Archive for the ‘Finance’ Category

Disclaimer – If you haven’t read my disclaimer yet, make sure you do so here. TL;DR version – Buyer beware, I am not an expert, I am fumbling my way through this like the rest of you.

Also, I hold a little bit of Bitcoin and Ethereum.

The promise certainly sounds good

Blockchain promises us something absolutely amazing – the decentralization of everything:

  • Whereas all currencies today are run by central governments, Bitcoin is not controlled by anybody because it is decentralized and therefore nobody can manipulate it
  • Whereas platforms are built on private corporations’ servers, Ethereum is not controlled by anybody because it is a decentralized platform that nobody can manipulate
  • Whereas all of our data is controlled by a handful of big companies, files stored on the blockchain are distributed everywhere so nobody can control it

This promise of decentralization is key to the entire value proposition of blockchain.

But tech has touted the benefits of decentralization before, and it didn’t live up to the hype.

The idea behind networks and the network effect is that you have a bunch of nodes that are more-or-less evenly connected, so that everyone can learn from everyone else. This is the grand bargain behind social networks – by sharing information, the best and most correct ideas will bubble to the top while the wrong and worst ideas will fade away. Information wants to be free – and shared – and therefore reason and logic will win the day because of the free flow of information. Good ideas survive (eventually), bad ideas are disproven (eventually) .

That’s what we were promised.

The reality looks way different

But it’s not how it turned out. Social networking, far from having a unifying affect on people, has turned out to have the opposite effect. It’s made us more divided than ever. And, far from weeding out the bad ideas, it turns out that wrong ideas flourish in social networks.

The reason is (partly) because in a social network, nodes are not evenly distributed where information flows freely amongst everyone. Instead, it turns out that there are bottlenecks everywhere. Groups are localized among each other, and connected via super-connectors (pictured in blue in the diagram below). We stay by ourselves in our groups and only occasionally interact with the outside world, and it’s done via the super-connectors.

This ends up suppressing the free flow of information, and reinforcing our own particular points of view, since information depends upon whether or not they can get through the chokepoints.

The tech industry seems baffled about why this occurred. Wasn’t information supposed to be free? Didn’t it want to be free? Wasn’t free expression and debate supposed to sift out the bad ideas? How could this be? [1]

Yet this was entirely foreseeable. The decentralization of information has occurred before, the Internet is not the first time. The most obvious example is the Protestant Reformation. Whereas Christian theology used to be centralized in the Catholic church, the Protestant Reformation’s rallying cry was that all people could be their own priests, and everyone could interpret holy scripture for themselves. The interpretation of divine revelation was meant to be free, not centralized.

While the Reformation succeeded in reforming the Church, it also caused a lot of divisiveness, wars of religion, and tens of thousands of splinter denominations. That’s what happens when you decentralize, anyone can come up with a particular view; and then if you have enough skillz to make a particular outlook popular, you can get people to join along with you and embiggen your group. I suspect Martin Luther did not foresee that people, upon interpreting scripture for themselves, would come up with such different interpretations and would form splinter groups as much as they did.

In the same way, tech did not foresee how the decentralization of information on the Internet would lead to the insulation of people seeking to reinforce their own particular viewpoints and biases, rather than seeking diversity of opinion in a quest for truth. Yes, that exists. I do it, you do it, we all do it. But we also prefer to reinforce our own viewpoints in many areas of our lives.

As a representative of the tech industry who was caught off guard by this, I plead guilty. I don’t know whether or not I should have known better back then… but I certainly do now. The results of decentralization can be mixed [2].

What happens when we apply it to new technology?

Which brings me back to Blockchain. As I said earlier, its biggest premise is decentralization. Yet decentralization is a mixed bag. Will it deliver on its promises? Or will it fall flat? Or worse, will the results be mixed such that we become so dependent on the good that we can’t roll back the bad, lest we simultaneously rollback the good?

Bitcoin has been a roller coaster since its inception. It’s up bigly since it was created but has undergone massive corrections of 30-60% every few months (it recently corrected 45% from its peak this past December 2017, and only took a week to do it). Is this massive volatility a temporary thing until Bitcoin stabilizes as it gets more adoption? Or, is volatility a feature of Bitcoin because of its decentralized nature, where anyone can come in and buy/sell with no financial oversight?


All this volatility is not a good thing; between buyers and sellers, if the medium of exchange is likely to fluctuate wildly, then what you pay is likely to be far different than what you agreed upon. That makes it less likely you will want to use it as a medium of exchange which was one of Bitcoin’s original benefits – to act as a decentralized currency (although as I have said before, it behaves more as a store-of-value since the IRS treats the dispersion of your Bitcoins as a taxable event).

Thus, when it comes to using blockchain as a currency, decentralization has the benefits of being a deflationary currency that is resistant to manipulation by central banks, but it’s still potentially vulnerable to manipulation by the millions of end users who have their own ideas of what digital currency is, and what it should be, and then shunt it off from its original purpose.

I don’t know whether or not that’s a good thing.

What about decentralized applications? Those act as a currency (sort of) and as a platform to build stuff on. I don’t know about those, maybe they are useful and maybe they aren’t. For sure, blockchain promises to be disruptive. There are some like Ripple and IOTA that solve real problems; Ripple is criticized for being a private implementation of a blockchain, which conceptually it isn’t but in practice it kind of is. But even if Ripple is pseudo-private, is that a bad thing (because it undermines the concept of blockchain as a decentralized application) or a good thing (since it means it can’t be accosted by “do it yourselfers”)?

I think that this is one of the fundamental known-unknowns with blockchain. Decentralization may be awesome.

But then again, it may be yet another false prophet.


[1] This blog post is inspired by an article I read in Foreign Affairs magazine (I am a subscriber), see The False Prophecy of Hyperconnection – How to survive in a networked age. It’s behind a paywall, though.

[2] For more on the Reformation, see Majority believe Reformation was divisive, but justified


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I’m getting a tax cut. Oh, joy!

This past week, President Trump signed into law a tax cut passed by the House and the Senate without a single Democrat vote. The tax cut lowers the corporate income tax rate from 35% to 21%, reduces the tax rates on the various income brackets, and repeals the individual mandate part of Obamacare. It also retains a slew of other tax breaks for wealthy individuals.

You might think I’m saying to myself “Oh, boy! I’m getting a tax cut! More money in my paycheck!”

But I’m not. I think that this tax cut is a bad idea. I used to write on this blog about 10 years ago that tax cuts were a good idea since it put more money into the hands of people who were likely to reinvest it in the economy and grow it, resulting in more jobs and prosperity for everyone. I have since reversed my position on that, tax cuts don’t make sense except at certain times. Now is not one of those times.

Why do I say this?

I calculated how much I will save on income tax. It’ll be about $7000. That’s nothing to sneeze at but I am an outlier. The Republicans have tried talking up the fact that the average family will save about $2000, and what working family wouldn’t want to save an additional $2000? Yet this claim is misleading because averages are skewed towards wealthier individuals. I am not wealthy, but you can see that my $7000 skews that average upwards. If there are five families getting an average of $2000, then that means that my $7000 takes up 70% of the break, leaving $3000 for everyone else – about $750 for the other four families. So even though the average is $2000, the reality is that the “average” family gets no where close to that. And the really wealthy individuals skew that much more than I ever could.

In reality, an average American family might get a $1000, or less than $100/month.

Still, you may say “But that’s $1000 they wouldn’t normally have! They should be grateful!”

Should they?

First, the Republican tax cut is going to add $1.5 trillion to the deficit, which means that in order to pay for its financial and debt obligations, the government will have to print more money. Printing more money will lead to inflation, which means that extra $1000/year is eaten up because the buying power of a dollar is now less than it otherwise would have been. Inflation is always present, but now it will accelerate.

Second, the individual mandate repeal of Obamacare means that people no longer have to buy health insurance. That means that young people can leave the market place, leaving only less healthy people to buy insurance. That means that health insurance companies have to charge more because whereas they used to be able to spread out the health risk among youth and healthy, sick and old, now they have sick and old and far fewer young and healthy.

This means that health insurance companies will have to charge more, which means that people will have to spend more buying their own health insurance, or employers will have to pay more to provide health insurance for their employees, or employer health plans will not cover as much. In all cases, consumer or employer buying power is reduced because money they normally wouldn’t have had to spend on health insurance now goes towards purchasing the exact same product.

Third, there will be cuts to government programs. This means that the private market has to make up the gap, which means that services that used to cost a certain amount will now cost a little bit more; or, service times will take longer meaning that people will have to wait for those services longer, and the longer we wait the less productive we are. Government spending on large projects – such as public transportation – scale much better than when private enterprise does it because of the economies of large scale. Only government has the ability to invest over a multi-year or decade timeframe, which ends up providing benefits for all of its citizens.

Fourth, eventually the bill will come due. Guess whose generation gets to pay for it down the road?

Yeah, that’s why I’m not that excited for this new tax cut. And I’m not alone, a large majority of American disapprove of it also.

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Last September (2016), the wife and I paid off the last remaining piece of the mortgage of the condo I bought in 2008. Ever since then, I’ve been debt-free.

I hadn’t been debt-free since 1996 when I first got a student loan. After that, I got a car loan in 2007, and a mortgage in 2008. I paid off the student loans in… I forget. I paid off the car loan in 2010. And then, as I said, we paid off the mortgage in 2016.

And I love being debt-free! As it says in Proverbs 22:7, the borrower is servant to the lender. I don’t want to be anyone’s servant (when it comes to money), I’d rather be the debt-owner (via holding bonds), or the owner itself (via holding stock, or property, or loans).

I don’t want to be in debt so badly that an opportunity came up to be in debt and I refused to partake in it despite the fact it would have resulted in a big savings. I need to get a new iPhone, the one I have – despite being a year old – is only 16 GB. That was a major mistake, I should have gotten the model with the most disk space because I’m always running low. It keeps filling up due to podcasts.

Best Buy was running a deal wherein you could get a new iPhone and save $150 or $200 or something on it if you signed up for a plan where you pay it off via installments. I couldn’t figure out how to pay it off all at once, and documentation on the web suggested that you couldn’t do that. That would in effect be like being in debt, it would add the payments onto the cell phone bill.

I wouldn’t do it. Either I pay for it all at once, or I don’t pay for it at all. I do not want to have to finance any purchase. Been there, done that; now finished.

Potential debt: don’t let the door hit you on the way out.

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This week on the way home from work, I caught part of an interview with the Chairman of the House Ways and Means committee, Kevin Brady. He was talking about tax reform, and how the Republicans were planning a large tax cut. I heard something on the radio that I thought sounded ridiculous, so I went back and read the transcript.

Chairman Brady was proposing a tax cut and referred to it as paying for itself, that is, the lower revenues caused by reduced rates would be made up increased wages of 8%, and increased economic growth of 9%. If you increase the size of the economy, then a smaller rate on a larger share results in the same amount of tax revenue and that’s supposed to keep the deficit from getting out of control.

I thought that a GDP growth rate was completely ridiculous! The only countries in the world that have that high rates are developing economies – because their economies are in such a shambles, they overheat when they get an influx of new capital. Developed economies like the United States simply don’t see that type of growth anymore. If he meant 9% GDP growth per year, I threw up my hands in exasperation because he wasn’t serious.

I decided to read the Tax Foundation’s analysis of the Republican tax plan (Trump’s is similar).

Their analysis must be the one that Brady is referring to because their wage growth and GDP growth numbers are the same. They estimate the plan would lead to 0.7% after-tax income increases for the entire population (oh, gee, thanks) but would go up 5.3% for the top 1% (surprise, surprise). However, when accounting for the extra GDP growth, everyone’s income would go up by an extra 8%.

The economic impact is calculated at 9% by mostly capital investment, and some wage rate increases, and new employment.

Does this make sense?

The Tax Foundation’s estimate is based upon a super-crucial, critical factor. Everything in their analysis hinges around this one fact – that lower taxes can create economic growth by spurring investment, which increases production.

In other words, if a person pays $25,000 in taxes and gets a tax break of $3000, and now only pays $22,000, they will take that extra income and invest it or spend it in the economy. Businesses will take that extra revenue to grow their business, or take that extra investment to similarly grow their business. Our economy is built on capital allocation and consumer spending.

The assumption that people will spend money they get from a tax break is correct if it goes to the lower income people (the bottom 80%). The average person spends nearly all of their income on basic things like food, shelter, transportation, maintenance of their stuff, family, and so forth. Additional incomes goes to projects they were previously putting off.

For wealthier people, they don’t spend all the money from tax breaks. Instead, they spend some of it, or they invest it. Businesses that receive money expand – they can increase productivity or hire more workers.

But here’s the thing, tax cuts can increase economic growth if the money ends up in the economy. Yet wealthy people don’t spend or invest 100% of their rebates; instead, they save it. They don’t invest it, nor do they spend. They just save it.

There’s nothing wrong with people saving money. I save plenty of money. But the problem is that saving money doesn’t grow the economy as much as either spending or investing.

So, the assumption that tax breaks lead to capital investment is incorrect, it is an overstatement.

Capital needs to be absorbed by someone

A tax break makes the economy get bigger by capital investment if a business can expand and make more stuff if there is someone to buy it. Supply without demand doesn’t increase the economy.

If wealthy people are saving money, and businesses are producing more stuff but the people who are most likely to buy (the bottom 80%) aren’t seeing much additional income and therefore aren’t buying enough stuff, then there isn’t that much revenue growth based upon internal demand within the country.

This means that a corporation must export in order to make larger revenue based upon the capital investment. But most US companies sell locally, it’s only the large corporations that sell internationally. But those international customers need additional income, too.

The point I am making here is that capital investment needs to result in increased supply and demand. The reason why the US economy grew so much in the 1950’s and 1960’s is because of Baby Boomers; the large bulge in population resulted in increased consumers and increased demand. Business couldn’t keep up, and that led to inflation.

The US population isn’t increasing as much as it used to, so to say that economic growth can increase without a proportional increase in consumers doesn’t make sense.

That’s why developing economies can rapidly increase GDP – as their child mortality rates plummeted over the past 40 years, their populations increased. And with investment in technology, it led to more wealth for the population by turning poor people into consumers.

Tax cuts need to result in more consumers to achieve economic growth, but they mostly go to the upper classes who don’t spend or reinvest as much as the lower classes.

And the one final assumption is the last problem

The last assumption that is problematic is that the estimates go out for 10 years.

When I read that, I said “Well, this is useless as a prediction.” I recently read Nassim Taleb’s book Antifragile and he makes the case that making predictions more than 6 months to a year out is useless because there are so many variables that can change.

Basing an economic analysis 10 years out and assuming stable conditions is a recipe for disaster. Since I started working full time, I’ve lived through two recessions (2001, and 2008). I will probably experience two or three more in my working time. Every time, these recessions reduce government income and put strains on the economy.

These economic models never account for this, they are always on the happy path.

We’ve never had a happy path.

The conclusion

Ten years ago I was writing blog posts that reduced tax revenue can lead to increased economic activity. That’s somewhat true, but behavioral psychology proves that it isn’t as effective as what some economists believe, including myself (at the time).

I don’t have good answers either, as I am not an economist. But what I do know is that capital investment needs to result in increased production, or increased efficiency, and it needs to be combined with increased consumption.

That’s oversimplified, but I think it’s more accurate, too.

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Recently, the White House unveiled its tax plan which President Trump said would be the largest tax cut in history. Here’s a quick screenshot of the changes:


I’ve been quasi-doing my own taxes for two years, and each time I’ve almost hit exactly the refund that H&R Block comes up with. So, I did the math on my own taxes for 2016 to see how much more money I would end up with.

The White House’s current tax plan does not list the income brackets that the three rates (10%, 25%, and 35%) are applied at. Instead, I went with a previous document he released last year or the year before and assumed the 10% rate is up to 75,000%, and the 25% rate is all of my household income for the rest; the 35% rate is higher than I currently earn.

Based upon these new income and tax brackets, and adjusting for the higher standard deduction of $24,000 (for both me and the wife), and eliminating the personal exemption of $8000 (for both me and the wife), and adjusting for a new capital gains tax rate and assuming the dividend tax rate is also no higher than 15%, my tax refund would increase by $4200.

Doesn’t sound too shabby, eh?

The drawbacks

The White House has called this the largest tax cut in history.

Well, that’s kind of true… while all Americans would get a reduction in taxes, the biggest gains – by far! – go to the wealthiest Americans.

First, let’s look at how this helps wealthy Americans. The argument that this isn’t a tax cut for the rich is that it phases out all deductions except for charitable contributions, and mortgage interest; and in return, it greatly increases the standard deduction by about $12,000.

If you are in the (new) highest tax bracket of 35%, then reducing your taxable income by $12,000 is worth $4200. So there’s a freebie.

Next, by reducing the top tax bracket from 39.6% to 35%, then for every dollar you make over $300,000 (estimated top bracket for married filing jointly), your tax burden goes down by 4 cents.

That doesn’t sound like much. But if you’re making $750,000/year, then you would owe (750,000 – 450,000) x 39.6% = $118,800. Under the new Trump plan, you would owe (750,000 – 300,000) x 35% = $157,500. So here you owe more.

But let’s suppose you’re really rich and make $10 million per year. Under the old tax plan, you’d owe $3.7 million. Under the proposed plan, you’d owe $3.4 million. So here, you’d owe $400,000 less.

Under the proposed plan, the higher your income goes, the more you save under the new plan. But it seems weird that you’re better off if you’re already doing pretty well to make that much money.

(This analysis doesn’t account for the higher rates in the lower brackets leading up to the highest bracket)

Second, the wealthiest people don’t earn all their income from salaries which is taxed at the highest rate. Instead, they earn a big chunk from dividends and capital gains.

The average American – myself included – don’t make the much from dividends and capital gains. I do make some but I can’t live on it, not even close. And I have a lot of money invested.

Under the Trump tax plan, which mimics the Republican tax plan, capital gains are now taxed only 15% instead of as ordinary income if you hold for less than a year (in other words, the richest people would pay at 39.6% or even 35%). Let’s assume that dividends are taxed at the same rate, only 15% for both ordinary and qualified dividends.

Since wealthy people earn so much from dividends and capital gains, this drop of up to 24% on some of their earnings represents a huge benefit. If you bought and sold a property and flipped it for $100,000 and claimed it as personal income, whereas before you might be hit with a $39,600 tax bill you would now only have a $15,000 tax bill. That’s a big savings, and only wealthy people can actually do.

Of course, wealthy people only structure their income like this in corporations, but still.

Third, look at those eliminations. Eliminating the estate tax! Today, at the federal level, if you die and your heirs inherit money or property, it is tax free up to $5 million (states may have their own rates). Since almost none of us have almost $5 million to bequeath, this doesn’t matter.

Except to the super rich. Let’s be honest, this is a way to pass down inter-generational wealth without paying taxes on it. It’s a freebie for people who are already wealthy and probably don’t need the tax break.


Fourth, it eliminates the alternative minimum tax (AMT). I don’t even know what this is, all explanations of it online are like “This is complicated.”

What I do know is that in 2005, President Trump earned $150 million and paid $38 million in taxes. But, that was because of the AMT. Had he not had the AMT, he only would have paid $6 million (4%).

Under his plan, he’d have paid (10% x 75,000) + (25% x [300,000 – 75,000 + 1]) + (35% x [150,000,000 – 300,000 + 1 – 24,000]) = $52 million. I’m assuming he is not writing off mortgage interest nor charitable contributions.

So, Trump would end up paying $14 million more. I’m not sure he realizes this.

Fifth, President Trump isn’t going to pass a tax increase on himself. Another part of his plan is to lower the tax rate on corporations from 35% to 15%, and also make that apply to pass-through entities… like President Trump’s real estate partnerships.

If he’s smart enough to shelter all his income in that matter (and let’s face it, I’m sure he is), then he would owe 15% x $150,000,000 = $22,500,000. That’s about $16 million less than he would have paid in 2005.

So there you have it, that’s what’s in it for him.


I don’t see how this tax plan helps the average American. According to the analysis I’ve seen at those two links in this post, these tax cuts only add about 1-2% to 90% of the population’s after tax income, barely anything. The largest earners in the top 1%) see their income go up by 5%, and that’s 5% on a much larger amount (I think the cut-off is around $400,000; so $20,000 at a minimum on the low end of the wealthiest people and way more for the top of that bracket). For the average person, you’ll get a few hundred… maybe.

So yes, it’s the biggest tax cut in history but it basically goes to people who already are well off.

Doesn’t seem like it helps the people who need it the most.

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This is going to be a boring financial post. But I’m typing it up so I can refer back to it next year. This post does not construe tax advice, it’s a strategy that I think works as best I understand it.

It’s the end of 2016 and I’m currently doing some financial planning, specifically around taxes. In year’s past, I always used to estimate my taxes on Jan 1. But this past year, I’ve been doing it since October.

Over the past few years, tax refunds for myself and the wife have not been all that good, so I’ve been trying to come up with creative ways to increase it.

Charitable donations

One way to do it is through charitable donations which reduce your taxable income. The way I used to think it worked is that for every dollar you donate to charity, you get to subtract that dollar from your income and that goes against your taxes.

So, suppose you make $75,000 per year, and during the year you pay 20% of your income in federal income tax (this excludes Social Security and Medicare deductions). This means you would pay $75,000 x 20% = $15,000 in federal income tax.

Then, suppose you give away $7500 to registered charities. I always used to think the calculation worked like this:

Tax owed = (75,000 – 7500) x 0.2 = 13,500

15,000 – 13,500 = 1500 refund

That’s the way I used to think it worked, more or less. But it’s not. Taxes are more complicated than that.

For one thing, you get what’s called a Standard Deduction, and let’s assume it is $10,000 per year. The amount of taxes you pay throughout the year seems to account for this Standard Deduction.

Next, you add up all of your deductions which include charitable donations, deductible interest, sales tax paid, etc. If the sum of all of those is greater than the Standard Deduction, you get to use that against your total income. Thus, you have to give enough charitable donations such that the sum of all of them plus a few more other little deductions is greater than what you would normally for the Standard Deduction.

In this example, $7500 is less than $10,000, so I would not get to write off anything against my taxes even though I gave $7500 to charity. It wouldn’t be enough to reduce my tax liability. I’d have to give at least $10,000.

It’s good to give money to charity, but as a part of tax planning they are not that effective at reducing our taxes unless we give a huge amount [1].

Capital gains and losses

The one place that I have found to be effective is in capital gains and losses.

If you sell a stock or piece of property at a loss, you can use that against your income. So, suppose I have a stock I bought for $10,000 and sell for $5000, that’s a $5000 loss. I can reduce my income, not by the full amount, but a max of $3000 (and carry forward the other $2000 the next year). This is how Donald Trump could have conceivably avoided paying income tax for nearly two decades when he took a $1 billion personal loss in the mid-1990’s.

Many years ago, I bought a bunch of ETFs that track the general market. I’ve bought US stocks, foreign stocks, bonds, and Real Estate Investment Trusts (REITs). Some of these positions are up, and some are down. You would think that after five years they’d all be up, but no – some are still worth less than what I bought them for (roll-eyes.gif). Sometimes diversification doesn’t work that well.

But, what I can do is this – I can sell the stock (ETF) and then buy it back, and then use the “loss” against my income. For example:

a) In June 2014, buy an ETF at $50/share, 100 shares

b) At the end of the year, in December 2016, sell the ETF at $40/share, all 100 shares. I have lost (50 – 40) x 100 = –$1000. I then claim a $1000 loss on my taxes, reducing my taxable income by this amount. This is efficient because it goes right against the taxable income, no deduction magic involved.

c) I then buy the stock back right away at $40/share. Because I’ve only incurred trading costs, if the stock goes up (over time, cross my fingers) and I sell it down the road, I still can think of my starting point as $50/share.

The catch in this plan is that the IRS won’t let you do step (c). They aren’t stupid; you can’t just sell a stock, take the loss, then buy it back simply for the purpose of taking capital losses on your taxes. Instead, they have something called the wash sale rule. You can’t sell something and buy something similar within 30 days and claim the loss on your taxes. If you want to claim the loss, you have to wait at least 30 days before buying back something similar.

So that’s what I do – at the end of the year, I sell some stocks to take the loss, and then I wait 31 days to buy it back. I make no other trades during this period.

There is risk. I could sell it at $40, wait 30 days, and then have to buy it back at $45. That would suck.

Still, I take my chances. It worked out in 2015 because I was able to repurchase at the same price (or even a bit lower); hopefully in 2016 I can do the same in February.

The drawback here is that I am draining all my capital losses now instead of in the future. That is, if I have more income in the future, I have almost no more stocks to sell at losses. I am taking my chances here as well. But at the same time, now that Trump is in power, his proposed tax plan reduces this risk for us because of increases in the Standard Deduction. I’ve done the math on it, and his tax plan is friendly to the wife and I [2].

This works when it is well-executed

In 2015, I executed on this perfectly.

In 2016, I made a blunder. Instead of selling 200 shares (for example) to take a loss, I bought 200 shares. D’oh! I did this twice. Double d’oh! In order to fix this, I then had to sell 400 – the 200 I wanted to sell originally, and then the 200 I just purchased.

Tax-wise, this complicates things. Suppose my buy/sell over time looks like this:

– June 2012 – Buy 75 shares at $50

– Jan 2013 – Buy 80 shares at $55

– Sept 2013 – Buy 70 shares at $48

– June 2014 – Buy 60 shares at $45

It’s now Dec 2016 and the price is $47. What’s my net gain?

My stocks use a First-In, First-Out model. So, if today’s price is $47:

– June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 45 = –$45

Total loss = $910

That leaves me with:

– Sept 2013 – 25 shares acquired at $48

– June 2014 – 60 shares acquired at $45

But of course, I wasn’t paying attention and first bought 200 shares instead of selling, which means I have to sell 400. This screwed up everything, so here’s what I think the situation is:

June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 70 = –$70

– June 2014 = ($47 – $45) x 60 = $120

That’s a running total of 285 shares, so now we dip into what I just bought, the 200 shares at today’s price of $47:

– Dec 2016 – ($47 – $47) x 115 = $0

That brings me a net loss of $815 instead of $910. It also means that my future basis for all sales from this batch (85 shares) is now $47.

Not a good thing. I need to pay more attention in the future.

And then there’s dividends

One of the simplest ways to earn money without having to do anything is through dividend-paying stocks. Normally, you think about stock gains as buying low and selling high. But another way to do it is through buying a stock that is stable and paying dividends. There’s a debate over which method is better, but I do find that I like seeing my account have money deposited in it automatically, whereas buy/sell-at-a-gain requires me to do more work (should I sell now? Later? When!). Ideally you’d get growth + dividends, but that’s rare for a single stock. It’s more common through an ETF or mutual fund.

But whereas buying and selling stocks at a gain don’t generate taxes until you actually sell, dividends always make you pay taxes. My broker doesn’t withhold taxes, so all dividends that I get throughout the year add up into my total income and I have to pay taxes on it come the following April. I don’t have to pay taxes in my retirement accounts (401k and Traditional IRA) but I do in my regular brokerage account.

Dividends are interesting because they break down into two types:

  • Qualified dividends, which are taxed at a lower rate. In our tax bracket, they are taxed at 15%. These are usually US-based corporations and some foreign-based corporations, and you must have held them for a certain period of time (e.g., you can’t have bought the day before).
  • Non-qualified dividends, which are taxed as ordinary income (if you are in the 25% or 28% tax bracket, that’s what it is taxed at). Everything that’s not qualified counts as Non-qualified.

Thus, as you can see, if you want to earn income that is taxed most favorably, you should try to get Qualified Dividends.

The problem comes with diversification – you can’t just buy US stocks, you need to own some bonds, foreign stocks/ETFs, and REITs. Unfortunately, REITs’ dividends are classified as Non-qualified, so are bonds, and much of foreign ETFs are, too (at least I think so) [3].

So to optimize, you really should own your non-qualified dividend-paying securities in retirement accounts that are tax-deferred or tax-free; and qualified dividend-paying securities in accounts that are subject to paying taxes.

I did that a couple of years ago because I read the advice online in an article, but without really understanding why. Now I understand why. It turns out that my accounts are not fully optimized because I’ve instead chosen to reduce fees instead of taxes.

Still, the point is, dividends are a good way to earn income that is taxed less than regular income, plus it has no Social Security or Medicare tax.

On my previous years’ tax returns, it looks like all of it is being taxed as Ordinary (Non-qualified) dividends, but my current research suggests that about 2/3 of it should have been taxed as Qualified (15%) and 1/3 taxed as Non-qualified (28%). If I am right that I overpaid, that would reduce my tax liability even more. This is something I need to talk to the accountant about.

Getting rid of some other stocks

A long time ago, I bought shares in Apple. They split 7:1 a few years ago, and I had 98 shares. Apple was a great stock for a long time, increasing in value all the time. However, over the past two years the stock has lost its luster.

I’ve held onto it for three reasons:

1) I hope [4] it will keep going up, it’s Apple after all

2) I’m sitting on a big capital gain I will have to pay taxes on

3) It pays a decent dividend

Yet I’ve been thinking about selling it for a while and picking up some more REITs, there’s a particular stock I want to invest in.

I haven’t invested in it because I am afraid to – I almost bought in the summer when it was at $66, now it is at $55 – a loss of 16%! I think it’s currently on sale and is probably going to go up.

This new stock is a single stock, a REIT that currently pays a 4.26% dividend, far higher than Apple. But it’s only one stock, and that means it’s not diversified. A REIT ETF is VNQ (where I already have shares) and it pays a 4.1% dividend. Less, yes, but less risk.

But after doing the math above, it makes sense to buy a single stock that’s not a big part of my portfolio because it will be taxed as a Qualified Dividend (I think), whereas the more diversified REIT would be taxed as a Non-qualified dividend, and therefore 10-13% higher. That’s a big deal.

So, here’s what I did:

– I bought two more shares in Apple, bringing the total to 100

– I sold a covered call on Apple, expiring in February.

My hope is that the call option is exercised so it gives me spare capital to buy this other stock, otherwise I probably won’t sell Apple. The drawback of this approach is that it means my shares in Apple are hedged, and therefore any dividend Apple pays me count as Non-qualified (if the shares are exercised by then, it won’t matter).

* * * * * * * * * *

I know all of this is complicated. But taxes and investing are complicated.


[1] This is not accurate for other people, because other people get to deduct their mortgage interest and property taxes against their income. The wife and I cannot do this, we can only deduct it against our rental income.

[2] For the record, Hillary Clinton’s tax plan would make almost no difference other than costing us a couple extra hundred dollars. Bernie’s was extremely unfriendly, and would have cost us an extra 12-14 thousand dollars.

Donald Trump’s tax plan will increase the Standard Deduction from $12,600 for a married couple filing jointly to $30,000 for a married couple filing jointly. However, it will also get rid of Exemptions which are added on after you take Itemized Deductions or the Standard Deduction. Still, under the current tax code we can deduct 20,700 from our taxes whereas under Trump we would be able to deduct 30,000.

This means it would be even harder for charitable donations to reduce overall tax liability.

[3] It looks this way for me when I go back over my old statements.

[4] In investing, ‘hope’ is a four-letter word.

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The mortgage is now paid off

8 years ago, I made a huge purchase – I bought a condo for the purposes of using it as an investment.

The goal, for 8 years, never paid off. This was during the recession and I wasn’t able to get it rented quickly, nor get as much as I wanted in rent. As a result, I was taking a financial beating.

I refinanced once a year later, then refinanced again a couple years after that. Along the way the economy recovered so that turned my big monthly loss to a small monthly loss.

That ends now.

For your see, the wife and I successfully paid off her condo in 2013. We then started to pay down mine.

We paid a little bit extra in 2014.

We paid a lot more extra in 2015.

We paid a ton more extra in 2016!

And with that, the place is paid off. The wife recommended we just get rid of the balance once it got down to a certain amount. I agreed, and now the balance is zero.

That means that this month, for the first time ever, it will be a financial boon for me to own that condo. It’s now actually an asset (from the Rich Dad, Poor Dad point of view).


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I’ve always considered myself a reasonably savvy financial investor. I’ve read plenty of self-help books on the matter and for the most part, I’ve followed their advice.

I got into stock trading over 10 years ago and in the 5 years that I did it, I came to one important lesson – don’t try to trade stocks on your own; instead, focus on passive investing. I learned this because unless you’re doing it full time, it’s hard to do it better than simply passive investing.

I got into real estate investing also because of reading books on the subject. I made my first real estate investment in 2008 and it turned out to be a total disaster. However, now that the wife and I are married, we have a separate real estate investment that is profitable. In 4-6 months after my place is paid off, we will have a second one.

That means we will be completely debt free.

And leads me to uncertainty about what to invest in next. Because I don’t know. There’s a certain desire to simply spend the money on frivolous things, but we all know I am not going to be doing that, and I won’t sign off on the wife doing it either. I feel like I have a bunch of options:

  • I could just invest passively in the stock market. But, I don’t like the wild swings up and down. And, while it’s liquid, the fact is that I just buy-and-hold and I do like the monthly income that real estate has. There also are few tax advantages of owning stocks. But, I’ve read that stocks give you better returns than any other asset class.

  • We could buy more real estate. UGH! Neither the wife nor I are big fans of owning real estate, even though we’re starting to get pretty good at it.

  • I have thought about investing in HomeUnion. This is a real estate investment platform where you put up the money to buy a place, and they manage it all for you. That’s tempting, so very tempting. But not particularly liquid if things go bad.

  • I have thought about investing in FundRise which is a real estate crowdfunding site that sells eREITs. eREITs are like regular real estate investment trusts except with better returns and poorer liquidity (you can’t get out whenever you want but only at certain times, and I think you may sacrifice some returns if you do).

  • I have thought about investing in other real estate crowdfunding that specializes in commercial property. These are websites like RealtyShares, and apparently you get some of the tax advantages of owning real estate. But again, I’m not sure how to get out if things go wrong. And do I want to be that tied to real estate? The other downside is that I have to prove I am an accredited investor (which means we have a net worth of $1 million, or make $250,000 year as a couple).

  • I have thought about investing in a stock called Realty Income Corp, ticker symbol ‘O’. I’ve run across this multiple times, it has increased its dividend every year for 15 years and has consistently gone up in value. Plus, it’s 100% passive. But do I want to have that much money in real estate? And stocks have no tax advantages so I’d be getting a little bit of money each month which I’d just re-invest, but then get taxed on it each year.

So you see, I feel like I have this mental pressure to do something with extra money to invest otherwise I’m just wasting it. But I feel like these new crowdfunding platforms are so new that there’s way too much risk involved.

I am paralyzed with indecision.

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I recently read an article somewhere (I forget where) that if you want to look at someone’s future 10 years from now, look at what they are doing today.

If I look at myself and where I am now, would 10 years ago have predicted where I am currently at?

First, let’s look at where I came from. I grew up in a middle class household, but that’s not enough of a description. The province in Canada where we lived – Manitoba – is not one of the wealthier provinces but at the same time, we did not live in a poor community. If you map out people’s classes the following way (using this article as a basis, you should read the whole thing), starting from the bottom up:

  1. The lowest, poor class – chronically unemployed, generationally poor
  2. Labor class level 1 – unskilled labor, work at fast food restaurants
  3. Labor class level 2 – assembly line work
  4. Labor class level 3 – pilots, plumbers, and small business owners
  5. Gentry class level 1 – schoolteachers and starving artists
  6. Gentry class level 2 – professions like engineering and law
  7. Gentry class level 3 – scientists and entrepreneurs
  8. Elite class – Although you can get a job in finance and make a few million and kind of get into this class, you’re mostly born into it. These are families with “old” money. They don’t work unless they want to.

Don’t confuse social class with economic class; you can be a wealthy plumber yet still be labor class because social class is more than money. Instead, it’s about economic opportunity, the people around you, your political beliefs and attitudes, your social beliefs and attitudes, and so forth.

My family was either Labor class 2 or Labor class 3. We weren’t poor, but we did live on an acreage out in the countryside about five miles outside of the nearest town of about 2000 people, and 20 min outside the nearest big city (of about 600,000 people). I can tell we were Labor class 2 or 3 because the families that we were friends with, and made up most of the other families, were the same as us. My friends’ parents had similar jobs with some variation. Our cousins’ families were similar to us, too, again with some variation.What cements the fact that we were Labor class were the things we enjoyed – my brother and I liked watching professional wrestling. Those are Labor class leisures.

I, along with my two siblings, went to university. I got a degree in computer engineering. For all the talk about how university isn’t worth the cost, the one thing it does teach you that you can’t learn in online courses is how the gentry class thinks. That was a big part of what I learned, especially when I took a class in sociology (half of which was wrong, but at least I know how they think).

Fast-forward to today, and I am in Gentry class 2. I somehow got and kept a job at a large tech company for 12 years. I am paid well and many days (most?) I wonder how I manage to have landed a position where I am overpaid as much as I am; I do feel guilty sometimes when I look back at the friends with whom I grew up and I out-earn all of them, and even some of my smarter classmates in high school, too.

I sometimes map myself along the household income scales you can find by doing web searches, and the wife and I – combined – are in the top 10% in the country which isn’t unusual for people living in Seattle, especially when one of them works in the tech industry. I am not complaining about how fortunate we are, nor bragging. It just is, and it contrasts with where I came from.

By the way, the top 10% sounds impressive but it isn’t. The top of the economic scale doesn’t get exorbitant until you get to the top 1% and even then, not until the top 10% of that 1%, that is, the top 0.1% of the country. But we are still doing fine.

So returning to my question from the start of this post – could 10 years ago have predicted where I am now?

10 years ago was 2006 and I was working back in Winnipeg for the same company I work for now, and I wasn’t getting paid that much money. However, there were a few things I was doing right:

  1. I had started a few side businesses and failed at all of them. I failed in at least 3 network marketing businesses the five years prior to 2006.
  2. I practiced researching and trading stocks. I spent a ton of time doing this. I got good at outperforming the market in up-trends but losing most of it in down-trends, and that’s why I quit. I did better doing passive trading.
  3. I did some part-time gigs performing magic. These never paid a lot but I worked at it.
  4. I did a lot of programming in my spare time while I was unemployed, I developed my own stock market trading simulator.
  5. I read a lot of books on personal finance and got into Robert Kiyosaki’s Rich Dad, Poor Dad series of books, among others. So I was well aware of what it took.
  6. In 2001, I was working for a tech company in the UK when I was laid off but got a pretty good redundancy payout. I invested £3000 into an investment account for long term retirement. It lost about 25% in a year, though, so I withdrew half.
  7. I was cheap. I rarely spent money on frivolous things. In fact, after I moved back to Canada from the UK, I lived at home with my parents because it was cheaper.

So looking back on my habits from 10 years ago, it’s not that surprising that I am doing reasonably well now. I was good in school (but not university) and liked to read, was good at math and programming, and I was interested in finance. Today, I am in a stable position.

I look at some of my friends who are not in as good a position as I am. Some of them would spend money far too easily for my judgmental eyes and today, they struggle to financially get ahead or even to keep their heads above water.

I am fortunate to be in the position that I am in. It is a lot of luck that I was born in the family I was, that I was born in the country I was, in the time I was. But that is also augmented with some early habits I developed that have so far paid off such that I can do many of the things I want to do.

It is true that money does not buy happiness. However, what it does is allow you to do the things you like to do and pay to not have to do the things you don’t like to do.

The wife and I read a lot of books on personal finance. We are aggressively paying down the mortgage on the condo I bought in 2008, we put a lot into retirement savings, and I have a large chunk in regular savings. We have met with a financial adviser, we take financial planning classes, we have a will (!), and the strangest thing is that now we get invitations in the mail to attend free dinners put on by people trying to sell us things. So far, we’ve done one for solar panel installations, and then I went to another one for learning how to invested in Fixed Index Annuities. I think we’re going to one or two more in the next couple of weeks.

So, what will things look like 10 years from today? Will the things we’re doing now pay off then?

We’ll see.

* * * * * * * * * * * * *

Another description of the social classes and labor classes can be found here:


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Mortgage progress

In 2008, I made a financial decision I have since come to regret – buying a condo to use as an investment property. At the time, my goal was to get passive income to use to fund my retirement in my old age since I probably wouldn’t be able to rely on social security or my company’s retirement plan.

However, that investment property plan did not go as planned. I underestimated how much I could get in rent and overestimated the costs associated with owning real estate. Those were good eye-openers for the real estate rental market. The one smart thing I did was not buy too expensive a place.

My previous plan was to pay it off about 10-15 years early and then start making money on it.

But in the past two years, those plans have fast accelerated. Thanks to the wife pushing me to do it, plus listening to Dave Ramsey, we have paid off well over half the mortgage and are now on track to have it down to zero within two years if we continue at the current rate.

But before we do, there’s one thing I want to do.

Last year, I got the mortgage balance to under 80%. For you see, if you buy a property but don’t put down a 20% down payment, you have to pay mortgage insurance which is an extra 0.4%/year of the overall mortgage payment (or something like that). Basically, I am paying an extra $800/year. After I got the mortgage balance to less than 80%, I wrote the bank and asked them if they would waive the mortgage insurance payment.

They told me that in order to stop paying it, I have to get the balance to less than 80% and have had the loan for 5 years or more. Since I refinanced in August 2012, that was the origination date of the loan. 2014-2012 = 2 years, not the original start date of 2014-2008 = 6 years. They wouldn’t waive it.

So, my goal instead is to continue paying off the mortgage aggressively and get it down to $1 before August 2017. I will then once again write the bank and ask them to waive the mortgage insurance premium I have to pay. I will explain to them that even though I have not yet had the loan for five years, it is a very low risk option for them to waive the fee since I have a good credit rating and the risk of me not paying the balance on my outstanding loan is trivially small. I then want them to look up my balance, see how low it is, get a good laugh out of it, and then agree to waive the fee.

That’s my goal. I’m not sure I’ll make it but I will try.

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This past week, I got the mortgage on my condo down to over 50% paid off.


I bought the place in 2008 and didn’t make much progress on the balance of the mortgage for 5 years. But since then, I’ve started paying it off more aggressively thanks to the wife who also contributes some funds.

We’ve been paying it off even more aggressively this year (2015) than last year (2014). And, if we keep up this pace, it should be paid off by August 2017.

If we keep up the pace.

It’s hard to do that because it feels like by doing this we are using up capital that we could spend on other house projects, or by investing the money so that it grows quicker and we have something to live off of in our old age.

But whatever. It’s nice to see debt decreasing.

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This past year in my neighborhood I noticed that there were a lot of houses for sale. Now, houses in my neighborhood are not cheap, they go for at least $500,000 for a 1500-2000 square foot place. This is the low end of the market, the average place is around $575,000; I’ve even seen $800,000 although I think that place was leased rather than sold.

I looked up some simple rules-of-thumb for how much someone can afford. Here are a few different rules:

  • Aim for a home that costs two-and-a-half times your gross annual salary.

    I’m going to round up to 3x annual salary which means a person needs to make $165,000 to $190,000 per year. According to the latest IRS statistics from 2012, if you are in the $100,000-$200,000 annual gross income bracket, that puts you in the top 17% of all income earners in the United States. Digging deeper into the data, $150,000 puts you in the top around the 10% of all households.

  • The front-end debt-to-income ratio – mortgage payment (PITI) divided by gross income – should be less than 31%.

    So let’s say a house is $575,000 and someone is going to put 10% down, or $57,500 (which is a lot of cash to have sitting around). A 30-year fixed mortgage rate today is 4.5% in Seattle for a decent credit rating. Property taxes on this place will run $4200/year.

    That translates into a an annual required gross income of $111,000.

    It really varies based upon how much you put down and how much other debt you have.

The bottom line is that you need a high income to afford a place around here. And here’s the thing – not everyone can be in the top 10% of all income earners. By definition, it’s 1/10th of everyone. And, those income earners cluster around the east coast (centered around New York City and Washington, DC) and in the Bay Area in California. Washington has some wealth but not at the same levels as those areas.

If you put all of your money into your monthly mortgage, it doesn’t leave you with that much money left over for other things you need, like saving for retirement, upgrading your house, saving for your kids’ college fund, making sure you have enough money for health care costs after you retire (because US medical coverage is lousy) and so forth.

High housing costs will eat into income and divert your money from savings which is bad because you’ll need it in your old age, and the United States does not do a great job of taking care of the elderly.

I guess people can afford expensive homes… but at what cost?

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I was reading some articles the other day about personal finance about how it’s not worth it to earn too high a salary (more than $250,000/year) because the extra income you make is reduced too much by taxes, and the small incremental increase is not worth the additional stress.

This spilled over into the comments section (I know, it’s dangerous territory) where people were complaining about the current government administration and the belief that rich people are greedy, and how nobody wants to be “rich” because they will be vilified.

The comments then degenerated into how we live in an entitlement society and that the rich are valuable and the poor just need to work hard and stop blaming the rich for their problems. I take this as a shortcut euphemism for “Poor people are lazy.”

This doesn’t resonate with me at all.

  1. It’s not a simple “We think all the rich are bad”

    For one thing, I don’t think that society is unilaterally against rich people. We distinguish between wealthy people and the super-rich, the top 0.1% or 0.01% of society – those making tens of millions per year, not those between $250,000 and $1 million per year. Indeed, there’s a much of a gap between the 0.1% and the 1% as there is from the 99% and the 1%.


  2. Getting wealthy requires additional factors beyond hard work

    Second, the idea that poor people are lazy simply isn’t true. While rich people do work hard, they also benefit from time and circumstance. I come from Winnipeg, a city in the Canadian prairies. People there work hard. But people work hard in Calgary, too, another province in the prairies. But people in Calgary are wealthier. Why? Because Calgary has better access to natural resources – oil – while Winnipeg does not. Being born in Calgary has a better chance in life of becoming wealthy than being born in Winnipeg.


    I moved from Winnipeg years ago to a wealthier city, Seattle. I work no more or no less hard than some of my friends back in Winnipeg, but I have more money than they do. They will probably never catch up to me. But I come from a background where I was encouraged to get post-secondary education, and I had access to computers early in life. My friends didn’t.

    So really, there are a ton of factors that go into people’s level of wealth that they don’t control beyond working hard, and being lazy.

    You may argue: Move. But humans aren’t like that, we’re not all about seeking economic opportunity but choose places to live based upon family, culture, access to opportunities, and not just the lure of more money.

  3. There is a perception that rich people take advantage of loopholes that are not available to everyone else at the expense of everyone else

    Third, society balks at the idea of the super-wealthy getting rich at the expense of the rest of us. It’s true that for many years, you could be an average citizen and a rising tide would lift your boat, but that stopped being true a long time ago, starting in the 1980’s and continuing on for the next three decades. During the 2007-2009 recession, everyone’s net worth took a hit. And since the recession, everyone has recovered. But, the top 10% has recovered much faster than the bottom 90%, and their levels exceed pre-recession levels. But not the average citizen. So, clearly, there’s something going on here. Does everyone in the 1% work that much harder than everyone else?

    One of the criticisms of Walmart is that they double-dip against the government.


    First, they pay their workers low wages, not enough to live on. They do this because it helps their profitability and results in increased share prices which directly benefits shareholders, people who are much more likely to be wealthy in the first place. Keeping your expenses down means your company makes more money, and shareholders benefit.


    But because their workers are not paid enough, they have to go on food stamps; they are the working poor (not not freeloaders). So, Walmart pays lower wages while making a small amount of people wealthy, while a large amount of people – who are needed to run the stores so these small amount of people can get wealthier – have to get government assistance, funded by taxpayers.  The argument is that if Walmart paid more, the difference wouldn’t have to be made up by taxpayers. That is dip #1.

    But the recipients of food stamps then take those stamps and buy food at Walmart, who advertises low prices and works to keep them low. So the very money that the government gives to Walmart employees is then spent at Walmart. This is dip #2.

    Thus, Walmart benefits doubly-so by not paying its workers more – they get to boost profits by holding costs down, and get to receive that same set of money that their workers would have spent on food (that they didn’t pay them) from the government.

    That’s why people balk at rich CEO’s. I’m not saying that is the reality, but it is the perception.

    And perception matters. A lot!

    Did the Obama administration make all of this stuff up? Or is there some truth to it? If there is some truth to it, how exaggerated is it? Or is it all fluff?

So, as you can see, I am sympathetic to the plight of people who are less fortunate than I am. I don’t think there is a conspiracy against the rich, I think it is more nuanced than simply saying “The rich are greedy!” Rich people are simply people, like the rest of us. Some of them work harder than others. But poor people work hard, too, they just don’t find it as easy to get ahead.

But nor are poor people lazy, in general. As time has passed, students have been getting stuck with larger and larger student loans. The minimum wage in the United States used to be enough to get by, but hasn’t been that way in years.

To me, this suggests that it is something structural within society rather than a secret conspiracy.

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A couple of weeks ago, my current tenant in my condo notified me that she had to move out. This was due to her needing to be closer to her family. It was mid-month and she had to move out within a short period of time.

My lease agreement says that a tenant can move out earlier than the expiration on it but they need to pay two months rent in order to do so.

I decided not to bother enforcing it.

My tenant did a good job of cleaning up the unit, however. It was cleaned from top to bottom and is move-in ready so I don’t have to spend any time ensuring that it is in good condition before getting new tenants.

And guess what? I put it on the market on March 1, and by March 7 (today), it’s rented out with a start date of April 1.

While I don’t like having a month’s loss of income I am lucky enough to be in a position that I don’t need it. And with this new set of tenants, I am able to raise the rent by $225/month from the previous time I rented it out. This means that the loss of rental income for one month while it sits empty will be offset in about 4 months. In other words, by the end of the year, it will have generated more revenue at the higher rate with a loss of one month than my former tenant being in the unit for an entire year.

That, combined with my time saved because of my tenant cleaning it up, is why I wasn’t enforcing the escape clause.

My strategy in pricing my unit is to be very competitive with the market. I took a look on Craigslist for apartments in the area of similar size and they are all going for $100-$200 more than I was charging. This ensures that I got a lot of applicants (I got around 12) and it doesn’t stay empty for long. I had to take down the ad after one day, I was getting so many replies.

You may be tempted to think that I priced it too low, and that’s possibly true. But, pricing it lower ensures it fills up faster and it prevents tenant expectations from getting too high. After all, it’s lower than everywhere else so it’s not going to be too flashy.

Personally, I think my tenants are getting a good deal. My rate includes water, sewer, and trash which over half the time aren’t covered in other apartments. I also repair pretty much everything in the unit when it goes bad. Last year, I replaced the windows in the condo at a cost of $5600 at no expense to my tenant.

The drawback of pricing it lower is that it still loses money; the rent is still about $200/month lower than it needs to cover all the expenses (mortgage payment plus property tax plus mortgage insurance + homeowner dues).

But by my math, in 3 or 4 years (probably 4), the condo will finally be making money.

It will have only taken 10 years.

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In 2014, I paid down my mortgage principle more in one year than I did in the previous 5.5 years put together.

For you see, from Sept 2008 to Dec 2013, I paid off 11% of the principle. From Jan 2014 to Dec 2014, I and the wife paid off 20% of the principle (meaning that the mortgage is 31% paid off).

We’ve been reasonably aggressive in paying it down. My condo is currently rented out but it still loses money each month. If I only paid the exact amount I needed to pay, I would lose $416 each month, or $5000/year. Because of the way taxes work, it ends up being less than that. But I am still losing money on it because I can’t get enough rent to cover everything relative to how much I could actually get (i.e., the market won’t let me raise the rent high enough to cover the total payment).

The goal is to pay off the condo in less than 4 years, maybe 3 years which is aggressive. Once it is paid off, it will generate about $450/month in net positive cash flow assuming nothing breaks.

I am looking forward to that day.

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Dave Ramsey’s second course – Legacy Central – is all about what you do after you become wealthy. The name of it derives from leaving a legacy to your heirs. What do you do after you have completed all seven steps?

We’re not through it yet, but we do follow most of the advice given in the videos. I think that what he says is true independent of the rationale given to support it.

But what I do find is that Ramsey spends a lot of time defending the idea that it’s okay to become wealthy, it’s not inherently wrong, and that acquiring wealth is Biblical – that is, the writers of the Bible are not against people becoming rich. I think he does this because he has a lot of detractors who claim that what he is teaching is contra-biblical.

I agree that it’s okay to become wealthy, it is not inherently wrong, but where I diverge from Ramsey is his view that the Bible does not treat rich people harshly; if it ever does, it’s that a person is rich and something else (e.g., greedy or self-centered).

I think it’s clear that the New Testament is especially harsh on wealthy people and very moderate on poor people. In the first lesson, Ramsey defends his beliefs by arguing that passages commonly used against rich people by opponents of rich Christians are misinterpreting passages:

  • In the story of the rich young ruler, Jesus tells a rich man to give away everything he had. But the point of the parable is not that rich people cannot be saved (because camels cannot fit through eyes of needles) but that nobody can be saved except with God’s help. It is a not a story saying that rich people cannot be saved.

    While this is one interpretation, I can’t help but notice that Jesus said “How hard is it for a rich person to enter the kingdom of heaven” rather than how hard it is for anyone to enter it.

  • In the story of the widow giving everything she had (Luke 21:1-4), Ramsey interprets this story by connecting it to Luke 20:45-46. In those verses, the teachers of the law are ripping people off, including widows. In the next verse, the widow gives her offering which is everything she had. Thus, the verse is not about praising the widow (because Jesus says nothing about her faith) but rather that the widow giving her offering is an example of the teachers of the law ripping people off.

Those are possible interpretations of those verses. However, Jesus’ teachings in the New Testament are always sympathetic to the poor and never to the rich:

  • In the Beatitudes, Jesus says blessed are the poor (Luke 7:20) for theirs is the kingdom of God, while woe to the rich (Luke 7:24) for they have already had their comfort. Jesus never mentions the faith of either one.

  • In the parable of the Rich Man and Lazarus (Luke 16:19-31), it is the rich man who is condemned while the beggar who is saved.

  • In the parable of the rich fool, the man who tries to store up his crops losing everything (Luke 12:13-21).

  • Even in the story of Zaccheus, the tax collector who became a follower of Jesus, didn’t receive positive feedback from Jesus until after he said he was going to give away half his wealth and pay back those he cheated (that is, he was going to become less rich).

I don’t think Jesus unequivocally believed that the rich were inherently bad because his teachings on wealth are complex. He had to have had wealthy followers who would have supported his ministry, probably Mary Magdelene was one. Joseph of Arimithea who provided a tomb was similarly wealthy.

But you still never see Jesus teach that the rich shown in a positive light while at the same time the poor are shown in a negative light.

Yet it is true that Jesus gives the rich a much harder time than the poor. In so many of his teachings, it is what people do that makes the difference in whether or not they flee the coming wrath (e.g., the parable of the sheep and the goats in Matt 25:46 only those who do the will of his Father in Matt 12:50, also Matt 7:21).

So while I don’t believe Ramsey is wrong to say that there is nothing wrong with the acquisition of wealth, I do think he is stretching things to say doing so is Biblical. Being wealthy is neither good nor bad, it depends on what you did to get there, and what you do once you get there.

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A few years ago, the wife and I took Dave Ramsey’s Financial Peace University. It’s basically a 7 (?) week course on how to organize your finances. We took a bunch of the advice except for the following:

  • Use case for all purchases – I tried doing this for a while, it lasted about a month. It got to be a pain handling all those coins. The idea behind this is that if you use cash, you feel the pain of spending it more than if you were to use a credit card which causes you to spend more.

    This is true, when I use cash it “hurts” more to spend it.

    However, in addition to the inconvenience of cash, I found I wasn’t saving as much money. The reason is that unless I paid exact change, I was losing the change. For example, suppose that I bought something and it cost $4.53. I had the cashier a $5 bill resulting in $0.47 change. Most of the time I put that change into my pocket and then I’d lose it. In effect, I’d be paying $5 for a $4.53 item which is an overpayment of 10%.

    This happened over and over.

    The solution was to stop paying cash. Seems to be working for me.

  • Don’t use credit cards – This is another piece of advice that both me and the wife don’t use. Not only do we still use credit cards, we have cut back on our debit card use and increased our credit card use.

    We use them for the rewards points. While many credit card holders have reward points that expire, we’ve gotten very good at redeeming them. They don’t go to waste for us, and if we’re going to pay for things anyways, we may as well get a two-for-one.

    Signing up for credit cards over and over can hurt your credit rating. While true, it doesn’t matter for us. We don’t plan to buy anything on credit anyhow – not a car, house, boat or motorcycle.

Those are the pieces of advice that we explicitly decided not to follow. However, the paying off of debt we are following. It’s taking a while but we have managed to put at least one mortgage behind us (wife’s condo paid off in 2013).

One more to go.

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14 months ago, I started a program to more aggressively pay down my mortgage (that is, the wife made me start paying it down more aggressively). I feel like it’s taking forever.

At the current rate of pay-down, it will take another 4 years. The wife wants that increased.

I am unclear if this is a good idea. Why? Because the rate of interest on the loan is 3.875%. That’s a reasonable rate. However, my stocks average about 7% per year, after taxes. Should I divert funds away from investing in stocks – which returns more money – towards the mortgage which is a fixed rate?

On the one hand, I want to be debt-free.

But on the other hand, I understand the value of time; xx dollars put into my retirement fund today means more time to compound and grow for when I need it later in 25-30 years. Does it make sense to sacrifice $100,000 for zero-debt when that same $100,000 be worth much more by investing in the markets?

I have analysis paralysis and don’t know how to proceed.

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Last month, I successfully managed to rent out my condo. For you see, this past September the wife and I moved to a house a little closer to my work (a bit closer for her, too, although it takes longer to get to the freeway). I had some upgrades to make to the condo:

  1. I replaced the sink and the blinds in the living room

  2. I replaced the floor in the unit with floating vinyl so now it actually looks nice

  3. I had the carpets cleaned

It took a while to get all of that done, but I did. I put it up on Craigslist, got many responses and a week later it was all settled.

I priced my unit below the market rate. I guess technically I put it in the bottom 10th percentile but it’s one of the cheapest you can find anywhere in the area. I did this because I think that housing is too expensive and I want to provide affordable housing if I can. Since I’ve got a break on living expenses now, I decided to pass that on to my renter.

But wait, there’s more!

December is the Christmas season. I informed my renter that I was knocking $100 of her December rent, for 2013 only.

Why would I do this?

I read somewhere that Jeff Bezos, the CEO of Amazon, say that they would be the type of company that would work hard to lower prices for their customers. That’s the type of company I want to be – work hard to deliver value for my customers.

I know that I like it when I randomly catch a break on anything, and I would definitely like it if when I were renting, my landlord gave me a one-time discount. So, that’s what I did – I gave my tenant a discount.

I’m just that type of guy.

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As I have written previously, the wife wants me to pay off my mortgage as quickly as possible. This is a difficult task because I feel like I owe so much and it’s hard to commit to something that will take 5-10 years with no clear benefits at the end.

That is, while I will no longer have a mortgage, in the back of my mind I am concerned about the opportunity cost. If I put $150,000 (for example) extra towards the mortgage, instead of sticking it in my 401(k) or stock trading account, am I losing out on five years of stock market appreciation that I can never make up?

This bothers me because after five years on the market, that $150,000 would most likely be worth around $175,000 (assuming 7% appreciation per year which is reasonable). But after five years of paying off my mortgage it would be worth perhaps $130,000 since my place is so far underwater.

On the other hand, I just don’t know which is better – investing or paying down low-interest debt.

Still, I have come up with a tentative set of goals for the mortgage:

  1. Goal #1 – Get the mortgage 10% paid off from my original purchase price in 2008. I have refinanced twice and each time the mortgage is a little less. But I want to target my original price.

    Estimated target: December 2013

  2. Goal #2 – Get the mortgage 20% paid off so I can stop paying Private Mortgage Insurance premiums. This will save me $75/month.

    Estimated target: December 2014

  3. Goal #3 – Acquire equity. This will occur when the mortgage remaining is less than what the place is worth.

    Estimated target: March 2016

  4. Goal #4 – Chop the debt in half. Whenever I acquire equity, the next goal is to reduce that by 50%.

    Estimated target: March 2019

  5. Goal #5 – Elimination of the mortgage

    Estimated target: Summer 2021

This is 3 years later than the wife wants it. I’ll have to see where I can optimize.

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