Tag Archives: finance

Who needs more than $1,000,000?

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Almost everybody will need more than $1,000,000 to retire on … most a lot more!

Look at this excerpt from an excellent report (that I would highly recommend you spend the $5 bucks on) from Retire Early:

” Perhaps the most troubling aspect of safe withdrawal rates is that very few folks will have the financial assets required to [even bother] … While we’re blessed to live in a rich and prosperous country, only a tiny sliver of the US population can comfortably retire on their savings alone. “

In 1998 the median family income in the US was $38,885 so using a fairly safe inflation-adjusted withdrawal rate of 4% would require nearly $1 million in assets.

Since most folks acquire a bit more wealth as they age, about 5% of the 47-year-olds could boast $1 million nest eggs in 1998. “

That’s why the Retire Early report goes on to say:

” More worrisome, is the fact that few people with million dollar portfolios would be comfortable living on $40,000 per year. Most feel that level of wealth should support a more expansive lifestyle…

… it doesn’t, at least not safely.

There’s an old adage in wealth building, “The first million is the hardest. The second million usually comes a lot easier and quicker.”

Why?

To fund even a modest retirement, you’ll need a significant wad of cash. Prudent folks will begin saving aggressively today! “

Good advice indeed!

How much to spend on a house?

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In a previous post, I weighed in with my thoughts on the Rent v Buy question. The answer for most people, at some stage in their lives, is to … buy.

But, how much to spend?

Boy, this is a biggie! I mean, your house is usually your biggest personal purchase. So, here goes …

You should INVEST no more than 20% of your Net Worth into your house!

[To calculate your net worth, try this calculator at CNNMoney.com: http://cgi.money.cnn.com/tools/networth/networth.html , then come back and read on, because you need the second half of the equation …]

The ‘20% Rule’ tells you how much of your current net assets you should INVEST, it doesn’t tell you how much house you can actually afford to buy …

… because, houses can be financed!

So, the 20% rule tells you how much deposit you can afford. And, the bank will then tell you how much you can afford to borrow (unfortunately, they won’t tell you how much you SHOULD borrow … only how much you CAN borrow).

Put your deposit + mortgage together, and there’s your house!

For example, say that you have saved $200,000 and it is sitting in the bank. And, assume that you have a job, but no other income or assets. Then you can afford to put down a $40,000 deposit on your house; the bank will look at your income and tell you how much you than then afford to borrow.

Why 20%? After you ‘invest’ another 5% of your Net Worth in ‘stuff’ (car/s, furniture, possessions), it means that you are never investing LESS THAN 75% of your Net Worth (that would be the $150,000 that you have left in our example) in income producing assets (like investment property).

It also tells you that you should never build up more than 20% of your Net Worth as equity in your own home without then borrowing against the remaining equity to invest.

So you should conservatively revalue your house at least every 3 – 5 years and withdraw any excess equity and add it to your investment pool!

If you can’t afford to trade up to a bigger house without breaking this rule … don’t trade up! When you get rich later, you’ll be happy you waited now.

But, if you can’t buy your FIRST (very small!) house without breaking this rule, then buy it anyway … as soon as you have enough equity, borrow against it to invest in long-term, income-producing assets, and keep rechecking this post.

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Never buy a new car … really.

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[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=Pev892H_dCs[/pro-player]

A quick tip for you …

… never buy new, this is more true for cars and even more true the higher the price of the car.

For example, the sticker price on my car, was $120k, but I looked around (actually, I just did a quick google search or two) and found the exact make/model/year (2007) that I wanted at a specialist dealer.

I found a car, in my own city no less, that was just 6 months old with only 1,700 miles on the clock in perfect condition for less than $90k … $30k buys a lot of enchiladas in anybody’s book!

I don’t think that I just got lucky …

I have found that the higher in price you go, the more fickle the customer … they buy cars on a whim and churn them quickly when they find out they would have rather had a boring ol’ Merc!

This works at pretty much any price range, too. If you want a more standard car, check out the leasing company sales (maybe at auction) for executive vehicles … a downturn means executive redundancies … redundancies means near-new cars available cheap!

The effect is even more pronounced when you buy imports (except for top line Italian sports cars, and certain Mercedes and BMW’s) because they depreciate by as much as 20% the minute that you drive them out of the showroom!

[Hint: next time don’t even go into the dealer’s showroom to buy that new car, just wait for the ‘other guy’ to drive their’s out, then offer him 85% of what he paid … give the poor sap your card … you just might get a call].

I once had a SAAB and every time I tried to sell it the price dropped more than I could accept: the first time I tried to sell it, I wanted $45,000 for it, but was only offered $35,000. So I waited a year …

Then when I tried to sell it for $35,000 I was only offered $25,000; the next year I got sick of waiting and just sold it for only $15,000!

I would rather have been the guy offering $15,000 than the guy selling.

Happy bargain hunting!

Should you rent or buy?

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Should you own or rent? I have seen a lot of rubbish written on this subject … stuff like “renting is just dead money” or “a house is a liability” … so let me set you straight:

 If you are just starting out, up to your eyeballs in debt, unemployed, or you just can’t afford a house right now, it’s simple: you just rent.

If you already own a house, don’t sweat it, keep owning.

 And, if you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key – ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

Now, if you are buying a house with 10% – 20% down, this won’t be until you pay it down a little and the market picks up a little.

But, when you do build up enough equity in your house to borrow against, you’d better be prepared to do it! If not, then you are FAR better off just renting and investing the money you save on mortgage payments every month …

… if you’re not prepared to even do that, stop reading this blog … you will never be much better off than broke.