Tag Archives: Rich

Let's not confuse 'saving' with 'investing' …

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This goes back to a comment that I received in response to a question posted on another finance blog – one that I happen to like for early-stage savers …

I suggested that for many people, their retirement savings actually won’t be enough to fund their ideal retirement … if they’re happy to accept less, fine!

If not, then I suggested that they may need to do something a bit more active to pick up the pace …

Here is a response that I received:

“Your investing approach of “actively (business, real estate, trading)” sounds more like speculating and your savings approach (CDs, 401ks, etc.)” sounds more like investing to me. Just based on the statistics of individuals who trade rather than index…most get eaten up by fees while compounding growth usually is the better way to go using monte carlo analysis, But who knows what will happen in the future.

Posted by: klauss | February 08, 2008 at 12:21 PM “

My point is simply this:
IF your retirement plan is on track, then keep doing what you’re doing.
But, the vast majority of people can’t simply SAVE themselves into their ideal retirement; they have to INVEST in their future.
I call it ‘investing’ – investing in our future – but, if starting a part-time, work-at-home business, experimenting with actively trading stocks or options [not my personal choice], renovating then holding an income-producing property, etc. is ‘speculation’ to you …
… I simply say:

Bring it on baby!

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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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.

How much does it take to be rich?

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My 10 y.o. daughter asked me exactly that question the other night … actually, she simply asked “are we rich”? I’ll tell you how I answered in a minute, because it is important that you understand how YOU would answer this question.

In the meantime, and by coincidence, I came across this blog just yesterday: http://www.millionairecorner.com/content/blogsection/4/110/

It’s written by Spectrum who did some research on what it takes to be rich …

How Rich is Rich?

 http://getrichstayrich.net/introduction/index.html

The problem is that they asked people who were already Rich!

 So, most said $5 million (what? net worth? in the bank? under the mattress?), but some said as much as $25 million. I would guess that this was related to how much money they made … the more they have, the more they spend, so the more they believe it takes to be ‘rich’.

Only 1 in 5 said $1 million, which is what many people just starting on the road to wealth would believe means ‘rich’ … when you get to $1M tell me if you’re ready to retire (I’ll bet the answer is NO!). 

I think the number is somewhere between $100 million and $1 billion …

… as one Billionaire said recently, after his company stocks grew five-fold in less than 12 months moving him from $1 Billion to $5 Billion net worth: “once you get past the first Billion the rest doesn’t matter.

So, how did I answer my daughter?

I said: “we are not ‘rich’ we are wealthy, because we can afford to live the same way that we are living now for the rest of our lives”. 

Now, we aren’t slouches (nice house in a great suburb, the ‘right’ cars, schools, vacations, etc.) but we have no helicopters or Lear Jets …

So, to determine when you are ‘rich’ you first need to determine your Number … that is the amount of money that you need to have ‘in the bank’ (actually in Passive Investments : bank accounts, investment properties, stock market … anything that makes YOU money even while you are asleep) to produce enough income for you to live your current (or desired) lifestyle for the rest of your life (which means, the amount has to be indexed for inflation).

I’ll show you how I worked through this in a future post!

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