Tag Archives: 7 million

Finding your lifestyle break-even point …

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7 Millionaires … In Training! has been featured in iReport; you can check it out by visiting: http://www.ireport.com/docs/DOC-145792 and, this article has been mentioned in this weeks Carnival of Personal Finance!

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rich_doctor

I wrote a post a while ago that explained why most doctors aren’t rich … the point wasn’t to appeal to all the medico’s in our audience; it was to demonstrate that income does not equal wealth.

Jeff, a navy pilot who I would happily trade a month or so of my life with (Maserati for Hornet for a month? Fair trade, if you ask me) commented:

Your analysis failed to consider Scott’s ability to incrementally contribute money from his income over the 10 year period. I just thought it was odd that you left it out, since the mantra of this blog (at least in the beginning–money 101 and early 201 stages) is to save as much of your income and invest it. Why wouldn’t Scott be able to follow this advice? …and more importantly, how would incremental contributions affect Scott’s ability to reach his goals?

Also, I bet the doctor making $700k per year in your example isn’t having a hard time investing $150k/year after tax. Why couldn’t a professional making $350k+/per invest $150k/year after tax (assuming they were following your money 101 steps)?

As I mentioned to Jeff at the time, my point wasn’t really meant to be mathematical … it was based upon my (and, Scott’s – who is the doctor mentioned in the original post) ‘real life’ experiences/observations …

… let me explain using four hypothetical doctors as examples:

‘Good Doctor‘ saves a good proportion of his ridiculously high income (what would you guess: 20%? 30%? More? Less?); lives within his means; etc. but will still most likely ‘only’ get to the $2M – $4M range +/- a few mill. if he is reasonably passively investing. That’s just experience talking …

‘Bad Doctor‘ spends more than he earns … there’s no limit to what some people can spend …  just refer to the Millionaire Next Door example from my previous post, if you don’t believe it’s possible to earn $700k a year and still be ‘broke’!

‘Typical Doctor‘ doesn’t wake up to the difference b/w good/bad doctor until he reads a few books and blogs … typically too late to really become ‘good doctor’ … he can’t save, say, $150k immediately – if ever – because he has ‘commitments’, but he sees the light and builds up to his own saving maximum over time … it’s this ‘lost time’ that is his undoing, so he ends up somewhere less than ‘good doctor’, say, $1M – $3M.

‘Business Man Doctor‘ sees the light and realizes that income/savings alone won’t get him to where he wants to go. He reads my post, and the rest is history 😉

Now, here is the issue:

In all of our four examples, the doctor is doing well – just like the two doctors in Dr. Stanley and Danko’s book – earning $700k p.a. … the problem is, if they are spending all of it to live on now (one of those two doctors was certainly doing that!) how are they going to keep it up in ‘retirement’?

Let’s check the math: $700k salary x 2 [for 20 years inflation @ 4%] x 20 [for min. size of passive nest egg] to ‘replace’ $700k spending power …

… that’s just shy of $30 Mill. in 20 years by my math!

So, there lies the real problem for any doctor / professional; how do they replace their income in retirement?

The mechanism is obvious – they need to channel part of their income into passive investments, and allow time for those investments to grow large enough to replace 70% – 125% of their final income depending on how much their spending will go up (most likely) or down (golf / travel, anyone?) in retirement.

There are only two ways that I know to achieve this:

1. Find their Replacement Income’s Break-Even Point: That is, as their salary increases over the years, how much do they allow their spending to go up in order to control their final spendable salary so that their nest egg neatly replaces it?

Let’s see:

Perhaps if they live off just half their salary ($350k) they may be able to get to somewhere in the near vicinity of $15M assuming that they allow themselves 20 years to get there (i.e. if $30 Mill. in 20 years was required, in our earlier example, to ‘replace’ the future value of $700k today, then $15M might do the same for $350K?)

How do we get that $15 Mill.? Well let’s see what happens if we save the other half of their salary:

$350k – 35% tax X 8% (say, after tax return of their ‘passive investments’). By my reckoning, if they increase these $350k (less tax) contributions by 4% to keep up with inflation each year, they may just get to $15M in 20 years. Success!

Naturally, this works for anybody on any salary … except the lower your required salary, the more that the ‘tools of the poor’ (401k; employer match; etc.) kick in to replace your final salary at perhaps less than a 50% of total income savings rate.

2. Find their Lifestyle’s Break-Even Point: The problem with the above example, of course, is that our ‘good doctor’ has to suffer with living off only half the income that he earns … now that he’s ‘retired’ he’s having to make do with playing at the local Public Golf Course while his professional friends are at the Country Club … poor sod.

To a greater or lesser extent this is the choice that conventional Personal Finance wisdom asks you to make: live large now and live poor later, or sacrifice lifestyle today to go for a longer period of being able to live the same lesser lifestyle in retirement (while your less-financially-astute friends simply take their chances).

But, this totally misses the point: what if the 50% Lifestyle simply ain’t good enough … are you going to take ‘second best’ (albeit for as long as you live) lying down?

If your answer is YES; then go back and revisit 1. with your own numbers and there you have your financial plan!

If your answer is NO; then you have come to the right place …  but, saving/investing alone is probably not going to do the trick 😉

We're split down the middle …

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… some agree that paying down your mortgage is the dumbest decision that you can make (not really the dumbest …. but certainly down there with the best – I mean, worst) and some simply don’t agree.

Right now, though, I want to pick up on one of Nick’s comments, since he has summed up the ‘pro-pay down argument’ really well:

I do a decent amount of investing myself, and while I don’t claim to be a master of the trade, I do well. That doesn’t change the fact that I don’t know how my investments will turn out. Everything could go horribly wrong, and I could end up taking quite a hit… or it could go really well and I could make a killing.

I don’t think anyone really knows for sure how well their investments will perform. I think anyone who does is either lying or fooling themselves. It is all about managing risk.

Putting a sizable portion of your cash as a down payment, and making prepayments to pay off your mortgage, is very good way to minimize risk. You end up with lower monthly obligations, less debt, more equity… Of course, this means less free money to invest and less money making potential..

Once again though, risk management philosophy comes into play. Is your primary residence something you want to take the risk with? In today’s market, putting less down, and making lower payments would turn out to be a very costly mistake if your investments don’t net the return you wanted (you’ll be stuck paying up to hundreds of thousand of dollars more in interest over time).. and this is only assuming you merely break even on the money you invested (and are not in the red).

I think everyone’s long term plan involves moving to a nicer house in a nicer area. This is something perfectly attainable by playing this situation safe. IMO, it is dangerous to put such basic life plans on the chopping block. I think this is how people could potentially get into serious trouble.

Now, don’t get me wrong. I’m not saying that you should immediately put any money you have towards prepayments, or you should put all your money down on that new house. I’m saying that you need to carefully balance this based on your confidence about making good investments and the amount of risk you are willing to take. In other words, I think its foolish for just about anyone to put very little down and not make prepayments when they can (i.e. tax return time, or portions of a raise). I think its equally foolish to put ALL of your money towards prepayment and down payment.

Make no mistake, that large down payment is a very good protection plan when you lose your job, your wife has a kid, or you encounter some medical emergency. Those lower monthly payments make things more manageable and prevent you from being overrun with debt.

A prepayment of only $300 a month on a $350,000 principal can save you well over a hundred thousand dollars in interest over 30 years. That money goes straight into your bank account or investments when your mortgage is paid off early.

These items are your safety net… and that’s part of good risk management isn’t it? To maximize gains and minimize risks. You can’t just focus on maximizing gains – you need to protect against potential pit falls as well.

By all means have your money work for you, and try to get investments that produce greater returns than your mortgage rate… but start off by minimizing your monthly payment (sizable down payment) and put a good effort in to pay your house off early (prepayments)… You know, just in case those investments don’t work out.

I have some questions of my own; let’s use Nick’s $300 per month example:

1. Is the $300 a month a sizable proportion of the amount that you intend to invest overall? If so, do you know what you are getting for it?

Nick says that paying down his mortgage by an extra $300 per month will save him $100,000 in interest over 30 years … let’s accept that number for now and assume that this $100k can be somehow freed up at the end of the 30 year period:

$100,000 in 30 years will have almost the same buying power then as $31,000 does today (assuming that inflation averages just 4%).

That should provide Nick a yearly stipend of just over $1,500 in today’s dollars (commencing in 2038, assuming that 5% can then be ‘safely’ withdrawn each year).

Now, there’s a problem right there; how can 5% be a ‘safe’ withdrawal rate in 2038?

If inflation is still just 4% Nick needs to find a ‘safe’ investment that will return him 9% after tax (4% to keep up with future inflation and 5% to spend) … he can’t get that return in retirement by paying down his mortgage any more, it’s already paid off!

So, now – in retirement – he has to look for a more ‘risky’ investment than the one he used to get there!

Therefore, I am assuming that Nick will either keep his paid off house and actually entirely forgo this income entirely or move into a smaller paid off house or unit to free up $100k of equity …

… in any event $1,500 or zero a month sounds pretty similar to me 🙂

2. Do you know what returns you can get elsewhere?

Even if Nick isn’t relying on this $100k (then why bother with it in the first place?!) – because he is also  investing elsewhere – what could he achieve if he also invested his $300 a month elsewhere?

Well, Nick is ‘saving’ 6% interest in the current market [AJC: if you aren’t prepared to fix an incredibly low interest rate like this, how can I help you?!], which could be equivalent to a 7.5% – 8% after tax investment return.

[AJC: Unlike investing in income-producing investments, there is possibly no income tax to be paid on your mortgage interest payments/savings … of course, there could be a tax disincentive if you have been itemizing your home interest on your tax return and can no longer claim that deduction]

But, what if he can find an investment that returns more than 8% after tax?

Even an extra 1% (after tax) additional return will improve Nick’s 30 year outlook by 20% (at least, for the $300 monthly extra that he is putting into his mortgage).

3. Do you care?

For me, this is the key question: can Nick achieve his financial goals even without investing this $300 a month elsewhere? If he can’t, is he willing to let these goals go for the apparent ‘safety’ of a home partly or fully paid off?

So, my real question to Nick is: can you achieve your financial goals at the same time as paying your mortgage off? It’s possible (hell, I did it!) but, for most people, not likely … they are already skating too close to the wind even before pulling extra money out of their investment portfolio.

To me, it’s the same thing as asking if you can fish for trout in a babbling brook without getting wet:

It’s possible, but you won’t probably won’t make a great catch unless you are prepared to (slowly, carefully, and not deeper than you can handle) wade in …

Who are 'the rich', really?

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“The rich are different from you and me.” — F. Scott Fitzgerald

“Yes, they have more money.” — Ernest Hemingway

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I received a pretty strong reaction from some readers to a post – largely tongue in cheek – that had a ‘social moral’ …

… that ‘rich people’ are actually just ‘people’ who happen to have a few more zeros in their bank account.

For a start, let’s look at how they got there: inheritance; marriage; luck; hard work [AJC: although, ‘marriage’ could also be included in this last one 🙂 ]

It’s a stretch then to say that ‘The Rich’ can be genetically or socially any different to the ‘The Not Rich’: what are the common traits required for each of the above methods? None obvious to me …

So, if anybody can get rich, why should ‘The Rich’ be any better or worse on any human scale (e.g. being socially responsible; giving to charity; etc; etc) than anybody else?

On the other hand, they may have the means to display their characteristics more obviously – for better or worse 😉

But, let’s not generalize, let’s turn to Prof. Thomas J. Stanley, former professor of marketing at Georgia State University (author of The Millionaire Next Door and The Millionaire Mind); I found a summary of the latter book by noted economist Prof. Mark Skousen who says:

Here are the results of his (Prof. Stanley’s] survey of over 1,000 super-millionaires (people who earn $1,000,000 a year or more):

  • They live far below their means, and have little or no debt. Most pay off their credit cards every month; 40% have no home mortgage at all.
  • Millionaires are frugal; they prepare shopping lists, resole their shoes, and save a lot of money; but they are not misers; they live balanced lives.
  • 97% are homeowners; they tend to live in fine homes in older neighborhoods. (Only 27% have ever built their “dreamhome.”)
  • 92% are married; only 2% are currently divorced. Millionaire couples have less than one-third the divorce rate of non-millionaire couples. The typical couple in the millionaire group has been married for 28 years, and has three children. Nearly 50% of the wives of the super-rich do not work outside the home.
  • Most are one-generation millionaires who became wealthy as business owners or executives; most did not inherit their wealth.
  • Almost all are well educated; 90% are college graduates, and 52% hold advanced degrees; however, few graduated top of their class — most were “B” students. They learned two lessons from college: discipline and tenacity.
  • Most live balanced lives; they are not workaholics; 93% listed socialiazing with family members as their #1 activity; 45% play golf. (Stanley didn’t survey whether they were avid book readers — too bad.)
  • 52% attend church at least once a month; 37% consider themselves very religious.
  • They share five basic ingredients to success: integrity, discipline, social skills, a supportive spouse, and hard work.
  • They contribute heavily to charity, church and community activities (64%).
  • Their #1 worry: taxes! Their average annual federal tax bill: $300,000. The top 1/10 of 1% of U.S. income earners pays 14.7% of all income taxes collected!
  • “Not one millionaire had anything nice to say about gambling.” Okay, but his survey also showed that 33% played the lottery at least once during the year!

Thus, we see how the super upper-income families of this nation are not the ones contributing to crime, welfare, divorce, child abuse, and a spendthrift society. But they are playing a lot of taxes and making a lot of contributions to solve these social problems.

But one still wonders, why are any of the ‘Rich = Bad’ believers reading a blog titled:  How to Make $7 Million in 7 years?

A new look at our 7 Millionaires … In Training!

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I’m hoping, but not sure if you are staying in touch with the goings on at our ‘sister site’ http://7m7y.com – the home of what I still call our ‘grand experiment’ to make a lot of people rich by applying the principles that I write about here …

Jeff asks:

I have a question about how your readers now fit into the conversation on 7m7y.com as the site’s focus changes. Since you have named your 7 MIT the posts and comments have naturally shifted focus toward those individuals. As I review the discussions, it appears to me that the conversations and comments have become almost exclusively between you and the seven with little engagement from outside.

Do you see a place here still for the team of benchwarmers who have been to practice but didn’t make the team? I have learned a lot about myself and my desires through the series of exercises that led up to the 7MIT selection. Will there be more “try this at home” exercises moving forward or will 7m7y.com become increasingly tailored to the seven?

You see, I don’t just want to create 7 Millionaires … In Training! I want to create 70, or 700, or even 7,000 Millionaires … In Training!

So, there are no ‘bench warmers’ in our 7m7y Community – don’t be a wallflower (!) – but, you do get to choose your level of involvement:

1. You could just passively read along and pick up a lot of valuable information that isn’t in this blog, and

2. You could comment/criticize/congratulate, and

3. You could ask/answer questions of anybody (including the 7MITs and me), and

4. You could participate in the same exercises that I purposely post online, and

5. You could even share your own progress by e-mail/comment/feedback.

If you do want to participate – and I sincerely hope that thousands of readers like Jeff will – I suggest that you hop over to that site and bookmark it because it is an unusual blog … by it’s nature: http://7m7y.com is fluid, not static!

That’s also why I have come up with some additional navigation options for that site … let me know what you think!

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Visit us at the Money Hacks Carnival, kindly hosted this week by The Financial Blogger.

The world is your backyard!

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For most people, their backyard is their investment (OK, you can throw in the front yard, the kennel, the house, and the above-ground pool, but that’s it!) …

… for others, the only place that they invest is near their backyard – well, their neighborhood or those close by.

And, it seems to make sense: you understand the area; you can manage your investment; you can (almost) ‘touch’ your investment … lots and lots of ‘warm fuzzies’ around that one.

That seems to be the thinking behind Ryan’s question:

I have a question on real estate investment when you’re nomadic. My concern is I’m young (28) and my girlfriend and I have a list of places we’d like to try living before we settle down (west coast, gulf coast, a big city, etc). Do you tend to only keep rental property near where you live? Or are you comfortable owning property across the country? And if the latter, do you run into any problems with doing that?

My concern is that, if I have enough income/capital to own property, would I be better off waiting 10 years until we decide where we’re going to live long term? Or might I be better off, when we decide to move somewhere, in buying a house, then when we move, trying to keep it as a rental, or something along those lines?

Any tips or thoughts you could throw at me about real estate investing when your location isn’t static?

Ryan, the best place to invest in real-estate is where you will make the greatest return. Seems obvious, but it opens up so many questions about:

– Location: where to invest

– Type: what class of property (residential, commercial, etc.) to buy

… as well as all the usual questions around how much to invest, funding, etc.

I have real-estate in Australia and in the USA, and I happen to be right in the middle of a big ‘argument’ with my accountant at the moment about where I should invest: he thinks locally (easier to manage, handle taxes, etc.) and I think globally (spread risks; greater potential returns; etc.).

Now, you might say that’s OK for me with a portfolio of real-estate, but the reality is that we also have a single condo overseas that we have held on to, as well as a quadruplex, and until recently we kept our old house and rented that out.

In all of those cases, good property managers ensured that we could manage the investments as easily as if we lived next door – almost 🙂

In fact, by investing away from home, you remove the temptation to manage the properties yourself … you focus on increasing income and finding the next deal; let others do the ‘grunt work’ on the existing properties for you.

As to the second part of your question: if you do want to invest in R/E and you see that as your main path to wealth … start now!

Let others wait ‘until’ …

What is risk?

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Jeff raises a great question about the nature of risk; he is talking specifically about real-estate investing when he says:

After reading a couple books, it looks like the majority of the return comes from leveraging your money and keeping your money leveraged over your holding period. Also, reinvesting your cash flows into another investment (instead of living off of them) adds additional compounded return over the long haul. These, however, dramatically increase risk…but, no risk, no reward.

Now, I need to make a point right here: I talk about real-estate (RE) investing a lot … and, I certainly made a lot of money in RE … so, it follows that I am in love with RE, right?

Actually, no.

I hate investing … I dislike real-estate … I abhor risk …

…. it’s just that I hate NOT investing even more. Seriously.

I have a lot of money sitting in the bank earning interest (an excellent rate, if I may say so myself); but all I can think of is that it’s not working fully for me … I am not anywhere near maximizing my return. Where’s the capital gains?

In the bank, there is none.

So, I am FORCED to look elsewhere to invest, and I inevitably end up back at real-estate. I do it because, for me, it represents the best risk/reward trade-off that I can find … IF I am certain that I can cover the cash flows if things go south for a while (repairs and maintenance, loss of tenancy, etc.).

Jeff is absolutely right about RE’s ability to get returns ” from leveraging your money and keeping your money leveraged over your holding period”.

But, back to Jeff’s questions about risk: when Jeff says that leverage = risk, he is technically correct but absolutely incorrect.

Let’s take a look at the technical nature of risk:

Case 1 – RE v CD

We compare the risk of investing our $100k into a $100k piece of real-estate (no borrowings, and for the sake of the discussion no closing costs) v. into a bank CD and we realize that the piece of real-estate and CD produce differing rates of return: according to common wisdom, slightly above inflation for the RE and about even with inflation for the CD.

But, the RE can burn down, lose a tenant, etc. etc. Of course, on the plus side, you can rehab the property cheaply and increase returns; choose better tenants; find a high-growth area; etc.

The CD is fully government-insured (hence the $100k limit for this exercise); and, you can look around for the best CD deal (from an insured bank!) in town.

Bottom line: Slightly different rates of return, markedly different risks.

Intuitively, we understand that there is a relationship between risk and return and the RE v CD example illustrates that in a way that we can all understand.

Case 2 – RE v RE

Let’s say that you decide that the better return from RE is worth the increased ‘risk’.

RE can be leveraged; so that must increase risk? Again, technically ‘yes’, but let’s look at it in practice:

0% leveraged RE v 100% leveraged RE:

If the ‘sub-prime crisis’ didn’t show the risk (not necessarily the folly) of ‘no money down’ RE deals, then we may as well stop the discussion right here, because we all know that fully-leveraging a property is much more risky than owning it outright (it’s why we pay down our home loans, right?)

But what about 0% leveraged RE v just 20% leveraged RE?

Does that seem a lot more risky to you? If not, what about 0% leverage v 40% leverage … and so on.

In other words, risk is also personal: once you decide to invest in an asset class – say, RE – there is no magical point at which leverage becomes ‘risky’ or ‘not risky’ (unless you were one of the people who thought that 20% leverage was ‘risky’).

The point here is to show that whilst there is indeed technical risk, it can be highly subjective and frankly far less important to your financial decision making than ‘absolute risk’ …

Absolute Risk

To put this in perspective, we all know that trying to jump over roofs between buildings is risky. Much more ‘technically’ risky than going through the fire doors, down the fire-stairs, into the street, then reversing these steps in the next building …

… but, if you are Jason Bourne and a CIA Operative is coming through the doorway behind you with a BIG GUN (did I mention that you were out of bullets?) to ‘take you out’, don’t you think that you just might suddenly ignore the ‘technical risk’ and jump across anyway (if you thought there was any reasonable chance that you might make it)?

Instead you might decide to try and surprise the armed assailant with a karate chop (what is the ‘technical risk’ of karate chop v armed assailant?) … in other words, you mostly ignore ‘technical risk’ because the ‘absolute risk’ of failure is too great.

Equally, financially-speaking, ‘absolute risk’ is the only risk that really matters; it simply asks:

What is the risk that [insert preferred method of investing here] won’t be enough for me to make my financial goals i.e. my Number /Date?

If putting your money in a bank CD that earns 4.5% gets you to your financial goals, then that’s probably what you will/should do.

But, if it won’t what do you do?

It all depends on how important your financial goal really is, doesn’t it?

Should you lend money to others to buy real-estate?

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A member of Networth IQ asks:

I’m debating on loaning a friend around 30k that I will dervire from a HELOC on my primary residence. I will recieve a flat 16% interest over the 6 months of the loan, and an extra 3% per month for every month if it’s not paid within 6 months. This moeny will be used for remodeling expenses on his investment property. We are in the process of creating a promisory Note and mortgage note for the loan.

Now, I know this is risky for a few different reasons but I don’t know how else I could generate $4,800 over 6 months for an investment of 30k.

Is there any glaring reason not to move forward with this loan?

D’ah, yeah!

Don’t go into business with relatives or friends … and, don’t lend money to them – which is pretty much the same thing, anyway …

… unless they are collateral damage and you are prepared to foreclose on them or sue them at the drop of a hat.

But, for the sake of this post, let’s put aside the “friends” issue and focus on the underlying ‘investment opportunity’ laid out in the question:

This goes to a debate that I was having on another topic about Trust Deeds …

[AJC: worth reading just for the entertainment value … you get to see how closed minded and rude some people can be when encountering contrarian thinking] just scroll back to see it)

… my contention is – all other things being equal – is that if you are going to take the risk, why not take the upside as well?

We don’t know the outcome of the remodelling of the investment property. For example, is this ‘friend’ going going to remodel then flip? Or hold?

Let’s take these two scenarios one by one:

Rehab/Flip

You have to ask yourself what the chance of success is in the current market?

Because, if you lend the money and the flip is not successful, how do you get paid back without suing/foreclosing? And, you presumably stand behind the bank, so what chance do you have of getting your money back, if you do foreclose?

If you are going to take this risk, you may as well be in the full-hog and hold equity in the deal to get the full upside, as well.

On the other hand, if the flip is successful, you have taken a major risk for limited upside: if the property can be sold to (a) pay you back your principle, and (b) pay you the interest owed to you, and (c) give the ‘friend’ their required profit, why don’t you just take a split of equity in the deal instead of (as well as?) the interest.

In fact, I would be asking for a split of the profit or equity in a rehab/flip deal, with a minimum payout of the interest component that I would have expected … a kind of cake-and-eat-it approach. Friend or no friend … take it or leave it offer.

Buy/Hold

There are only two ways that I see this as a likely scenario:

1. The Rehab/Flip scenario didn’t work, so the investor/friend team are forced to hold on to the property (foreclosure being the ugly alternative, as discussed above), or

2. The friend intends to approach the bank (or another one) to refinance on the new post-rehab, presumably improved, valuation and use some of the proceeds to pay out investor out … in the current market, a lot of if’s and but’s in there!

The safest approach for both parties in this scenario is to borrow the unimproved value from the bank, add in the $30k from the HELOC as ‘equity’ and hold the property together under some agreed equity split. Paying HELOC interest the whole time doesn’t make sense, so the partnership agreement should spell out the requirement to at least try and refinance every so often.

The advantage: the property increases in value over a sufficiently long hold period (in the current market, who knows how long ‘sufficient’ will be … which is why buy/hold, at least as a backup option to flipping, is so attractive) and you get the negotiated % of the upside.

So, in both cases, by lending the money, you take on significant risks associated with the underlying investment, without access to the underlying capital returns. Why do it?

One final note: by using a HELOC to invest in this new property you are gearing to the max.

This, of course, is a good thing ifyou are (a) certain to flip at a profit, or (b) able to hold and cover the costs of the HELOC long term (or refinance out of it) … pretty big if’s, if you ask me 😛

More on the debt-free fallacy …

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The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at http://ajcfeed.com ….

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Recently, I wrote a post that (I hope!) exploded the popular view peddled by the Ramsey/Orman/Frugal crowd: that you should pay down all debt, including your home loan. You will need to read that post to see why it’s such a bad idea.

As expected, the post generated a lot of reader comment, much centered on the theme that owning your own home outright is (a) better than doing nothing (true, but eating pizza every day is also – marginally – better than eating nothing) and (b) a great emotional ‘cushion’.

Money Monk summarized it perhaps most succinctly:

I think it all depends on a person risk tolerance. Some people just love the security of a paid for home. I just think either way is OK. I just would not suggest someone scraping by just to pay off their mortgage. Forcing themselves to live frugally

Either way is definitely not OK:

Sure, either way is better than NO way …

…. but, one way is clearly better than the other way!

The ‘catch 22′ here is that the very thing that these people THINK will make them secure (e.g. paying off their home loan) actually makes them much less so, in the long-term.

That doesn’t mean that you shouldn’t make emotionally-self-satisfying decisions … for example, owning your own home is not always a smart FINANCIAL decision, yet it’s one that I actively encourage people to make for exactly the EMOTIONAL reasons that Money Monk (and others) stated:

http://7million7years.com/2008/01/28/should-you-rent-or-buy/

But, that does NOT mean that you should own the property outright …

… there is far more REAL SECURITY in knowing that you will retire with enough to live off than there is in the FALSE SECURITY of having ‘just’ $1 Mill net worth in, say, 20 years (usually wrapped up in your home ownership):

http://7million7years.com/2008/02/28/is-your-home-an-asset-a-simple-question-with-a-not-so-simple-answer/

But, I’m not out to change EVERYBODY’s view … only SOME people’s: those who want to become Rich(er) Quick(er) ;)

Retirement Planning Made Easy!

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Meg, a reader, asks:

My goal has long been to reach $1MM (net worth, not assets) by age 30 – which is under 6 years away for me. I’ve been working actively towards the goal for over a year now, so if I reach it it will have been $1MM in 7yrs. Not nearly as impressive as 7MM in 7 yrs, but that’s if I do it the most conservative way possible with minimal risk and leverage. If all goes according to that plan (which primarily involves utilizing real estate leverage) I will reach $2MM by 35 and then more than double it again by 40…of course that’s almost 2 decades away. Maybe I should look into ramping up my plan with some risk!

[AJC: My response …]

Meg,

Sounds great!

Now, I suggest that you work backwards:

How much income do you need (forget inflation for now, just use today’s dollars) and by when (figure costs of family, college, travel, etc.) … no more work for you OR hubby from then on!

OK, then double that amount for every 20 years until The Date (that accounts for 4% inflation) … and, multiply by 20 (if you want to be really conservtive, multiply by anything up to 40) to get The Number – that’s your Net Worth target (assuming that you also obey the 20% Rule).

Now, do you need to ramp up your plan with some risk, or not?!

Retirement Planning Made Easy! )

Good Luck!

AJC.

Why 99.999% of businesses fail …

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This short (less than 2 minute) poorly made commercial for “Dan’s” product or service (or whatever it is that he is offering) is delivered by a ‘talking’ toy car.

Aside from that, he gives a great summary of what it takes to have a business rather than a glorified job. On that basis alone, it’s worth the effort to try and watch without snickering.