View from the Mountain Top

I just finished reading through the entirety of Thoughts of an Anonymous Lawyer, a chronicling a big law lawyer’s 6 year journey to financial independence. While it is daunting that the blog goes back to 2009, he doesn’t post more than a dozen or so times a year making it something you can read through in a couple hours.

Needless to say, as a young lawyer the journey he underwent is pretty fascinating. Growing his net work from $300k-1.7M in 6 years is impressive, and it takes a lot of guts to walk away from what looks like a $500k salary. I enjoyed how it read like a diary. It struck me as an honest look at one man’s mission to escape the rat race.

But it also goes to show how miserable the practice of law can be. I won’t sit here and say I am miserable, but handling divorce litigation matters and generally nasty situations on a daily basis has its moments. And I barely survived a summer internship at a big law firm – I highly doubt that I could have clawed my way to the top like this guy. I think the takeaway for me is to try to appreciate the journey to the extent that is possible.

Hats off to him to stick it out, stack the cash, and pull the cord when the time is right. It certainly lends some perspective and I know I am a better person for it.

Enjoy the early retirement Anonymous Lawyer. I am sure there are plenty of folks who would love to pick up those extra billable hours while you are vagabonding in SE Asia. Speaking of which, I gotta get ready for my hearing in the morning…

Investing in Silver? Six Reasons to Consider

On a whim I recently purchased approximately $1000 in physical silver. Well, I shouldn’t say on a whim. I have been curious about buying some sort of precious metal with cash for a while now, but I more or less woke up in the morning, decided to buy silver, and had $1000 of the shiny stuff before lunch.

Silver prices are at a 5 year low. With the recent turbulence in the stock market you have to think that people will start looking to precious metals again as a “safe investment” over traditional stocks and bonds. I am not sure how “safe” silver is. Those that bought silver in 2011 for $45/ounce lost their shirt. It has steadily declined over the past 5 years:

5-year-silver-chart

Has it reached the bottom? Who knows. Maybe it will continue to decline. Or maybe it will plateau for years, as it appears to have done from 1985-2003. Or maybe it will head back up into the clouds. I won’t pretend to know for sure, but obviously I am long silver at this point. My thoughts and rationale on buying physical silver are as follows:

1. You can pay cash for it.

There are so few investments you can pay for with cold hard cash that have any kind of liquidity. I bought my silver at a precious metal shop, and apparently they take cash. This is pretty cool if you happen to be sitting on some greenbacks for whatever reason. Of course you pay for the privilege – in my case I paid $1.50/ounce over spot. This seemed on par (actually a little better) than buying from large websites.

Of course there are interesting precious metal mutual funds, and funds that give you some other forms of exposure to precious metals (like Vanguard’s Precious Metals and Mining Fund). These funds may be a better bet if you are not going to be paying with cash, as you can avoid paying as large of a transaction cost.

2. No sales tax.

If you buy over $500 worth of silver you don’t need to pay sales tax in my state. That’s pretty sweet.

I realize that this varies from state to state. If you are in a state that does charge sales tax on silver then you are stuck paying the tax or buying online (and then paying the sales tax voluntarily – right?).

3. There is liquidity.

Apparently you can take this silver stuff to various coin shops and precious metal dealers, and they will pay you the spot price on the spot. I asked my silver seller why he paid spot (and not X% of spot), and he told me he pays spot because when he buys it from the mint he pays spot plus a markup, plus shipping. So to pay spot to a guy walking into his store is a good deal for him, because then he can sell it back with his markup and not have to pay shipping or the markup from the mint.

Other physical assets can be a lot harder to unload, so the ability to drive to a coin shop 5 minutes from my house to liquidate my silver holdings at spot price is great. If only buying and selling real estate was so simple.

Silver is sold in various configurations: 1 ounce pieces, 5 ounce, 10 ounce, 100 ounce, etc. I opted for 65 1 ounce rounds (coins). The price per ounce was all the same so I figured it would be nicer to have the rounds so that if I wanted to sell some off (or trade some in a post apocalyptic future – you know, for drinking water or bullets or something) I would have an easier time with the rounds. They come in little plastic containers so it’s not like they are rolling around loose. Plus they are just cool.

So theoretically I could offload this stuff tomorrow if I needed to. Of course you pay for the privilege of buying physical silver – a markup of $1.50 an ounce in my case. This is pretty steep when you consider the price per ounce currently is around $14. That’s over 10% right off the top. Silver will need to gain some ground before I even break even on this stuff. But still, the silver trader is performing a service so I made the purchase.

4. It’s an interesting hedge against traditional investments.

In times of economic uncertainty people seem to flock to precious metals. The stock market has only grown more volatile over the past 15 years and while I firmly believe that over a long enough timeline my portfolio of US stocks will go up and to the right, I am expecting to see some down cycles.

If the market goes down far enough to jack up the price of silver substantially, then I can cash in and potentially move the money into something else. If the silver market continues to drop, then I will likely continue to buy. My timeline for this investment is 10 years minimum (maybe 20 or 30+?). Of course if silver were to go back up to $40 an ounce tomorrow I’d likely sell.

5. Appears to be More Volatile than Gold

At its height gold was trading at $1,900 an ounce. Now it’s around $1,100. Silver, on the other hand, maxed out at $48/ounce (and currently it is around $14). I like the added volatility with silver. I have a long investment horizon, and it seems like there is greater potential for it to swing up. At least based on past performance.

6. The “Prepper Factor”

I really did not buy this stuff in anticipation of a dystopian future. I realize there are people who buy physical silver and gold in anticipation of WW3. The guy I bought silver from told me about people that apparently buy $5k a week from him, and introduce themselves as “John Doe”. They are paranoid that the government will find their silver and take it away (presumably with their guns).

While I am as suspicious of the government as the next guy, this didn’t factor into my decision making at all. There are bigger fish to fry than my 65 ounces of silver.

As for using this if the “Shit Hits The Fan,” I don’t think it’s a problem to have some cash handy for a natural disaster, but I am not convinced I will have a chance to exchange my silver for MREs any time soon.

Cons to this Investment

I see a number of disadvantages to buying physical silver, gold, or other precious metal commodities. The first being, you need to keep it somewhere. In my case I tucked it away into a safe deposit box, which costs me ~$100 a year (which may otherwise be unnecessary).

It also throws off no income. When you consider other investments like buying debt, dividend bearing stock, certificate of deposit, website, cash flowing rental property, etc, silver and gold will never cash flow.

Plus no one has a crystal ball so who knows what the market for silver will do over the next 5, 10 or 20 years. Hopefully it will at least pace inflation, but who knows for sure. It may continue to go down or do nothing for a long period of time. There certainly are safer investments.

So the investment cost me money from the start, costs me money each year to store, may not appreciate in value, and does not throw off any kind of income.

When I think of it that way it seems like a pretty dumb investment.

Thankfully my investment horizon should be long enough to iron out any kinks, and this is a small portion of my portfolio. I think there are dumber things I can do with $1000 than buy than silver at $15 an ounce, so I am not too worried (famous last words).

Final Thoughts

If you can afford to hang on to it for a long time I think it’s OK to speculate on a little silver. That’s what I consider my purchase: speculation. I speculate that it will eventually go up in value, but I really have no clue, and I’ll be OK if it doesn’t.

I will say if it continues to decline I will continue to buy, and sort of dollar cost average my way into it. I think we will continue to see volatility in the stock market, and we will ultimately see the price of silver rise. Otherwise I would not have bought it.

However, I have approached this with a long term mentality. 65 ounces of silver is not going to make or break me, and represents a small portion of my small portfolio. I certainly wouldn’t sell my condo or cash out my IRA to buy silver, and if this investment loses significant value in the future I am “OK” with that.

So lets see what happens. I think it will be fun to keep my eye on the silver market in the coming days.

The Big Short – Book Review

I finished up The Big Short by Michael Lewis a few weeks ago, after reading Brad Feld’s recommendation.

It was an interesting read, but less gripping than Flash Boys or Liar’s Poker. Maybe it is because we all know how the story is going to end.

Still, I think it was well worth reading, as it went behind the scenes on the entire mortgage meltdown. I think is important for anyone interested in real estate to understand. Not so much for the lesson that you shouldn’t over leverage and rely on appreciation to pull your deal out of the mud, although certainly that’s a good lesson, but if you are waiting for another “bubble” to burst prior to buying more real estate.

In my opinion, a bubble like we saw in 2008 will not be happening again any time soon. This was a perfect storm. A financial fuck up of epic proportions, and the chances of it happening again in then near future are nigh impossible. Millions lost their shirt (and their house), and the few who foresaw it and had the courage to double down, even when everyone else told them they were crazy, made out like kings. And in reaction lenders have tightened up, a bevy of new regulations have been put into effect, and mortgages are no longer handed out like roofies at a frat party.

So I don’t think we will be seeing a collapse of the housing market like we did in 2008. Although, oddly enough, Michael Lewis thought Wall-Street was crazy back in the 80s, only to find it even crazier when he wrote the Big Short. So who is to say what the future will hold. Markets move in cycles, and if you wait long enough real estate will eventually go on sale again.

I recommend the book. The subject matter can get dense, but Lewis writes in his breezy and irreverent style. He follows a few investors through the bubble, and from what I can tell he did a good job explaining how it all went down. It was an easy and informative read that kept me turning the pages – even 5 years after it hit the bookshelves.

My Core Financial Philosophies

What good is a blog about personal finance if the writer doesn’t establish his baseline philosophies on personal finance? How else are we to determine whether our philosophies align and if I have anything interesting to say?

My goal is to flesh out some of my core financial tenets as a basis for discussion and future articles. These are my core beliefs I have in regards to my own finances.

Minimize Taxes

A very closely held financial belief of mine is to (legally) minimize taxes. Beyond paying for basic things like food and shelter, when it comes down to what I do with a dollar, the tax implications are the first consideration. Taxes color ever aspect of our finances, and when you start making money they can have a tremendous impact on your bottom line. So to ignore the tax implications of your financial decisions is stupid.

Taxes are especially important when you run your own business and pay self employment tax like I do. If you are single and on a salary, it may be a little easier to figure out what to do (contribute to your 401K to match your employer contribution, and attempt to maximize your 401K contributions if your budget allows for it, use your HSA if your employer offers it, etc). But once you get into business for yourself you quickly realize how badly you can get reamed by the government if you aren’t careful.

Although I do have a finance degree and took a few tax law classes in graduate school, I work with a CPA. I do this for a few reasons:

I don’t have time to learn how to be a tax guru and I don’t know it all. At this point I have several businesses. My main business usually has me working 8-10 hours a day. And I have a part time job that has me working another 16 hours a week. When I’m home I work on my online business or my rental business (or god forbid I am going to the gym or relaxing in the back yard with a cigar). While I appreciate having a basic understanding of tax avoidance and tax preparation, I don’t do my own bookkeeping, I don’t run my own payroll, and I don’t file my own tax returns. I pay people to do that and consider it money well spent. Plus, if you run your own business these are typically tax deductible expenses.

A good accountant can be viewed as a profit center, not a cost. This is especially true with large businesses.

So I do several things to minimize taxes:

  • I consult with tax professionals to help me minimize my tax burden.
  • I make use of tax advantaged retirement accounts where it makes sense. (namely a SEP IRA and Traditional IRA)
  • I carefully manage my deductions and keep track of my records.
  • I invest in my businesses to make them grow.
  • I try to consider the tax consequences of my investing and purchasing.

Live Frugally

I must confess that while I have always (sort of) been a naturally frugal person, I have never consciously thought of frugality as a road to financial independence until I started reading the MrMoneyMustache blog. Frankly reading that website changed my life.

I grew up in high income family. My father made very good money as I was growing up, and is an extremely smart and aggressive business person and holds a PhD in organic chemistry from one of the top universities in the world. The emphasis growing up was to get educated, go to school, get a graduate degree and then leverage that to try and make big bucks. Being smart as hell and making (relatively) massive amounts of money was the key to financial success.

I wish I could say that I am as smart as my father. I am not a total idiot, but I got straight C’s in chemistry in college, fucked around in high school and college quite a bit, barely squeaked in to a decent grad school, and don’t have the same fire in my belly than my father has. He is very type “A” – I am much more laid back. So obviously this was concerning for a kid growing up and trying to find his place in the world. Every parent wants their kids to do better than they did, and many say that for the first time in decades my generation (the “millennials”) will be financially worse off than their baby boomer parents. I refuse to resign myself to that fate – but that is the subject of another article.

While my parents were never huge spenders (they certainly saved and invested lots of their money), and were at least relatively frugal, they aren’t “Mustachian”, and to read Pete’s blog really opened my eyes to the other half of the equation. Truly, a penny saved is a penny earned and you can build wealth and reach financial independence faster by focusing on optimizing your expenses. By thinking consciously of your spending and lifestyle, you can make dramatic results to your bottom line in a short amount of time.

Also, you can trim expenses and not compromise your quality of life. If you focus on the things you truly care about and cut back on the things you don’t, you can live a rich and satisfying existence and still have money left over to save and invest.

So it’s a relief to think that I won’t need to make half a million dollars a year to retire. To think that I will never reach the same levels of success as my parents. Often we get caught up in “keeping up with the Joneses,” and many financial gurus tell you to chuck the notion of keeping up with the Joneses out the window, but what if you grew up in the Jones family? First world problems definitely, but stumbling across the concept of frugality while standing in the shadow of my parent’s massively successful careers was a huge mental breakthrough for me personally.

And I gotta admit – I like nice stuff. I’m typing this blog post on a $1,300 Thinkpad Laptop, I have a $1,500 watch strapped to my wrist, have a closet full of expensive business clothes, and generally am fond of high quality stuff. So I gotta be careful because if I decide I do want something, I typically buy something pretty nice. But a lot of stuff I don’t give a shit about, like clothes for the weekend, going out to dinner every night, or driving a BMW. I splurge on things occasionally – typically if I know I am going to use it a lot and enjoy it a lot. So I’m not a paragon of frugality, but I don’t live paycheck to paycheck either.

Now some blogs have focused entirely on the concept of frugality. While this is a core tenet of my financial plan, I do not plan on making this into a frugality blog. It’s a big part of the equation, but it is not my life’s mission to be as frugal as possible or espouse frugality as a panacea (although I think in many ways, it can solve a ton of problems). One of my goals is to save at least half of my income every year.

However, I am very driven about my next core financial belief…

Hustle Hard – Make Money

Living frugally is all well and good, but maximizing your earnings while living frugally is like pouring jet fuel into your financial freedom gas tank. Although organic chemistry was never my shtick, I like to think I inherited my father’s fascination with business and making money, and a big belief of mine is to hustle hard and make some fucking money.

Many people are upset with their jobs. I worked several jobs as a kid and while going through school. I never particularly enjoyed working for anyone. And when I got my “big ticket” corporate law internship in law school, and worked for an AMA 200 law firm over the summer it totally sucked. I was miserable working in this setting. I’m somewhat embarrassed to admit this, but I was so disappointed with this internship (which, ironically, was the thing I was pursuing for years and spent tens of thousands of dollars on) I cried. I absolutely hated what I was doing.

Thankfully, I never got offered a full time position after the internship so I was forced to find something else to do. I graduated law school in the bottom half of my class, was broke, unemployable, and couldn’t get a job interview to save my life, so I did the only logical thing and started my own law firm. Now, I am not going to pretend to be a self made man – I got lucky in finding the right mentor, was supported by my family, and was essentially at the right place at the right time with the right attitude. But immediately I went from lowest man on the totem pole to “senior partner” of my sparkling new law firm, and the amount of money I wanted to make was only limited by the amount of hustling I wanted to do to earn clients, learn how to practice law, run a business, and make money. 3+ years later and I’m still at it, and could not be happier with the decision to work for myself. Sure it was (and continues to be) hugely stressful, but at this point I don’t think I would have it any other way.

But not everyone runs their own business, or wants to for that matter. In those situations, they can either start a side hustle, or work their way up the corporate ladder to earn a higher and higher salary. How do you do that? I have no idea, but my best guess is that it takes a lot of hustle and a willingness to become a better person. Stronger, smarter, and more emotionally intelligent. My guess is there is also a fair amount of strategy involved, and maybe a little politickin’.

The world belongs to those who hustle, and while I can’t really comment on being a good employee and advancing up the corporate ladder, I am sure if you take the time to learn the game you too can reap the rewards. And the way I see it, there is more to making money and getting ahead than simply being a “good employee” – you have to be good with people and develop a broad skill set to add value. You can’t punch in for 8 hours, go home, watch TV until you fall asleep, wake up and do it all over again. You need to be pushing yourself to learn new things and become more valuable so you can give yourself greater opportunities.

So at least some part of this blog will be devoted to personal development. Productivity hacks, inspirational stories, book reviews and recommendations – whatever I can comment on to make you a better person. There is more to success and independence than simply saving money. That’s a big part of it, but becoming a better person is the real reason to get out of bed.

Pay Down High Interest Unsecured Debt

One of the best ways to reduce your expenses is to pay down your debts. If you are like me, you have a mortgage, car payment and student loans. Maybe you have credit card bills or some other form of unsecured debt on your balance sheet. While I do not think debt is necessarily evil, the unsecured debt is a burden on your balance sheet and debt of any kind certainly hurts your cash flow.

When I graduated law school in 2012 I had $75k in student loan debt accruing at 6.8% interest. I know many people graduated school with a lot more debt than me, but the thought of this debt at near 7% interest was quite scary and uncomfortable to me, and a priority was paying it down aggressively. I did not have a traditional W2 job, so refinancing at the time was not an option. I concentrated my efforts on paying these loans down, and refinanced last year through So-Fi (and wrote about the experience at length here).

Currently the balance of my loan is just shy of $20k, and my interest rate is under 4% (I refinanced into an adjustable rate loan). I am not paying it as aggressively at this point (especially at the time of writing this article – when I am still figuring out my 2015 tax burden, and the market is depressed so stock is “on sale” and could be getting even cheaper). Still, the goal is to get this sucker paid off.

I have a car loan with a modest balance on it (less than 7k). That is at 3% interest so I have never made any extra payments on it (instead paying down higher interest debt or investing my money). If I still have a car loan after I pay off my student loans I may chuck some extra cash at this and squash the loan early, but for now I’m comfortable with it.

Although I have a credit card I do not maintain a balance on it. I do not plan on taking on any further unsecured debt in the future.

Develop Multiple Sources of Income

The word “income stream” pisses me off for some reason. It’s too buzzwordy. But I must confess that my personal strategy to financial success involves developing multiple sources (or “streams”, if you will) of income.

Ideally I want to develop sources of income that don’t require my direct involvement. My day job as lawyer still revolves around the billable hour; exchanging my time for money. I would like to have some assets that leverage my time instead of consume it endlessly. The wealthy know that the income from their assets will far outstrip the income they could earn working. That is the whole concept of wealth. I already have developed some of these passive income generating assets in my short career. Here is a list:

Stocks and bonds that throw off cash.

This is what most people think of when the idea of “passive income” pops in their head. Living on the dividends and coupon payments. Swimming in a sea of gold coins like Scrooge McDuck. This can be a powerful source of income and it’s the bedrock of my strategy. While my portfolio is nowhere near large enough to generate money that I can live off, the end goal is to one day have a portfolio of that size and to employ the 4% rule to live off of these liquid investments.

I also want to add that I am interested in Peer to Peer lending and have a modest Lending Club portfolio (around $5k currently). I have been investing in Lending Club since September of 2014. I will definitely be writing more on that subject later. But I am definitely interested in not just bonds, but buying notes, and P2P lending.

Real Estate

Sadly I did not spring onto the real estate scene in 2009. I was fortunate enough to acquire a single property in 2013 (a 1BR condominium), and I have rented it out over the past year or so. It has been a powerful lesson in business, and it has certainly wet my appetite for more properties in the future. The only problem is that prices have risen substantially since I acquired that property, and if you were to enter the market now real estate in my area does not make as much sense from a cash flow and ROE perspective. Plus I don’t really have the contingent funds yet to buy another piece of real estate. I am still paying down debt and maximizing my tax advantaged accounts. I’m slowly building up the funds needed to not only acquire another piece of real estate, but have the cash buffer necessary to pay for the inevitable unexpected problems that crop up in real estate.

Whether it’s unexpected repairs, horrible tenants, or a health enough down payment to avoid PMI, investing in real estate requires a good amount of working capital if you don’t want to loose your shirt.

Still, real estate is an attractive investment vehicle for all the reasons people love real estate:

  • The ability to use leverage;
  • The tax advantages (depreciation; the ability to offset any losses against gains from other passive businesses);
  • Cash flow, and the ability to a develop passive, or semi passive source of income;
  • Appreciation; and
  • Diversification from traditional paper investments.

Traditional Businesses

As mentioned before, I run a law office in small town. I typically charge hourly for my time, and while it sounds cool to say I run my own business I am basically just self employed and the business runs me. This is essentially my day job.

However, when you run a traditional business it is possible to engineer ways to develop income streams through your business – even in a high touch business like practicing law. The way to do that is to leverage employees, processes, and technology.

The formula is simple: hire employees to follow processes to make you more money, or invest in technology to make you more money.

When you first start out you may not have the luxury of being able to hire someone or spend boatloads of cash on fancy technology. I know I didn’t have that luxury. And that was a good thing, because I didn’t know what the hell I was doing so there is no way I could have taught an employee to do anything or utilized technology smartly. But eventually I learned a few things, helped out some clients, learned some more things, helped out a few more clients, and before I knew it I was overwhelmed with work (lots of it routine paper-pushing type stuff) and needing to hire some part time help.

I hired someone to help in and handle the lower value tasks (routine preparation and assembly of documents; coordination of hearings and phone calls; handling certain kinds of phone calls; administrative work) so I could focus on the higher value tasks. I also found that I could actually bill out this person’s time to clients and have this person effectively “pay for themself”. So instead of going crazy licking envelopes, preparing basic documents, and coordinating things like conference calls and hearings, I have my employee do this.

I also leverage technology and have hired a payroll company and CPA to take other time consuming tasks that I do poorly off my desk so I can focus on getting better clients, and billing them for high value tasks like making court appearances, drafting high level documents, and solving their legal problems. This has allowed me to be more profitable and lower my stress.

Blogs / Online Businesses

I stumbled across the concept of making money on the internet while trolling the Miscellaneous section of the BodyBuilding.com forums back in the summer of 2010. I always thought “making money online” was a scam, but I remember wandering across a thread on making money through the Amazon Affiliate program, and it made sense to me.

For those unaware of the Amazon Affiliate program (or affiliate marketing in general), the basic idea is to send traffic (people surfing the internet) to some sort of e-commerce website using a trackable link called an affiliate link. If people purchase something on the e-commerce website within a certain amount of time of clicking through your affiliate link, then you receive a commission on whatever that person buys. In the case of Amazon, you make anywhere from 4-9% of whatever people buy on Amazon if they buy something within 24 hours of clicking on your link. At the time I was a fan of Amazon (still am), and so it made perfect sense to me that this could be a legitimate way to make money.

Several hours later I had purchased my first domain, set up a crude wordpress site and was trying this whole affiliate marketing thing out. Low and behold it actually worked – people found my website, clicked through my link, and actually bought stuff. I was hooked. Unfortunately, I never rose to the level of success that would have allowed me to drop out of school and be a full time affiliate marketer. It has been a struggle with lots of mistakes made along the way. I was able to get the business up to around $500 a month after maybe a year or so, but got slammed by the Penguin update, and it took me years to crawl my way up to $1,000 a month. Last year I averaged $1,500 a month (which was great!), and in December of 2015 I broke through the $2k a month barrier (which was really great!). I’d love to develop this income source into something that I could truly live on (say 10k a month before taxes).

Arguably the biggest success of my affiliate marketing website was learning about websites and SEO to develop the website for my offline business. My lawfirm website has generated hundreds of thousands of dollars of revenue. Without it I would not be where I am today, and I also likely would not be writing this article. The internet is an amazing thing.

As it stands I continue to learn and experiment with my affiliate websites and experiment with things like social media, online videos, podcasting, hiring freelance writers, and even developing online products. The idea of treating websites as an asset class is fascinating to me, and I am considering purchasing a website as an investment in the future.

Final Thoughts

OK – I think I wrote way too much here on my various “philosophies” on personal finance and kicking ass. I will write more articles on all of these subjects down the line, but I wanted to provide an overview of what my current strategy is and some of the rationale behind it, as I think its important context for you, and the process of thinking critically and writing it all out is helpful to me.

I reserve the right to tweak this article in the coming days. I don’t profess to have it all figured out here, and there is something cathartic about dumping all of these thoughts onto a page. My goal is to refine these thoughts and improve the strategy. There are certainly other ways to manage your finances, and half of the point of writing this blog is to try and crystalize my viewpoints, expand my mind, and hopefully learn some things in the process. I’m not a guru on the mountain top, and don’t play one on the internet.