Ooops! She broke the 25% Rule ….

keeping up with the jonesI wrote a post some time ago about how I broke (nay, smashed!) the 20% Rule (you know, the one that tells you what % of your net worth you should have ‘invested’ – read: tied up – in your own home) when I bought my latest house – considering that we paid $4 mill., are about to renovate for at least $1 mill., and still own another $2 mill. house that we haven’t been able to sell due to the crash, I’d say that we need some major corrective action … which, I outlined in this post.

The next housing problem that I wrote about, doesn’t affect me (as we paid cash for our houses) but, was how to deal with the now-all-too-common situation where you are ‘upside down’ on your mortgage.

Now, thanks to Alexandria who commented on that post with a question, we can now assess the third major housing-related financial problem: what to do when you break the 25% Rule (the one that lets you know how much of your income to spend on rent/mortgage payments)?

Panic is always a good first option …

… before we do that, let’s hear Alexandria’s ‘problem’:

Ok… after reading the above I want some options on my situation. Married, three school aged kids. Currently own a home with a high mortgage that is worth just about $50K more then we owe. Not the home of our dreams. We are not in foreclosure. I am self emplyed and my husband is a Police Officer. We can make our monthly mortgage but it eats up about 60% of our monthly income. We have no savings, a mininal 401 plan, no large other debt. We are both in our mid thrities. We can rent a much nicer home in our area for about $1k less then our mortgage a month. If you were us, would you sell and rent or keep the house?

OK indeed!

My first piece of financial advice would be to dump the copper and marry some rich bloke (I’ve seen your photo) who looks like me … but, marriage proposals aside, I can’t offer you any better advice than that, because I am NOT you …

… that’s why I struggle to answer specific “what would you do if …” questions on this blog, because I rarely have enough information to know how to deal with YOUR Life’s most difficult financial decisions.

BUT, it’s not all doom-and-gloom, because I can use wonderful readers’ questions, such as this one, to inspire some general points: just don’t construe it as direct personal advice, even though I may liberally intersperse “you” and “should” in my posts to make them more readable.

Disclaimer out of the way πŸ™‚

Even though I can’t really give you the answer that you can ‘take to the bank’, I can ask why you would consider keeping a home that you don’t like, when you can sell it and rent a nicer one and save/invest an extra $12k a year?

Better yet, what would it do for you financially (balanced against family ‘needs’ … not keeping up with the Jones’ … hence, the image at the top of this post) if you sold this place and used the freed up equity as a deposit against a smaller/cheaper place that fits closer to the 25% income Rule, and then used the money saved on mortgage payments (100% of it!) to finally start to build your financial future?

Remember, given that this is effectively your first home (i.e. you have not built up any housing equity yet) the answer – for you – maybe somewhere between the two …

Nice house v fewer financial headaches … what a trade-off to have to make πŸ™‚

Don't ask "if" … ask "how"!


I got home very late last night to see this e-mail from my son – we live in the same house, but he is 14 years old, so that is now his preferred mode of communication πŸ˜› –

i have decided that this is gonna be my car, i dont know how but somehow …eventually :

You have no idea how proud that made me feel …

To explain, let me give you some background:

I was a ‘late bloomer’ in that I was always willing and able to work, and never stood in line for a handout … but, I didn’t really get hit by the entrepreneurial bug until my late 20’s (even though I always had that vague “make my first million by 30” idea in the back of my mind. Oh, I missed by about 15 years … then retired at 49).

On the other hand, my son has had his own eBay business for about 2 years (off and on due to various accidental – and minor, in my opinion – account ‘oversights’); we are used to the idea of seeing packages on our doorstep in the morning (left by our son for the postman to deliver to his customers) and in the evening (packages left for my son, containing stock from overseas … usually China).

Right now, he is instant messaging (i.e. in ‘live’ conversation) with various suppliers in China looking for more genuine Bose headsets (he has just imported 2 at about $150 each).

Now, to put this in perspective:

– he was 12 when he started his business

– he researched and set it up totally on his own

– he found and negotiated with his own domestic and foreign suppliers (mainly communicating via e-mail)

– he downloaded Quicken (accounting software), integrated it with eBay’s software, and worked out how to set it up (including opening balances)

– his allowance is twice his age (currently $28 per month) and easily outstrips that rate with his eBay profits per week

… and, he did all of this with NO outside help (I have no idea how to do ANY of this).

So, I am proud of my son, not just for his entrepreneurial spirit (he is self-starting 10 to 15 years before I did), but that he has discovered something important:

Don’t ask “if” or “I wish I could have this car” … ask, “HOW can I get this car“; as I said in my e-mail back to himΒ  – I think I need to make an appointment in his busy schedule to speak to him about this πŸ˜‰Β  –

This car is WAY too powerful for you to drive until you are at least 25 years old … but, after then, the world is your oyster (that means: go for it!) …

BTW: You are asking the right question: How can I get this car? Not: IF I can get this car? Once you ask yourself HOW, your subconscious starts to work on providing the answer and eventually it will come! Good Luck!

Notice that I did NOT say ” good boy, now rich dad will buy it for you” and, notice how he didn’t ask? That’s MY boy πŸ™‚

How do I invest with only twenty dollars to spare each month?

This is actually a very common question: How do I invest with only twenty dollars to spare each month?

It was most recently asked by Jacqueline Robinson of TX in response to a US News article that I contributed to:

Basically, I would have to put back pennies at a time and hope that one day it will add up to a nice saving for me in the future. Ok, yes I would like to have that special person to come onto my job at Sobway and say, I read your story on the us news and how I feel that this money would benefit you more than it would me at the moment, or that you are the lucky winner today. Well, that would be living in a fantasy world, so if I could get some good, strong suggestions on how to save money and invest at the same time for my future I would leave El Centro College in Dallas TX with a smile on my face.

Well, Jacqui, I’m certainly not going to come into your ‘Sobway’ for a sandwich and write you a check for $150,000 as a ‘tip’ as you will no doubt lose it pretty quickly because you need to first learn the lessons of money before you make your money so that you can keep your money πŸ˜‰

The question is normally asked in a manner that suggests: “$20 is such a small amount, what possible difference can it make if I save it instead of spend it?”

Well, in some respects I understand the ‘losing attitude’ because even if you faithfully save $20 each month and somehow manage to match the 30 year ‘guaranteed’ stock market return of 8.5% compound (ignoring fees), after 30 years Jacqui will have saved less than $30,000 (which is worth less than $9,000 in today’s money if inflation averages just 4%).

But, Jacqui will no doubt be receiving better and better jobs and at least increasing the $20 monthly savings with inflation (won’t you, Jacqui?), so she should end up with something approaching $45,000 (or, less than $14,000 after inflation) …

… so, I share her implied pain.

But, with $20 a month you can rent a stall at a market and sell on consignment seconds from local manufacturers (that means that local manufacturers will gladly let you have a bit of their not-quite-right stock on ‘loan’ until you can sell it and pay them a pretty cheap price) … or, one of a hundred other ‘micro businesses‘ that require little to no start-up funds.

With the couple of hundred dollars a month that you might make from that activity, you might be able to build up a ‘nest egg’ 10 times larger than before …

… better yet (because, who can live the rest of their lives off the equivalent of $140,000 after inflation … total?!) use that money to gain a higher education and/or start an internet-based business that might make you an extra few hundred dollars a month.

With, say, an extra $700 a month you could ‘retire’ after 30 years with the princely sum of $450,000 (in today’s ‘after inflation’ dollars) or use that few extra hundred dollars a month to start a ‘real’ business … one that can …

… well, you know the rest: it’s how I went from $30k in debt to over $7 million in the bank in just 7 years.

Jacqui, you’re already $30k – and, $20 a month – better off than I was when I started my journey, so suck it up and get to it! πŸ™‚

Speculating on your own home?

Ryan, who is upside down on his own mortgage asks:

I agree that plenty of investments, if not most, will give you a better APR than your house, but what about leverage?

$500,000 House( $400,000 Bank’s money, $100,000 Your Down Payment) * .05(expected year 1 appreciation = $25,000

$100,000(Your would be down payment) * .15 (from a successful investment or business venture) = $15,000

This is POSSIBLY true IF you gain market appreciation; that’s called speculation.

On the other hand, if you put the same money into a cashflow positive rental, then you make money on the rents and any future appreciation is a bonus; that’s called business.

A case can possibly be made for using your own home as a ‘business’ investment IF you presume to (nominally) charge yourself market rent for the same type of accommodation …

… but, would you pay that same rent rent to somebody else?

The answer must be ‘yes’ for this to work.

If so, then compare how the property then stacks up as an investment if you were the owner and renter i.e. is the pseudo-rent greater than the mortgage?

But, there is still a catch: you also lose most of the great tax benefits of a true investment (e.g. depreciation), even though as home owners in the US you gain some (capped) tax-benefits – particularly in relation to your mortgage interest.

But, there is a solution: buy a house to rent out, and rent the identical one from somebody else!

Rent out the one that you own and rent the other one from the owner: this way, you ‘force’ yourself to treat the one that you own as a real cashflow investment and the other as a place that you live in.

What do you give up?

Probably that sense of ‘ownership’ (but, hey … you do own the identical one, right?) and security of tenure.

But, you must weigh this up against the benefits:

1. True investment ‘status’ … buy, sell, hold, refi as the numbers dictate

2. Gain depreciation benefits for anything that you add (works great if this is a new’ish house!)

3. Full, uncapped tax-deduction on mortgage interest, etc.

4. ???? [you tell me?]

In fact, if you have a friend, why don’t you each buy a house and rent it to the other? Now, that is a strategy worthy of a millionaire … in training! πŸ™‚

Please cough, sir …


This is a neat little tool produced by CNNMoney to check your ‘financial health’ … it asks a few simple questions and gives you a diagnosis, highlighting problem areas in the red ‘bubbles’ (the blue ones are all OK).

The one shown here has been done for somebody who certainly seems to have some financial problems, having scored only a C+; this person is:

1. Paying too much for housing

2. Not diversified enough

3. Has too much of their stock portfolio in company stock

4. Has no life insurance

The problem is, this person is me πŸ˜‰

CNNMoney thinks that a multimillionaire scores a C+ on their finances, but somebody who can’t rub two sticks together scores an A+ as long as they:

– Are diversified,

– Have life insurance,

– Pay too much for their house

[AJC: CNNMoney recommends no more than 38% of your gross income; we would say no more than 25% of net income]

… and, so on.

A common-wisdom tool with a common-wisdom result for a common-wisdom (work for 40 years, retire on minimum wage at 65) outcome. At least you won’t be broke.

BTW: Why did I [almost] fail?

a) We are renting a house ($35k a year) while renovations on our new one are underway, and we have not yet sold our US home, so land taxes ($30k a year) still have to be paid; both temporary costs

b) We fail diversification because it doesn’t ask about real-estate and we have too much in cash at the moment; the way I look at it, we pass on the ’emergency fund’ bit because we have at least 20 years living expenses on hand right now πŸ™‚

c) We failed on company stock because we had a few mill. in bonus shares [AJC: now worth two-tenths-of-f**k-all as they say in Aus] and are waiting for some semblance of a ‘rebound’ before we sell … could be a loooonnnngggg wait

d) Life insurance? see b) πŸ˜›

Try the tool and let me know what you think ….

Folks are dumb where I come from …

I had cause to use this video, but it got me to thinking – at least, if I could fire up those few little grey cells that I got left – about the relationship between money and intelligence …

… it turns out that there ain’t none πŸ˜‰

[AJC: At least I’m smart enough to embed a video, insert a couple of links, write 15 or so words, and …. voila … a day’s posting/work done!]

What is the MOST important Making Money 101 tool of all?

I don’t often talk about Making Money 101 on this blog; perhaps a little too much for some, but certainly not as much as other personal finance writers …

… there’s a good reason: I didn’t MM101 my way to $7 million in 7 years, but without at least SOME of it, I would not have got there.

I’ll tell you which MM101 tool was the most important to me, but first I’d like to hear your opinion, please vote AND leave a comment?!

It's all about the curve …

The secret to making money can actually be most easily explained visually; at least I’m going to have a go at trying to explain it visually in this three-part series:

The Straight Line Curve


A straight line is actually a ‘curve’ mathematically / graphically-speaking …

… but, financially-speaking it describes a situation where you may have a lump sum just sitting in CD’s and earning you 2.5% and you withdraw the interest to spend. This describes a basic Making Money 301 situation where you may have already reached your Number, want to keep it in the bank (safe, right?), and can afford to just live off the interest.

[AJC: This would be OK, if it were not for the effects of inflation; in reality, your Net Worth would be decreasing as inflation erodes the buying power of your lump sum savings]

This ‘curve’ also describes what happens when you earn money primarily from your own labor: you have a ‘lump sum’ (i.e. the total number of hours that you can apply to your job/profession), which provides a ‘fixed return’ (i.e. the hourly rate that you are paid or charge) that you spend / live off: nice, while lasts πŸ™‚

Given that none of my readers are interested in ‘straight-lining’ their way to certain financial ‘death’, in the next two parts of this series, we will examine ways to accelerate your returns …

Blogging history made at last?

Warning: Chances are I am the only person who sees any irony / humor in this story … therefore, I have italicized the only useful bit in this whole post … feel free to scroll down and ignore the rest. For the rest of you poor souls, here goes ….



You’ve probably heard this old proverb about a small action snowballing into a larger effect (“for want of a nail … the war was lost”) … well, a similar effect has occurred in the blogosphere, all because I left a comment on BripBlap’s recent post about ‘spending’; here’s what I said:

Money clearly has one and only one purpose: to be spent.

Money Monk read the comment and said: “I have to blog about your comment, it really makes sense” … eventually writing about it here, saying:

Money clearly has one and only one purpose: to be spent. This was said from blogger AJC. And I could not agree with him more. Even if you save money eventually it will be spent on something later. Once you figure out a way to balance everything, that’s when you are truly Rich

Now, that’s pretty unusual in itself … usually one leaves a comment on a post; only rarely does one leave a post on a comment!

Then something really strange happened: Early Retirement Extreme picked up Money Monk’s post and followed it up with his own post, thus creating the very rare Triple-Nested Post … a post-about-a-post-about-a-comment πŸ™‚

For those of you smart enough to skip over all of the above [AJC: I did warn you!]; the ‘meat’ of this post is this:

Whether you horde money now to spend later, or spend now and risk your ‘later’ is a matter that is overly analyzed, particularly on the web.

Instead, simply:

1. Embrace the Life that you want to live – focusing on what is / will be vitally important to you;
2. Calculate how much money you will need (usually a necessary evil for most, but not all, Life plans);
3. Put in place strategies and tactics to ensure that you have at least that much money available when you need it;
4. Happily spend the rest (or horde it, or give it away, or … whatever turns you on).

… and, by writing this post about my own comment, I have thus finally created the ‘holy grail’ (with apologies to the religious amongst us) of blogging: the previously only dreamed about Quadruple-Nested Post … a post-about-a-post-about-a-post-about-a-comment πŸ˜›

No doubt, bloggers will be talking about this momentous event for many, many years to come …