John Tesh says that it’s important to find your true calling – a.k.a. your true Life’s Purpose – and I agree:
It provides a direction for you to aim for … and, it makes it much easier to decide if a seemingly arbitrary decision (e.g. which of two jobs should I take?) takes you CLOSER to your Life’s Purpose or FURTHER away from it.
If you do decide to find your Life’s Purpose, here’s a free web-site that helps you through the process [AJC: created by yours truly 😉 ]:
You’re probably attracted to this blog because you want to get wealthy … and, if you’re anything like I was (and, now still am for ‘professional interest’) you probably read any and all decent books on personal finance in the hopes of finding those very ‘keys to wealth’.
But, you’re probably wasting your time …
The key to wealth isn’t to be found in this blog or any other blog, book, seminar or boot camp. Not convinced?
Guys, as the economy improves (if it improves) interest rates will surely rise, as they already are in other countries.
If you haven’t already done so, seriously think about buying some fire-sale real-estate and locking in the the interest rate for 30 years; one strategy – especially if the banks won’t let you take out a 30 year fixed rate mortgage on an investment – is to buy your NEXT home now (it need not be any bigger/better than your current), taking the 30 year fixed on that one, and keeping your current as a rental.
I’m not sure if that’s exactly what Lee was thinking when he asked:
Although the market in our area has held up fairly well through this housing crisis, it’s definitely a buyers market. I don’t think I’d get top value for my home. So, I’ve seriously been considering renting it out after we move. If I did rent it, then I could go a couple different routes:
1. Refinance current home to 30 year (to help cash flow) and take enough cash out to put 20% down on our new home.
2. Refinance current home to a 30 year but take no cash out to get the payment down to a very low amount to have a very good positive cash flow. Then put 20% down out of pocket on the new home.
3. Take out a home equity loan on the current home just to cover the 20% down payment on the new home loan (30 year).
4. Just go ahead and sell our current home so I can take advantage of the tax free capital gains … I could then use part of it to put 20% down on our next home … and use the remaining as a down payment on one or two rental properties.
5. I have to throw in one scenario just because of that little guy I call Mr. Conservative that sits on one of my shoulders, lol! I could just pay my current home off within the next 2 years or so, then rent it out with a large cash flow, and use that cash flow to pay the mortgage of the new home we buy.
6. Maybe something I’m not even thinking of?
I think I see a case of paralysis by analysis coming on, so we had better head this off at the pass …
… while I can’t give direct personal advice (as I told Lee), I can point out that in cases like this it’s always good to ask yourself a couple of key questions before Mr. Conservative starts to get very vocal (in your subconscious) and you end up taking no action at all, so I suggested that Lee run some numbers:
a) What would be the situation on your current home, if you just took out a new (or refi) FIXED rate 30 yr mortgage, and put tenants in … what would be your new monthly mortgage payment and what monthly rent could you conservatively [it’s good to have Mr Conservative on your shoulders] expect?
b) After pocketing the excess of 75% of rents over mortgage from a) above – or, making up the deficit on the excess of mortgage over 75% of the rent – how much per month do you think you could save from your other sources of income assuming for the moment that you have FREE accommodation for yourself somewhere?
[AJC: the 75% of rents is to allow a buffer for vacancies and other costs of renting … just a very rough approx. for now]
Once you answer these two questions, my feeling is that the best scenario for you will become obvious … I hope 🙂
In Lee’s case, here are his current numbers:
3 bed / 2 bath 1450 sq ft. home in a great location.
Cost Basis: $158,000
Current value: $210,000
$96,000 (9 years 6 months) remaining on a 15 yr mortgage @ 4.625%
Current P&I repayment: $1,042 per month
And, if he refinanced the $96k remaining balance his bank has given him two options for a 30-year fixed loan:
For rent, Lee thinks “being ultra conservative” $900/month to $1100/month, which means:
Using 75% of excess over mortgage ($300) and assume living in FREE accommodations, I could easily save $3,000/month because that’s what I save currently even with my $1042 mortgage. Throw in not paying our current mortgage and having $300 in additional cash flow and $4,000+/month would not be unreasonable.
For now those are the numbers, although I have to say the 75% of excess over mortgage number is probably high considering taxes and insurance on this place are about $200/month. But as you said, these are rough numbers for now.
So, Lee is getting closer to being able to make a meaningful decision; here are the steps that I suggested:
STEP 1: OK, it seems to me that if you decided to keep your current home as a rental, you would lose money if you stuck to your your current $1k pm mortgage, and produce a positive cashflow of $100 to $200 p.m. if you refinanced.
STEP 2: It seems to me that your $3k pm savings rate will be enough to cover the expected $200k mortgage on your new home. Right? BTW: You WILL fix for 30 years, too (because this will become an ideal 2nd rental, eventually)?
STEP 3: Next, all you need to think about is how to raise the deposit; well, if you don’t have it now, go back to Step 1 and revisit these numbers, assuming that you refi, say, $150k instead of $96k. I’m guessing that you’ll be close to B/E – or, a slight monthly loss – on the rental?
STEP 4: You keep 25% of the rent (plus another $200, say) to cover taxes, ins, and contingencies PLUS you have plenty of excess monthly savings to cover you, until this ‘provisioning fund’ builds up.
Now, what do YOU think Lee should do?! Here’s what he thinks:
I think the smartest thing would be to refi without taking any equity out so that I have a nice cushion of cash flow. I would then need to come out of pocket with the down payment for the new home which I should be able to do, and even if I need a little help, I could always get a small home equity loan on the rental temporarily. But I feel pretty confident I could raise enough cash to cover the down payment without having to do that.
My next step…develop my plan of action.
Take Lee’s advice: model these questions to develop a plan of action that works for you … and, take it! 🙂
They say that the most important skill that you can have in your [business] life is to be able to SELL.
And, why shouldn’t it?
– You want to buy a house? You need to shmooze the bank manager … SELL him on why he should give you the loan.
– You want to get married? You’d better woo the spouse-to-be and their parents … SELL them on letting you join their family.
– You want to get a job? You should brush up on your interview skills … SELL them on why you should get the job over all the others applying.
– You want a pay-rise? You had better impress the boss … SELL her on why you – above all others – deserve the promotion.
– You want your start-up to break-even, the maybe make a few bucks profit … who else is going to do the SELLING for you??!!
Unfortunately, I’m actually a terrible salesman, and am very uncomfortable in a one-on-one ‘convince the other guy to give me what I want’ situation.
Luckily, I actually think that the ability to sell is only the second most important [business] skill …
… the first – most important – one came back to me when I attended my daughter’s Speech Night tonight.
In case you’ve never been to one of those, it’s when a bunch of kids each select a random topic and write – then present to their classmates and parents – a 3 minute speech.
Now, I remember the first time that I spoke in public: it was while I was still at college and I was asked to be Best Man at my friend’s wedding; well, all I remember was:
a) I was so nervous that my knees were literally wobbling as I spoke, and
b) I had no idea what to say … I only remember that it was ridiculously schmaltzy like some cheap, drug-store gift card.
I also remember my first ‘real’ work-related speech: it was at a training course for selling, sponsored by the company that hired me straight out of college. I remember that my speech, my delivery, and my materials (overhead transparencies, hand-drawn/colored like some some 5th grader!) were terrible, and my instructors were more than happy to let me know 🙂
The turning point came when – at a later course, after I learned at least SOME presentation skills – I was video-taped giving a practice talk, and (naturally) felt very uncomfortable and unconfident … but, I soldiered on as best I could, resigned to be as embarrassed as usual when I saw the tape.
However, when I was finally shown the tape, the person I saw on the screen was somebody else entirely: he looked relaxed and confident … I couldn’t even see his leg shaking 😛
From that moment on, my career as a ‘public speaker’ was launched!
Realizing that it didn’t matter how I felt that counted, but how my audience perceived me, I rapidly went from strength to strength, actively seeking opportunities to stand up in front of a whiteboard, write-on-wipe-off felt-tip marker in hand.
This, more than any other single skill, accounts for my success in business, investing and Life:
– If I wanted to fund my businesses and investments, I presented my financial plans to my bank manager and his team, careful to fully explain the opportunity and address all of their potential concerns; the presentation format allowed me to be proactive, yet still leave room for additional questions. This allowed me to secure millions of dollars in funding, even when I had absolutely NO assets behind me!
– When I wanted to get married, my real job began at the first family dinner as I carefully presented myself in the best possible light with (sparingly applied!) carefully chosen anecdotes.
– When I wanted a promotion or pay-rise, I made sure that I had a an opportunity to have my boss see me doing something that most people (including him!) are afraid to do: being relaxed, confident, informative, and entertaining in front of an audience. This made me one of the most successful ‘experts’ in my field, within only a couple of years of taking up that particular specialty.
– When I wanted large companies to buy what my company had to sell (and, later, to buy my company), I always came up with a crackerjack presentation that addressed all of their buying considerations (which I had been careful to assess in prior “ask polite questions and listen to what they have to say” meetings); being the only person standing up really allowed me to control the flow of the meeting and helped me to sign multi-million dollar contracts all over the world.
In other words, I let the presentation do the selling, which really took the pressure off me having to perform as a Salesman …
… and, it became clear to me: everybody respects the person standing on the stage.
As for my daughter: she did an awesome, confident speech … as did many of her classmates.
In my opinion, if they keep it up, they will have a flying start in their later business life … and, so will you, if you take the time to learn – and, practice – speaking to an audience.
I’m not usually one for motivational stuff, but it seems to me that this is something worth remembering, IF you want to take the Large Number / Soon Date route to your Life’s Purpose:
It’s when things seem worst that you must not quit
… because things usually DO get worse before they get better!
It seems, an unfortunate FACT of life 🙂
Do you have any “it got worse … but, then it did get better” stories in your personal financial journey, so far? If so, this would be a GREAT place to share them!
Jim wants to know if he can turn his current rental into a Rent To Buy:
I have moved from a (rented) flat costing me ~33% of my (net) monthly income to a small house costing 25% (net). (Of course, being a First Time Buyer, I’ll be breaking the 20% net worth rule to put down a deposit, especially given the level of deposit required to get a decent rate here in the UK).
The current owner seems enthusiastic about the option of selling it to me at some point, but I’d like to ask advice on what sort of ‘offer’ to make. i.e. what sort of contributions my rent payments would be / discount off the market value.
I’m thinking if we both have a valuation done, I offer 15% off the average of the two?
I’m not sure that the Rent-2-Buy works in Jim’s case, because he’s already in the house and paying the rent!
But, let’s assume that Jim is willing to sign a longer lease, it will then depend upon whether he is able to bypass the agent or not.
You see, for a rent-to-buy to work, basically you are trying to say to the owner:
Rent to me for longer, then I will:
1. Save you the agent’s fees and commissions, because I will be staying in the house and will keep it as my own (“so, you don’t need an agent to manage me”)
2. Save the 2 to 4 week’s typical vacancy each year as the typical shorter-term tenants move on (you will need to find out what’s common in your area AND what the owner’s experience has been).
Then wouldn’t it be reasonable to split those ‘savings’ with the current owner (by way of a ‘credit’ towards a future purchase of the house)?
BTW: Jim, it’s OK to break the 20% equity rule on your first home, because it helps to get you into a house:
If you ask most people what they want out of life, it’s “to be happy” … go ahead, try and ask a few people!
But, Julia Baird, the deputy editor of Newsweek has an interesting viewpoint:
The most inspiring people are those least obsessed with their own happiness, especially those who stride confidently across the globe to create, evoke change, or wrest from life what they will. Eleanor Roosevelt believed happiness “is not a goal, it’s a byproduct.” I think she might be right.
Your Life’s Purpose then is the Goal that Julia refers to – and, money (i.e. Your Number) may be the tool to get you there – with happiness the outcome … at least, that’s how I see it.
And, it may serve to explain why Money and Happiness seem to be intrinsically linked, as Julia goes on to say:
The most recent findings, for example, are that wealth makes you happy
I have a personal viewpoint on this (from experience of both sides of the wealth equation), but I would be interested to hear what you have to say?
Well, the first thing thing that I will say is that you had better finish what you start …
… because, if you don’t complete your four year college-level degree, you will probably still end up with the average student debt of $20,000 but only earn $4,000 a year more for your troubles!
OK, so for a $20k ‘investment’ (at least, if we assume the average debt left behind), the average college grad. can earn an extra $19k – $20k per year; sounds like a great deal?
It seems that we forgot to account for the extra four years of income that the high-school grad (but no college degree!) earned while you were off at the frat or sorority house!
So, let’s say that the college graduate starts (4 x $27k) + $20k behind the 8-ball … how long does it take him to catch up?
Well, if we assume that both achieve 4% yearly salary increases (starting from the same date that both are working, keeping in mind that the high-school-only grad. has already put four solid years of work in) and earns 8% on their investments (fueled by consistently saving 15% of their gross income), then we can see that it’s a ‘no brainer’:
– The College Grad would have saved $794,000 after 26 wonderfully exciting working years, and
– The High School Grad only saved $468,168 after 26 equally wonderfully exciting years working.
So, college is ‘worth’ $326k, in this admittedly highly-oversimplified example …. yippee!
But, readers of this blog aren’t thinking of spending the next 26 years working in the Quick E Mart, studiously saving 15% of their hard-earned income, just to earn 8% p.a. …
… no, they are preparing to be investors (say, real-estate and stocks) and/or entrepreneurs. Activities that high-school grads – and, even high-school drop-outs – can and certainly do in equal numbers to college grads!
You see, serious money making doesn’t discriminate on the basis of education … some of the world’s richest people have little to no formal schooling.
And, they aren’t wasting their ‘no college’ years earning $27k (and, salivating over their next 4% pay-rise) … no, they are busy reading this blog and starting their business/investment careers.
They have realized that serious wealth comes not from what you earn, but from the return that you earn on your money. So, with just the benefit of 4 years head start, they can turn a $20k per year earnings deficit into the same amount as a high-flying College Grad, by only increasing their annual return on that 15% savings from 8% to only 11.5%.
[AJC: If they can increase their return to serious real-estate investment territory of 20%, they will blow the college savings rate away by amassing nearly $3 mill. in 26 years, and if they achieve ‘entrepreneurial’ 50% p.a. returns, well they will join the ranks of the rich with more than $300 mill. to their name … really!]
Of course, if you choose to go to college – as I did, and will encourage my children to do – there’s nothing that says that you can’t also be an equally good entrepreneur and/or investor, on the side … or full-time 😉
Today’s Video On Sunday has absolutely NOTHING to do with money, other than that it may help you win a few bets at the pub 😉
And, my American readers [I hope!] will appreciate learning a little about cricket …
… which is best explained, IMHO, by comparing it to that great American institution: baseball. In fact, cricket is just like baseball, except:
– There are only two ‘bases’: imagine home base being where the batsman (a cricket term for the guy hitting the ball with the bat) stands, and that ‘first base’ is shifted to sit on top of the pitcher’s mound – except that there is no mound, so the pitcher (in cricket terms: the bowler) has no height advantage.
– There are 11 players a side, but two batsmen are on the ground at the same time; one stands at ‘home base’ to hit the ball and the other stands at ‘first base’ near the where the bowler (aka pitcher) will be.
– There are only two innings per side, but each innings is over when ALL of the batsmen from each side is ‘out’ (actually, 10 from each side, because you need 2 on the ground at the same time).
If you can imagine those differences, let me walk you through the video which covers the 3 main aspects of the game:
Bowling
– The bowler cannot whip the ball (which is VERY hard, much like a baseball … perhaps a little harder) with his elbow, as he MUST bowl with a ‘straight arm action’. A little curious I know, but he gets speed by running as far/fast as he likes, until he reaches a line just behind ‘first base’ than releases the ball; the combination of the run and the fast (albeit strange-looking) straight-arm overhead throw produces the speed.
– The ball can be thrown directly at the batsman (within reason … you aren’t allowed to deliberately try and hit him!), but is usually bounced off the ground making it much more erratic and harder to hit.
– In fact, the red (or yellow) ball has a very pronounced seam effectively dividing the ball into two hemispheres, therefore a slower ‘spin bowler’ can be equally effective as a ‘fast bowler’ by deliberately imparting spin and/or aiming the ball at a spot on the ground that is rough or has cracks from the heat to make the ball ‘jump’ or ‘spin’ one way or another.
– The IDEAL outcome for the bowler is to get the batsman out, not by ‘striking him out’ but by using the cricket equivalent of hitting those three little sticks sitting right behind the batsman. Very quaint. It gets better! If you look carefully, balanced in little grooves on top of the stumps (i.e. those three little sticks) are two even smaller pieces of wood called ‘bails’, and the batsman is OUT if the bowler can hit the stumps with the ball AND the little sticks fall off. Cute 🙂
Watch the video until 1:30 and you’ll get the idea …
Fielding
– Of course, the other team is all on the field, carefully positioned to ensure this doesn’t happen. For example, if the batsman happens to hit the ball then they can get him out – just like in baseball – by catching the ball before it hits the ground.
– Because both bases – hence most of the action – happens right in the middle of the pitch (which is usually a large oval playing field), the batsman can hit the ball in ANY DIRECTION (there is NO ‘foul ball’ rule in the game of cricket), so it is just as critical in cricket to carefully place the fielders – but, in this case, all around the entire ground – depending on the characteristics of the specific batsman (is he a left-hander? is he likely to accidentally ‘snick’ the ball or is he going to whack it a long way?)
– Remember that really hard ball? Well, the cricket fielders prefer to catch them without wearing gloves. Just watch the video until 3:00 minutes in, and you’ll see what I mean [AJC: if you really want to see a tough sport, if I get enough interest, I’ll tell you about Australian Rules Football in a future post!]
Batting
– Of course, the batsman are in there trying to make runs, just like in baseball; and, they do it by running from ‘home base’ to ‘first base’ and back again as many times as they can, before they are at risk of getting out.
– But, in cricket, a batsman can ONLY get out four ways:
1. By being ‘bowled out’ i.e. the ball hits the stumps and those little bails (remember them?) fall off,
2. Or by being bowled out on a technicality (much like a ‘technical knock out’ in boxing) where the umpire (aka referee) rules that the ball WOULD have hit the stumps EXCEPT that the batsman stuck his leg in the way (instead of his bat) to avoid that from happening. This is called ‘Leg Before Wicket’ … imaginative, huh? 🙂
3. By being caught out (just like in baseball), either by the fielders around the ground, or by the wicket-keeper, who is the cricket equivalent of baseball’s short-stop except he wears NO body of face protection. But, the wicket keeper does usually wear TWO over-sized gardening gloves (that don’t look anything like baseball mitts).
4. By being ‘run out’ which is where the batsman hits the ball and madly dashes for the ‘base’ (actually called a ‘wicket’) which is merely a line drawn on the ground a couple of feet in front of the stumps:
– If any part of his body or his bat (because, in cricket, the batsman always seem to carry their bat when they’re running) touches the ground between the line and the stumps BEFORE the opposing team can get the ball to knock those little bails [there they are again!] off the stumps, the he is IN (aka SAFE!)
– If the opposing team can throw (or touch) the ball to the stumps and get the bails off before the batsman reaches that ‘line drawn in the sand’ (literally!) then he is ‘run out’ i.e. OUT in any sport’s language! Oh, and touching the ball to the batsman or catching the ball and standing on the line means nothing in cricket, sorry 🙁
All of this means that the batsman can score in a few different ways:
– They can hit the ball (or bunt it, or miss it entirely if they like) and attempt to run between the wickets as many times as they like (i.e. until they feel that they would be at risk of the opposing team getting the ball to hit the stumps before they are ‘safe’).
– Batsmen can usually run back and forth between the wickets 1, 2, or 3 times … only very rarely will they get 4 runs in (usually because somebody has tried to throw the ball at the stumps, missed it, and the ball has started to run on towards the other side of the ground … ooops!).
– The bowler can throw the ball so badly (or make any number of ‘technical errors’) that the batsman has no real chance to hit it, so the team is automatically awarded one extra run (conveniently called an ‘extra’)
– But the best is if the batsman can hit the ball so hard that it bounces or rolls until it hits – or crosses over – a rope encircling the ground just inside the fence (hence, it’s name: ‘the boundary line’), as he is awarded 4 runs (nice!) … but, if he can hit the ball all the way over the boundary line without it touching the ground (or anybody else) first – the cricket equivalent of a ‘homer’ – he gets 6 runs (better!).
– Best of all, each batter stays in and keeps hitting the ball until he goes out (in one of the four ways mentioned above); so it is typical for even a bad batsman to score a few runs (eg 15+) – and, not uncommon for a GREAT batsman to score up to 50, 100, or (extremely rarely 200+) runs in each of the two innings!
– Remember, the team innings isn’t over until all 10 batsmen from the team go out, and the game isn’t over until both teams go out twice … two innings … no wonder a game routinely lasts 4 or 5 days with each teams scoring 150 to 450+ runs!
Oh, and because a 5 day ‘test match’ (as they are called) is way too exciting for the Average Joe (or, more likely, Bruce in Australia and Nigel in England), two new versions of the game are being played at the moment:
– The One Day Games, which have been reduced to a mere 8 hours of excitement, simply by having only one innings per side, which finishes when the 10 batsmen are out OR 50 overs (6 balls – or ‘pitches’ – constitute an ‘over’) which usually comes first, and
– The 20 Over Game (i.e. each side is limited to seeing how many runs they can score in only 20 x 6 balls/pitches), which is proving to be way too short and exciting at a mere 4 or 5 hours, so is in danger of being consigned to the ‘cricket trash can’.
Well, it’s nearly summer here in Australia, so if you don’t see a post for 4 or 5 days you know where to find me …. yawn … 😉
This is ridiculous. The author apparently believes he is untouchable and will never lose his job, get sick, or die.
You can do all the complex math you want, but the simple fact of the matter is that Risk is the biggest variable, and I don’t see it show up in your equation once.
Don’t be stupid America, and dont prescribe to a system that encourages you to continue owing people money long after you need to.
Pay off your house, free up some income, then pay off your credit cards, pay off your car, and be a happier, less stressed individual.
Hmmm …. paying off your mortgage as a ‘risk management tool’?
Before we even consider why anybody in their right mind would pay off a (say) 8% mortgage before paying off a (say) 19% credit card or car loan, let’s review the substance of my “don’t pay down your mortgage early” argument:
Look at everything that you own as a business: if it’s your own home, separate the ownership of the property in your mind from it’s use …
… for example, even if it’s your own home, treat yourself as your own tenant and figure the rent that you would otherwise had to pay when doing the sums.
Then evaluate the investment against any other investment or ‘business’ …
… but, if you’re still trying to get rich(er) quick(er)?
If you own a home, don’t pay it off … use the upside to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …
If you have other sources of income (businesses, investments) don’t spend it or reinvest all of it … use some of the spare cash to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …
That’s my advice to you, but only take it if you want to be rich!
But, Dan says that the ‘math’ matters not, you should consider what happens if you “lose [your] job, get sick, or die”. Well, what happens?
If you have paid out your mortgage, your money is locked in the safest bank vault imaginable … all you have to do it sell the home to access the cash. Just pray that the market is an up market and not a down market, when these events outside of your control force you to sell. Or, would YOU prefer to choose the timing? Hmmm …
Of course, you could just borrow some money against the house; but then, aren’t you now putting yourself in EXACTLY the financial situation that Dan wants you to avoid: i.e. “owing people money long after you need to”?
And, even if you still do want to use your Zero Mortgage Bank, what are the chances of the bank actually lending you (or your survivors) any money when you are jobless, sick, or dead?
Oh, and let’s say that you do happen to be unfortunate enough to “lose [your] job, get sick, or die” while you are still in the 10-15 year period when you are well ahead of the 30-year payment curve, but haven’t paid off the mortgage in full, yet? How easy will it be to refinance, or even convince your bank to hold payments for you? Even if you THINK they will, you had better be certain 😉
What do you reckon? Dan’s on the right track? C’mon, be honest … would you feel safer paying off your mortgage early, or letting it ride?
You’re probably attracted to this blog because you want to get wealthy … and, if you’re anything like I was (and, now still am for ‘professional interest’) you probably read any and all decent books on personal finance in the hopes of finding those very ‘keys to wealth’.
Guys, as the economy improves (if it improves) interest rates will surely rise, as they already are in other countries.
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Well,