Unlike many of us, Barack and Michelle Obama are multimillionaires. But, like us, they could make some improvements to their finances.
Recently released financial disclosures shed light on how much money the POTUS and FLOTUS are worth and how they have their assets invested. Without a doubt, legal and ethical considerations restrict Barack and Michelle in their First Family capacity. But if the Obamas were my clients, I would make these three recommendations to improve their finances.
1. Make Your Money Work Harder.
The Obamas hold the majority of their net worth in cash and Treasury notes. As a general rule of thumb, an individual shouldn't hold more than 10 percent of his or her net worth in cash. Of course, that's assuming someone isn't swirling away a pile of dough to pay off a mortgage, endow a new business venture, or fund an upcoming major purchase.
Excess cash isn't making your money work very hard for you. With relatively few stock investments, the Obamas could stand to invest more aggressively by upping their overall stock market exposure.
2. Refinance the Mortgage.
After they leave 1600 Pennsylvania Avenue, the Obamas will likely return to their Chicago residence. If that's their plan, they'd be wise to refinance.
They obtained a 30-year, 5.625 percent mortgage in 2005. But with borrowing rates at rock-bottom lows, Barack and Michelle could refinance into a rate potentially south of 4 percent. That would save them oodles of cash each month.
3. Revisit the Girls' 529 Plans.
Mom and Dad Obama deserve kudos for getting a head start on funding Malia's and Sasha's college education. The Obamas have saved at least $100,000 for each daughter, with the money invested in tax-free 529 college savings plans. But even that won't be enough to cover the costs of college by the time the girls are ready to go off to school.
According to the College Board, a private university education currently runs close to $42,000 per year. Public schools are slightly more affordable; the current average cost of a four-year, out-of-state public university education is $34,000 annually.
College costs are expected to increase 6 percent annually. So even though the Obamas have stashed away substantial sums of money for Malia's and Sasha's educations, they will still have to fork over even more cash, especially if the girls attend Ivy League schools. (Of course, that's assuming they don't qualify for financial aid or take on student loans.)
In addition to upping the 529 contribution amounts, the Obamas should revisit how the assets are invested.
As Malia and Sasha (who'll turn 15 and 12 years old, respectively, this summer) approach college age, the 529 plan dollars should be shifted into more conservative investments. They currently have roughly 50 percent in stocks and 50 percent in bonds. But during the next couple of years, a greater percentage should be allocated into bonds and cash. That way, gains are locked in and the money won't lose value due to market fluctuation and volatility.
How Barack Obama Made His Fortune
Even the Obamas Could Be Smarter With Their Family Finances
While he was an Illinois state senator, both parents in the Obama family were working. In his 2004 financial statements, Barack Obama indicated that he had three sources of income. One was an $80,287 salary from the Illinois Senate, where he was a state senator.
The other was a $32,144 salary from the University of Chicago Law School, where Obama taught as a lecturer while he was in the statehouse.
The third was Michelle's salary from the University of Chicago Hospitals, where she was an administrator.
While the picture is fuzzy before 2001, here's where Obama kept the money he made from Dreams From My Father in 1995 and his law career.
First was the Illinois State Senate Pension Fund, which Obama listed as worth something between $50,000 and $100,000.
The other two were investments in funds with Vanguard, the investment management company.
Obama had investments in the Vanguard Wellington Fund, which he evaluated as worth between $100,000 and $200,000. The Wellington Fund consists of around 60 to 70 percent stocks and 30 percent to 40 percent bonds and is essentially a fundamental mutual fund.
The Obamas also had $50,000 to $100,000 invested in the Vanguard Wellesley Fund. This Fund is more bond-heavy than most balanced funds, with exposure to around two-thirds bonds to one-third stocks.
After giving the keynote address at the 2004 convention as a candidate for Senate -- the speech, "The Audacity of Hope," was a slam-dunk that propelled Obama's popularity upwards in the years before his presidential campaign -- Obama inked a number of book deals with Random House.
This is the real money.
He signed a deal for 2 nonfiction books and one children's book. One nonfiction would be "The Audacity of Hope," an extended version of his 2004 speech. The children's book - we believe - became "Of Thee I Sing," with proceeds going to charity.
Here are the terms of the book deals that made Obama phenomenally rich:
After January of 2005, Obama will receive a $1.9 million advance on "The Audacity of Hope."
For that book, the deal says that he gets 15 percent of the list price for hardcover copies, 7 percent of the list price for the trade paperback version, then 8 percent of list price for the first 150,000 issues sold of the mass market paperback, then 10 percent of the list price thereafter.
He also gets 10 percent of audio book sales. He would go on to win a Grammy for his recording, too.
Random House also republished his 1995 book, "Dreams From My Father," generating more sales.
Once Obama got the money, he didn't just let it sit in a bank account. He invested.
He got a JPMorgan Chase (JPM) Private Client Asset Management account, worth at least a hundred thousand dollars. His checking account with Northern Trust was worth between $250,000 and $500,000, and he also banked with UBS.
He got $378,237 in royalties from Dystel & Goderich, his literary agent for "Dreams From My Father," and another advance from Random House, $847,167.
By this point, he was worth between $1.1 million and $2.5 million.
During the two years before his presidential run, Obama cemented his wealth.
in 2006 he got $147,490 for "Dreams From My Father" and $425,000 from Random House for "The Audacity of Hope." In 2007, as his presidential run made him a household name, book sales skyrocketed. He got $815,971 for "Dreams" and $3.28 million for "Audacity."
With the money from this, he made a number of consequential financial choices. He bought somewhere between $500,000 and $1 million worth of U.S. Treasury Notes. He moved the money from the two Vanguard Wellington Mutual Funds to the Vanguard FTSE Social Index Fund, which invests based on "certain social, human rights, and environmental criteria."
The year he ran for President, Obama bought millions of dollars worth of U.S. Treasury Bills.
Likely distracted by the race, he didn't make any major changes besides investing even more in U.S. Treasury Bills.
By the time he was sworn in, Obama owned somewhere between $1.1 million and $5.1 million worth of U.S. Treasury Bills, comprising most of his net worth. His other assets were worth between $411,000 and $915,000. He did not collect any income from his books.