Yesterday’s post on the use of HELOC’s v. ‘standard’ mortgages brought up the concept of using the right tool for the right job.
Since this is a vital concept, I want to make one additional point, and I’ll do it in response to a comment that Moom left me on that original post:
Aren’t HELOC rates above 1st mortgage interest rates? Or if you have no first mortgage you can get a lower rate? Diane: At AJC’s level mortgage interest on owner occupied property is not tax deductible I think, while interest on investment loan is. Which might explain the HELOC strategy?
Moom is partially correct: at my level, tax detectability of the home loan portion is limited.
Having said that, since I am trading I may be able to offset the entire interest cost against my gains on the stocks anyway (a question for my accountant, I guess).
But, to be honest, I very rarely consider tax consequences or even cost differentials when making these kinds of decisions (unless major).
Read that again, because it goes against the concept of ‘millionaire as financial genius’ which is a mythical image that most of us erroneously carry.
Not only that, it serves to explain why the wrong people are rich!
So, I’ll repeat:
I very rarely consider tax consequences or even cost differentials when making these kinds of decisions (unless major).
This doesn’t make sense, does it? Because:
‘Rich people’ know every dollar that they have coming in and out, right?
‘Rich people’ ‘spreadsheet’ every decision that they make, right?
‘Rich people’ know the tax consequences of every decision that they make, right?
‘Rich people’ know ALL the alternatives – and, the costs thereof – and choose the lowest cost alternative every time, right?
‘Rich people’ are the smartest, most financially astute people around, right?
Some rich people know these things, but in my experience most don’t (at least not to the level that you might expect) …
… in fact, most rich people that I know are not the most financially astute people around. They just have the most financially astute people around them.
The financially astute people are in the supporting roles! They are the B-movie stars or ‘best supporting’ actors, not the guy carrying the ‘best actor’ Oscar …
Because ‘rich guys’ became rich by ACTING when more financially astute people would still be ANALYZING …
Because ‘rich guys’ became rich by focusing on INCOME when more astute people would still be focusing on EXPENSES.
For example, I create INCOME … I pay advisers to help me minimize EXPENSES:
– I pay an accountant to advise me on tax consequences.
– I work with a private banker to help me with finance products and interest rates.
– I work with a broker (rarely) if I need help to put together a new hedging strategy.
But, it is I who creates the new business concept; the new investment strategy; and, who makes the next real-estate purchase …
… and, it is the huge increase in INCOME that these decisions can make (and, have made) that have been far more important to the increase in my personal net worth than any cost/tax-based ‘adjustment’ that my accountant, banker, or broker could have made.
So, when Moom asks about interest rate differentials, and tax advantages, I have to say that I generally don’t even think of these – at first …
… I look primarily at UTILITY.
Which product do I think will best help me achieve the increase in INCOME that I am looking for?
9 out of 10 times I will go with that approach, even if my experience points in the direction that it will cost a little more in interest or may be slightly less tax-advantaged.
If I am not sure, or it seems like it may not be a close call, then a quick phone call to one of my panel of advisers will usually do the trick.
So, why did I choose the HELOC even though it costs a little more in interest (and, possibly more in tax, as well)?
Because, at the time, it seemed like the right thing to do. Simple!
Interesting comparison. I guess you don’t want to be one of those people who contract “paralysis by analysis”. I’m thinking the key here is to just make a move, even though it may not be most perfect move?
@ Josh – no doubt about it!
Why the ‘right’ people are rich
I think you left a few key things in this post- risk and sacrifice! I love knowledge but it isn’t enough on its own. I suspect your advisors could make as good a rate of return if they were willing to take the same risks. If they also made equivalent sacrifices to get similar amounts to invest they should have similar results.
Shouldn’t you be rewarded for taking those risks? Didn’t you have to make sacrifices when you started your business or expanded it either by putting in more work, or not taking as much personal compensation? If so those are some very valid reasons why you are rich and your advisors are not.
@ Rick – risk, sacrifice and I’ll add non-conformance (is that a word?) – taken together, that pretty much sums it up … thanks!
Pingback: Just make a move! « How to Make 7 Million in 7 Years™