Sunday, August 13, 2017

California vacation: being frugal can cost you more

We recently just came back from a trip to the west coast. It was a week long vacation with lots of driving between different cities within the state of California. I had to be careful not to overspend. I may be a millionaire, but keep in mind that it's 2017-- a million bucks won't even buy a decent house in San Francisco (maybe a shoebox, but that's not an option unless you don't mind smelling like a shoe).

Just some background...

California, pronounced by its ex-governator Arnold  Schwarzenegger as Ca-li-for-nia, is easily America's richest state by Gross Domestic Product (GDP). This is not surprising because it is the most populous state in the United States and the third largest in terms of area. The fact is, according to Forbes, there are more billionaires in the state than any country, with the exception of the U.S. itself and China. The state is a magnet for wealthy people. Immigrants and non-immigrants alike are flocking to California ever since gold was discovered there in 1848.

Rodeo drive, where the rich and wanna-look-rich shop.

So when I got invited to attend my 30th high school reunion in San Diego, I knew it was the perfect opportunity to visit the Golden State. The last time I've been there was in 2011, but that was mainly in San Francisco area. I figured it was my chance to re-explore other cities.

Because I'm bringing my entire family with me, there are other goals that we need to accomplish. Unfortunately, mining gold is not one of them.
  • Bring my wife to her mini college reunion in American Canyon
  • Pay my physician sisters a visit in Sacramento
  • See the Hollywood Walk of Fame in Los Angeles

While we did accomplish all our goals, one thing that I can conclude, time and time again, on every vacation is that being frugal can sometimes cost you more.

Here's why.

Booking a cheap flight

So far, the best way to search flights is through Google Flights. The site showed me the available fares to Los Angeles for the selected dates. You can also track prices by enabling email notifications if you want to. I could have flown to San Diego, but it seems cheaper to fly to Los Angeles if you're coming from Philadelphia.

Since we had a flexible schedule, I chose to leave Philadelphia on a weekday, particularly Wednesday. That's usually the best day to travel if you're hunting for bargain deals.

In the end, I found an American Airlines flight that will bring us to LA for $195 and a $186 Spirit Airlines flight for the return trip, for each per person. I purchased the tickets through my Expedia account where I get to accumulate reward points.

As it turned out, the Spirit flight costs more. The fares may be cheaper, but the fees can add up quickly: $50 for a carry-on bag, $9 to reserve a seat, or $5 for a bottle of water. My impression is that if they can charge a separate fare for your soul, they would. It's just not worth it unless you're a backpacker.

Being frugal can sometimes cost you more.

Renting a car

I originally booked a Mitsubishi Mirage, a subcompact car, along with my flight on Expedia because I want to stay within my budget. But after arriving in Los Angeles, it dawned on me that I want something that is safer as the city has some of the worst drivers in the country.

Sorry, Mr. Money Mustache, but safety is an expensive illusion only until you get into a major accident. I don't want to take any chances, especially when my entire family is involved.

I've survived being sandwiched between two bigger cars on my subcompact before, but that was really a minor one in spite of the lawsuit.

Also, I wanted to have a more comfortable ride as I can easily accumulate over 1,000 miles travelling back and forth from one city to another:
  • Los Angeles to Sacramento to Los Angeles, 770 miles
  • Sacramento to American Canyon to Sacramento, 110 miles 
  • Los Angeles to San Diego to Los Angeles, 240 miles

So I quickly realized that I need want a bigger car. Besides, this is supposed to be a vacation-- I've already been driving a Prius C all year round.

I end up upgrading to a bigger car for an extra $188 for the entire week. It would have been cheaper if I booked a full-size car outright.

Again, being frugal can sometimes cost you more.

Drive from Sacramento to Los Angeles

Airport parking

It's a common dilemma for frugal people about to fly-- where to leave your car while vacationing. Once upon a time, I asked my neighbor friend to go with me to the airport so he can drive my car back home. In this way, I don't have to pay airport parking fees. Everything was good until the moment when I boarded the plane. That's when I realized that my car keys were still with me!

My poor friend had to commute to get back home (probably cursing me along the way) and I had to pay the short-term airport parking rates, which was about 4x the rate of regular economy parking. Fortunately, I was gone for only a few days.

The lesson is that being a cheapo and dumb at the same time can cost you even more!

For this trip, I opted to use Philadelphia Airport's economy parking for a flat fee of $11 per day. I'm sure there are cheaper alternatives, especially with online coupons. But we're only going to be away for a week. It's simply not worth my time.

Hotel stay

My gracious sister owns stupid timeshares that she seldom uses. So she ends up offering it to relatives and friends. I gladly accepted the offer because it will surely save us some money as we get to stay there for 2 nights, absolutely free.

A decent hotel, but 60 miles away from my reunion venue.

It turns out that the hotel was 60 minutes away from the event that we're attending and the traffic on I-5 can sometimes go into a grinding halt, which it did. Had we stayed in downtown San Diego, we could have used the time to bring the kids to Balboa Park or Seaport Village. We could have used the time to socialize with friends.

It did save us money, but it cost us a lot of time.
And since time is money, being frugal can sometimes cost more!

We stayed at my sister's place in Sacramento for the rest of the trip. So we end up paying for just 1 night stay in a fancy hotel in LA for $160.

Finally relaxing in our LA hotel, tired and exhausted.

Total cost of trip

All in all, we didn't over spend. We managed to stay below our budget of $3,000 dollars for the whole trip.

Regardless of the cost, it was all worth it. We had a fabulous time together. I'm looking forward to  visiting California again in the near future.

I know what you're thinking. Keep in mind that the guy is 6'2".

Excited to see Ironman in Hollywood

Greystone Mansion in Beverly Hills

Thanks for visiting.

Monday, July 31, 2017

FIRE, FART, or neither, the choice is yours

When it comes to your finances, there are two extremes to model yourself on, FIRE or FART (acronyms below) -- that is if you want to be an extremist. The third option is neither, and that's completely fine.

The choice to quit the rat race at either 35 or 95 is completely your own prerogative. It's called personal finance for a reason. What bothers me is when PF gurus preach FIRE as gospel, like there's no other way.

Financially Independent Retire Early (FIRE)

Being a huge fan of becoming FI early, this is the obvious choice for me. However, some people bring frugal to an extreme level by eating dog food, skimping on shaving cream, biking their way to work, living in a tiny house, or saving 70% of their take home pay to be able to retire in their 30s that it's sometimes difficult, even for a frugal guy like me to relate.

But overall, the effort makes perfect sense especially if the goal includes paying-off toxic debt. And rightly so-- it takes an extraordinary amount of effort to achieve extraordinary results. This is especially beneficial when you're young because your savings have time to compound.

If the goal is to merely retire early, however, you better be sure that you'll continue to contribute to the community in a positive way, or you'd end up disappointed. You may have a couple of million dollars in your retirement account, but that alone won't make you happy. True happiness can only be found when you continue to become a productive member of the society while sharing the fruits of your labor with others.

I wasn't aware of the existence of the movement, nor did I know what the acronym stands for, but at one point in my life I've genuinely been on FIRE, for example:
  • I've spent $400 for a wedding when I have $50,000 saved
  • rented a room instead of an apartment when I can afford the latter
  • worn a bonnet inside the house during the winter to save heating costs.

Some typical characteristics of someone who is on FIRE:
  • brown bags lunches regularly and very seldom go out for lunch
  • drives a beater car in order to avoid monthly car payments
  • saves 30% to 50% of their take home pay.

Once you reach a certain level of wealth, however, you'd be crazy to stay on FIRE. You should become a moderate, if at all. You should start reaping the benefits of your labor.

Financial Assistance Required Tomorrow (FART)

This option obviously is as stinky as it sounds. Only an insane person will intentionally choose this path. People unconsciously fall into this trap by living beyond their means having been brainwashed by society into thinking that buying on credit is the norm. They are content paying the minimum monthly payments on their enormous student loans or credit card debts.

Some are perceived as well off by the equally clueless as they often drive leased cars, wear signature clothing, watches, or hand bags when in reality they are a ticking financial time bomb. They are one paycheck or pink slip away from insolvency. They often have relatively high income, enough to justify spending $12 on daily lunches, $600 on monthly car payments, and $300 golf lessons. Delaying gratification is not in their vocabulary as they fear missing out on something, may it be attending that expensive Maroon 5 concert, wearing the latest fashion trends  or coolest tech gadgets.

A few perceive themselves as victims of a society that favors the wealthy and the privileged. They practice self-pity and over reliance on the established authority or divine providence to improve their lives instead of developing a workable plan to get ahead in life. Oftentimes they treat their children as retirement accounts-- they expect financial support from their children in old age because they took 'great' care of them when they were young. This utang na loob (debt of gratitude) mentality is rampant among Filipino culture hiding under the guise of having close family ties.

Other typical characteristics of someone who is on FART:
  • maxing out their credit cards
  • little or no emergency fund
  • not investing for retirement
  • not adequately insured
  • don't plan ahead/ messed-up priorities.

The Third Option

A third option is to be like my other big sister who is completely indifferent about her finances yet still end up becoming a millionaire. In fact, she has a slightly higher net worth than me.

I have come to know a lot about her finances after she asked me for financial advice the other day.

Some facts about her:
  • She's a single 60-year old psychiatrist who has never married and with no children.
  • She currently lives in California, but spent most of her career in Texas, a no-income tax state.
  • She buys on impulse (once bought a $5,000 infrared sauna over lunchtime).
  • She does occasional irrational spending (like the $20,000 infinity pool she no longer uses)
  • She rarely cooks, relies on her microwave, and eats out often.
  • She owns stupid time shares but seldom uses them.
  • She contributes substantial amount to her retirement accounts, but doesn't maximize them.
  • She has a lower risk tolerance as she prefers investing in annuities over stocks.
  • She earns $250K on average for the past 15 years.
  • She has no student loan or significant credit card debts.
  • She once got punched by a patient with mental issues.

Her assets as of this writing:
  • $481,000 in real-estate equity (including her primary home)
  • $258,000 in Thrift Savings Plan
  • $200,000 in 401K / 457 Plan
  • $108,550 in other retirement savings
  • $203,836 in money market accounts
  • $15,400 in an IRA account

That's over $1,266,000 in net worth. Not too shabby for someone who doesn't budget and pays little attention to her finances until recently!

She may be a UAW according to Dr. Thomas Stanley's definition, but I think she will be okay considering that she's in good health and plans to retire at age 70.

Here are four things that we can learn from her...

Your income is your most powerful wealth building tool.

She earns $250K a year. That's more than what most families in America can hope for. If you earn less than 100K then this option is probably not for you. If you want to become a millionaire, you need to be on FIRE. Either that or find a way to increase your income.

Your savings rate is more important than your investment returns.

This is a no brainer. Saving 50% of your take home pay is a sure way to increase your net worth. Your mutual fund may be returning 20% on the average, but if you're only investing your spare change through Acorns, you will never become a millionaire.

You still need to live within your means.

My sister may be a big spender, but she still lives within her means. She only buys things that she can afford. She uses credit cards but pays the bills in full every month.

Paying attention to your finances does make a big difference.

Her net worth would have easily grown to $2M to $3M had she paid more attention to her finances. If she simply invested 25% of her take home pay in the S&P 500, one of her retirement accounts would have easily grown to more than a million dollars in 15 years.

Time machine/ sauna

So what advice did I give her?

I told my sister that I'd use the enormous stash of cash that she has in a money market account that is earning little to no interest to payoff her mortgage for the house in Florida.

I also told her to seek financial advice from a qualified professional, which she can very much afford-- given that she can spend $5,000 on a time machine that happens to look like an infrared sauna.

Saturday, July 15, 2017

Millionaire Next Door: here's a better rule of thumb

One of my favorite personal finance books of all time is the one that was written by the late Thomas J. Stanley, The Millionaire Next Door (published in 1996).

The bestselling book identifies common traits that show up again and again among those who have accumulated wealth. The surprising finding is that most millionaires in America don't really live in mansions, drive luxury cars, or wear expensive watches.

Most millionaires never earn $500,000 in one year. Most never become millionaires until they are fifty years of age or older. Most are frugal-- only a few could have ever supported a high-consumption lifestyle.

The book also offers a simple rule of thumb to determine if you are wealthy...

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be."

The problem with the rule of thumb

As a 31-year-old who had just started getting serious about my finances, I remember being outright discouraged by this calculation. I was a UAW, or under accumulator of wealth, according to Dr. Stanley's rule of thumb.

What I didn't realize back then is that I haven't saved long enough to benefit from any compounding of interest whatsoever. So this rule of thumb is not very useful to someone who just started getting the ball rolling, so to speak.

Another issue that I have is that the calculation uses your current realized pre-tax income instead of the average throughout your working years. It doesn't take into account that you've been earning peanuts for many years before you got that big promotion, for example.

Lastly, the calculation does not take into account that I'm Filipino-- I've got multiple families to support (LMAO). Well, seriously I really think that the calculation should take into consideration the number of your dependents. The more dependents you have in the household, the more challenging it will be to accumulate wealth for obvious reasons.

Using Dr. Stanley's rule of thumb, I'm only a little above the averagely wealthy or an AAW-- I'm just an average accumulator of wealth:

46(age)  x 200,000(income)= 920,000(net worth)

But who wants to be average? Certainly not me. I'd rather be a PAW, or prodigious accumulator of wealth, which is by definition double the recommended net worth of an AAW.

I understand that it's just a rule of thumb. One with a broad application and is not intended to be strictly accurate or reliable for every situation. But there's probably a better calculation that is more suitable for you and me.

The ruler of thumb

A better rule of thumb

Ladies and Gentlemen, may I present to you, the Millionaire Before 50 rule of thumb for evaluating your net worth.

Without further ado (** drum roll **):

"Multiply your age times your average realized pretax annual household income from all sources except inheritances. Divide by ten plus the number of your dependents. This, less any inherited wealth, is what your net worth should be."

Let's recalculate, but this time using our average income throughout our working years as a couple and 5 dependents (my eldest son actually moved out of the house, 2 years ago):

46(age)  x 175,000(avg.)= 536,666(net worth)
15 (10 + 5 dependents)                                           
Using the above formula, I'm a PAW because my net worth is easily more than twice as much as the above number.

I know this sounds self-serving. But at least my rule of thumb doesn't discourage people from having kids.

Click here to perform your own calculation.


Friday, June 30, 2017

Have no fear, market crashes will always be here!

While I don't believe that a bear market is coming, one big lesson from the last two recessions is that it can't hurt to be prepared.

Crashes will always come and go. Whether it's 6 months or 6 years from now, nobody really knows. The prospect of me becoming a thousandaire again is not beyond the bounds of possibility.

As a Generation X-er, I've been at ground zero of 2 big market crashes: the Dotcom Bust of 2002 and the Housing Bust of 2008. Both were followed by deep recessions. The great recession of 2008 was way deeper, but the recession of 2002 could be just as deep-- if you happen to work in the tech industry just like I do.

In the summer of 2000, I left my job in Philly to work for a software company that sells analytical tools to fund managers. The company was headquartered in Research Triangle Park, NC --the tech hub of the south. They collect data from investment companies that manage funds pooled by individual investors (i.e. mutual funds) and translates that into useful information.

Times were pretty darn rosy in that the company even paid for my relocation plus some generous sign-in bonus. There was "irrational exuberance" as massive euphoria was everywhere, investors were buying internet companies left and right that have ridiculous valuations. The NASDAQ index rose from 1,000 to almost 4,000 at its very peak.

But sometime around March that year, it came to a crashing halt. The bubble, which had been building up since I moved to the states, slowly started to pop. People lost faith. Stocks sunk. With less and less money to manage, fund managers who have been buying software licenses from us suddenly had to cut back on their spending causing our sales revenue to plummet. I had a strong inkling of a sinking ship  and boy I was right!

Except for the fact that...

I resigned a few hours before I was supposed to get laid off!

In a bizarre case of bad timing,  I submitted my resignation letter just a few hours before my company announced the massive employee layoff. My immediate boss happened to be on vacation that terrible day (maybe on purpose), so I had to give my two weeks' notice to his boss who happens to have a stake in the company's bottom line-- there's no chance he's going to give me a hall pass on severance pay.

The 'firing' process went something like this. A memo appeared on our inboxes telling us which room to go: room A or room B. I was asked to go to room B. Once there, an HR personnel told us that we're in room B because the people in room A will be given their pink slips.

There was complete silence in the room. We know this will happen but not so soon. There was a sense of relief at first. And then people were in tears, especially the ones that were friends with the people in the other room. I couldn't help but think about the friend of mine who just bought a house. I felt bad for everyone.

As for me, I literally didn't know whether to laugh or cry...

- The good news was that I already accepted a contract position elsewhere that pays $50 an hour.
- The bad news was that I didn't get my severance pay-- I officially resigned, not laid off.
- The worse news was that  I had to work for 2 more weeks to fulfill my obligations. Ugh!!!

Later that day, the whole office was talking about my good but somewhat bad timing.

In retrospect, I should have followed Financial Samurai's advice  -- "Never quit your job, get laid off with a severance instead".

How not to fear the next market crash

When crazy things happen, always expect the worst. Companies can layoff people at any time, but it can become the norm during a recession-- hardworking people can lose their jobs. When people lose their jobs, they spend less-- much less. And when they do, companies make less money causing them to layoff more people. It's a vicious cycle.

As an investor, however, you should learn to embrace bear markets-- these are the greatest windows of opportunity in your life to leap frog from where you are to where you want to be. When the market drops 20%, 30% or 50%, then you'd be buying shares at a discount. Think of it this way, if bear markets were IPhones you'd be rushing to the nearest Apple store!

Here are some facts:
  • Bear markets generally occur every 4 to 5 years
  • Every single bear markets are followed by bull markets
  • The worst thing that you can do is stay in cash (read this Charles Schwab study).

Keep your portfolio well-diversified

Diversification essentially means investing in a mix of asset classes to ensure you are not in serious trouble even if you lost a significant amount of money on one of your investments. This is because any losses, incurred on any of your investments, may be offset by gains earned by other assets.

Being diversified can help cushion against losses, and that's a precaution that you can take now. Increasing your allocation in bonds, for example, helps soften the effect of a market crash on your portfolio because they are usually inversely correlated to stocks.

You should rebalance your portfolio like a dentist every 6 months to match your goals.

Stay the course, don't miss out on market rebounds

Many investors sold at the bottom of the bear market in March of 2009, turning temporary paper losses into real, wealth-shattering losses.

According to another Schwab study, if you had invested $100,000 on January 1, 2009, but missed the top 10 trading days, you would have had $43,000 less by the end of the year than if you’d stayed invested the whole time. Your timing might end up much worse than mine!

Make cash an integral part of your portfolio

Cash reserves will come in handy in down markets. With cash, you can buy when prices are relatively low, without having to sell any of your existing positions at a loss. Cash can provide your portfolio with a sense of stability and offers protection against volatility. It helps mitigate downward risk.

In my case, I'm setting aside at least 10% of my portfolio in money market accounts. But that's just me, run your own numbers.

Beef up your emergency fund

In a recession, 3 months won't do. You need at least 6 months worth of expenses. Beefing up your emergency fund helps keep your stress level down. Being prepared gives you the confidence that you need to tackle any of life's unexpected events like a job loss during a recession.

I eventually lost that contract job that paid $50 per hour. The original 6 months was shortened to a few months due to spending cuts. But guess what I did?

Instead of rushing to find another job, I toured the whole continental United States for the next couple of months! All because I had my emergency fund in place.

Have no fear.

Learn how to protect your portfolio in a downturn.
Here's a great book that I recommend.

Wednesday, June 14, 2017

When the lender is a slave to the borrower

You've probably heard Dave Ramsey say this many times before, "The borrower is a slave to the lender." The quote was taken from the scriptures. That's exactly what I had in mind when I decided to lend my sister $14,000 last summer. Finally, I can 'enslave' my annoying sister, who spends most of her free time bashing Obama on Facebook. At least that's what I thought.

She and her husband, Abe were looking to buy a property near Texas Tech University in Lubbock where my nieces currently attend college. By buying the property, they were hoping to save money on room and board costs. But they were short of the 20% down payment required to avoid PMI (private mortgage insurance).

Love-hate relationship with my sister

No, I'm not really a big fan of Obama. I didn't vote for him in 2008. Yet I told her I did, just to piss her off. You see, my sister hates the former president, and she's not shy expressing it on social media. What crosses the line is when she continues to do so, three months into Trump's presidency. That's when I finally unfollowed her.

My sister and I have very little in common. She lives in the heartland, I live on the east coast. She's a republican, I'm a registered democrat. She's also a huge fan of G. W. Bush, which is not surprising because they live in Midland, Texas-- the hometown of the Bushes.

Almost every other summer, our families would meet in Orlando and discussions always end up revolving around politics. The last meet turned ugly when she lost her cool--  I told her that the younger Bush is the worst president the U.S. ever had (again, just to piss her off) and that the only thing that I admire about him is his shoe-dodging skills. That was the day I learned that my shoe dodging skills weren't as good.

So, it came as a surprise when I received a phone call from her, last summer, asking if she could borrow money.

How she negotiated the deal

The conversation went something like this (names were changed to protect those involved):

Sister: "Mark, can I ask you something? We are planning to buy a house in Lubbock and we're looking to put down $30,000, which is 20% down.  Your nieces will both attend college there. But I'm not really borrowing the whole amount."

Me: "Umm.. how much are you borrowing then?"

Sister: "Maybe, $10,000? Abe was thinking of applying for a personal loan but the 7 percent interest is too steep. Instead of paying enormous interest, we can just pay you more than the borrowed money. I really hate using our credit. Our three rental houses are paid off, though our residential house, not yet fully paid but interest rate on that house was less than 3 percent. "

At this point, I was thinking that investing in real-estate supposed to provide you with increased cash flow. It's clearly not the case for them.

The bright side is that they must have an excellent FICO score judging from the interest rate on their existing mortgage.

Sister: "The dormitory is so small plus they will have to share with other kids.  School officials don't  want them to rent outside, other than if we have our own house there. Abe thinks it is not wise to throw $9,000 away."

Apparently, she thinks it's wiser to borrow from me, her brother 8 years her junior. Perhaps she's right because I end up lending her the money anyway, without publishing her real name in this blog for the whole world to see.

The conversation continued partly in Taglish, which is a mixture of Tagalog (Filipino) and English languages:

Sister: "Baka naman, may extra ka diyan? I'll make a promissory note. I'm sorry that I'm asking you. We have not found a house yet but every time we buy a house, we put at least 20 percent down."

Sister: "I will pay in full within one year and may give extra for interest."

Me: "OK, call me again later tonight."

I end up writing her a $14,000 check. That's the maximum amount that you can give to an individual in one year without having to pay a gift tax. Except that this is not exactly a gift, she offered to pay me $500 in interest or about 3.5%. In contrast, my savings account is offering next to zero.

Her promissory note

Loaning money to family or friends is often a bad idea

I was reluctant to lend her the money at first, not because I didn't like her or because we disagreed over politics. Lending to family or friends is never a good idea. The relationship almost always ends up strained, or worst, destroyed. But when the one who is asking is your beloved sister, it is easier said than done.

Almost all of us have had bad experiences with loaning people we have good relationships with at some point in our lives. When I was 19,  I sold my Hypercolor T-shirt to someone whom I thought was my friend. He promised to pay me back on payday. Payday came, and went, he was nowhere to be found. It became clear that he has been avoiding me. I'm glad I lost that %$#%# friend of mine, but I regret losing my shirt, literally speaking.

In the end, I've set the bad experience aside and relented to her request for the following reasons: (1) that's what my late mom would do, (2) she's my sister-- blood is thicker than water, (3) I have extra cash sitting in the bank.

One year later, when the loan matures

She called me up with a barrage of excuses, which I'm sure was genuine. But this time, the conversation was one-way. I barely said anything.

Sister: "Mark, I'm sorry I can't pay you in full. We have so many expenses. We just had our air-conditioner unit system changed last September. One of our rentals got vacant for 5 months. We have so many expenses. We're scared we may not have enough money to pay for 5 property taxes. We were planning to take a loan to pay you immediately 'coz we said we pay it all this June. Kaya lang baka malaki yung interest."

Me (thinking): I'd sell all your rentals, if I were you.

Sister: "But if you need it quick tell us. I really appreciate your understanding. We have money in stocks and retirement. But we don't want to take it out because of the huge penalty."

Me (thinking): Yeah right, like I didn't know.

Sister: "Instead, I will send the $5,000 tomorrow. I'll send another $5,000 in 3 months. And $4,500 before the end of the year."

Me: "That's fine. I understand." (hanged-up the phone)

Now she's dictating the terms of the loan. I stayed quiet. I was disappointed that she didn't keep her word. But I wasn't in the mood to negotiate. I don't need the money yet anyway.
What am I supposed to do, sue my own sister? Easier said than done.

I'd rather obey the new contract and be her slave.

Wednesday, May 31, 2017

Thoughts about Bitcoin

I've recently started a Facebook group for this blog where members are encouraged to ask any question about money. Out of the blue, one member asked about Bitcoin. In an effort not to monopolize the forum, I waited several hours. But nobody was keen on answering the question.

I eventually end up writing a brief but very informative answer only to see the post mysteriously deleted (ugh!). I'm writing this to preserve what I wrote and to expound on the topic a bit while the upfront research is still fresh in my mind.

I'm no crypto-currency expert and never owned Bitcoins, but I'm probably more qualified to write about the technological aspects of Bitcoin than most bloggers out there given my experience:

  • spent almost 20 of my working years developing a Foreign Exchange trading system
  • led the development of an FX order management system used by broker dealers
  • implemented a web-based payment system used by various regional banks
  • architected my company's web security infrastructure.

In other words, I used to eat currencies, payments and digital certificates for breakfast. However, I'm going to spare you from hearing about the technical intricacies, so you don't fall asleep.

Without further ado:

What is Bitcoin?

Bitcoin is a type of digital currency with a built-in payment network. The exchange rate as of this writing is $2,236.02 per BTC or Bitcoin currency. As recent as one year ago, it was worth about $500 apiece. That's more than 400% return!

Hold your horses, before you invest speculate. I wouldn't recommend anyone to invest in Bitcoin because of the wild swings in prices. There are legal and regulatory issues that need to be addressed that affects its volatility. 

For one thing, Bitcoin is not legal tender. It's  not recognized by law as a medium of payment that can meet a financial obligation. This means that you cannot require your landlord to accept your Bitcoins as late payment for your rent-- he can still legally kick you out so you fall flat on your face.

Should you do decide to gamble, make sure it's a small portion of your portfolio or be prepared to lose your shirt (along with your underwear).

The idea behind Bitcoin is that there's no central regulatory bank that can control the supply of money. Governments like that of China or the U.S., for example, can simply print money to devalue its currency to make exports more competitive-- which often causes inflation. Not so with Bitcoin, there's a special algorithm to prevent that from happening.

Just like gold, Bitcoins can be mined albeit electronically-- anyone with specialized equipment, software and knowhow can become a miner. The mining process involves the use of high-powered computers to solve mathematical puzzles as controlled by a special algorithm. Miners are issued a certain number of Bitcoins in exchange for the work done. It is this same process of solving mathematical problems that make the payment network more stable and secure.

Bitcoin peer-to-peer network

The Napster of money

Do you remember Napster? It was the music service that first popularized peer-to-peer file sharing protocol. Between 1999 and 2001, pretty much anyone can download MP3 music files for free. And millions did so, including myself who acted like a kid in a 24-7 candy store. The fun didn't last a long time as it was eventually shutdown after the company was sued by Metallica and Dr. Dre.

Unlike traditional client-server network architecture, peer-to-peer networks don't use centralized servers to host the resources. Instead, pretty much any node in the network can allocate resources to other nodes. For Bitcoin, there are many advantages to this setup, among them:
  • no central point of failure
  • no third-party involvement
  • minimal transaction fees.
It's no surprise that this is the network architecture of choice for Bitcoin given its decentralized nature. This means that a merchant in the U.S. doesn't have to deal with a shady bank in Somalia to accept payments from Somalis. No third-party involvement means that the transaction can occur instantaneously with minimal transaction fees.

Built-in payment network

What makes Bitcoin revolutionary is that it's both a currency and a payment network. Never in the history of mankind had a currency been interwoven with a payment network. A dollar or a peso is a currency, but neither are payment networks. Paypal and Visa are both payment networks, but neither are currencies.

Software that runs Bitcoin protocol is called a wallet (you can download an app for your smartphone). It allows the holder to move Bitcoins from one wallet to another instantaneously without the involvement of a third party. This essentially makes users to effectively become their own bank.

Other interesting facts

Bitcoin was supposedly designed by a certain Satoshi Nakamoto-- a man born on 5 April 1975 (which coincides with my wife's birthday).  Many believe this is just a pseudonym for a person or group of people who developed the protocol.

Bitcoin protocol is open source. Much like Wikipedia, anyone can view and modify the code. Subject to review by a panel of people, of course.

The first Bitcoin transaction was made in 2010. Somebody from the U.K. purchased 2 Papa John's pizzas for 10,000 BTC. If that person kept the coins, it would have been worth around $22,000,000 today!

Would you invest in Bitcoin? Please comment below.
Want to learn more about Bitcoin? Here's a very good book that I recommend.

Sunday, May 14, 2017

Rich Mom, Poor Dad: a tribute to my mom who saved us all

My mom came from a rich family in the northern Philippine town of Batac, Ilocos Norte. The same town where the late dictator Ferdinand Marcos, known for looting the country of billions of dollars, grew up. In fact, they were contemporaries. My mom told me stories about how Ferdinand's father, Mariano Marcos-- a budding candidate for the country's National Assembly, use to borrow money from my grandfather who was a U.S. Navy veteran with 'boatloads' of money that can potentially finance his campaign.

No, my mom didn't get rich because my grandfather stole from the U.S. Navy. Nor did she become rich because she happens to date a future billionaire dictator when they were younger. Ferdie wasn't her type anyway. For one thing, he was 13 years her senior. Another thing is that he was an accused murderer. In 1935, young Ferdie was charged with murder. He was accused of personally pulling the trigger that killed his father's political rival, Julio Nalundasan. The murder happened just a few days after his father lost the election to the latter. A charge that he was initially convicted of. But it was somehow overturned by the country's Supreme Court. Marcos was subsequently acquitted and eventually rose to power to rule the country for 21 years. He was eventually deposed but only after leading the nation to economic peril.

Her rich upbringing

Note that being rich is a relative term. When you can barely eat 3 square meals a day, like most poor Filipinos struggle to do, and then you suddenly find a large elaborately prepared food on the table, then that can instantly make you feel rich. My mom's family weren't filthy rich, but they were probably in the top 5% of the society that they lived in. In that sense of the word, she grew up rich.

My mom and her siblings weren't raised in a mansion, neither were they fed with a silver spoon, but they lived a very comfortable life. My grandpa who had thriving real-estate investments chose to continue to live modestly. After World War II was over, he was able to send all his 5 children to study in Manila when the dust finally settled. Three of her siblings eventually became physicians. Two eventually made their way to the states to practice lucrative careers. My mom learned her very first lessons in frugality from my grandfather.

My mother told me that her household was the first one in town to ever buy a refrigerator. A very expensive luxury at the time. Her 'rich' neighbors initially made fun of them thinking that it would be impractical to use one as they hardly have reliable electricity in the neighborhood. Soon enough when everything stabilized, they started buying their own to keep up with the Joneses. Back in the day, people get by without refrigerators by preserving meat by traditional methods-- removing the fat, applying salt, and letting it cure under the sun.

Grandpa's U.S. Navy stint

As a young lad, my grandpa was a U.S. Navy sailor. He was honorably discharged shortly after World War I. His total pay per month while in service was $17. At the time of his discharge, he was paid $145 in full and $38 per month in benefits, thereafter. If you factor in inflation, his veteran benefits would have been equivalent to a one-time payment of $2,300 and $600 monthly in today's money. I've found out about all these numbers by obtaining a copy of his service records from the National Personnel Records Center archives. If you earn that kind of money as a 26-year-old, you are considered rich.

(  For readers out there who think that first generation immigrants like me are just here in the states to enrich ourselves at the expense of robbing natural-born Americans of their jobs. Please be aware that some of us are descendants of people who actually fought for your freedom. Admittedly, losing WWI probably would not have cost you your freedom, but you get the point  ;)

Meeting my poor dad

Mom may have lived a very comfortable upbringing, but like everything else, it didn't last a very long time. At age 24, she was swept off her feet by my father, a struggling law student. They fell in love and got married, after a brief engagement. Dad eventually ended up impregnating her, not once but nine times! By the time the last baby came out of her womb, everything was 'perfect'-- it was me that came out last.

My father grew up as the only child of a widowed mother who barely graduated from elementary school. His sister met an unfortunate accident when she fell down the stairs and died later of a brain hemorrhage when they were both very young. He often recalls attending his elementary graduation wearing a girl's shoe as at the time he had no more workable good shoes but merely sandals. It was this lonely and miserable upbringing that my poor dad experienced that I believe led to his unstoppable desire to procreate.

Thriving careers

He managed to support himself first by doing the household chores for relatives in exchange for a meager salary. Eventually, he landed a job in Manila as a typist, messenger, and janitor for his congressman, Don Quintin Paredes, who ended up becoming the 5th Senate President of the Philippines. My father's employ in the law office paid off. He started obtaining his law degree. Over time, through sheer hard work and determination, he passed the bar exams, and he eventually became an associate lawyer in the firm.

Meanwhile, my mother became a government employee in the Manila Central Post Office (one of the heavily bombed buildings in the Battle of Manila during World War II) after a brief teaching sprint. There she worked for 4 decades, working her way through the ranks until she became the head of the registry section supervising close to a hundred employees.

They both may have had very good jobs, but those were not enough to support a fast growing family, especially if you're married to a womanizer. Not to discount my dad who is a great provider, but it was my mom who made the wise financial decisions.Without my mom, we would not have survived financially. Sadly, my poor dad's idea of investing is buying lotto tickets.

The real head of the household

It was the wisdom of my rich mom who had the foresight to invest in real-estate. It was her that pushed my dad to save up. It was her who pushed for paying for everything in cash even if it meant literally eating rice and beans for dinner. Mom and Dad bought rental properties in various places in Manila to the point that they had over 9 fully paid rental properties in their portfolio, including our primary residence, which was also partly rented out. Each property probably had 4 to 8 rental units for somewhere around 50 units in total. It was the income from these rentals that fed us. It was the income that paid our tuition fees.

It was the wisdom of my mom who pushed my father to start his own law practice. In the early 80s, my father was at the point of his career where he had most of the connections needed to start his own law firm. Working as an attorney in a lucrative patent and trademark industry, most of his clients were big companies from all over the world. So he rarely had to meet clients in person. At the peak of his career, he was making tens of thousands of U.S. dollars while living in a relatively low cost-of-living city of Manila. With the real-estate income already in place,  the income from the firm was used mainly for travel related expenses to different countries to attend related industry seminars and conventions.

On her deathbed

My mom died in 2007 of liver cancer. On her deathbed, my father tearfully confessed that he fathered another child out of wedlock, a 15-year-old boy. This was in addition to 2 other siblings we've all known, cared for, and accepted as part of this ever growing family of ours. Not sure if she felt any emotional pain at that point, she may have very well been desensitized to revelations such as this. One thing for sure, she will always have a special place in my heart.

Happy Mother's Day!