter how much prices rise and how much the value of the degree depreciates.

Further, the allure of a U.S. college education seems to only be growing in attractiveness to international students. To college chancellors, international students are the golden goose since most pay full price.

Student Housing As An Investment

Given there is an insatiable demand for a U.S. college degree, the easiest way to invest in this demand is through student housing.

The investment thesis is similar to investing in San Francisco Bay Area real estate over the past 20 years based on the growth of major tech giants like Google, Apple, Facebook and the creation of new tech giants like Uber and Airbnb. They’re all paying big bucks and their employees need a place to live.

I was too stupid to get a job at some of today’s most well-known companies. As a result, I just bought their stock and leveraged up and bought as much property as I could in 2003, 2004, 2007 (oops), 2014 and maybe something in 2019 as well.

Overall, my SF real estate investments have returned enough to provide both my wife and I a simple retirement lifestyle. Therefore, perhaps investing in student housing in the face of college degree fever is also a wise move.

Here are some positives of investing in student housing.

1) Relatively recession proof. When the economy turns down, more people go back to school. During the 2008-2010 financial crisis, MBA applications surged 50% for two years in a row. Part of the reason why I decided to get my MBA part-time between 2003-2006 was that I thought I might get fired by my new employer in the wake of the post-dotcom collapse.

2) Stability of cash flow. Whether in a bull market or a bear market, student housing supplies a reliable cash flow stream so long as the university is in good standing. We’re talking 99% occupancy rates when school is in session.

3) Enrollment continues to increase. Enrollment in postsecondary institutions is expected to increase 14% to 23 million by 2024, according to the National Center for Educational Statistics. As a result, rental rates are estimated to grow by about 2% a year according to Axiometrics.

The Negatives Of Student Housing

There are of course no guarantees when it comes to investing in student housing. We’ve all seen Animal House and know there can be some headaches when it comes to managing college students.

Here are some potential negatives:

1) First-time renters with unestablished credit. Student renters are almost always first-time renters. Although you can hope they will be responsible tenants who will pay on time and take care of your property, you just don’t know for sure what they will do. Having a parent co-sign the lease is an absolute must. You’ve also got to properly vet the student’s parents. Hopefully, they’re really rich like all the parents who got caught in the bribing scandal.

Related: Example Of A Good Rental Lease Agreement

2) More wear and tear on your property. Students drink and party, which results in excessive wear and tear on units. Sometimes they bash into walls when drunk. Sometimes they overflow the washing machine and cause the ground to flood. The more wear and tear, the more time and money it takes to maintain the unit.

3) Higher liability. Given students are considered more high-risk tenants, your rental insurance costs may be higher due to potentially higher risk activity. Sometimes college students like to throw bonfires on the balcony and accidentally burn your unit to a crisp. You just never know what newly free young adults will do away from their parents. I remember having a jolly good time when I was in college.

The Best Way To Invest In Student Housing

One of the easiest ways to invest in student housing is to buy a publicly traded REITs that has some exposure to student housing. The two REITs that I’m aware of are:

1) American Campus Communities (Ticker: ACC, NYSE) – ACC is the most established student housing REIT with a ~$6.5 billion market cap. They pay a ~3.8% yield and have done well over the past 12 months.

2) EdR – Was acquired in 2018 by Greystar Student Housing Growth And Income Fund for $4.6 billion, so that’s out.

The other way to invest in student housing is through a private student housing REIT. I found one run by Rich Uncles founded in 2014. You don’t have to be an accredited investor and can invest as little as $5 on their platform.

Their Student Housing REIT only buys student housing within a one-mile walking distance of major NCAA Division I universities that have at least 15,000 enrolled students.

This seems like a prudent precaution as some smaller, less well-known universities are facing lower enrollment figures and are at risk of shutting down.

All properties purchased in the Student Housing REIT must have a minimum capacity of 150 beds, feature 90%+ rental occupancy rates; and represent a broad spectrum of geographic locations.

What I like about the Rich Uncles REIT is that there is no broker/dealer fee that public REITs charge and they have a good performance fee structure.

The first 6.5% of any profit is paid out to shareholders with no fees. All profits after 6.5% are split 40% to Rich Uncles and 60% to you. This performance alignment with shareholders is my favorite type of fee structure.

If you buy ACC, you’re buying for its 3.8% yield and potential appreciation. If you invest in the Rich Uncles Student Housing REIT, you’re buying for the steady income. Of course, neither offer guaranteed returns.

Don’t Physically Own Student Housing

The long-term demographic trend towards more people going to college is a nice tailwind for the student housing sector. As a parent now, I realize parents are willing to do anything for their children to get ahead. Spending big money on education seems to be the solution if you can’t spend time educating your children yourself.

The growth of international student demand is positive as well. They won’t discover until decades from now that a college degree from an American university isn’t worth what it used to be.

Although student housing seems like a wise long-term investment, I wouldn’t want to actually physically own and manage the student housing. Turnover and maintenance would be major headaches.

The only way I would invest in student housing is through a public or private REIT. Let the professional managers deal with rowdy students and let us earn income passively.

Readers, what are your thoughts on investing in student housing as a long term investment? What hiccups do you foresee? Any other publicly traded student housing REITs you are aware of? What other ideas do you have for profiting from the college admissions scandal? For those who have investments in ACC or Rich Uncles, I’m curious to hear your thoughts, especially negative ones.

The post A Legal Way To Profit From The College Admissions Scandal appeared first on Financial Samurai.

from https://www.financialsamurai.com/a-legal-way-to-profit-from-the-college-admissions-scandal/

[ronaldmrashid]

The Return On Rent Is Always Negative 100 Percent: Here’s How To Live For Free

There’s a ton of talk about how there’s a housing affordability crisis in various parts of the country.

Perhaps the fear of forever being priced out is an underestimated motivating force behind the continued demand for housing despite high prices.

I remember when I bought my first 2/2 condo in 2003, I felt a sense of relief that I no longer had to pay ever-rising rents. Even though the $2,300/month mortgage payment was about 15% higher than my previous rent after a 25% down payment, it felt good knowing my costs were generally fixed.

What I’ve recently realized is that many people in San Francisco and many other cities have not had to pay a single penny for housing costs over the years.

What? How is this possible when San Francisco is considered one of the most expensive cities in America?

Let me show you with a friend’s example that doesn’t involve mooching off your parents as an adult child.

How To Live For Free In An Expensive City

Here’s the profile of a home that was purchased for $1.3 million in 2011 and sold for $2.2 million in early 2019. He put down 20% and took out a $1,040,000 mortgage at 3.5%. Below are some approximate numbers.

Positives

Monthly rent avoided for eight years: $5,500

Total rent avoided after eight years: $440,000

Net proceeds after fees, principal pay down, all taxes from selling house: $1,100,000

Negatives

Opportunity cost of not investing $260,000 (down payment) in the stock market from 2011 – 2019 = $286,000 (110% appreciation)

Net mortgage interest cost after eight years = $203,000

Net property taxes after eight years = $90,000

Maintenance cost after eight years = $20,000

Net cost of living = ($440,000 + $1,100,000) – ($286,000 – $203,000 – $90,000 – $20,000) = $941,000.

If this simple math is right, not only was my friend’s family housing free for eight years but he was also paid $941,000 to live in San Francisco. That’s pretty good value for just living.

Obviously, experiencing a 69% appreciation in his property was a big factor in this equation, but so was not having to pay $440,000 in rent during this time period.

Even if the property only appreciated by 3% a year, my friend would still have been paid over $500,000 to live in San Francisco for eight years.

Related: Reinvestment Ideas After Selling A House

How Much You’ll Spend On Rent In Your Lifetime

Check out this chart about how much money you’ll spend on rent for a median-priced home in various major cities.

It’s kind of crazy to see that a San Francisco resident would pay $2,468,000 in rent for a median-priced property by the time he or she turns 60.

Is your city on the list? If not, add up how much you’ll end up spending on rent for your desired property if you never buy. I don’t think you’ll like the results.

With such massive amounts paid in rent over one’s lifetime, is it no wonder why the desire to buy property is so strong?

I’d love for property prices to decline by 20% so I can snap up another Golden Gate Heights panoramic view property in San Francisco. Alas, unless I get really lucky, another investment property is not in my cards.

Some Takeaways On Getting Paid To Live

1) The return on rent is always -100%. Yes, you get a place to live, but if you buy, you also get a place to live. Once this variable is canceled out, what’s left is the owner’s optionality to sell the asset. Who said high school algebra was a useless course.

2) Although buying a home is making a concentrated bet with leverage, buying a home may ironically be easier than investing the same amount of money in the stock market because you’re buying a tangible asset that may improve the quality of your life. With stocks, there is not utility gained. Further, prices could decline out of the blue.

3) Renting and investing the difference in the stock market and other assets is a great idea, but people often fail due to a lack of financial discipline. Without a proper automatic invest strategy in place, chances are high the saved difference ends up getting spent or left sitting in a bank account.

4) Time is your friend when it comes to owning a property. Over time, the cost to rent rises to barf-inducing levels. Meanwhile, the appreciation of a property also sometimes rises to unbelievable levels. The only way you can survive as a renter is if rents stay flat or go down, which usually doesn’t happen due to inflation. Rising rents and rising property prices will crush your financial progress if you are unwilling to get neutral real estate by owning your primary residence or moving to a lower cost area.

5) To live for free, you’ve got to take risk. Staying in a rent-controlled apartment is somewhat akin to working at a safe day job with no upward mobility. You’ll likely never starve, but you’ll likely never get rich either. If you take some risk by buying real estate, you might do very well just like if you decided to start your own business or hop to a different employer. Alternatively, you might go bankrupt if you buy inappropriately. But at the end of the day, no risk no reward.

6) Living for free strengthens the real estate market further. Living for free is another phrase for rising home equity. The more home equity there is, the larger the buffer in case of a recession. Given lenders have significantly tightened their lending standards since the 2009 financial crisis, only the most credit worthy borrowers have bought homes.

When you combine high credit worthiness with record high home equity and low mortgage rates, it’s hard to see another crash in home prices again. The best we can hope for is a 10% – 15% decline window before another recovery. Instead, we’re likely going to see increased discretionary spending.

Arbitraging To Live For Free

Once you own your primary residence, you won’t truly know until after you’ve sold your property whether you lived for free all those years or not. In the meantime, you can make educated estimates every year about whether buying or renting made more sense.

If you really want to live for free in the present, you’ve got to figure out a way to make investments that will produce income that will cover all your housing expenses and then some.

The concept of Buy Utility, Rent Luxury (BURL) is one logical strategy. Aggressively saving money on the short end of an inverted yield curve to cover your longer duration borrowing costs is another strategy, especially when the yield curve is inverted.

But the easiest strategy is to simply not rent for life. If you rent for life, you are going to look back 30 years from now with regret. Your kids will also likely hate you for not buying so long ago.

All these rich kids today are rich because their parents had the foresight to do some math and take some calculated risk decades ago.

If you’re not willing to build assets for yourself, at least do it for your children. Just make sure the numbers make sense.

Related: Focus On Trends: Why I’m Investing In The Heartland Of America

Readers, have you been living for free all these years? If so, I’d love to hear about your numbers. Despite all the data that shows homeowners are on average 44X richer than renters, why are there still so many people against long-term homeownership to build wealth?

The post The Return On Rent Is Always Negative 100 Percent: Here’s How To Live For Free appeared first on Financial Samurai.

from https://www.financialsamurai.com/return-on-rent-is-always-negative-100-percent-how-to-live-forfree/

[ronaldmrashid]

How To Get Your Spouse To Go Back To Work After Having A Baby

I realized something quite surprising the other day.

Ever since my son was born, I’ve felt increased financial pressure to provide. It didn’t matter how much I had in the bank or how much our net worth had grown since the financial crisis, the pressure to earn more money was a constant.

It makes me wonder whether this type of pressure is simply hardwired into a parent’s brain in order to ensure the survival of our species.

When I asked my wife about whether she feels the same pressure to financially provide, she admitted she did not. After all, she has me.

Her pressure is to ensure that our boy gets cared for and loved as much as possible. As a father, I feel that same pressure, but probably not as intensely as she does.

We both agreed that we’d be stay at home parents at least until our boy was eligible for preschool at 2 years 5 months old. After he comes of age, we’d have the freedom to do whatever we wanted.

As the sole financial provider, one of the logical ideas I had was to go back to work. This way, we could earn more money, get subsidized healthcare, and let me assimilate back into the Borg after more than seven years of being away.

Going back to work isn’t my favorite idea because I dislike commuting, office politics, and being told what to do. However, it is a responsible option for my family.

Since we both we believe in equality, I asked my wife whether it would be OK if she went back to work instead of me? After all, being a stay at home dad is easier once a child is weened.

My wife responded with a frowny face. She didn’t want to leave our boy and go back to work. She tried to allay my fears that everything would be alright. She told me we had enough passive income to support our frugal lifestyle.

I wasn’t quite convinced, so I came up with a plan.

The Risk Of Never Going Back To Work As A Parent

I’ve spoken to dozens of fathers who feel trapped by the increased pressure of having to provide financially after having children.

What was once an easy financial union where both spouses worked full-time jobs turned into a stressful one of minus one steady income plus the added cost of raising a child or more.

But what long-term stay at home parents don’t realize is that they are putting themselves at risk of financial ruin if they don’t go back to work. At the very least, they should work part-time in their field of expertise.

Take my friend Nancy for example. She went to Amherst College and then to Northwestern University for her Masters in Journalism. These are two extremely expensive private schools and she graduated with roughly $45,000 in student loan debt.

For eight years after Northwestern, she worked as a journalist and non-fiction writer for a major media publication. Then she had a son and for the next 10 years was a stay at home mom.

Unfortunately, she and her husband decided to divorce after 13 years. Although she received alimony, it was limited to two years. During those two years, Nancy tried to find a full-time job in media, but could not.

Why could she not find a job despite her stellar resume? It was because she had not written a single piece of published literature in over 10 years!

She ended up making about $8,000 in freelance income her first year and $22,000 in freelance income her second year. Unfortunately, she had to move out of her Manhattan apartment because she was spending over $100,000 a year on her lifestyle.

If you rely on a partner or spouse for money, what happens if you one day suddenly find yourself alone? You could either go through a divorce, lose your spouse to an untimely death, not have the proper estate planning in place, or fall victim to financial mismanagement.

We all have about a 2-3 year grace period to take a break from work to raise a family, go to graduate school, or travel the world before a prospective employer starts souring on your time away. This is why it’s imperative that all of us continue to keep our skills sharp despite being stay at home parents.

With the proliferation of freelance work through the internet, there is simply no reason to ever let our skills become irrelevant.

Related: Financial Dependence Is The Worst: Why Each Spouse Should Have Their Own Financial Accounts

How To Get Your Spouse To Go Back To Work After Having A Baby

Treat your spouse as an equal partner. If your spouse has worked a lower number of years than you, seek your spouse’s agreement to at least match your number of years worked. Equality is very difficult to argue against. If you are the male, then you absolutely must step up in the parenting department.

Discuss negative what-if scenarios. We never think something bad will happen to us, but bad things happen all the time. Discuss how having subsidized healthcare and a steady paycheck can be beneficial to your family in times of difficulty.

Discuss the rewards of work. There has to be something meaningful to work. Otherwise, why do hundreds of millions of people go to work every day? It can’t just be for the money. Maybe your spouse’s work can help improve the lives of the visually impaired due to new technology. Maybe your spouse’s work can help people achieve financial freedom sooner.

Highlight the positives of letting your child become more independent. Having parents care and play with you 24/7 is nice, but eventually, you want your child to explore on his or her own. Learning how to interact with other kids and adults is an important social skill. Having the confidence to interact without a parent’s watchful eye will also make parenting less stressful.

Discuss the failure of other relationships. Everybody knows of some relationship that has failed after kids. One big reason is due to money stress. The goal is to psychoanalyze what went wrong and figure out what you guys can do right.

Highlight the gender wage gap. Given women only generate roughly 82 percent of what men make, if your spouse is a woman, you can help motivate her to close this wage gap by going back to work and climbing as high as possible on the corporate ladder. The higher she climbs the more she will fight for women.

Discuss the positive influence a working mom has on her daughter. According to a study by HBS professor McGinn, the daughters of employed mothers often perform better in their eventual careers than the daughters of stay-at-home moms. Compared to women whose mothers stayed home full time, women raised by an employed mother are 1.21 times more likely to be employed; 1.29 times more likely to supervise others at work; and they spend 44 extra minutes at their jobs each week. They also earn more money in their careers.

Admit your anxiety and stress. If you are the parent responsible for most or all of the income, then have an open discussion of how going back to work may help alleviate your stress and improve your marriage. At the end of the day, you guys are a team and need to adjust with the times. For some reason, it isn’t as acceptable for men to expected their fears and pressures to provide. We need to break down this taboo and allow men to be more open with their feelings.

Remind your spouse the cost of his or her education. Spending 13 years attending K-12 is a lot of time. If your spouse happens to be a college graduate, then that’s another 3.5-5 years of time spent on education. Let’s not even mention spouses who go to graduate school and spend a minimal amount of time in their field of study after due to parenting responsibilities. By highlighting how much time and money they’ve already spent on their education, this might encourage them to at least do some part-time work in their field.

My Wife Is Going Back To Work!

After much negotiating, I’ve convinced my wife to go back to work after being a full-time mom for two years! She will be looking for work as either an operations manager at a financial firm or large technology firm here in San Francisco.

With a target salary of $200,000 + RSUs, this old man can finally breathe easy again. As the professional driver in the family, I will be responsible for dropping off our boy and picking him up safely from preschool this fall. I might even give my wife a ride to work if she’s en route.

Having my wife go back to work helps her long-term employability. She’ll become an awesome independent working woman who will blaze her own trail. Her income will also significantly ease my stress of being the sole income provider for our family.

If we are blessed with another child, we can revisit the decision again for her to be a stay at home mom. But for now, it’s time for her to bring home the bacon while I finally take a load off for at least the next 12 months. I promise to be the absolute best dad possible while my wife works in an office.

There’s one last positive for Financial Samurai readers now that my wife is going back to work. The temptation to cash in and sell Financial Samurai declines as I no longer need a significant windfall to relieve my financial anxiety.

Let’s all give my wife some enthusiastic encouragement! The more she can work the longer Financial Samurai can live.

Heck, I might even rebrand myself as an early retirement blogger now. I like the sound of that.

Always fight for equality every single day.

Related:How To Get Your Spouse To Work Longer So You Can Retire Earlier

Readers, have any of you successfully convinced your spouse to go back to work after having a baby? Did you feel more financial pressure to provide for your family once your baby was born? If so, how did you manage to cope? I’m curious to know if any parents took an extended leave of absence after having a baby and how hard was it to transition back into the workforce?

The post How To Get Your Spouse To Go Back To Work After Having A Baby appeared first on Financial Samurai.

from https://www.financialsamurai.com/how-to-get-your-spouse-to-go-back-to-work-after-having-a-baby/

[ronaldmrashid]

Paying Off Your Mortgage Is A Bad Move When The Yield Curve Is Inverted

This will be the last time I write about mortgages for at least a week. Don’t worry.

If my quest to refinance my primary home mortgage doesn’t make my views obvious, I believe paying off your mortgage is a bad financial move when the yield curve is inverted.

I’m in an interesting position where I have both, paid off properties and mortgaged properties. I also have the ability to pay off my mortgages tomorrow. Therefore, I can argue both the quantitative and the qualitative side to paying off a mortgage or not without much bias.

At the end of the day, I want everyone to make the best financial moves in order to decrease financial anxiety, boost wealth, and increase happiness. As a family man now, I care about these three things for readers more than ever before.

Why You Shouldn’t Pay Off Your Mortgage

When the yield curve is inverted we have some serious economic implications to consider. Let’s talk about the primary reason why you shouldn’t pay off your mortgage along with a few other reasons.

1) Best relative value to borrow. The yield curve is normally upward sloping at all time intervals due to the time value of money. As a lender, you require a higher rate of return for longer duration loans due to inflation and the increased risk of not being paid back.

The yield curve very seldom inverts and when it does, it means that longer duration borrowers are getting the relatively best deal.

Let’s study a normal yield curve from 2015 below. Short-term rates during this time period were very low partially because the Federal Reserve kept its Fed Funds rate at near 0%.

The spread between the 10-year yield and the 3-month yield was 2.1%. In other words, as a borrower, you had to pay a 2.1% premium to borrow for 10-years.

Now let’s look at a slightly inverted yield curve on March 22, 2019. Instead of paying a 2.1% premium to borrow for 10 years, you’re getting a 0.01% discount to borrow for 10 years.

Borrowing for five years might seem to be even more enticing given the larger discount. However, you would be losing five years of a fixed rate, so there is a tradeoff.

The inverted yield curve is screaming at you to take advantage of the point of inversion and to save as much money as possible in short-term money market accounts and treasuries.

2) Best relative risk-free return. Back in 2015, your money market account and short-term treasury bonds paid practically nothing. I clearly remember when I was only getting 0.1% at my main bank where I had seven figures in assets.

As a result, logical investors decided to take on more risk by buying stocks and real estate. Stocks and bonds have performed handsomely ever since but hit a rough patch in late 2018 as investors pulled back.

With short-term rates higher than long-term rates, investors are naturally reconsidering the wisdom of taking so much risk when expected future profits and economic indicators are slowing.

Investors can now earn 2.45% risk-free in savings and 2.5% in 3-month treasury bonds. Not bad for not having to take any risk or do any work while having maximum liquidity.

Since the end of 2015, the total added value a consumer has been getting is roughly 4.6% (2.2%from borrowing at the point of inversion and 2.4% from saving). This value increase is significant.

3) Liquidity grows in value. Although an inverted yield curve does not guarantee the U.S. economy will go into a recession, every recession has been preceded by an inverted yield curve.

During a recession, companies naturally reduce capital expenditure and hiring. If the recession gets bad enough, as it did in 2008-2009, potentially millions of people will lose their jobs.

With uncertain times, the value of cash goes up because cash provides individuals with more options. Cash allows people who get laid off to wait out the storm until the economy recovers.

The people who were forced to sell stocks and real estate between 2008 – 2012 probably did not have a high enough cash balance. They are surely trying to kick themselves in the face today.

Unless you pay off your mortgage in full, you will continue to have the same mortgage payment amount each month. The only difference is that the percentage of your payment going to principal will be increasing.

Therefore, one of the riskiest scenarios if for you to pay down your mortgage without fully paying it off and then experience a job loss. If this happens, you will probably feel a tremendous amount of financial anxiety because your investments are likely taking a hit while your housing expenses are still the same.

4) Vulture firepower. Whether in a bull market or a bear market, there are investment opportunities every day. You always want to have at least 10% of your investable assets in liquid cash ready to pounce.

However, after a 10-year bull market and/or when the yield curve inverts, you probably want to have at least 30% of your investable assets in liquid cash. After all, your cash is earning at least 2.45% risk-free.

The investment opportunities during the 2001-2002 dotcom bubble crash and the 2008-2010 housing bust were plentiful. There will be more plentiful opportunities again. You just need to have the courage to leg in when everyone is running the other way.

Recessions only last for about 18-22 months on average. If you’ve paid off your mortgage and didn’t buy any bargains during the recession because you didn’t have enough money, you will likely feel bad about your inactivity once the economy picks up.

5) Peace of mind is overrated. You will feel at most six months of excitement after you’ve completely paid off your mortgage. After six months, it’s back to business as usual. The same thing happens after you get a promotion, a raise, a business win, or win a championship.

The highs never last forever. Likewise, your peace of mind will not last forever either.

When times are really bad, you might actually have more peace of mind if you don’t have a significant amount of your net worth tied up in one asset.

When times are really good, you may start feeling bad that you aren’t more levered to earn a greater return on your property.

After paying off a condo in 2015, I wrote about the mortgage payoff fees and procedures to expect so folks don’t get blindsided. But after about a month, I no longer felt any joy from having no mortgage.

When it came time to do my taxes eight months later, I wondered where my 1098 mortgage interest statement was because I had forgotten I had paid it off! I actually felt a little dismayed I didn’t have that deduction anymore.

Arbitrage The Kink

You want to save aggressively in money market accounts or short-term treasuries to take advantage of higher rates and borrow money at longer-term durations to take advantage of the inversion.

To go the opposite way and borrow short-term money at a higher rate and lend longer term money at a lower rate is completely illogical. Only non-savvy financial readers do this.

But this is exactly what banks are being forced to do, which is why since the yield curve inverted, the banking sector has started to significantly underperform the S&P 500.

Notice in the below chart how XLF (banking ETF) started to underperform the S&P 500 in the second half of March 2019 once the yield curve inverted.

If you don’t want to take my advice, then at least be aware of what the stock market and billions of dollars of lost value is telling you.

In general, less debt is better than more debt. To not have debt in retirement is a wonderful thing.

But if you are like most people who are still working and who don’t have unlimited funds, then hanging onto your mortgage or refinancing into a mortgage with a fixed duration that matches the point of inversion makes the most financial sense.

If the yield curve gets extremely inverted, then it’s up to everyone to go all-in and arbitrage the kink. Can you imagine if the 3-month bond yield stayed at 2.5% while the 10-year bond yield collapsed to 1.5%?

Banks would be paying us 1% to live in our homes.

Don’t buy when things are full price. Always buy when things are on sale.

An inverted yield curve only comes around about once every 10 years. Refinancing your mortgage during this sale is the most logical conclusion if the numbers make sense.

Related: Why Real Estate Will Always Be More Attractive Than Stocks

Readers, what type of people or institutions borrow at higher short term rates and lend at lower long term rates? If you can identify them, we should pay them a visit and make lots of money in the process.

The post Paying Off Your Mortgage Is A Bad Move When The Yield Curve Is Inverted appeared first on Financial Samurai.

from https://www.financialsamurai.com/paying-off-your-mortgage-is-a-bad-move-when-the-yield-curve-is-inverted/

[ronaldmrashid]

No-Cost Refinance Loan: There’s Really No Such Thing

Even though a no-cost refinance sounds great, there’s really no free lunch.

It’s like marrying someone for their money. You might think you’re getting a great deal, but you’ll probably have to put up with your partner’s controlling, narcissistic, and disgusting ways. If you’re not physically attracted to him or her, then that’s a whole other set of problems to deal with.

OK, a no-cost refinance isn’t as bad as that. But there are always costs even if you can’t see them.

A no-cost refinance is a loan transaction in which the lender pays all the refinance costs.

Refinance costs includes: processing and underwriting fees, the appraisal fee, loan origination fees, title and escrow fees, notary fees, and courier fees.

These fees can easily add up into the thousands of dollars, making potential borrowers hesitate as to whether to go through with the refinance or not.

See some of the fees below I had to pay during my last refinance some years ago, but was mostly covered through credits.

To boost business, lenders entice potential borrowers by covering all the fees so there is no out-of-pocket cost to the borrower.

If the borrower gets a lower mortgage rate without paying any fees, then the decision to refinance becomes easier. The only factor to really consider is the time and effort it takes to refinance.

No-Cost Mortgage = Higher Mortgage Rate

Lenders aren’t in the charity business. In fact, publicly listed financial firms have some of the largest market capitalizations in the entire S&P 500 index because they make so much money.

The way lenders make up for covering all refinancing costs is by simply charging a higher monthly mortgage interest rate.

It’s the same thing as the employer making you, the employee, feel great about their generous 401(k) matching and free or highly subsidized healthcare benefits. You might be getting great benefits, but it’s costing you in terms of a lower salary.

Mortgage rates are set in increments of 0.125% e.g., 2.5%, 2.625%, 2.75%, 2.875%, 3%, etc. Therefore, instead of paying 2.5% for a mortgage refinance with fees, your bank might charge you 2.625% or 2.75% instead if you want to go the no-cost route.

The longer you take to pay off your mortgage, the more interest income the bank will make. Banks know that on average homeowners own their homes for ~8.3 years. Therefore, they can calculate their potential expected profits with relative ease once they have enough mortgage customers.

No-Cost Loan Fine Details

There are different types of no-cost mortgage or refinance deals as well. It’s important to ask your lender about every variable and read the fine print.

Some lenders may just cover lender fees like origination, underwriting, and processing. While others may also include third-party costs like title and appraisal, title, escrow and so forth.

If you plan to go the no-cost mortgage refinance route, then you might as well keep things simple and ask for the lender to cover all costs. Why makes things overly complicated?

You want to stay away from lenders who attempt to nickel and dime you by covering certain fees and not covering others.

If you can’t get the lender to cover all your fees, the other option is to simply add on the fees to your mortgage balance. Over the long run, you will pay more money. But at least in the short run, you’ll be more liquid.

I’m not a fan of increasing your mortgage debt by rolling up the fees. The whole point of refinancing is to save money.

Example Of A No Cost Mortgage Refinance

Option A) No cost refinance: 4% mortgage rate, NO fees. Option B) Standard refinance: 3.75% mortgage rate, $5,000 in fees.

Which option do you choose?

The decision depends on the size of your loan and how long you plan to keep the loan until it is paid off. How long you plan to keep your loan depends on many life variables and your view on future interest rates.

Let’s say the loan size you want to refinance is $1 million and you plan to keep the loan for 10 years before paying it off. You plan to turn your home into a rental and build your passive income portfolio.

A 0.25% difference in interest rate is $2,500 a year in interest savings on a $1 million loan. From the bank’s point of view, if they charge the higher rate, they’ll get to make up to $2,500 more in interest income a year, depending on their cost of capital, for the life of the loan.

Over a 10 year period, if you choose Option B with the lower 3.75% rate, you will save $25,000 in interest expense. Therefore, it’s clear Option B is the right financial choice assuming all else being equal.

In a different example, let’s say you only plan to borrow $300,000. It’s your first home in a city you plan to live in for four years after which you plan to sell it and go to graduate school.

A 0.25% difference in mortgage rate is a savings of only $750 a year on a $300,000 loan. Over the four year period, you will have saved $3,000 in interest expense by selecting the 3.75% mortgage that cost you $5,000 in fees.

Given saving $3,000 is less than the $5,000 mortgage refinance cost, going with a no-cost mortgage at a higher rate makes more sense all else being equal.

Only if you decide to stay or keep the property for at least 7 years does it start making more sense to go with Option B, the lower mortgage rate with $5,000 in fees.

Should You Do A No-Cost Refinance?

Psychologically, it feels GREAT to pay zero fees out of pocket. If your new mortgage rate is less than your existing rate while not having to pay any fees, going the no-cost route is the better way to go. You’ll feel like you got something for nothing, even though you know nothing is really free.

If you’re planning on moving, upgrading, or downgrading homes within five years, or if you believe rates will move lower during the duration of your homeownership, paying upfront costs for a lower interest rate is not an optimal financial move. A no-cost refinance is more appropriate if the numbers make sense.

Imagine paying $5,000 in loan fees to save $750 a year in interest expense only to sell your house one year later for a great job opportunity in a different city. You will feel pretty stupid, maybe even to the point where you decline the job opportunity that might make you a multi-millionaire. Going the no-cost route would have been a much better option.

A no-cost refinance is also good for a borrower who plans to pay down their mortgage quicker. Even though the rate is slightly higher, you might save on mortgage interest expense over the long run if you have the cash flow to aggressively pay down principal.

A no-cost loan isn’t inherently good or bad. A no-cost loan is simply an option to help banks generate more business by meeting borrower demand. If your main reason for taking out a no-cost loan is because you can’t afford the fees, then you’re likely borrowing too much and/or buying too much house.

Always Negotiate Everything

I strongly recommend everyone make at least a 20% down payment for a property plus have a 10% liquidity buffer. In other words, if a property costs $500,000, the most you should borrow is $400,000 and still have $100,000 left over in cash or securities that could be easily liquidated. Downturns do happen.

Companies like McDonald’s long ago figured out that once they allowed for credit cards, their customers would spend on average $7 versus only $4.50 when using cash. A 55% increase in spending is huge and great for business. But spending more money is often bad for the consumer’s finances and waistline.

Never be afraid to negotiate your mortgage interest rate and your mortgage fees. The first quote is seldom ever the best quote a lender can give.

For those of you wonder, I’m still battling it out with my lender to get below 3% on a 10/1 ARM with zero closing costs. My battle should be done within a week, at which time I’ll share with you all the gory details. I’m confident I will win as the 10-year bond yield continues to go down.

Related:

Now Is The Time To Refinance Your Mortgage

Adjustable Rate Mortgage Over 30-Year Fixed All Day Long

Readers, how do you determine whether to do a no-cost refinance or a standard refinance or loan with fees?

The post No-Cost Refinance Loan: There’s Really No Such Thing appeared first on Financial Samurai.

from https://www.financialsamurai.com/no-cost-refinance-mortgage-loan/

[ronaldmrashid]

Refinance Your Mortgage Now As The Yield Curve Inverts

On March 11, 2019, Federal Reserve Chair Jerome Powell indicated there will be no further rate hikes in 2019, even though he suggested that two were likely this year as recently as December 2018.

On the one hand, his backpedaling is welcome news for risk assets. Stocks have performed well year to date and real estate buyers are coming back into the market thanks to cheaper mortgage rates, lower property prices, and higher inventory.

On the other hand, declining fixed income yields is a sign of slowing growth. The Federal Reserve does not see the economy as strong enough to withstand higher interest rates.

It’s hard to accurately predict the future. The bond market is telling us one thing and the stock market is telling us another.

But when you’ve got a bird in the hand, don’t let go. Every homeowner should at the very least refinance their mortgage now and boost cash flow.

Refinance Your Mortgage As The Yield Curve Inverts

The 10-year bond yield is now at ~2.45%, a one-year low. As recently as November 2018, the 10-year bond yield was at 3.2%.

Given mortgage rates follow the 10-year bond yield up and down, mortgage rates are also back down to one-year lows.

This 10-year bond yield chart should make you salivate

It doesn’t matter if the bull market continues or a recession is on the horizon now that the yield curve is inverted. Refinancing now makes a lot of sense because saving money always makes sense.

Homeowners who are seeing their adjustable rate mortgages expire within one year or homeowners who bought when rates were much higher should especially consider refinancing.

A ~0.75% decline in mortgage rates since 4Q2018 is significant.

The Adjustable Rate Mortgage Survives Again

When I bought my current house in June 2014, the 10-year bond yield was at the same level as it is today. As a result, you’d think that my 5/1 ARM would see no adjustment.

Unfortunately, my 5/1 ARM is tied to the one-year London Interbank Overseas Rate (LIBOR) plus a 2.25% spread. Given short-term rates have gone up, so will my 5/1 ARM when it adjusts this summer.

If my 5/1 ARM had been tied to the 10-year bond yield, then my mortgage rate would have stayed the same.

Related: The Anatomy Of An Adjustable Rate Mortgage Increase

Instead of allowing my 5/1 ARM to reset to 4.5% from 2.5% this summer, I can simply refinance my 5/1 ARM to a new ARM at around 3%. While this rate is higher than my current 2.5% rate, it is still 0.75% – 1% lower than it was in 2H2018.

Further, an average rate of 2.75% over a 10 year period (5 years at 2.5%, 5 years at 3%) is still much lower than a 3.5% 30-year fixed rate mortgage I was considering back in 2014.

If I let my 5/1 ARM adjust this summer, my new payment would be about $3,700/month, down from $3,907/month. Why is this?

Despite the mortgage interest rate rising from 2.5% to 4.5%, my monthly payment declines because we paid down the mortgage from $990,000 to $700,000 in five years (-29%).

Paying down principal during the fixed rate period is what many ARM opponents forget about.

But the real potential cash flow savings are derived by comparing my upcoming 4.5% rate to the new 5/1 ARM rate I can get if I refinance now at 3%. In other words, my cash flow improvement is the difference between $3,700/month at 4.5% and $2,951/month at 3% = $749, a significant amount of change.

However, there is no free lunch. The appraisal, application, processing, and underwriting fees for a new mortgage may cost ~$1,700 and the title and escrow fees may cost ~$1,300 for a total of $3,000, before any credits.

One common method used by homeowners to help defray the cost of refinancing is to add the refinancing costs to the loan amount.

Partially inverted yield curve in March 2019 – 10-year is actually lower than 3-month yield as well now

Related: Understanding The Yield Curve: A Prescient Economic Indicator

Always Save Money When You Can

On a million dollar loan, a 0.75% – 1.375% lower mortgage rate is an annual interest savings of $7,500 – $13,750. If the cost to refinance is $3,000, you’ll have covered your cost in just 4 – 6 months.

A general rule of thumb is that you should refinance if your refinance cost is covered within 12 months. In other words if your refinance costs $3,000, your monthly interest savings should be at least $250.

The 12-month barometer is also on the condition you will live in your house for at least 13 months, preferably much, much longer. The longer you plan to live in or own your home, the more you can afford to violate the 12-month rule.

Stick to at most a maximum 24 months break even given the average homeowner lives in his or her home for only about nine years.

When it comes to refinancing, there is also a PITA factor to consider as well. You’ll have to provide your last two years of tax returns, your last two months of pay stubs, and potentially other financial documents to the bank during the underwriting process. Then you’ll need to sign a binder full of documents and set up new auto payments.

But when it comes to saving and making money, none of us should be afraid of doing a little extra work. It’s extremely easy to run the numbers once you get some legitimate quotes.

If a recession is really going to hit, we’ll be happy to be saving money each month. If the bull market continues, we’ll be absolutely ecstatic to not only be saving money but experiencing further appreciation in our beloved homes.

You can check online for the latest mortgage rates with LendingTree as opposed to going to each lender one by one. They have a massive mortgage lending market where they make lenders compete for your business.

Be forewarned, they are on the more aggressive side in contacting you. But when it comes to refinancing your mortgage, you want lenders who are hungriest for your business.

Then of course you should check with your existing bank who has your mortgage to see what they can provide for you. They don’t want to lose your business, so they should be incentivized to provide you the best rate possible.

Despite ~3.8% being the current average rate for a 5/1 ARM according to Freddie Mac, I’ve successfully locked in a 10/1 ARM at 3% worst case with a refinance cost of less than $1,000.

In an upcoming article, I’ll discuss my mortgage refinance strategy to help you get the lowest interest rate possible as well. I’ve still got some levers to pull to try to get my 10/1 ARM down to 2.875%.

I’ll let you know what happens. In the meantime, start getting legitimate quotes right now.

Homeowners, have you checked the latest mortgage rates? If so, are you refinancing now or waiting for even lower rates? Can you believe how lucky we are that rates have collapsed again? Or are you in the low interest rates for life camp like me?

The post Refinance Your Mortgage Now As The Yield Curve Inverts appeared first on Financial Samurai.

from https://www.financialsamurai.com/its-time-to-refinance-your-mortgage-and-boost-your-cash-flow/

[ronaldmrashid]

Increase The Value Of Your Professional Network By Befriending These Five Archetypes

For 10 years I acted as a mentor to incoming analysts or associates at one of the two investment banks I worked for.

Being a mentor was rewarding and a way to help younger folks navigate the often terrifying waters of a cutthroat work environment.

One of the main pieces of advice I gave was this: You should spend as much time selling yourself internally as you do externally. 50/50.

What I noticed during my career was that those who zoomed up the corporate ladder always seemed to have the strongest networks, regardless of whether or not they were the best producer.

The majority of people hate to network. They believe hard work is enough to get ahead. Unfortunately, from a career and financial perspective, networking is vital if you want to outperform.

There is no true meritocracy.

The Rise And Fall Of A Network

At its core, a network’s fundamental reason for being is for survival purposes. When you have a group of people fighting for you, it’s much easier to avoid getting eaten by lions.

When I started Financial Samurai in 2009, nobody gave me the time of day even after a year of operation. A lack of recognition is why so many blogs or online businesses shut down within a year, despite the low operating costs.

Therefore, I started my own blogging network to help me and other nascent bloggers grow. We promoted each other’s sites over social media, allowed for each other to guest post, helped each other with technical issues, and shared advertising contacts.

At its peak, the network grew to 120 bloggers strong. To pay for my time and the operating expenses of running the network, the network took a 10% cut of all the advertising campaigns mostly I and sometimes other members created. It was a promising business model based on honesty.

The network was going great until one member decided to take the advertising contacts we had accumulated and started her own business creating blog campaigns. Then another member started doing the same.

Because of greed and selfishness, instead of having one strong network, we now had rival factions. Contract prices fell and chaos ensued. No longer was the network mainly about supporting the growth of each other’s sites.

The network created money monsters. I guess I can’t blame the two members who took my idea and created their own mirror image business because they only made about $36,000 a year from their day jobs. To them, they only saw dollar signs dancing around their heads.

Their intense focus on money and lack of loyalty disappointed me greatly. Consequently, I changed gears and decided to spend less time networking and more time writing on Financial Samurai. In retrospect, I’m thankful with how things turned out because running the network began feeling like I was working a day job again.

In case you’re wondering, neither of the two bloggers who took my idea is still around today. They are back to the grind. When you focus on making money first and providing value second, you tend to lose more often than you win.

What people may not know is that I still do an occassional “side hustle” of putting together blog campaigns for financial clients just like in the good old days. I just do so privately to keep things simple. Never stop side hustling! The opportunities are endless.

As for my network’s original intention of helping other bloggers grow, I’ve established The Financial Samurai Underdog Tour where anybody with an underdog story can sign up and tap my platform for exposure. The FS Forum is my new way to keep the camaraderie alive for personal finance enthusiasts.

Build These Five Relationships

It’s always good to network up and down. Those who’ve been around longer have more connections. Those with more connections tend to have more money and power and so forth.

Having 1,000 LinkedIn connections who won’t give you the time of day isn’t very helpful. Neither is having 10,000 Facebook friends who won’t show up to your birthday party.

Once you’ve built a network that won’t let you drown, it’s time to focus on building a network that will help you thrive.

Below are five types of people you should bring into your professional network. They will make you richer and happier.

1) The Life Giver

By far the strongest person to have in your professional network is someone who can give you or your children a job. In order to wield such power, the person must either be a C-level executive, a celebrity, or be the majority shareholder of a business.

Given growing anti-nepotism rules, more companies public and private, are not allowed to hire relatives. But that doesn’t forbid people in power to refer their friends and their friend’s children and push them through the system.

The most powerful Life Giver is the person or family who owns a large privately owned business. They can hire and promote whomever they choose at whatever salary they like. The most powerful family with a private business that comes to mind is the Mars family. They are the makers of M&M candies and are worth over $60 billion. True Stealth Wealth.

Then there are much smaller private companies owned by an individual or partnership that is quite powerful as well. For example, if you own a private online business that generates $1 million in revenue and $500,000 in operating profits, you could easily hire a handful of relatives for $50,000 – $100,000 each.

Your goal is to get to know at least one Life Giver. Once you do, the worst case scenario is that you’ll always be taken care of.

2) The Golden Retriever

It’s sometimes hard to meet C-level executives, celebrities, or private business owners. They tend to wall themselves off because so many people are always asking them for something.

The next best thing is to build a relationship with a Golden Retriever.

A Golden Retriever is someone who makes him or herself extremely useful to a Life Giver. Due to their usefulness, they have joined the inner circle and become one of the Life Giver’s most trusted confidants.

A Golden Retriever could be the executive assistant to the CEO who control’s her schedule. A Golden Retriever could also be the sidekick, like Turtle or Johnny Drama in Entourage who invite whomever they want to Vincent Chase’s parties and movie premiers. The most powerful Golden Retriever is the Life Giver’s spouse.

A Golden Retriever will help you get in the door, but he or she can’t make the final decision. Only the Life Giver can. It will be up to you to impress sufficiently the Life Giver in order to get the job, land the funding, or get invited to fabulous boondoggles.

Your goal is to get to know at least two Golden Retrievers. Once you do, you’ll always have opportunities to grow.

3) The Educator

If you have children, there’s nothing more important than your children. Parents often view education as the key investment they can make. As a result, some parents go to great lengths to ensure their children gain entrance into the best schools.

Although money can buy admission, you need a lot of money to legally buy your children’s way into the best private grade schools and private universities. Legal bribery is in the millions, not in the hundreds of thousands.

The best way to improve your child’s chance of getting into a great school without running the risk of a fine and jail time is to know Educators. Educators are the teachers, coaches, athletic directors, admission officers, school heads, and board members of schools.

If you can procure a letter of recommendation or a good word from an Educator, you drastically improve your child’s odds of getting into a particular school, especially at the lower school levels. Every recommendation counts.

Unlike public grade schools which must accept everyone, private schools can pick and choose the families they would like to join their fraternity. The more the very people who run the school can provide a good recommendation, the better your child’s chances.

Ever since I became an assistant tennis coach at a particular high school, I’ve noticed several people at my tennis club are much nicer to me. They know that even if I, as a lowly assistant coach, can’t help them get their child in, they must at least be pleasant to me out of fear I might say something bad about their family. Getting blackballed is a real thing.

Whether you have children or not, your goal is to know at least three Educators. Once you do, you’ll at the very least diversify your network so that it’s not all just rich and powerful people.

4) The Healer

Health is greater than wealth. Therefore, it behooves you to get to know as many health professionals as possible who you can ask for help.

Imagine if you had friends who are cardiologists, radiologists, optometrists, ophthalmologists, psychiatrists, orthopedic surgeons, podiatrists, earn, nose & throat doctors, nutritionists, physical therapists, gynecologists, nurses, pediatricians, and physical trainers. You could ask them anything and everything.

After getting an MRI on my knee 10 years ago, my radiologist friend whom I’ve known since 9th grade told me to send over the file so he could give me his opinion. His evaluation provided me tremendous peace of mind to not pursue arthroscopic surgery to fix a meniscus tear.

With the soaring cost of healthcare and the dwindling time we get with healthcare providers, it’s good to know as many Healers as possible.

Your mission is to get to know at least four Healers who specialize in different areas of health. Ideally, you are able to befriend a general practitioner, a physical therapist, and a psychiatrist.

5) The Unfiltered Genius

Life is easier if you are extremely smart. You can process information more quickly and make better decisions. Smart people also have the ability to better foresee opportunity where most cannot, which can make them extraordinarily wealthy. Unfortunately, not all of us are intellectually gifted, including myself.

The next best thing to being a genius is to befriend someone who is an Unfiltered Genius. The Unfiltered Genius is your sounding board for all of your life’s big decisions: joining a new company, getting married, buying a house, starting a business, negotiating a severance, and more. He or she will tell it like it is without being afraid of hurting your feelings.

We all have blind spots that lead us to walk off cliffs. The Unfiltered Genius will analyze every issue thoroughly and help you make better decisions in your life.

Everyone needs to know at least a couple Unfiltered Geniuses. If you don’t have one as your friend, it is worth it to hire one. If you can’t afford to hire one, then seek to read, watch, or listen to Unfiltered Geniuses over the internet who are experts in their field.

The easiest way to avoid saying, “If I knew then what I know now,” is to speak to an Unfiltered Genius who has been there before. At the very least, seek advice from your parents.

Not All Relationships Are Created Equal

Quality matters over quantity when it comes to building a valuable personal and professional network. The rich and powerful are getting more rich and powerful. At the same time, technology is enabling us to become more independent.

Go through your existing relationships and see if you can categorize each relationship into one of the five archetypes above. Then, systemically cull the relationships who aren’t real, never reach out, provide no value, or who only take and never give.

You need to proactively cultivate these five archetypes over time. Asking for help out of the blue is a great way to strain a relationship. Always focus on giving first.

If you are unable to befriend one of these five archetypes, then it’s up to you to become one. Once you do, you’ll find yourself naturally getting included into more powerful networks over time.

Related posts:

Are You Delusional? Let’s Talk Dunning-Krueger

Be Smart Enough To Act Dumb Enough To Get Ahead

Readers, do you have all five archetypes as part of your network? Which archetype are you? What are some ways in which you proactively cultivate your network?

The post Increase The Value Of Your Professional Network By Befriending These Five Archetypes appeared first on Financial Samurai.

from https://www.financialsamurai.com/increase-the-value-of-your-professional-network-by-befriending-these-five-archetypes/

[ronaldmrashid]

How To Plan For Your Retirement The Second Time Around

The main reason why I’ve gotten more conservative with my investments is not because valuation for the S&P 500 is near an all-time high and earnings growth is decelerating.

Nor have I gotten more defensive because housing inventory has shot up across major parts of the country and prices are clearly declining.

No. The main reason why I’ve gotten more conservative with my investments is because I’m very close to retiring for a second time.

Let me recap my background and share some retirement preparation plans if you’re also planning on retiring soon.

The Return To Retirement Living

After first retiring in 2012, I spent about nine months living the early retirement lifestyle. I wrote a book about my experience negotiating a severance and my wife and I traveled around the world for about 12 weeks.

By the beginning of 2013, I no longer told anybody I was retired. People gave me funny looks whenever I mentioned I had left corporate America for good. I also felt stupid saying I was retired in my mid-30s.

I longed for more purpose and a more acceptable identity that didn’t require explaining my background each time. So I decided to pivot from early retiree to full-time writer and entrepreneur.

Almost immediately, I felt better about my new role in the world. Growing Financial Samurai all these years has been incredibly fun.

On average, I spend about three hours a day on the site, which is one of the main reasons why it’s been so enjoyable. If I was forced to work 10 hours a day on FS and commute, I’d have probably started hating it after a year.

Having something intellectual to do, especially after my son was born in early 2017, has been a blessing. Being cooped up in the house all day is no fun for this stay at home dad.

Another thing I’ve enjoyed doing in my second career is mastering everything that relates to online publishing. From writing, to marketing, to business development, I now have a strong grasp on all the things it takes to build and run an online media company from the ground up.

Although it’s been seven years since I left full-time work, it’s been almost 10 years since I started Financial Samurai in 2009.

Back then, I had told myself that if I could reach various stretch goals by the summer of 2019, I would give myself the luxury of taking it easy once again.

The main stretch goal was to regularly generate over one million organic pageviews a month.

As fate would have it, I have the option to let go this summer and fully retire once more.

The Origin Of Luck And Fear

What I realize now is that whether by coincidence or on purpose, I’m living my life in 10-year cycles.

I first got a job out of college in 1999. Getting a job at a major investment bank was mostly luck because graduates out of a non-target public school usually don’t get these front office jobs in NYC.

Although there was the dot com bust in 2000, the 10-year journey from 1999 to 2009 was an overall positive for my career.

After about two years at the first investment bank, I got my second lucky break when a recruiter placed me at a new firm in 2001 in San Francisco. If I had not changed jobs, I would have been kicked to the curbed after my two years were up.

Then, of course, everything started crashing in 2008 – 2009. I was scared for my future given Lehman Brothers, Bear Sterns, Washington Mutual, and a bunch of other firms had collapsed. Friends were losing their jobs, their houses, and their savings.

Somehow, I managed to escape seven rounds of layoffs in a two year period at my firm. My immediate boss had left the firm to become a client the year prior. Thus, if the firm was to lay me off, it wouldn’t have had anybody to run the business. Another lucky break.

I was so worried about my future in 2009 that I decided to finally start Financial Samurai, an idea I had had since graduating from business school in 2006, but had been putting off.

If you look at the chart of when Financial Samurai was started, you’ll see that it was started at the exact bottom of the previous financial crisis in July 2009.

To start Financial Samurai at the bottom of the last financial crisis and then have a massive bull market help propel the site forward was also tremendously lucky.

Yes, I’ve spent many hours developing this site, but I fully admit that most of the growth is serendipitous. Living in San Francisco, the epicenter of technology and financial innovation has also helped me develop some key industry relationships.

If you started something in 2009, it would be relatively hard not to have successfully grown your business or your wealth.

The tailwind is like having a mentor who is actually the CEO of your company and also happens to be your dad who wants to give you the company. In such a scenario, how can you fail?

Since 1999 I’ve constantly wondered when my luck will run out. I’ve already talked about experiencing survivor’s guilt after my friend passed away when I was 15. All the good that has transpired since has only made me wonder more about the future.

Don’t Push Luck Too Far

Despite the good fortune, 2009 still burns deep in my psyche because of how badly my finances got crushed. Perhaps this is how survivors of the Great Depression felt for the rest of their lives.

I don’t want to ever again suffer through a 2009-like experience. I recently got a taste of temporarily losing lots of money in 2018, and that was enough.

I’m so thankful we’ve recovered and I no longer wish to push my luck.

2019 is the year where I plan to retire again after 10 years of running Financial Samurai. I’ll either sell the site, write less, or hire talented staff writers or guest writers to write using the Financial Samurai principles.

It’s been a great run, and I want to leave on an up note. If you are thinking of retiring for a first or second time, here are some things you should consider.

Retirement Planning Checklist

1) Adjust your risk exposure down.

As with any classic retiree in their 60s or 70s, it’s important to take down risk exposure because you no longer have the ability or the desire to work any longer.

Measure your risk tolerance in terms of the Financial SEER ratio. In other words, how many months are you willing to work to make up for a potential loss in retirement.

Once you’ve retired, you don’t want to be forced to go back to work. Giving up precious time for money is one thing, but so is the embarrassment of having to go back to work because of poor financial planning.

Debt should be completely eliminated or reduced to a level that will never be able to sink your finances.

2) Calculate your various income streams.

If after taxes, your income streams can sustain your desired retirement lifestyle, you’re golden. If not, keep working or build more side hustle income. To be conservative, it’s best to have at least a 20% cushion above your living expenses.

Plan out a tax-efficient safe withdrawal strategy based on a combination of your pre-tax and post-tax retirement accounts.

Those who want to stay conservative should try to only live off their after-tax passive income and never touch principal. Only when Required Minimum Distributions are in effect should you start drawing down principal.

3) Make sure you’ve accomplished all your goals.

When you leave your profession, you want to leave with as few regrets as possible. The best way to leave with few regrets is by fulfilling your stretch goals.

One of the reasons why professional athletes retire after winning the Super Bowl, a Major, or the NBA Championship is because there is no greater glory. During the rare times when such a champ tries to make a comeback, it’s often a sad affair filled with struggle.

If you cannot reach the pinnacle of your profession, one thing you must ask yourself is whether you’ll be leaving the place better than when you first started. If the answer is no, then you must take measures to rectify or continue working.

Retiring when your fund or company burned to the ground will make you feel like an unsettled ghost, unable to rest in peace. You want to go out on your own terms, which is why negotiating a severance can be incredibly powerful to your mental well-being.

4) Ensure your legacy will be left in good hands.

The longer you’ve worked, often the harder it is to walk away. The transition is made easier if you have someone you’ve trained or trust to take over once you’re gone.

The last thing you want is to have all your good work get undone by someone with a completely different philosophy. If this happens, you will feel as if you wasted many years of your life. Find an excellent successor and don’t leave until you do.

5) Have a next purpose.

You don’t want to retire into nothingness. Going from working 12 hours a day to having all the free time in the world can be very disconcerting. After being so used to structure for so long, you might start wondering what else is there to life. Some of you might even get depressed if you don’t have purpose.

Instead, diligently map out your retirement goals months or even years before you retire. You want to retire to something, not from something.

Start talking to people in the fields that interest you when you still have a job. Once you retire, it may be tougher to build relationships because society tends to look down of those who no longer work.

Having a clear purpose in retirement will make your remaining days at work even more meaningful. You’ll also experience a much more joyful retirement life.

Retire As Many Times As You Can

There doesn’t need to be only one retirement in your life. Instead, I encourage you to retire multiple times because that means you’re challenging yourself with new endeavors.

Whether you decide to retire for six months or for six years is up to you. There’s nothing more professionally fulfilling than mastering a new skill and enjoying its accompanying rewards.

Skills are highly fungible today thanks to technology. So long as you’re able to work hard, communicate intelligently, get along with others, and produce more than you cost, you can do well at almost anything because the rest is learned on the job.

I truly hope we never see another 2008 – 2009, nor am I anticipating a correction of such magnitude. I’m just not willing to take unwarranted chances given I’m satisfied with what I have.

With now a wife and son to take care of and potentially zero active income if I sell Financial Samurai, I can no longer afford to take any excess risk. To go through another 40% loss as I did in 2009 at this stage in my life would be devastating.

Our passive income should keep us afloat, but I haven’t truly been able to means test it yet due to my severance that paid out from 2012 – 2017 and the active income I’ve been generating from Financial Samurai.

From July 2019 – July 2029, I plan to spend my 40s primarily focused on raising my boy and spending time with my parents. If we relocate to Hawaii, we’ll have more than enough activities to keep us busy in our second go around.

Let’s pray the next 10 years are as lucky as the past 10!

Related Posts:

The First Rule Of Financial Independence: Never Lose Money

The Fear Of Running Out Of Money In Retirement Is Overblown

Readers, anybody on a 10-year cycle like me? How do you plan to ensure good fortune for the next 10 years of your life? Anybody retire a second or third time? How long did each retirement last and what did you do? What else should people do to prepare for retirement?

The post How To Plan For Your Retirement The Second Time Around appeared first on Financial Samurai.

from https://www.financialsamurai.com/how-to-plan-for-your-retirement-the-second-time-around/

[ronaldmrashid]

Perhaps Bribing For Admissions Starts In Preschool

March 12, 2019 is a day I’ll never forget. Not only did the college admissions bribery scandal break that morning, we found out our boy got waitlisted by two preschools. Waitlisted is really just a euphemism for rejected.

The first preschool was a Mandarin immersion preschool I’ll call PooPoo about 20-25 minutes away. We had to go for an initial one hour tour, then a 30 minute parent interview with the admissions director who was hacking up a lung that day, and then a final play date interview along with 11 other kids and parents.

It was an arduous process that we found unappealing, especially given the commute. During our application process, the school canceled its 4-day a week part-time program in favor of only 5 full days a week. We found this to be too much for a 2.5 year old.

The school seemed like it was being run more like a business first, and a school second with its massive $1 million fund raising banner in the entrance and its decision to go 5 days a week in order to charge their full $31,240 a year in tuition.

Given these issues, we were not disappointed when PooPoo waitlisted our boy. We had already decided he wouldn’t attend. Spending $31,240 a year on tuition for a 2.5 year old felt extremely unnecessary. I speak Mandarin and we could use the money to live in Taiwan for a summer instead.

The second school we applied to I’ll call PeePee; it’s about a 15-18 minute drive away. We liked the school because it had a two day a week program that runs from 9:30am – 12:30pm for $8,500 a year. We thought this was a more appropriate transition for a young toddler first experiencing a school setting.

The only problem with the school is that it’s not very racially or socioeconomically diverse. Further, 11 of the 12 available spots for this upcoming preschool year for 2-3-year-olds were already preassigned for siblings. This ensured further homogeneity.

The Executive Director personally reached out over e-mail and told me that 80 people applied for the one open non-sibling position, which meant that they only had a 1.25% acceptance rate.

Given we had no connections to the school, don’t look like the majority of parents, don’t have any status since we didn’t tell them we run this site, didn’t donate any money, and learned the application numbers, we weren’t surprised about the rejection, just a little disappointed.

Bribes Might Start As Early As Preschool

I wasn’t told the application statistics by PooPoo because they didn’t personally reach out like PeePee. They basically sent a blast waitlist/rejection e-mail. But, I’ve got to imagine the application statistics are similarly dire.

1.25% would be the lowest college admissions rate by far in the country. If parents were willing to spend $250,000 – $400,000 on average to get their kids into colleges like USC with a 17% acceptance rate, it makes me wonder what parents would do to try and get them into the most hoity toity of preschools.

The parents sending their kids to the two schools we got rejected from have very similar racial and economic profiles as the 33 parents who’ve so far been caught by the FBI. I spoke to many of them during our interview process and learned their backgrounds: bankers, techies, entrepreneurs, venture capitalists, executives, lawyers, doctors, etc. Preschool could very well be where this entire bribery culture starts.

But then I started to think things through because unlike the college admissions bribery scandal, there aren’t any tests to manipulate or rowing coaches to illegally bribe.

Instead, you just basically contact the admissions director and tell them you are willing to donate a large sum of money to the school for expansion or educational purposes and would like to be a part of the community. You must reach out because preschool is ground zero. That, or the school knows who you are and recruits your family.

With a 1.25% acceptance rate at PooPoo, you’d think I wouldn’t know anyone who sent their kids there. But in reality, I know several parents whose kids went there and they are all extremely wealthy. Donating $100,000 – $200,000 for their kid to play with wooden blocks would mean nothing to them. I didn’t bother to ask them for a recommendation because I don’t know these parents well enough nor did I care enough.

Legal bribery in the form of quid-pro-quo donations has always been around and looks like it’ll always be around.

Also, I realized that because wealthy people can more easily afford to have multiple kids in expensive cities like SF, NYC, LA, Boston, and Washington D.C., the elite institutions starting from preschool through college will continue to be geared towards the wealthiest people in America who mostly look the same.

For those who don’t know, younger siblings basically get preferential admission into the preschool, elementary school, middle school, or high school their brothers or sisters attend, so long as they aren’t a screw up or they meet a minimum academic standard. The preferential treatment gets less with each schooling level, but it’s there, even in college.

Legacy admissions is the biggest affirmative action policy of them all.

But I understand the sibling preferential admissions policy because you want to maintain continuity in the family. The school has also built a relationship with the family and it would be extremely awkward to reject a sibling. But such rejections do happen.

However due to the nature of homophily, people of a certain class and race tend to hang out and support each other. We know that all parents want the best for their kids, so I don’t blame these schools for accepting the same types of children year after year.

Don’t Worry About Us

Although we got rejected by two schools, we got accepted by one I’ll call WheeWhee! A 33% hit rate ain’t too shabby.

The school we got accepted to came highly recommended from my wife’s ex-coworker and one of my tennis students at the high school I currently coach at. It was the first school we visited and applied to a year and a half ago.

What’s great about the school is that it’s diverse, not rigid, super friendly, and is only a five minute drive away. The short commute really is a blessing.

Having to drive to the other two schools made me feel like I was driving to work. With WheeWhee, it feels like I’m just going down the hill to my neighborhood grocery story for a bagel.

The tuition at WheeWhee is not cheap at $1,800 a month for five full days a week. But we have the option of going half days each day or three days a week for $1,400 a month. Further, we can go month-to-month if we decide to go on an extended vacation in the future.

The admissions director told us they get on average 200 – 260 applications a year for 12 spots. Only three of the spots are reserved for siblings. An acceptance rate of 3.5% – 4.5% is still quite low.

Our lucky break for getting in was when we started to get to know one of the teachers randomly at the California Academy of Sciences where we take our son three times a week. We started bumping into him at least every week for at least a year. As a result, he felt comfortable recommending us to the admissions director.

We’ve now got a decision to make.

Do we put down a deposit for the spot or give it up so we can remain free to relocate. We aren’t entirely sold on the necessity of putting our son in preschool before three years old since we are both full-time parents. We also might end up in Honolulu and send him to preschool there if the summer works out well.

We’ll probably put down the deposit and ask for a refund if we change our mind. They won’t have trouble filling the spot anyway with over 200 applicants a year. Besides, the school year starts in August, so we’d have at least two months in Hawaii before having to come back.

The preschool application process requires you to be on the ball. Given the amount of demand, any missed deadline will eliminate your chances of getting in.

You’ve got to interview well, write a comprehensive application, and consistently show your interest by attending events and following up. Even if you do everything right, the chance of admission is still low in many big cities.

But don’t worry too much. Every kid will get in somewhere if they apply to enough places. Some spots open up randomly throughout the year as well. It might not be the ideal school, but so long as the children are loved and kept safe, that’s all that really matters.

It’s just preschool after all!

Related:

Navigating The Preschool Admissions Process

Perpetual Failure Is Why I Continue To Save And Invest So Much

Readers, do you think there’s a lot of legal bribing at the “prestigious” preschools in your city? Why do people care so much about where their child goes to preschool so long as they are safe and learning? Is there any more educational research you would like me to do and write about?

The post Perhaps Bribing For Admissions Starts In Preschool appeared first on Financial Samurai.

from https://www.financialsamurai.com/perhaps-admissions-bribing-starts-in-preschool/

[ronaldmrashid]

The Wide Implications Of The College Admissions Bribery Scandal

Thanks to the fantastic work by the Department Of Justice and the FBI we have learned the average bribe it takes to buy your kid’s way into an elite private university is between $250,000 – $400,000. Although, some bribe amounts went as high as $6 million.

The 10-month-long investigation, code-named “Operation Varsity Blues,” uncovered large bribes nationwide across various stages of the college admissions process. So far, two SAT and ACT exam administrators, one exam proctor, a college administrator and 33 parents, including actors William H. Macy, Felicity Huffman and Lori Loughlin were arrested.

The private universities spanned across the nation, including Yale, Stanford, Georgetown, USC and Wake Forest. A couple of public schools such as UCLA and the University of Texas were also involved in the scam.

In one alleged incident, the Yale women’s soccer coach received $400,000 to accept one student on her team, even though the applicant did not play soccer.

In another alleged incident, Lori Loughlin, aka “Aunt Becky” on Full House, allegedly paid $500,000 in bribes and fabricated photos depicting her daughters as competitive crew rowers in order to get them accepted into USC.

In another alleged incident, the Stanford University sailing coach agreed to also accept $500,000 in bribes in order for two students to gain admissions.

What’s up with crew by the way? It’s not a money-making sport for the university. Perhaps crew is a sport where a potential admit can be more easily manipulated into looking like a high caliber athlete through photoshop and other means.

Bribe-willing parents take note!

College Bribes And A Rigged System

According to Andrew Lelling, the US Attorney for the District of Massachusetts, the ringleader of the scam is William Singer, owner of a college counseling service called Key Worldwide Foundation, who accepted bribes totaling $25 million from parents between 2011 and 2018.

Singer’s counseling service is alleged to have been in reality just a money bribing business which enabled wealthy parents to buy their kid’s admission into an elite private university. Singer even set up his own fake charity where parents could “donate” the money and then write the donation off on their taxes.

“The parents are a catalog of wealth and privilege,” Lelling said. “They include, for example, the CEOs of private and public companies, successful securities and real estate investors, two well-known actresses, a famous fashion designer and the co-chairman of a global law firm.”

Implications Of The College Admissions Bribery Scandal

As the parent to a two-year-old currently “stuck” in extremely competitive San Francisco, I find the details from this investigation extremely fascinating. In fact, 14 of the 33 parents indicted hail from the SF Bay Area.

Over the years, I’ve written many posts regarding the private school system as I try to work out what’s best for our son.

After all, I come from a middle-class family and went to public high school, public college, and public graduate school. A public school education has worked out fine for me, but I want to make sure I’m not missing the benefits of going the private school route.

Here are some past posts to review:

Would You Accept $1,000,000 To Go To Public School Over Private School?

What If You Go To Harvard And End Up A Nobody

Private School Or Public School? Depends On Your Level Of Fear And Guilt

If you read the posts, you might come away thinking I’m waging a jihad against the private school system. In actuality, I’m just trying to get my head around paying such enormous amounts of tuition for an asset that is declining in value.

After all, this is Financial Samurai, a personal finance site that focuses on optimizing our finances and living our best lives possible.

I love the topic of education, and this latest college admissions scandal is worth reflecting on since every parent cares for their child’s future and we all care about competing in a fair society.

Here are 15 implications from Operation Varsity Blues.

1) Private school reputation takes a hit. Private schools are already under fire due to a number of reasons: 1) outrageous tuition, 2) student body is much wealthier than the overall US demographic, 3) rumors and now facts of buying your way in, 4) affirmative action, and more. The Varsity Blues investigation simply buttresses the point that this stuff goes on at private schools. It’s the same way we know shady recruiting tactics occur in D1 college sports.

2) Public school reputation grows. Notice how the vast majority of admission bribery cases occurred at private universities. Some argue this is because there are many more prestigious private universities than public ones. However, there are still plenty of prestigious public institutions like Berkeley, UVA, UCLA (named in scandal), UCSD, Michigan, Wisconsin, UNC Chapel Hill, Purdue, University of Illinois Urbana-Champaign, George Tech, US Military Academy, and William & Mary where it appears somehow much harder to buy your way in. The less public schools are implicated, by default the stronger their reputations grow.

3) Affirmative action for the wealthy gets harder to deploy. We learned from the Asian-American lawsuit against Harvard that donor legacy kids have a 10X greater chance of getting into Harvard than a nondonor, nonlegacy kid. The reason why affirmative action for the wealthy is far more egregious than affirmative action based on race is that wealthy people, no matter their race, already receive the best education, the best tutoring, the most stable home environments, and the most amount of access money can buy.

4) All universities take a hit overall in reputation and importance. Although it takes a tremendous amount of capital to bribe your kid’s way into these elite schools, a college education is fast becoming unnecessary. We can now learn everything for free online. It is also much quicker to do research and learn thanks to the internet. Yet, colleges continue to raise their tuition 2X-3X the rate of inflation each year. Meanwhile, it still requires the student 4.-4.5 years on average to get a diploma. Talk about an antiquated system the elite is desperately trying to perpetuate.

Don’t you think there’s something wrong with this chart?

5) The angst for all parents is real, but should decrease. Even if you are a famous, rich, white person like William H. Macy, Felicity Huffman or Lori Loughlin, you are not immune to the anxiety and stress of trying to get your kids the best educational environment possible. The famous, rich, white person is competing against even more famous, rich, white people. This constant comparison will never stop until we make it stop. People of color and the poor should find some solace in the fact that people with all the privilege in the world are still stressing out about their kids’ future. People playing by the rules should feel better that something is being done about this rigged system.

6) Smart, hardworking students get unfairly sullied. Unless the FBI discovers the majority of students at elite universities have parents who buy their way in, it is likely that most students got in through merit. Unfortunately, this college admissions scandal will unfairly paint all elite college students and graduates, especially wealthy ones, with a suspicious eye. It’s the same way affirmative action may discredit an underrepresented minority’s achievements. We must remember that the vast majority of graduates of such schools are highly intelligent, good people.

7) Elite private university graduates will start questioning their accomplishments. Singer’s consulting firm made sure the kids had no idea they didn’t get into their respective universities by cheating. The FBI wiretaps highlighted such discussions. As a result, there will be plenty of students and graduates of these bribe-accepting schools who will wonder whether they got in due to their accomplishments. As self-doubt creeps in, self-esteem may drop, especially for graduates who end up working at a regular job.

Fake charity Singer set up so his clients could write off their bribes

8) Big city living is becoming less attractive. Notice how most of the schools implicated in this latest bribery scandal are located in large coastal cities such as Boston, Washington D.C., the San Francisco Bay Area, and Los Angeles. Big cities attract the most educated, type-A go-getters because big cities have employers who pay the most amount of money. The desire for money and prestige will eventually make you miserable because everybody is frantically competing to one-up the other.

9) Smaller city living is becoming more attractive. When we look back on our lives, we don’t wish we spent more time in the office trying to make more money and getting some meaningless title. What we wish we had more of was the freedom to spend time with family and friends and doing meaningful work. I foresee the continued growth and attraction of smaller cities as more people “opt out” of the grind. The FIRE movement has arisen partly because people are tired of all the corporate work BS and would rather be free.

10) Private business owner’s increase their purpose. The end goal for getting the best college education possible is to get the best job possible after graduation. Therefore, you’ll always be at the mercy of someone else’s decision if you do not own your own business. If you own your own private business, you can rig the system in your favor by hiring your know-nothing 22-year-old kid as VP of Operations and pay him or her a huge salary if you want. Unless you are a C-level executive at a public company, it is very hard to get your kid a top job or even an internship at your firm.

11) If you are a poor Asian American, you probably face the toughest hurdle. Given there is clear affirmative action for the wealthy through “donations” and straight up bribes, while race-based affirmative action does not include Asian Americans, poor or middle-class Asian Americans will have the greatest difficulty of getting into an elite private university. This is one of the reasons why you see so many mom and pop stores owned by Asians across the country. They know nobody is coming to help them, so they must count on themselves.

12) Poor students will see a rise in reputation. On the flip side, if you happen to be a poor Asian American or a poor student from any race who graduated from an elite private university, your stock should go up given more people realize what you’ve had to go through to get in.

13) A greater percentage of parents will donate to schools. The irony about this bribery scandal is that parents will simply go through legal bribery means by donating quid-pro-quo directly to their desired schools. The 33 parents caught so far were simply bad at cheating. They should have just contacted the admissions office at XYZ private school and discussed a plan to donate directly to a new building, courtyard, or scholarship. The donations will likely be more anonymous.

14) There will be a rise in stealth wealth. Given the college bribery scandal has reignited hatred for the rich, the rich will flaunt their wealth less. Luxury car sales might go down as BMWs are traded in for Hondas. Rich parents will tell their rich kids to stop showing off their wealth over social media. There may even be a surge in luxury home inventory as the rich decide to move out of expensive neighborhoods. Stealth wealth has always been a good idea. As we surpass our 10th year in a bull market, practicing stealth wealth is more important than ever before.

15) The middle class may become wealthier and happier. As college becomes less important in finding a job, there will be fewer people spending four years and borrowing tens of thousands in student loans. With more time and less financial baggage, more people will be able to aggressively save to buy a house, start a family, and save for retirement. With more financial security and more time, society as a whole becomes much happier.

Let The College Admissions Bribery Scandal Pump You Up

Instead of getting bummed out about how all these image-conscious and misguided wealthy people buy their kid’s way into elite universities, get happy!

Not only do you not have to spend $250,000 – $400,000 on average per kid on bribes, you also don’t have to pay $50,000+ a year in tuition alone for 4-5 years! The bribes plus the full cost of attending a private university for four or five years could run you over $1 million.

Life is already hard enough as it is. We don’t need people who have all the means in the world pull further ahead from the rest of us who abide by the rules or who went to public schools.

Let us all thank Andrew Lelling, the U.S. Attorney for the District of Massachusetts; Joe Bonavolonta, special agent in charge of the FBI Boston Field Office; and the entire team for unrooting this scandal.

I trust this is just the beginning of much more to come!

Related: How To Stop Worrying About Your Child’s Future Again In This Brutally Competitive World

Readers, what are your thoughts on the college admissions bribery scandal? Why didn’t these parents just donate directly to the school instead? Why isn’t there more backlash against affirmative action for the wealthy? What are some other implications about the bribery scandal I have not mentioned?

The post The Wide Implications Of The College Admissions Bribery Scandal appeared first on Financial Samurai.

from https://www.financialsamurai.com/the-wide-implications-of-the-college-admissions-bribery-scandal/