Devolving the Myth of Income … Part I

What’s your definition of ‘rich’ … would being a highly-paid professional (such as a doctor) or a high-flying executive (such as a high-tech sales rep) earning megabucks-per-year do it for you?

If so, strap in, because I am about to devolve the myth of income by looking at two case studies, both from Networth IQ a web-site for people to track (and discuss) their own Net Worth.

To start, here is an excerpt from an e-mail that I received from docsd  (you may need to register and log-in to see his Networth IQ Profile):

I have been awaiting approval on a home that I am purchasing and just received word today that I was approved for the loan and that the closing process will proceed. My wife and I plan on staying in the home for many years to come, as it is an older historic horse farm on several acres outside of Louisville, KY and this home fulfills my wife’s dreams of being able to have horses. I actually came to a compromise with her regarding this house because my goal has always been to live as far below my means as possible while accumulating wealth and her goal was to have a considerable and high-end horse estate on several acres (obviously not inexpensive living, especially if this is a 500k-million dollar home that you plan on staying in). The compromise we made was to wait as long as we could to find the best deal possible so that we can fulfill both of our desires between the property and the low personal overhead to help with wealth accumulation. That time has come and we found the property, basically stole it for tens of thousands below its most recent appraisal and we qualified to purchase it while still holding on to our current home. We are purchasing the new home for 325k and our current home is valued at between 307k and 314k.

I feel I am in a unique position as the owner of 2 homes this early in starting my career and have a feeling I can make a much better situation out of my current home by holding on to it instead of selling it quickly in this market….however, I am worried that it is too pricey to be able use as a rental property investment at this time. Provided I refinance it to the going rate, around 6%, which is considerably better than the 8% we qualified for when we bought it just over 2 years ago, the total monthly liability for us would be just over 2k per month and I’m just not confident we can get that much monthly for rent here at the moment. This house is a very nice and large house in one of the more exclusive parts of town (in an area that has been averaging nearly 10% appreciation for homes per year across several years and not impacted near

What would you do if you were the ‘Doc’?

Obviously, we don’t know nearly enough about his situation … and, we can’t give specific financial advice, anyway … but, we can make some general observations:

Firstly, we can see a hard working professional (we presume) earning over $150k per year … easy street!

Then we see the problems that go along with it: too much house, too much lifestyle, too much debt … even though our ‘Doc’ says that he is focused on saving and wealth creation.

But, Doc has some bigger issues to deal with:

Assets   $ Diff % Diff
Cash $3,400 $400 13.33 %
Stocks $0 $0
Bonds $0 $0
Annuities $0 $0
Retirement $0 $0
Home $313,500 $6,000 1.95 %
Other Real Estate $0 $0
Cars $8,220 ($280) -3.29 %
Personal Property $25,000 $0 0.00 %
Other $0 ($1,500)
Total Assets $350,120 $4,620 1.34 %
Debts   $ Diff % Diff
Home Mortgage(s) $279,510 $0 0.00 %
Other Mortgage(s) $0 $0
Student Loans $142,725 ($125) -0.09 %
Credit Card $0 $0
Car Loans $0 $0
Other $15,440 ($780) -4.81 %
Total Debts $437,675 ($905) -0.21 %
Net Worth ($87,555) $5,525 5.94 %

1. Student debt and other debt (plus his mortgage) of nearly $160k that must be paid off!

The ONLY reason not to concentrate solely on paying it off now is if (a) the interest rates on these loans are lower than mortgage rates, and (b) the money that should be used for paying off these loans will instead go into long-term, buy-and-hold, income producing rental property.

2. The ‘doc’ has a negative Net Worth!

Now, that’s always understandable for a professional with large student loans to pay off early in their career; I don’t know how long ‘our doc’ has been working, but to be looking to compound this Net Worth deficit by upgrading lifestyle is not something that I would usually recommend.

But, there is also an emotional/lifestyle decision to be made here: 

For example, we need a wife who is onside, so it would be tempting to simply swap one home for the other (keeping in mind it’s probably ‘only’ a $50k – $100k ‘swap’ … new house is slightly more expensive than the existing, but there will also be closing costs and selling costs, etc.).

But, I have a question around the horses … this house comes with a new lifestyle: are the horses just an expense (i.e. buy, feed, maintain) or also an income (e.g. agisting other people’s horses, selling horses, giving riding lessons, etc.)?

If the latter, I would consider upgrading just to keep the ‘little missus’ happy, but only if I was committed to earning more and using that extra income to accelerate debt repayment … if the former … hmmmm.

Given that we are not really assessing the Doc’s situation, because we don’t know enough, we need to realize that high income = high wealth only when that income is put to:

a. Debt reduction, then

b. Passive Investments

Lifestyle comes from the perpetually sustainable income that good passive investments should spin off … at least, that’s how I live.

In Part II, we’ll look at the super-high-flying-sales-rep …

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22 thoughts on “Devolving the Myth of Income … Part I

  1. It was explained to me about 2 years ago that big secret to wealth creation and financial freedom was for your lifestyle to be proportionate to your investment income, like you say.

    I don’t plan on upgrading anything until I reach the break even point, and then only with what the investments will pay for.

    It’s nice to read another blog where low cost index funds aren’t the apex of investing.

  2. Hello folks, I just wanted to give you some background info on my wife and me and our situation. Together with my wife’s income, we currently earn just under 200k per year. We just got married 1 1/2 years ago and I just started practice 3 years ago (however, we just began earning our current level of income recently).

    These first couple of years, we’ve paid off over 70k in debt between my student loan, paying off both of our cars, and paying off nearly 25k in student loan debt (most of which was mine due to paying tuition and books with low interest credit cards while in school and unable to get student loans for a couple of quarters). Other than that, we have lived off of a little over half of our income and used the rest these past 2 years to pay off debt.

    The only financial decision that I regret was buying a 280k home 2 years ago instead of a home around 100k. If I had been single, I would have probably bought a 50k condo and lived off of 20% of my income, but I’ve spent some time getting my wife’s goals and mine congruent. Luckily I have changed her aspirations of owning a 600k+ horse farm into a 300k+ one so that makes me feel better :). Other than that we have budgeted very tightly, paid off almost everything else, etc..

    Also, we stopped paying extra to my student loan because it is locked in at 2.8%. We decided to pay only the minimum due to such a low interest rate(hopefully that was a wise decision) and our new mortgage will be fixed at 6%. Other than that, almost 40% of after tax income will go towards finishing off the last of a personal loan (which is the other debt) and then will go to savings/passive income producing assets.

    Hope this clears the picture better! Thanks for any advice. I truly appreciated it!


  3. Oh I meant to add to my previous post that concerning the horses, we are receiving our own as rescues for 1 dollar each in the next few weeks(yes you read that correctly) and with the quality of the pastures, they will be naturally cared for, meaning the just graze, so there is really no upkeep costs(supplemental hay in the extreme winter only). They are pretty much the same expense as having a lab or german sheppard if you have the right land. And to boot, my wife and I have discussed the possibility of boarding a few horses for passive income. In our area, it is not uncommon to be paid over 500.00/month per horse to board them so that is something we are considering. Hope that helps! Thanks!


  4. @ Fiscal – Thanks – I like your blog. Another (much more exciting/challenging/risky) way of looking at it is that your FUTURE PASSIVE INVOME MUST MATCH YOUR FUTURE PASSIVE SPENDING (see my “BrBl Beats Me To The Punch Post”) … now, THAT can launch a whole $7m7y journey for you (just like it did for me)!

    @ Docsd – Good Luck! BTW: Did you know that agisting just TWO horses for 20 years (assuming that you can 2.5% CPI increase fees annually and return the market average 8% / year) could be worth over $700k to you … could swing the pendulum into your “wife’s dream’s” favor!?

  5. Thanks AJC, I was thinking the same thing about the additional income via the horses. Hopefully the added info I provided regarding our financial situation over the past couple of years provides a clearer picture. I know judging from the negative networth it doesn’t look like we’ve been on track, but believe me, we started with almost a -200k networth after my education was complete. That seems to be a fairly common starting point amongst new practicing doctors, lawyers, etc…considering the student loans over 10+ years of school. It may not look like it, but we’ve definitely come a long way and other than buying more house than I think we should have, we’ve lived a life of a couple making less than half of what we earn from salaries. I do feel however that we should have lived even tighter than that to do better.

  6. @ Moneymonk – maybe, but we don’t know enough about the Doc to answer that question.

    @ Doc – you’re right, it is common for professionals (particularly doctors, because of their extended education etc.) to start with a Negative Net Worth. It’s tough at the top 😉

  7. Hello Moneymonk,

    I’ve battled with the save and pay debt or pay debt only delima for quite some time. Since i’ve been studying and reading on financial success for the past 2 years, pretty much everything i’ve read says to set aside a small emergency fund (1-3k) then debt snowball to pay off debt, which is what we have been doing ever since. But as I said earlier, we have stopped paying extra to my student loan because it is fixed at 2.8% and very soon the only other unsecured debt we have (the capitalone personal loan that we used to consolidate high interest credit cards for faster repayment)will be extinguished and we where planning to begin investing/purchasing income producing assets. I’m just unsure if we should begin that or save up 3-6 months worth of living expenses(which is pretty much what we keep reading is the next step that we should do) to keep in a MM account and then invest, or to just send everything per month to the student loans at 2.8%. Then there is the question of what to do with the 2nd home? Rent it out, sell it as lease to own, owner financing? Sometimes I wish I could live vicariously through someone who has made it to wealth already and “do as they would do” if they were me in my current situation…

  8. Doc

    If you are able to have a horse just graze and have the expenses not be higher than a lab you are a smarter man than I.

    I too have a wife who had a dream to move to a horse farm. But I have concluded that there is no such thing as an investment that eat overnight. It is an ongoing expense and needs to be managed as any other hobby. I’d be happy if our expenses were less than 2k a month.

    Horses are a wonderful passion, but can be the financial equivalent of a cocaine habit.

  9. Hmmm, well that scares me then Merlin…I don’t want to sabotage financially to fulfill my wife’s dream, however i’m mostly going by what some of our friends tell us about their horses, interviews with other owners, as well as general consensus in the area of those with decent quality land and pastures for those practicing natural horsemanship. I have heard of averages in the winter time of about 100.00 per horse due to supplemental hay with very low expenses in the spring, summer and fall to make up for it. I’m curious, how many horses do you have and what are you paying for per month that costs so much? Do you have horses with medical problems/special needs, challenges with land/pastures, etc.. other than a hoof trim once per quarter and little to no unnecessary vet work, what am I missing?

  10. Here in NC, rents have dropped significantly – a home that rented for $1800/month 2 years ago now rents for $1200/month.

    It doesn’t sound to me like you would come close to covering costs by renting out the old house.

    I’d sell it for what it will bring and invest your time and energy into building your practice (increaing your *active* income)

    You’ll need it to subsidize your wife’s new expensive hobby (forget feed, wait until you see large animal vet bills)

    At under 3% interest on the student loans, build your emergency fund to several months before accelerating student loan debt repayment.

  11. So we live in an expensive area — north of Baltimore, near the city, where much of the horse country is in land preservation. It’s of a rural nature, but still around city costs.

    We built the barn last year and my wife has moved the horses, its a mile away from our house. We are not building a house until construction costs come down; probably next year and we have enough debt paid off so I can rent our current house if need be given the real estate situation

    Last year we had a horse and 2 ponies; now this year we have 2 horses and 2 ponies in the barn. No special needs. Hard to get a run rate as there were a lot of “one-time” costs in building the barn. However, there seem to be a lot of “one-time” costs with horses in general.

    Some basic costs last year from quicken were $1300 for vet bills, $2500 for straw / hay (drought doubled costs), $2000 for supplies,
    $2500 for additional help — my wife works and needs help. Plus riding lessons for the kids. I’ve not included any costs for building the barn.

    Having been in your shoes 16 years ago where my wife and I had a combined – $160k of student debt I was glad that the horses didn’t happen until well after the debt was paid. We buckled down, moonlighted like crazy and paid the debt in 3 years.

    I have to admit I haven’t tried to cost manage this down as this has been my wife’s hobby. . .

  12. Sounds good Bill, thanks. Since the horses are rescues, we have vet connections so vet bills will be next to nothing as long as we keep them healthy. They won’t be over medicated, over vaccinated, or any other unnecessary procedures/expenses. Diddo on farrier fees. When you take in rescues in this area, there are a group of professionals that provide greatly discounted services because they see you as providing sort of “charity” for a horse that was about to be slaughtered (we are in the land of people who are crazy about horses as my wife is). And they will be kept natural, so no sweet feed will be purchased for them (which is the equivalent to cookies, cakes, pies and crackers for humans) Also, I figure even boarding 1 horse at just 400.00/month would absorb most if not all of our yearly expenses for our horses. Boarding 2? Well that’s money in the bank per month.

    Concerning our old house, does anyone have any experience with lease to own or owner financing? I have seen homes still rent in the area for 1600 to 1800 equivalent to ours but even at a 6% interest rate and after taxes and insurance, our monthlies will be around 2100 so we definitely won’t be able to cover the full expense per month with a standard rent. At least not yet….

  13. @ Merlin & Docsd – Sounds like I should have retitled this ‘a primer on owning horses” 😉 But, really good stuff on assessing the possible ‘hidden’ costs of a purchase. Thanks! AJC.

  14. LoL, sorry to stray from the point AJC,

    Really good points however on hidden costs. Now if I could just get my wife to get her hands on a few good thoroughbreds like some of the horse estates down the road have. I know some of them are fetching 50k to 300k for some of their new born babies. Now that can make a person change their mind about investing in something that eats or grows….

    I know some of the estate owners that have multi million dollar net worths built from raising and selling thoroughbreds.

  15. @ Docsd – NOW you are suddenly onto possibly a great Making Money 201 idea; create a business from a hobby or something you love (I have a post coming up next month on EXACTLY this subject). But, only do it, if you’ve laid the financial groundwork and can afford to take the risk.

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