I recently came back from a vacation in Hawaii, and believe it or not, I got a job offer!  I didn’t mean to get a job offer, but between eating some white puree mangos for breakfast and hitting the waves for some boogie boarding, I decided to reach out to the head of a major wealth management firm over e-mail.

To my surprise, he responded the same day and CCed his assistant to set up a meeting.  After an hour over coffee, he asked when I could start?  I told him I had to think things through since my roots are in San Francisco.  As any good blogger does, I wrote a post entitled, “Would You Take A Steep Pay Cut To Live In Paradise?” and allowed it to percolate and help me think.  Have a read if you want to know more.

In this post, I’d like to go through some mental exercises to do if you do get a job offer you like but feel the pay is too low.  I plan to go through some of these steps and so should you.  I’m meeting up with the gentleman next week (yes, I’m going back to Hawaii), and will report back my findings.

TIPS ON NEGOTIATING A HIGHER SALARY

* Know your worth.  The worst thing you can do is accept a job offer out of desparation, and realize you’re being severely underpaid after the fact.  Resentment will fester until you quit.  It’s important to know your worth by checking online sites such as Salary.com, Glassdoor.com, career forums and with financial bloggers.  Congruency is key.

* Know the market.  Hawaii is famous for paying less and costing more.  The reason for lower pay is because Hawaii is paradise.  Firms in Hawaii don’t need to pay up to attract talent.  Salary for doctors in the boondocks are way higher than in major cities like New York City and LA to start, because the desire to live in the boondocks is lower.  You can’t approach your potential employer and demand X, when the market is at X * 80%.  That will just show your ignorance.  Make sure you know the local market wages.

* Calculate expenses.  If you don’t have to move for your new job, great, ignore this.  However, if you do plan to move, also take into consideration food, gasoline, taxes, and education costs.  Furthermore, you should peruse property you realistically plan to rent or buy in your area of choice.  Honolulu is actually about 30% cheaper than San Francisco on a like-for-like price per square foot basis.

* Calculate your total income and assess how you feel.  If you are taking a paycut to move closer to family, or to a nicer place, calculate what the environment is worth to you to.  Take your new salary and add on your various income streams to see if it feels right.  Have an salary idea in mind before the heavy salary negotiations.

* Talk salary last.  Do not give the impression that all you care about is money.  Money should be the last thing you bring up.  In fact, don’t bring up money until they bring it up first.  Instead, you need to focus on the reasons why you are good for the job, what you can bring to the table, and your long-term commitment to the job.  Nothing is more maddening than a manager losing an employee just 6 months into the job.

* Anchor high.  When the inevitable topic of salary comes, always anchor higher than you’d be willing to accept.  The anchor must be within reason, obviously.  For example, if the offer is $100,000, and you know the market is $90,000 to $110,000, shoot for $130,000 and highlight the reasons why (your clients, expertise, your wife/husband, kids in school etc).

* Never give an answer right away.  Waiting is a very powerful negotiation tactic.  It shows you are level-headed, are not in a rush, and potentially have other job offers lined up.  Your distance will make an employer want you more.

FINAL SALARY AND JOB CHANGE TIP

Always join people, not firms.  Get to know your hiring manager and your future colleagues as much as possible.  They won’t mind having lunch and drinks with you.  It’s for your own good, and for their own good as well.  You will be spending more time with them than some of your loved ones, so you better get along!

I’m looking forward to meeting up with my potential new employer.  If nothing comes out of it, at the very least I’ll make a new contact and eat some good food!

Readers, have you ever got a job you liked but thought the pay was too low?  What did you do?  What other salary negotiation tips do you have?

Regards,

Sam

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Everything is relative when it come to money.  If we all earn $1 million dollars a year and have $5 million in the bank at the age of 40, none of us are very wealthy given all our costs (housing, food, transportation, vacations) will be priced at levels that squeeze us to the very end.  As such, we must first get an idea of what the real average net worth is in our respective countries, and then figure out the average net worth of the above average person!

According to CNN Money, the average net worth for the following ages are: $9,000 for ages 25-34,  $52,000 for ages 35-44, $100,000 for ages 45-54, $180,000 for ages 55-64, and $232,000+ for 65+.  Seems very low, but that’s because we use averages and a large age range.

The above average person is loosely defined as:

1) A person who went to college and believes that grades do matter.

2) Does not spend more than they make because that would be irrational.

3) Saves for the future because they realize at some point they no longer are willing or able to work.

4) Largely depends on themselves, as opposed to mom and dad and the government.

5) Takes responsibility for their own actions when things go wrong and learns from the situation to make things better.

6) Has an open mind and is willing to look at the merits of both sides of an argument.

7) Welcomes constructive criticism (and is not overly sensitive) from friends, loved ones, and strangers in order to keep improving.

Has a healthy amount of self-esteem to be able to lead change and believe in themselves.

9) Understands the mental to physical connection in everything we do so that that a healthy mind corresponds with a healthy body.

10) Enjoys empowering themselves through learning, whether it be through books, personal finance blogs, magazines, seminars, continuing education and so forth.

Now that we have a rough definition of what “above average” means, we can take a look at the tables I’ve constructed based on the tens of thousands of past comments by you and posts I’ve written to highlight the average net worth of the above average person.

THE ABOVE AVERAGE NET WORTH DECONSTRUCTED

First, we must highlight what the average tax-deferred retirement savings plan is for those in America.  We’ll focus on the simple 401K system we have here where one can contribute $17,000 of their pre-tax income every year.

This chart can be used as a rough estimate for those with the RRSP plan in Canada, and retirement plans in Europe and Australia as well.  In fact, any country that has any sort of tax-deferred retirement plan and social safety net program for retirement that has a GDP/capita of $30,000 or more can use the below chart as an aspirational guide.  Remember, we are talking about the “above average person”.

FINANCIAL SAMURAI TAX DEFERRED (401K)  SAVINGS GUIDE

The assumption here is that the above average person is able to start maxing out their tax-deferred retirement plan every year after the second full year of work, and continue on without fail until 65.  The low and high end account for 0% to a relatively conservative 5% constant rate of return.  Of course you can lose money and make much more if you are good and lucky.

This chart does not take into consideration any after-tax savings post 401K contribution.  To understand what the average after-tax savings rate is post tax-deferred retirement contribution is a gargantuan task because there are too many assumptions that are debatable eg. income and after-tax savings rate post maximum pre-tax retirement contributions.  That said, I’ll offer a base case guide anyway.

FINANCIAL SAMURAI AFTER-TAX SAVINGS GUIDE

The above chart assumes on the low end that one saves about $5,000 a year in after-tax income and around $10,000-$15,000 a year in after-tax income on the high-end after maxing out their tax-deferred retirement vehicle.  I’ve tried to keep things as simple as possible, assuming no inflation and no investment returns.  I also believe saving $5,000-$15,000 a year in after-tax income is very realistic for the above average person, and probably very easy for many who earn more than $85,000 per person.  Finally, the chart should show you the power of consistency.

THE IMPORTANCE OF REAL ESTATE

A 2010 study showed that the average 2007 net worth of a homeowner is roughly $200,000, or 40X greater than the average renter’s net worth of $5,000.  We can debate the merits of this study (done by a real estate association of course) all day long (demographic sampling, housing price changes, etc), but the point is, “above average” people generally all own homes and are wealthier, be it 2X wealthier or 40X wealthier than the average renter.

The return on rent is always -100%.  You get a place to live and that’s that.  There is never a positive return on an asset after a month, or 30 years of renting.  A renter cannot pass on her paid off house to her kids or grandchildren.  There is no asset accumulation at all.  There is a reason why some 97% of millionaires are property owners.

The value of real estate varies across all the land and the world.  It is very hard to make an assumption of what should be inputted as a result.  According to the US Census bureau, the median home price in America is $221,800 while the average home price is $272,900.  You can’t get anything livable in San Francisco, New York City, Los Angeles, and maybe even Washington DC and Boston for $250,000.  But, you sure can in the mid west for $250,000.

Hence, let’s construct an equity value chart of something based on a range of $250,000-$500,000, with the assumption that upon retirement, you have your house paid off and can attribute this amount into your net worth, or the capitalized value of all rents you would pay if you did not own.

FINANCIAL SAMURAI HOME EQUITY PROGRESS GUIDE

I assume that the above average person buys a $250,000-$500,000 piece of property at 27.  By the time they turn 28, they will have owned the property for 1 year and have paid down $3,500-$7,500 in principal on a $250,000-$400,000 loan.  I conservatively assume a $250,000 no money down loan for the low end house, even though after 5 years of working, the low-end above average person should have around $25,000-$30,000 saved up in cash based on the after-tax savings charts above.

By the time a 27 year old pays off his or her mortgage in 30 years, s/he will be 57 years old with a place to live rent from for the rest of his/her life.  That is the true value of the property, the rent saved for the remainder of the owner’s life.  It can be calculated as the present value of those future rental payments, or simply the market value of the home.  I assume zero price appreciation on the home to keep things conservative and no extra payments to accelerate the payoff either.

THE X FACTOR

So far, we’ve touched upon pre-tax savings, after-tax savings, investment returns of 0 for those savings to remain conservative, and real estate.  You need to spend less than you earn for that inevitable day you no longer have an income.  You also need to live somewhere, hence, you should own your property if you know you will be there for much longer than 5-10 years.

There’s something missing in all of this, and that something is what I call the X Factor.  Above average people seem to always be thinking of new ways to build wealth.  There is an optimism about them that no matter what happens, they can always find ways to make more money.  It’s hard to quantify what that X Factor is for the average above average person, but it’s there somehow through music, writing, athletics, communication, entrepreneurship, hustling, and so much more.

The great thing about savings and real estate is that the process is highly automatic.  If you implement the plan and wake up 10 years later, you will inevitably be worth much more provided you keep your job and your home.  Given savings and building equity in your home over the next several decades is largely automatic, the X Factor comes out because you have so much more free time to do something else!

THE AVERAGE NET WORTH OF THE ABOVE AVERAGE PERSON

I have gone ahead and averaged the averages for pre-tax savings, post-tax savings, and real estate equity progress in the spreadsheet below.  The pre and post tax savings can be invested however you see fit and is a topic of another post.  Another thing to note is taxation, given pre-tax savings have to eventually be withdrawn and taxed.  Again, these are rough estimates to give you an idea of the average net worth of the above average person.

There you have it!  Based on my assumptions above, the average net worth of the above average 30 year old is around $240,000.  By the time this person is 40, his/her net worth should climb to around $650,000 and all the way up to around $2,000,000 million by the age of 60.

Of course some of you above average Financial Samurai readers will have a total net worth much higher than the chart.  But then, I’d have to write another post entitled, “The Average Net Worth Of Financial Rockstars!”

Readers, how do you stack up? Please share with us your net worth, age, whether you rent or own, and so forth if you feel comfortable sharing.

Note: The figures in this post are per person, not per couple.  However, I realize life changes and people get married, stay at home to be parents and so forth.  Hence, if you believe in your marriage, and believe that a marriage can be defined as one unit, then you can use the figures per couple.  However, I urge all of you to use the guidelines for a single individual because marriages can also change.  

Please read, “How To Save More For Retirement If You Don’t Make Much Money” as a follow-on if you are filled with doubt.

Best,

Sam

Photo: Big Pumelos, SF Farmer’s Market.  SD

All I want to do is nothing, if only just for a little while.  I’ve got 30 days to relax until a decision needs to be made whether to jump back into the work force or give this entire entrepreneurial endeavor a full go.  Why?  I’ve decided to take a sabbatical, and I might never come back!

Although I’ve got 30 days to decide, I’ve really been thinking about this moment ever since I launched Financial Samurai three years ago.  The first words in my About page talk about how money stopped being a driving factor.  Instead, the elusive balanced lifestyle is what keeps me going.

When we have enough money, I argue that we stop caring so much about making more money anymore.  Many people disagree with this statement and feel that having money makes you crave for more.  Perhaps it’s the reason why some multi-millionaires and billionaires still cheat even though they’ve got enough money to last several lifetimes!

I’m not sure, but perhaps I’m blessed with the realization of what enough is.

LESS MONEY, MORE FREE TIME

If I decide to never go back to work, I’ll be taking an enormous pay cut.  Most would think I’m crazy if they knew the amount, but then simple math will dictate that most would just be pontificating.  What I lose in money, I gain in time.  Time gets incrementally more valuable as years go by.  Two years ago, my neighbor’s wife died.  She was 76.  Last year, my other neighbor’s husband died.  He was 63.  Last month, my friend’s mother died of a stroke.  She was 72.  The other week, Adam Yauch of the Beastie Boys died at 47 from throat cancer.

The average life expectancy is around 80 years old, yet for some reason, all four examples above died earlier than expected.  I’m under no illusion that I could contract a serious illness and go by this Christmas.  It’s why you’ll see me online at all hours of the day and going to parties till midnight even though I’ve been working for 15 hours.  Give me until age 60, and I’ll be happy.  Every year beyond 60, I will count my blessings!

With more free time and enough money, is now the time to start a family?  Such befuddling things I wonder.

MAKING THE VARIOUS INCOME BUFFERS COUNT IS HARD

Part of the ironic benefit of regularly saving 70% of my after-tax income for over a decade is that if I take a 70% after tax pay cut, my life won’t change a bit!  Despite the belief that my lifestyle won’t change, I’m sure I’ll have more stress given such a large income buffer will be eliminated.

I won’t know what it’s like to potentially tap my savings or passive income buffer because I’ve never touched it since college.  I’ve always just relied on 30% of my after tax income to live.  Spending passive income is one thing.  Reducing savings is another.

Just thinking about touching passive income to survive makes me feel a little queasy.  In fact, thinking about using one buffer up in online income to live feels like I’m going in reverse.  Online income is more than enough to maintain my standard of living, but I just don’t want to touch the income at all.  The money would be better spent re-invested in the company rather than paying for my food, clothing, and shelter.

IS IT OK TO JUST BUM AROUND AND DO NOTHING FOR A WHILE?

I remember the days when we were kids.  We could just lounge around the pool for 3 months during the summer and be bums.  We’d have our parents cook us meals, wash our clothes, and pay our bills.  Whenever we had a problem or a question, our parents would help out and know the answer.  As we grow older, that safety net goes away….. for most at least.

Once we are financially secure, all the pressure we experience is self-imposed pressure.  Given I expect a lot from myself, the pressure dial is always close to, or on maximum.  I have the ability to wind down for a day, but afterward, I start feeling like a non-productive member of society and will probably work harder the next day to make up for the day of rest!

I long to be a lifestyle blogger who just travels the world, blogs about his adventures, has no responsibilities nor dependents.  I just feel guilty about not maximizing the potential I know I have.  I feel guilty for not trying harder so that I can provide for my family and for my parents if and when they need me.

If you are living a life of leisure who lives paycheck to paycheck online or offline, please share your wisdom of how you eradicated your guilt.  If you’ve retired early, please share the same.  Help me shatter my belief because I know many will disagree with what contribution and guilt means.

Is it OK to be selfish and start taking more than I give?  Is it OK to join the 47% who don’t pay any federal income taxes anymore due to a lower income or a large deferral of taxable income?  Perhaps I can join the Occupy protesters and fight against those who do not believe in equality.  Is it OK to sit back and relax for a couple years?  I hope so.  It’s just so hard to do even though it requires little effort!

THE COUNTDOWN BEGINS

My sabbatical isn’t a countdown to freedom, because unless I’m living in a prison cell, I will always be free.  My sabbatical is a time where I need to find out what’s next.  I’ve listed eight things I plan to do in my announcement post on Untemplater, and I’m hoping that I will execute them all.

For those of you who’ve taken a sabbatical, I’d love to hear from you here or on Untemplater what you did, and how you felt after you took your sabbatical.  What do you regret not doing or doing while on sabbatical?  Any tricks you have for making yourself not work on sabbatical and feel OK with it?

Please read: “Taking A Sabbatical And Potentially Never Coming Back” and let me know your thoughts.

Photo: Fog over the Golden Gate Bridge on a sunny SF day.  SD

Thanks,

Sam

The stock markets are tanking right now thanks to Europe and you’re loving it!  Why?  Because you and I are sitting pretty on our 12% gains since we took profits around March 15, 2012 when the S&P 500 was hovering at 1,405.  We are disciplined, and realized that a 6X return over the 10-year government bond yield of 2% in just two and a half months was outsized and unsustainable.

Furthermore, we know that plowing our proceeds in a stable value fund that yields just 2.5% guarantees ourselves a total return of roughly 13.5%.  Anything above a 10% return in this shaky environment is a glorious return because everything is relative.

But, what if you aren’t satisfied with just a 13.5% in your mothership fund?  What if you don’t want to take the rest of the year off and go to Aruba with all your new lady friends and still crush 95% of the competition when the results are tallied on December 31?  Not a problem, because who wants to kick back and live the good life?  Greed is an elixir!

HOW TO OUTPERFORM ALL DAY AND ALL NIGHT, BABY!

If you want to outperform, all you’ve got to do is jump right back in the markets.  The S&P 500 at 1,350 is down about 4% since you decided to take profits.  As a result, all you’ve got to do is invest all of our proceeds in the S&P 500 by buying the cheap and easy ETF fund, SPY.  Now that you’re fully invested in the S&P 500 again, no matter what the market does through year-end, we will outperform by 4%.

If the S&P 500 claws its way back to 1,405, your total return will be 16%.  And if the S&P 500 continues to correct down to 1,300, you’re down to +8% but still better than the index at only +4%.  Whatever happens, you’ve locked in your outperformance for the year, and if you ran a mutual fund, you’ll immediately rocket to the top of every fund analysis review from Morningstar to Fortune Magazine.  With the accolades comes tremendous fund flows, and therefore more fees, and bigger paychecks.

With your picture in Morningstar winning Fund Manager of The Year, you will start receiving tons of e-mails and phone calls from seemingly innocent women (and men) who want to jump your pants.  You will be shallow and respond to only the attractive ones who will immediately accept your invite to Aruba.  With the extra money you have at your disposal, there is nothing too expensive for you and your friends to indulge in.  Life is good!

MORE GOODIES TO CHOOSE FROM NOW THAT YOU’RE RICH

Now that you’ve got the capital, bankers come flocking to you for more sexy investment products that aren’t available to the general product.  Structured Notes they pitch, with a minimum total investment of $100,000.  ”$100,000?  Psssha. How about 1 meeeleon dollars as I’m big time now!“, you retort.

“As you wish sir!” responds the banker, as he gleefully calculates his $20,000 commission while you check the time on your IWC Big Pilot watch.  You sadistically wish the markets IMPLODE before the IPO date.  You put a million bucks into the S&P500 Buffer PLUS structure note because it provides you 10% downside protection and 2X upside gains up to 22% over a 2-year time period.  Holy crap.  Not only are you up 12% YTD for 2012, you get to put all your proceeds into such a product which gives you double the upside, and keeps you up even if the markets go down 12%? Thank you heavens!

You start feeling guilty because the game seems rigged.  Why do you get to invest in these products while other people can’t and have to suffer market losses?  Then you look back at your IWC and remind yourself of all the hours you spent reading books, going to school, studying the markets, and putting your balls on the line.  ”Screw the guilt!  This is America, damn it!”, you shout as you transfer funds.

WHAT ABOUT THE LADIES ALREADY?

Well shoot, we’ve already talked about this!  There is a high correlation with how attractive your girlfriends are, and how ostentatiously wealthy you are.

When you’re outperforming, by definition you are doing better than your peers.  With more money, you aren’t counting pennies when you buy that $10 Cosmopolitan for the lady along with the $400 dinner.  Afterward, you won’t be worried about taking her home to a one bedroom rental in the ghetto because you’ve got a swank pad at the St. Regis!

Women like to say that money doesn’t matter, but that’s probably because they aren’t with a man with money.  If you have man #1 who is: handsome, kind, funny, fit, and smart vs. man #2 who is: handsome, kind, funny, fit, smart and rich, man #1 will get shut out!

If you are a broke ass foolio who hasn’t been saving, hasn’t been studying, and hasn’t been investing, you will not have a sexy girlfriend.  Furthermore, if for some odd reason a hot woman is with you, you should bet your bottom dollar that she won’t stay with you for very long.

When the juice runs low, they’ll know it’s time to go!

RESETTING THE CLOCK

Come the New Year, you’re back to being a nobody, because your clients and the markets only care about what you’ve done for them lately.  You only care about what you’ve done lately as well.  No matter, you’re a grizzly veteran now and have Financial Samurai on your side to kick your nuts or squeeze your nipples, reminding you that you can never lose if you lock in a gain.

Investing takes discipline.  You understand your risk-adjusted metrics because you really aren’t investing for yourself.  You’re investing for your family, or your future family that you care so deeply about.  The more you have, the more you have to lose.  It might take 10 years for you to build your investment nut, and just one year to lose half of it.  You don’t want that.  You are not a donkey, but a savvy investor with an even-keeled mind.

Sometimes you win, sometimes you lose.  But, for as long as you live, you know a new year will come again.

I’ve locked in my outperformance by buying stocks at S&P 500 ~1,345-1,350 and plan to invest another chunk of savings in the principal protection structured notes at the end of May as discussed.  The motherfund allocation is now back up to ~70%.  Don’t crap out on me now markets!

Readers, What are you guys doing with your stock portfolios and extra cash?

Recommended Reading:

Stock Rebalancing Time

Financial Samurai Predictions for 2010

Financial Samurai Predictions for 2011

Financial Samurai Predictions for 2012

Photo: SF Cross dresser in red. SD.

Regards,

Sam

The best CD interest rate I can find is 2.3% for a 7-year CD offered by Bank of America at the time of this post (5/7/12).  2.3% is pretty weak, but the next best rate I’ve seen from a known institution is around 1.85% for the same duration.

I’m seeking yield to further enhance my passive income streams for financial freedom (highlights the various income streams).  My current CD monthly interest income is around $2,800 a month and I’ve got some liquid cash that’s sitting in a money market account earning 0.2% interest.  Let’s say that amount is $225,000 in new money to provide more clarity to the numbers.

Having $225,000 in a money market earning 0.2% interest is a lousy $400 a YEAR, which means I can’t even buy an overpriced iPad like millions of crazy rich folks are buying nowadays!  The amount of money people have to spend on material things makes me so bullish about the economy.  People don’t spend money they don’t have, just like I can’t drive a Ferrari Italia that I don’t own.

Everyday I keep my money in a pathetic money market is another day I’m missing out on free money.  As such, I have been focused for the past couple of weeks on searching for ideal products to invest my money.

Narrowing the investment choices down to the following:

1) 2.3% 7-year CD with Bank of America.  Guaranteed estimated return $5,175 a year / $431 a month and bringing my CD passive income to $3,243 a month.

2) 6-10% potential returns via peer to peer / social lending. Non guaranteed $13,500-$22,500 a year / $1,125-$1,875 a month.  Have $50K ear-marked to this stream if and when the partnership comes through.  But, could invest more if things work out well.

3) Structured CDs, with a guaranteed rate of 2% for the first two years and LIBOR + 1.45%.  $4,500+ a year / $375+ a month.

4) Online trading via E-Trade or ScottTrade.  No guarantees.  + or – $40,000 a year.

5) Private equity investments.  I’ve received a couple offers to invest in some start-ups in the Bay Area.  70% chance for a -100%, up to a 5-10% chance for a 500% return.

6) Rental property.  Borrow at 3%, earn a rental yield of 8%.  Estimated cash on cash return is 5% therefore $10,000 a year / $833 a month.  Return on principal based on potential appreciation is different.  Problem with rental property is that it is a PITA compared to online income or CDs.

7) Structured Notes.  Similar to Structured CDs, but not FDIC guaranteed, and different return profile.

Not too narrow a list huh?  The goal is to raise the $6,500 gross a month passive income to around $15,000 a month in order to have a comfortable lifestyle enough to take care of a family of four.  The other goal is to have money work for me so I can focus on my business.  The strictly passive income goal (excludes online and all other income) may change over time, but for now, $15,000 a month is what I’m shooting for.

If possible, please don’t get distracted by the capital amount discussed and if it helps, use whatever capital amount that makes you feel comfortable.  The discussion focus should be on understanding structured products and feedback on a couple choices below.

THE FOCUS ON STRUCTURED PRODUCTS AS AN INVESTMENT OPTION

I like the dumbbell approach to investing e.g. high risk + low risk.  As I looked more into Structured CDs, I’ve come to realize that structured CDs are exactly what I like!  Structured CDs guarantee a minimum rate and up to $250,000 of your money back thanks to the FDIC insurance + it has an upside component to its returns based on a derivative.

Structured CD Examples:

1) A 5-year CD rate will guarantee you a 1% minimum return every year for 5-years.  However, if Mitt Romney wins the 2012 Presidential election, the bank issuing the structured CD will agree to pay you 10% a year for the remaining four years!

2) A 3-year CD will guarantee you a 0.5% return for year one, a 3% return in year two, and 4% return in year three if the S&P 500 increases by 15% in year two, and at least 10% in year three.  Every percent beyond 15% and 10% in years two and three will be divided 50/50 eg year two has a 19% increase, hence your 3% return gets a 2% bonus.

3) A 7 year CD will guarantee you 2% the first year, and 3.5% every year for the remaining six years so long as the CPI (inflation) index stays below 3.5%.  Every 0.1% increase above CPI reduces your 3.5% rate by a commensurate 0.1% with a 2% floor.

So excited to start investing in structured CDs until I went looking for them.

I strolled over to Citibank to ask about their latest structured CD offering and to my surprise, they don’t have any!  Disappointed, I asked what else they’ve got.  Structured Notes of course!  Structured notes are investment products that are structured by the bank for their wealth management clients.  The products have Initial Public Offerings and are NOT guaranteed by the FDIC.  Instead, the guarantee, if any is based on the viability of the institution and the markets.

There are a myriad of Structured Note products, and I want to focus on two that sound most interesting and ones where I am actually considering putting capital to work:

Dow Jones Principal Protection Structured Note

* Minimum investment $50,000.

* 6 year note to maturity.

* Receive 0.5% coupon per year for 6 years.

* Receive 100-110% of the upside of the Dow Jones Industrial average from day of structure (May 24, 2012 in this case).  In other words, if I invest $225,000 and the DJIA is up by 20% in 6 years, I will have made a $45,000 return + 0.5% in annual interest income for the duration.

* At the end of 6 years, I get 100% of your principal back at a minimum.  If we go into a horrible bear market and the DJIA goes down 30% in this time period, I get all my money back provided the market is still functional.

* Opportunity cost is 2.3% CD – 0.5% coupon = 1.8% per anum I do not invest in the 2.3% BoA 7-year CD = $300/month or $3,600 a year.

* The return on the DJIA payment is a “bullet” at the end of 6 years.  In other words, all proceeds are paid at once upon maturity.

S&P 500 Buffered PLUS Structured Note

* Minimum investment $50,000.

* 2 year note to maturity.

* Receive 0% coupon over 2 years.

* Receive a 10% downside buffer based on day of offering (June 4, 2012). In other words, if after two years the S&P 500 is down 12%, I only lose 2%.

* Receive 2X the upside of the S&P 500 in two years up to 18-22%.  In other words, if the S&P 500 is up 5% in year 1, my return is 10%.  However, if the S&P 500 is up 30% in two years, I don’t get 60%, but a max 22%.

* Opportunity cost is 2.3% a year to -92.3% of the value of my principal if the S&P 500 goes down by 100%, which is not going to happen.  Also not allowed to receive the 2% annual dividend yield the S&P 500 is currently providing.

WHICH STRUCTURED NOTE WOULD YOU CHOOSE?

I like the S&P 500 Buffered PLUS note because there’s only a two year lock-up and has a nice 10% downside protection before I start losing money.  My bogie for market returns a year is 3X the 10-year bond yield =  ~6% at the moment.  If I can get 2X that return, that yields 12%, which is on par to earn a max two-year return of 18-22%.  Although my bogie is 3X the risk free rate, I’m really always shooting for a 10% per anum return.

The Dow Jones structured note is also attractive because it proves a 0.5% coupon while I wait, returns all my money at the end of 6 years even if the markets go down, and gives me 100%-110% of the upside.  I’m a long-term investor, and if I can find a product that I like, the longer to maturity the better!  The downside is if I do need to tap the $225,000 in capital, I would have to sell the note at a loss.  There are no penalties, just the market rate for the note, as a large value of the note is time.  Of course, the note could go up if the markets tanked 50%, since buying the note returns you the full par value e.g. Note starts at DJIA 13,000 and in year 3, the DJIA is at 8,000.  The note would trade at a 60% premium because anybody buying the note at DJIA 8,000 would recover all principal back to DJIA 13,000.

Perhaps I should invest in a little of both?  What do you think?

BEFORE YOU INVEST IN STRUCTURED PRODUCTS

* Understand yourself. You need to first understand your risk tolerance, income generating abilities, and capital needs.  My preliminary requirements are that I want a minimum guarantee return of all my money back (principal protection), with a minimum 30% optionality of up to 15% on the upside, for as long a duration as possible.  Doing the math, If I can get a risk adjusted total expected return on my structured product of anywhere between 4-10%, I am a very happy camper because I expect inflation to be well contained.

* Understand the product. Make sure you have the banker explain everything in as much detail as possible.  Ask for the downside risk and upside risk.  Ask them to provide you examples of various return scenarios.  Make sure you understand everything before you lock or invest your money away.  Spend time reading the entire prospectus for structured notes!

* Focus on big institutions.  I’m sticking with the big banks like Citibank, Bank of America, Wells Fargo, USAA, and Chase because: 1) They are too big to fail, and 2) I already bank with many of them, hence have more leverage.  These aren’t fly by night banks, so I feel confident they will be around, or be bailed out by the government if they get in trouble.

* Everything is negotiable.  Don’t take everything at face value.  Ask for a better rate, or a better product.  There is always something for everybody.  I suggest you come in with as large a war chest as possible, but keep the amount hidden.  The more money you have, the better concessions they will give you.  They will always ask how much you are thinking of investing.  Start with their minimum… perhaps $10,000, and work your way up by asking with each increment what more you can get in return.  When you anchor low with $10,000, and start speaking about $100,000 at the end of the conversation, the bankers will really start bending over backwards for you.

* Get motivated to earn more money.  The banker’s minimum investment to open a structured product investment is $50,000 if I invest $100,000.  Clearly the banker has incentive to bring in as much money as possible to earn a commission (1-3% of principal).  The point is, these products will only be offered to a minority of people because the banker only has so much time and is not going to open 100, $1,000 accounts when he can open 1, $100,000 account.  Having a cash hoard gives you optionality to invest in potentially superior investment returns.

Readers, what would you do with $225,000 sitting in a money market account earning nothing?  How would you divide the money up?  Which structured note would you choose and why?  If you aren’t willing to invest in a structured note, why not?

Note: Please focus on the investment options rather than the absolute dollar amount.  Thanks.

Photo: Some carrot apple juice to clear the mind while I go through the DJIA structured note prospectus.

Regards,

Sam

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Eddie from Finance Fox writes an intriguing post entitled, “Money Will Change You“.  I salivate at the picture he uses because it is my dream to one day never have to fly commercial again!  Having a matching Aston Martin waiting for me with Kate Upton in Monaco wouldn’t hurt either!

When Eddie was in serious debt, he writes, “My mood sucked. I was edgy, worrisome, desperate and a nut case. Our moods are strongly tied to our earnings. I know this first hand.”  Who can blame him, given not being able to do what you want due to a lack of money, or worse yet, doing things you don’t want to do because you need the money is a horrible way to live.

Thankfully, Eddie now has three income streams: 1) A commercial cleaning business, 2) A full-time job, and 3) Blogging income.  Rock on!  No longer does he suffer from money anxiety.  Instead, he describes money as a “high“, a type of “laughing gas” if you will that lets him breathe easier and not be in constant worry.  In a large way, I agree with him.  Sometimes I pinch myself when I realize that I no longer have to work at McDonald’s for $3.25 an hour, or work at all for that matter!

WHAT HAPPENS IF YOU MAKE MONEY TOO QUICKLY?

The speed of wealth accumulation is what makes people go bonkers.  Nobody is really jealous of Warren Buffet because 1) He is a humble guy, 2) He’s in his 70′s, and 3) It’s taken Warren decades to make his wealth!  Warren is an extreme example of course.  You can use a 60 year old doctor who went to school until 35 and makes $700,000 a year as another example.  Most people would say the doctor deserves everything if not more given all the dues he’s paid.

But, let’s say you’re a couple years out of college making $35,000 a year.  You’re a good looking, affable young adult who gets poached by a competitor who offers you triple your salary to work for them.  You’re now 25 years old and making $100,000 a year.    Suddenly, your old colleagues and probably your friends will start becoming jealous of your success.  Who makes $100,000 a year at 25 years old?  Not many!

Finance Fox asks a very important question,

“If money engenders admiration, why does having an enormous amount of money also cause a tremendous amount of envy?”

Great question that I’d like to tackle.

THE REASON FOR MONEY ENVY 

Money envy is not only due to our inherent jealous tendencies.  Those who are suddenly rich play an ENORMOUS part in shooting themselves in the face.  Making money too soon destroys you because you end up destroying yourself.  Let me explain.

If you’re that recent college graduate who makes $35,000 and suddenly start making $100,000 at 25 years old, you are going to be hard pressed to contain your excitement.  As a guy, you will undoubtedly buy some fancy car that’s way outside your budget because that’s what guys do, buy cars!  You think the good times will last forever, so you end up purchasing or leasing a $50,000 BMW 335i coupe.  You’ll probably get some new threads and a nice respectable watch as well.

As a gal, you will undoubtedly buy some multi-thousand dollar Louis Vuitton or Hermes handbag.  As accessories, you’ll go to Tiffany’s and get yourself a matching bracelet.  Of course, no fine lady is without a pair of Christian Louboutins or Manolo’s for $500 a pair!  You’ll start posting on Facebook how fabu it was to go to the spa, as well as pictures of you and your girlfriends renting a limo up in wine country.  One girl I know loves panties.  When she got a nice $20,000 bonus she went out and spent $1,000 just on undergarments!  Nice!

Remember, these are 20-something year old recent graduates who can’t help but spend their newfound money until they blow themselves up.  I see this all the time, and I know you do too.

ANNOYING THINGS NEWLY WEALTHY PEOPLE DO WITH THEIR MONEY

Eddie uses The Real Housewives Of Vancouver as an example.  Every time he sees them on TV or in a magazine he admits to thinking to himself, “Gold diggers“!  Ouch, but perhaps very true!

Let’s say one of the Real Housewives was very unnattractive, served in Iraq for three years away from her family, has an autistic child, and is now in charge of a homeless shelter for veterans.  Do you think Eddie and others would despise this Real Housewife of Vancouver?  Of course not!  This housewife would probably be the most favorite housewife of all!

Instead, the Real Housewives are all talking about their mansions, boob jobs, charity events, and fine clothing.  It’s way more fun  to hype up their riches for reality TV, and the ratings prove it!  There is a massive love/hate relationship with the Real Housewives in America and in Canada, just like there’s a real hot cold relationship with Keeping Up With The Kardashians.  People hate ‘em, but they just can’t stop watching them!

Annoying Things Newly Rich People Do:

* Constantly updating their Facebook status with pictures of themselves in exotic places.

* Highlighting pictures of themselves with other rich people or celebrities.  Once in a while is fun, but not all the time.

* Repeatedly telling everybody how much money they make with immature adjectives to describe their excitement.

* Driving to work in a car worth more than their colleagues and managers.

* Talking about how wealthy their parents are, providing double insult to the observer who now thinks they are only wealthy due to connections.

* Wearing inappropriate clothing in the work place, including too ostentatious jewelry.

MONEY CHANGES YOU NO DOUBT!

In the wrong hands, money changes people for the worse.  Those who suddenly go from little wealth to lots of wealth end up doing things they regret later on.  How many times have you seen athletes make millions only to end up broke?  How many times do you see people win the lottery or inherit loads of money only to admit spending it all in a short period of time and having to go back to work when they never had to again?

When it comes to money, it’s better to make it slowly and with all your effort.  Everybody’s maturity and definition of “slowly” is different.  But I tell you more harm will come out of fast new wealth than slow steady wealth.  You’ll learn to appreciate money more and it will therefore go a much longer way.

If the newly wealthy can learn to stay humble and be more adept at hiding their wealth, there wouldn’t be such such a conflict between classes and between emotions.

Check out Eddie’s post and share your thoughts.  I’ll be commenting over there.

Regards,

Sam

What’s the one thing I’ve told you guys to study in the markets if nothing else?  Forget?  Well, let me remind you.  The one thing you should always pay attention to is the US government long bond yield eg the 10-year US Treasury yield.  See chart below and take a moment to study it.

From this simple chart, you will understand:

* What the risk free rate of return is.

* Expectations on interest rates.

* Expectations on inflation.

* Borrowing/credit costs.

* Risk aversion, or lack thereof.

* The health of the world.

That’s right.  By understanding what the latest 10-year treasury means, you will be able to save a lot of money, make a lot of money, and stop being an bozo who just follows the heard and listens to whatever people tell you to do.  Think for yourself!  

The tone of the article was inspired by a response from a “mortgage specialist” who wrote a book on mortgages.  I received an e-mail from her asking me to promote her book.  I congratulated her and mentioned I had just refinanced a 5/1 ARM at 2.625%.   Instead of responding in a normal way, she replied, “Oh, no! You can’t refinance to a fixed rate???? That sucks!”  I couldn’t be more disappointed with her response and her subsequent reasoning.  I fear for the public if people are reading her books.

I’ve noticed, with great dismay how people are paying way more in mortgage interest expense than they have to.  A large part of it is because the media and mortgage officers continue to push people to get as long a fixed rate mortgage as possible.  In America, the longest conforming standard is 30 years.

I’m here to tell you that borrowing on the long end is a suboptimal use of funds.  The people who are pushing you into 30-year fixed loans: 1) Are not economics majors or bond traders, but journalists, and/or 2) Have a vested interest in you borrowing as long as possible so they can make as much money off you as possible.  The higher the rate, the easier it is for you to earn a wider spread.

WHY 30 YEAR FIXED MORTGAGE LOANS ARE A WASTE OF MONEY

* Upward sloping yield curve.  It’s important to understand that due to the time value of money and inflation, the longer you borrow the higher your interest rate.  If you borrow money from me today to pay me back tomorrow, I won’t charge you interest.  But, if you want to borrow money from me today, to pay back over the next 30 years, you better hell believe I’m going to charge you an interest rate above inflation to counteract inflation, make some money, and bake in some risk of default.

* Average length of stay.  First of all, the average duration one lives in and owns a home is 7 years.  If that’s the case, what on earth are you doing borrowing a 30-year fixed rate mortgage for?  A 23 year + overestimation of ownership is a serious miscalculation based on the statistics at hand.  With a 5/1 ARM, your underestimation is only 2 years, but you already have baked that in.

* Match fixed rate with length of stay.  If you plan to live in your house for 10 years, take out a 10 year fixed rate (amortizing over 30 years) as the most conservative loan duration.  A 10 year fixed rate is cheaper than a 20 year or 30 year fixed rate.  It is only logical that you match your mortgage fixed rate with your expected duration of stay.  Sure, you might stay longer, but you might also stay shorter as well.  If you know you plan to stay in your house forever, it’s more justifiable to take out a 30-year fixed, but I still wouldn’t because 1) You will likely pay down your loan faster than 30 years, and 2) The spreads are unjustly high in this environment.

* Adjustable rate loans have an interest rate cap.  People think, thanks to fear mongering by the media and mortgage officers, that once the adjustable rate loan period is over, your mortgage rate will skyrocket and make things super unaffordable.  This is not the case because everything is relative and rates are capped.  I’m refinancing to a 5/1 ARM at 2.625% with all fees included, and after 5 years, the interest rate can reset one time to a maximum of 7.25%.  Whoopdee doo!  After 5 years, if I don’t pay any extra principal, my principal mortgage amount is about 10% less.  A 7.25% mortgage rate on a 10% lower principal amount is very digestable.

* If rates rocket higher, you will be celebrating.  Things don’t happen in a vacuum.  The 10-year yield is a reflection of inflation expectations.  If the 10-year yield, and therefore mortgage rates are skyrocketing, that means inflation expectations are at the very least skyrocketing.  However, you don’t have inflation expectations going higher unless demand for real goods and services going higher.  Higher demand is a reflection of a stronger economy, and your real assets (property), by very definition or inflating!  So what if inflation rises from 2% to 5%, causing your mortgage to reset to 7% due to the 2% spread?  If your home is now inflating by 5%, and you have a 80% loan-to-value ratio, your cash on cash return is going up by 25%!

* 30 years in a row of deflation.  Look at the historical 10-year treasury yield.  Rates have gone down for 30 years in a row.  That’s right folks.  THIRTY YEARS!  Are you telling me there’s no trend here?  Are you saying that we are going to see massive inflation spikes on the way (which are fine as I just wrote) all of a sudden?  In these 30 years, we’ve become a much more efficient society who enacts monetary and fiscal policy in anticipation or with shorter lead times.  Yes, there will be occasional upward blips in pricing, but I highly doubt there will be a 5-10 year continuous ramp in inflation, which means your 5-10 year ARM is just fine.

WHAT IS YOUR PEACE OF MIND WORTH?

Insurance salesmen and mortgage officers are very skilled at evoking fear.  They will paint worst case scenarios of super inflation and crushing payments so you can pay more money now than you should.  Have a 30-year fixed provides a great peace of mind that your payments will never go up.  In fact, your real payments will actually go down over time given you will be paying back a fixed loan with ever depreciating dollars thanks to deflation.  The question is, at what price is this worth?

Given you know the yield curve is upward sloping, you must study the spreads between each borrowing point.  A 30-year fixed loan is currently around 4% vs. 2.625% for a 5/1 arm.  Let’s say you borrow $1 million.  $1 million X 1.375% = $13,750 more in interest expense you will have to pay every year for the length of ownership.  If the average length of ownership is 7 years, that’s $96,250 more in interest expense you would have paid if you borrowed at 30 years.  That is just ridiculous.  However, if your peace of mind is worth $96,250, and you can’t handle the reality of economics, don’t know your options, and don’t believe in yourself, then why not.

BenGenie has telegraphed the Fed Funds rate will stay at current levels until end of 2014.  I believe him, and so should you.  Signaling low rates helps businesses invest and consumers to spend again without fear of getting railroaded.  It’s the same thing with taxes, which is why the sceptre of increasing taxes is not a good thing.  If I could borrow at a 1 month floating for the next 2 years at 1.625%, I would!  Alas, I can’t find a bank to loan me this type of mortgage.

Readers, why do you think so many people take out 30-year fixed?  Do people not understand duration, bonds, inflation, and economics?  Are people that easily afraid of their own shadows?

The next time someone is hawking you a 30-year fixed ask them: 1) What their major was in college or grad school, 2) How many times have they refinanced before, 3) Quiz them on what the current 10-year treasury yield is, 4) Where was the 10-year treasury yield 10, 20, and 30 years ago, 5) If they are a homeowner, 6) How much more are they going to make off you.  Finally, refinancing now to a 30-year fixed from an existing 30-year fixed is a good option.  Refinancing to a 30-year fixed is just a sub-optimal good option vs. borrowing on the shorter part of the yield curve.

Addendum: Please not there is a BIG difference between a negative amortization loan and a adjustable rate mortgage like the ones I’m referring to here.  A Neg Am loan causes your principal to grow larger every month because it is by definition, negatively amortizing.  The Neg Am loan generally is only fixed for one year and a teaser low rate.  Hence, you have a lower than market rate + a payment that’s based on a lower amount that gets added to the principal.  This is where people get in trouble.  People who have normal ARMs have not been getting in trouble because when their ARM floats, their rates are LOWER than when they first locked!  Please understand this point.

Please also see: Mortgage Refinance Tips For A Smarter You

Regards,

Sam

At long last, my latest principal residence mortgage refinance is now closed!  Things were looking very dicey towards the end after PG&E threw a couple grenades my way that hit my credit score by ~100 points due to a $8 non-payment from three years ago by my tenants.  Alas, the Humvee was able to withstand the blast from corporate evil and make it back to home base!

The mortgage loan refinance started on January 20, 2012 when I overheard a colleague say he just locked a 5/1 ARM for only 2.75%.  Ehh?  I had just refinanced my own 5/1 ARM in the fall of 2011 to 3.125% from 3.625% and I wanted to dance the mambo too!  I incredulously gave Citibank a call to see if I could get the same offer as my colleague with all fees baked into the price and they said absolutely!  In fact, the very next day, my banker called me to say that they could give me 2.625% with all fees included.  Yeah baby, yeah!

All giddy and bullish, of course I take a moment to thank our savior, Ben Bernanke and order some extra hamachi sashimi for lunch to help stimulate the local economy.  If my refinance goes through, I’ll be saving several hundred dollars more a month in interest, and pay $100 more a month in principal.  Who doesn’t love free money for doing “nothing”?  So long as I continued to pay homage to BenGenie, I knew the rain would keep pouring.

Unfortunately, one week I forgot to pray to the heavens and BenGenie decided to toy with fate and punish me for my insolence.

THE MORTGAGE LOAN REFINANCE SAGA

Having been a Citibank Gold client for over a decade, I had absolute faith my mortgage refinance would go through.  After all, just three months earlier, I had closed on my mortgage refinance with them.  They had all my documents and access to all my accounts.  Easy peasy right?  What could go wrong?

Mortgage Loan Saga: The First 30 Days

30 days had passed since locking the loan before I got any requests for documents.  The usual suspects were requested:

* 2011 W2 form

* Latest 2 pay stubs

* Printout of assets from bank accounts or only one if it had over $250,000

* Home insurance policy

I actually thought they didn’t need any of this since they waited 30 days to contact me for this information.  Not a problem, I sent over all the documents via their interoffice mail since my fax machine was broken.

During this time period, I received three Good Faith Estimates (GFE’s) that reviewed the terms of the loan, and two credit score reports that showed me in the 790-800 range, as expected since that’s what it was now 4.5 months ago during my last refinance.

Mortgage Loan Saga: Days 30-60 – A Bullish Datapoint

After sending in all my documents, I heard nothing from Citibank for the next two weeks.  Not in a rush, I went about doing my own thing until I realized, wait a minute.  Don’t we need to do yet another appraisal since an appraisal report is only good for 90 days after?

I shot my Citibank representatives an e-mail asking about the appraisal, and they said I would need one, and that they’d get back to me.  I asked them why they were taking so long, and they said they were backed up due to all the purchases going on. Bullish indicator!  If you are putting in an offer to buy a home, you generally want to make it quick and painless for the seller to accept.  That usually means a 30-45 day close maximum.  I can certainly understand Citibank prioritizing purchase loans over refinances.

Citibank finally got back to me around day 55 and confirmed that an appraisal is needed.  Great, another $750 $860 out the window, but good thing Citibank was handling the cost.  The appraisal is always the tricky part because nowadays, a bank will only loan up to 80% the value of the house e.g. 80% LTV = $800,000 loan for a $1,000,000 house.  I wasn’t too worried since the refinance before, my LTV was at 60%, but one never knows.  I wrote a post entitled, “Sweet Talking Your Home Appraiser Pays Off“, which provides some tips for those who are worried.

It turns out that the home appraiser didn’t even have to come to my house this time!  The appraiser just sent in an electronic report to Citibank, appraising it coincidentally at the same amount from 4.5 months ago!  What a great job!  If you want to make bank, become a home appraiser!  You’ll at least make multiple six figures no problem, so no complaining all of you who make less!

Mortgage Loan Saga: Day 60-75 – Nothing Is Happening!

Although Citibank is paying the $860 home appraisal fee, I am really paying the fee indirectly through a higher rate.  There is no free lunch in mortgage refinancing.  When they say all fees are included, the bank has already baked in their own margins.  Hence, those people who feel guilty about collecting unemployment insurance even if they have the means, don’t feel guilty!  Just know that your employer already baked in your salary to account for the unemployment insurance they have to pay.  Collect, and collect with pride!

Another two weeks have gone by, and now I’m getting worried.  It’s day 75 and in this time, I get three more Good Faith Estimate reports and another credit score update.  The process is killing trees inefficiently!  I guess sending the GFE’s is a good way to protect the client, but during these past 75 days, the rate and the loan amount have not changed, so I don’t know why they kept on sending me these papers.  By deduction, I realize that it’s their fees that kept on changing.  Interesting.

Mortgage Loan Saga: Days 75-85 – Shit Is Hitting The Fan And Splattering!

By day 76, I am totally miffed at WTF is going on with my mortgage refinance.  The 10-year yield has moved up from 1.85% when I locked, to 2.3% and I was getting worried.  Is my mortgage refinance really not going to go through? I begin to wonder.  I kept on thinking what a waste of time this all was, and started preparing for the worst, continuing with my 3.125% rate.

My mortgage loan officer contacts me and says I need the following additional papers for the underwriter:

* Home insurance statement with contact person and loan number

Fair enough, but why didn’t you ask me for this in the first 45 days?

At around day 80, I finally get an urgent call from my mortgage officer at work.  I so happened to be golfing that day, and my assistant said that I wasn’t working (that day).  My mortgage officer took it to mean that I was no longer working at my job and e-mailed me with a title, “URGENT: Please Respond Immediately!”  Funny, alas, they are feeling the sense of urgency because there’s only 10 days left until we lose the incredible 2.625% lock!

My mortgage officer picks up the phone and says, “We can’t go through your mortgage refinance if you are no longer working!”  What the hell?  Just because I take the afternoon off to go play golf doesn’t mean I’m no longer working.  I’m working on my 2-iron stinger, lady!”

She calmed down, and brought up the new news of the devastating 100 point credit score hit due to a highly delinquent payment from PG&E Utility from 2009.  You can read about the entire story in “Corporate Greed By PG&E Killed My Friend’s Family And My Credit Score“.

After 80 days I was now pissed off for them waiting so long to get going.  Amanda implied in our conversation that the mortgage refi was all but dead.  I wrote her a long e-mail back saying that this was wrong of them to do.  I’ve been a good client for over 10 years, have never been late, have referred them over 30 customers, and have enough cash in the bank to pay off the entire principal loan for goodness sakes!  How could the 2009 PG&E mispayment come up only now, and not during the last refinance in 2011?

A senior mortgage officer stepped in and eased my concerns and assured me that the mortgage refinance would go through.  I spoke to PG&E and told them this delinquent payment penalty was egregious and they agreed to send me and my bank “Clear Credit Letter” stating that the delinquency is removed and they have contacted all credit agencies to remove the penalty.  The senior mortgage officer even called PG&E to expedite the process.  Good job Citibank!

Mortgage Loan Saga: Day 85-90 – Aloha Emancipation

Even though I knew we were closing in on the 90 day limit for locking in the mortgage rate and refinance, I decided to take advantage of a Hawaiian Airlines three-day sale and buy a round trip ticket to Honolulu for $328, including tax and fees.  Is this irresponsible of me?  No.  A little stubborn and risky?  Yes.

I wasn’t about to let this mortgage refinance saga derail my plans for being free and having fun.  Remember, making money and saving money are a means to a better lifestyle.  Sitting around twiddling my thumbs in San Francisco waiting for Citibank, while I could be in Hawaii playing golf and surfing doesn’t make sense.

I told my mortgage officer and her boss that I’m off to Hawaii, and that if they want me to sign the papers, I will do so when I get back in a week.  Alternatively, they could send a notary to my place of residence in Hawaii to get the process done.  They elected not to wait another week and hired a notary for $175 at their expense to meet me at my place!  Now that is service!

Mortgage Loan Sage: Day 90-97 – Head-fake Coco Head

When the notary showed up, she showed me my settlement statement and asked for a cashier’s check for the interest due for the rest of the month.  What?  Nobody from Citibank informed me about needing a cashier’s check and this amount of money.  Well guess what?  There are no Citibanks in all of Hawaii!  There are also no Bank of America’s or any other bank for that matter.  Only Hawaiian banks for protectionist reasons.

I can’t easily wire transfer online (figured out how later), or get my private banker to do it because I’ve got to fax them (not e-mail) a signed letter with all instructions.  I’m not about to spend another hour of my time going to Kinko’s or somewhere to do this.

Instead, I told Citibank and the title company they’d have to wait another 5 days until I get back to San Francisco before they can officially close the loan.  The closing officer at Citibank dropped the ball by failing to review my final statement with me over the phone or on e-mail, and indicate the necessary cashier’s check I had to bring.  Details people, details!

By this time, I was just laughing.  What’s another 5 days? I thought to myself.  Time to make them sweat given the wait and fear of things not going through starts messing with your head after three months for the borrower.  In the end, it took 97 days to get my mortgage loan refinance completed.  I should be getting some checks back from Citibank due to overage charges.  I’ll then need to set up the account online to do auto-transfer so I never have to think about paying.

TAKEAWAYS FROM REFINANCING A MORTGAGE LOAN IN 2012

We’ve come a long way since the credit freeze of 2008-2009.  Here’s a recap of where we are, and where we’re going:

* Banks are lending again, but they are being encumbered by new government rules and regulations which are there to protect the borrower.  The 10 Good Faith Estimate documents is the most obvious example where things have changed.  In the past, I only got one.  Speaking to the notary, it turns out that our magnificent government instituted this GFE rule in 2011, so that anytime even a penny of fees is changed, they must send a new multi-page document via FedEx/UPS.  This is good for consumers, as hopefully we consumers read the GFE’s and point out discrepancies.

* Before the 2008 financial crisis, a mortgage refinance would take 30-40 days on average.  Soon after the financial crisis in 2010, mortgage refinances were taking 50-65 days.  After speaking to several friends who are also refinancing, and going through my own experience, it looks like mortgage refinancing is taking 80-90 days +++.  Amanda, my mortgage officer said they are super backed up, and a large portion of their refinances are taking well over 90 days!  One friend, who is refinancing with Citibank said he’s in month 7 of his mortgage refinance!

* A loan-to-value of 80% is industry standard now.  I don’t know any banks who are lending more than 80% of the value of your property.  This is good for all of us in the long run, as it weeds out donkey’s who over leverage, blame other people for not being able to pay their debt, and end up hurting all of us in the process.  The problem for some is that they need to come up with a cash-in refinance to get their LTV ratio to 80%.

* Cheap money is getting cheaper.  When I refinanced in the fall of 2011, the 10-year yield was at the same level as when I locked in my refinance on January 20, 2012, around 1.88%.  What this means is that spreads have narrowed given my mortgage rate is now 2.625% vs. 3.125%.  Banks are willing to lend more aggressively with a lower margin than last year.  That is a good thing for the economy, provided that borrowers are credit-worthy.

* People who do not need to refinance get to refinance.  This is the law of unintended consequences.  Only if you have excellent credit (720 to 740+) and a LTV of 80% are you able to refinance.  If you don’t have a job, are struggling to make your monthly payments, have an underwater home mortgage loan, and have poor credit, banks will not lend to you.  If only you could get the same rate as new borrowers nowadays, you could much readily pay your monthly mortgage, you think to yourself.  Since you can’t, you might as well default and tell the bank and the government, Up yours!  Now the cycle begins.

* The rich will get richer.  From individuals to private real estate funds, those with capital are buying properties in droves right now.  They understand that a rental yield of 8% vs. a borrowing rate of 3% is a great return to earn while they wait for capital appreciation.  The very same mega-landlords will write great propaganda why renting is better than buying to keep people out of the purchase market (less competition), and keep people happy to keep paying rent.

* Banks hate the government as much as people.  Before you go blasting your mortgage officers for dragging their feet, know that they are waiting on the underwriter just as much as you are waiting on the mortgage officer to get back to you.  It’s because of new government regulations that have made the underwriting process significantly more difficult to pass, that has created a 100% increase in the time it takes to refinance a mortgage loan.

Readers, have you recently gone through a mortgage loan refinance?  If so, how was your journey?  How long did it take, and what were the bumps a long the way?

Photo: Old Samurai Armor from Yoroi.com.

Regards,

Sam

“Why work if I make $1,800 a month in unemployment benefits?” was a question asked to me by someone I met in the hot tub last year.  At 28, Julie has been on unemployment for over 52 weeks.  Her old job was as a designer for Billabong USA.  During her time off, she’s been selling some of her paintings via Facebook where she posts her portfolio.  Of course, all her art earnings are not reported, otherwise, her $450 weekly benefits will start getting garnished after the first $25 dollars of income earned.

We’ve stayed in touch over the year and she’s been generous enough to give me some insights into the unemployment process.  She’s planning a two month trip to Jamaica with her friends, and she wants to do the right thing by suspending her unemployment benefits for that time period because she won’t be looking for work.

Despite her good intentions, she could not get through to the California Employment Development Department (edd.ca.gov) after calling 58 times.  That’s right, 58 times!!

So guess what?  She’s going to Jamaica for two months and will have her friend back in California fill out her bi-weekly continued claim form.  One of the questions she will have to answer is, “Did you look for work during the week?“  She will answer, “No.”, but undoubtedly, her unemployment benefits will still hit her Bank of America debit card like clockwork.

WOULD YOU WORK IF YOUR UNEMPLOYMENT BENEFITS EQUALED HALF YOUR EARNINGS?

$1,800 equals $21,600 a year in unemployment benefits.  President Obama has graciously allowed all Americans to collect up to 99 weeks, or $44,550 in unemployment benefits during this time.  It looks like benefits will gradually be reduced down to 92 weeks or less, but either way, anything more than 52 weeks is better than a kick in the face.

If you make $44,000 a year, which is the income level you need to have in order to qualify for maximum benefits, would you bother finding another job making $35,000-$44,000 a year if you could make $21,600 a year and do nothing?

Earning money under the table is rampant.  You can sell artwork like my friend, or teach lessons for cash.  There are random hole in the wall restaurants who have “no credit card” policies.  Why you ask?  Because they are not reporting their full income and have separate books for the IRS.  We all know that accepting credit cards is way easier than only accepting dirty cash in a restaurant.

I don’t feel annoyed at all at my friend for collect unemployment benefits.  She is holding out to the very end to find that ideal job.  The government has allowed her to be patient, and that’s exactly what she’s doing.  In fact, I feel happy that she gets to receive some benefits back from the government, since so few of us taxpayers even get 20% of what we pay to the government back.

THERE ARE STATES WITH EVEN BETTER UNEMPLOYMENT BENEFITS!

After doing some more digging, I’ve come to realize that California doesn’t even have the best unemployment benefits despite being a high cost State.  Hawaii has even more generous benefits at around $525 a week, or $2,100 a month!  If a husband and wife can move to Hawaii, have no rent or mortgage and collect $4,200 a month for 99 weeks, I dare say that life would be the envy of many!

1. Hawaii
Percentage of Weekly Wages Covered By Benefits: 54.3%
Average Weekly Benefit Amount: $416
Unemployed Receiving Benefits: 43% (Seventh Highest)
> Unemployment: 6.3% (Ninth Highest)

2. Rhode Island
Percentage of Weekly Wages Covered By Benefits: 45.9%
Average Weekly Benefit Amount: $380
Percentage of Unemployed Receiving Benefits: 27% (Eighth Lowest)
Unemployment: 11% (Fourth Highest)

3. Iowa
Percentage of Weekly Wages Covered By Benefits: 44.9%
Average Weekly Benefit Amount: $321
Percentage of Unemployed Receiving Benefits: 40% (16th Highest)
Unemployment: 6.1% (Sixth Lowest)

4. Kansas
Percentage of Weekly Wages Covered By Benefits: 44.7%
Average Weekly Benefit Amount: $326
Percentage of Unemployed Receiving Benefits: 35% (20th Highest)
Unemployment: 6.8% (12th Lowest)

5. North Dakota
Percentage of Weekly Wages Covered By Benefits: 44.6%
Average Weekly Benefit Amount: $310
Percentage of Unemployed Receiving Benefits: 36% (24th Highest)
Unemployment: 3.6% (Lowest)

6. New Mexico
Percentage of Weekly Wages Covered By Benefits: 43.7%
Average Weekly Benefit Amount: $316
Percentage of Unemployed Receiving Benefits: 32% (28th Highest)
Unemployment: 8.1% (23rd Highest)

7. Wyoming
Percentage of Weekly Wages Covered By Benefits: 43.3%
Average Weekly Benefit Amount: $337
Percentage of Unemployed Receiving Benefits: 34% (22nd Highest)
Unemployment: 6.2% (Eighth Lowest)

8. Utah
Percentage of Weekly Wages Covered By Benefits: 43.1%
Average Weekly Benefit Amount: $316
Percentage of Unemployed Receiving Benefits: 27% (15th Lowest)
Unemployment: 7.6% (17th Lowest)

9. Montana
Percentage of Weekly Wages Covered By Benefits: 42.5%
Average Weekly Benefit Amount: $272
Percentage of Unemployed Receiving Benefits: 48% (5th Highest)
Unemployment: 7.4% (14th Lowest)

10. Washington
Percentage of Weekly Wages Covered By Benefits: 42.3%
Average Weekly Wage Paid: $384
Percentage of Unemployed Receiving Benefits: 33% (25th highest)
Unemployment: 9.2% (16th highest)

I can’t believe the most generous state in all America for unemployment benefits is also the most beautiful state as well.  I actually just got back from Hawaii and am contemplating a job offer there for just $50,000 a year.  Check out the story if you want to help me wrap my arms around the situation.  It’s a large pay cut, but now I’m thinking, if I can work for $50,000 for one full year and get laid off, I could then collect $2,200 a month for almost two years in Hawaii thanks to the good graces of our big government!

Readers, if you made $44,000 a year, wouldn’t it be hard to get the motivation to work if unemployment benefits paid half that?  What do you think about the idea of working in Hawaii for a year, and collecting unemployment benefits for two years afterward and kicking back?  Do you know of anybody on unemployment who is unmotivated to find work due to the amount of benefits they receive?  Here is a good reader’s perspective on what it was like for her to be unemployed. 

Photo: Surfing Dog, Waikiki, SD.

Regards,

Sam

Despite mentally writing off the value of my Social Security benefits, in the bottom drawer in the way back of my cob-webbed mind, I know it will be there to fund my early bird special seafood buffets when I’m retired.  Sure, the eligibility age for withdrawal might rise from 62 to 67, but we’re all hopefully living longer too.  Besides, who really needs Social Security benefits if we’re saving over half our after-tax income for some many years anyway?  Don’t get greedy now!

The Middle Class of America has given me a recent tremendous boost in conviction that Social Security benefits will be around for all, forever.  If you read the comments on my post, “Disadvantages of The ROTH IRA: Not All Is What It Seems“, people have come out in force defending the virtues of the ROTH IRA, even though I clearly telegraph why we should not be contributing to a ROTH IRA if we haven’t maxed out their traditional IRA and 401K yet.  To pay more in taxes to an inept and corrupt government that shirks on its promises is an atrocity.

We should ignore the fact that people comment on things even if they know they are wrong, to justify why they did something to make them feel better.  Instead, we should take comments at face value.  Those who support the ROTH IRA most likely have opened a ROTH IRA.  Because they’ve opened a ROTH IRA, they believe that the government will do better with their money than they can on their own.  Remember, only middle class people are allowed to contribute to a ROTH.  Higher earners be damned!

As you know, I have an open mind and always look at both sides of each debate.  My conclusion from the comments in my ROTH IRA post is this: Because so many people support the ROTH IRA, the people of America believe in the efficiency of the government and the fact that Social Security will be fully guaranteed at the age of eligibility.  If people did not believe the government would make due on its promises to fully pay for Social Security, there’s no way people would give the government more of their money to manage!

People Vote With Their Pocket Books 

Even though I am somewhat miffed at folks who are contributing to a ROTH IRA despite my reasoning, I am hopeful that the middle class of America believes in our government so much.  This is why I firmly believe Big Government President Obama will be re-elected again.  I’ve challenged Republicans to bet me whatever they want up to $1,000 to take the other side.  My offer still stands for any of you who don’t believe Obama will get re-elected.

I am also ironically pleased that the income cut off limit for ROTH IRA contribution is so low at $105,000/$169,000 for singles and couples.  This arbitrary income cut-off limit helps protect the thousands of hard working Americans who make more than this from falling into the trap of giving more of their income to the government to waste.  At least the upper income group is being looked after at the margin.

The middle class, defined as sub $122,000 for individuals by the government, is what makes and breaks politician’s futures.  Without the middle class, politicians cannot get elected and abuse their power in only ways that they know how they can.  Hence, no politician will be stupid enough to try and raise taxes on individuals making less than $122,000.  President Obama has wisely set the cut-off attack line at $200,000 for individuals.

The Only Social Security Risk Is Your Loneliness

If you are single and die before drawing Social Security, you’re screwed.  But that’s OK, since you’re dead anyway.  The government wins and you lose because you’ve paid all that money into the system only to reap no rewards.  Oh, it’s kind of like the ROTH IRA come to think of it!  But, that’s cool, because contributors are cool with it too, so never mind!

To clarify, it’s your closest relatives who are SOL if you die before collecting Social Security.  Your Social Security benefits do not get passed down to your children to allow them to draw when they reach the full retirement age of 67.  Your money will be forever kept by the government to do what it wishes.

If you’ve ever thought that there’s too many financial penalties for being married, especially if both spouses are good income earners, then consider the social security benefits of marriage.  If one spouse dies, the other spouse gets to benefit from their social security benefits.

People Love The Government

Given the middle class believes in the government, they also believe that Social Security will be there for them when they retire.  If not, all hell will break loose and politicians will no longer be able to gain and retain power.

People do not feel that it’s wrong the government gets to keep all the Social Security benefits if a single person dies.  If people felt this was wrong, we’d do something about it.  My belief in the American people has been renewed.  I want to thank all ROTH IRA contributors and voluntary extra tax payers for their kindness and patriotism.

If you can count on yourself, then you can surely count on Social Security which is funded by you and your employer to take care of you in retirement!

Readers, after reading this article, and the one on the disadvantages of a ROTH IRA, are you now more bulled up than ever that we’ll get all our Social Security benefits or what?

If you don’t believe SS will be around in full, please explain.

Regards,

Uncle Sam

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