Help a reader pay off their credit card debt …

What should this reader do?

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Help a reader out by reading this, then answering the poll:

When I first spoke to you, I had just paid of my cc debts and was working 2 jobs and saving a little money.  4 years later, and I have since moved from NYC to Miami, got married, just had a baby, and right now I am in the process of buying our first home. (Not an investment, but our primary residence.)

With all of the life changes that have happened, my savings is gone (we had to pay for the move, marriage, and honeymoon ourselves) and over the past 2 years I have watched as my credit card debt has risen to over 13K. I  have a very well-paying job, making 130K in Miami as a computer programmer, but right now I am the only source of income, as my wife is not working.

Anyway that is a quick catch-up with my life to date. And I have question for you.

Once I close on my house, my next move is to get rid of cc debt. Here are the 3 choices I see available to me. (Perhaps there are other ways, I am just not aware)

A. Pay it down heavily and hope to pay it off over 2 years.
B. Move it over to a 0% card for 15/18 months.
C. Take a loan out against my 401K to pay it off credit card immediately

Chris also wanted me to know that the “loan against my 401k is special in that the 4% interest I pay back is added back into my 401K account. So every penny I pay goes back to my pocket. There is no hit to my credit, since I am borrowing against my own funds, and it allows me to pay back less aggressively.”

What would you do? Please help me help Chris by choosing one option from the poll …

Note: if you chose ‘other’ please leave a comment; if you didn’t choose ‘other’, please still leave a comment 😉

Real-estate: can you tell the difference?

I know when it’s time to give up the game: when you start dreaming about it.

Last night I dreamed that I was telling a group of people the difference between commercial and residential real-estate … the one – key – difference.

Don’t worry, because I’m going to continue blogging about personal finance, but I guess I should at least bring my dream into the the real world by writing about these two classes of real-estate here:

So, what is the difference between the two? That one, key difference?

Is it price? Is it purpose (you can live in one, work in the other)? Something else?

I think it’s all of those things, and more, but I think one reason stands out:

This is residential real-estate, these two houses [pictured above] are the same in every respect:

They look the same; they cost about the same; they will provide a similar standard of living … and, they will produce roughly the same investment return over time.

This is commercial real-estate, these two properties [pictured above] are the same in one very important respect, yet:

They don’t look the same; they didn’t even cost the same; they are totally different types of properties (one is an office, the other a small showroom and warehouse) …

… but, here’s the one thing that makes them identical, at least to an investor:

They will produce roughly the same investment return over time.

You see, residential real-estate is bought/sold/valued on the basis of its utility as a home, not an investment. So, while you can choose to live in it or rent it out as an investment … ultimately, it’s all about its desirability as a future home, street, neighborhood.

Residential real-estate is roughly valued by comparison to others like it, and is ultimately favored by investors for its future value …

… even though residential real-estate is considered a ‘safe, easy’ investment, it’s a sham ; a false promise based on comfort: we all know and understand (to a greater/lesser extent) the value of residential real-estate, because we live in it. Or, if not in ‘it’ in something very much like it, probably even in a neighborhood very much like it.

But, this is false and residential real-estate is actually the most dangerous form of real-estate investment because is is largely speculation; most of the return from residential real-estate is based on capital appreciation.

[AJC: there are exceptions, of course: defence housing, rural areas, and so on … generally, though, you are trading future appreciation for lower rents now. Cashflow positive real-estate does exist, it’s just than most people don’t know how and where to find it]

Commercial real-estate has the reputation of being difficult. Of course, it’s not: you purchase a property, you find a property manager, you rent it out, you collect the rents … nothing could be easier.

And, you are rewarded in the short-term: commercial real-estate is mostly about the income that you can derive from the property. It’s current and future value are simply a multiple of that return [the capitalization rate].

The returns are usually higher, per dollar invested, than residential real-estate (although, the banks will lend less against it); capital appreciation more certain; and, it’s easier to manage (tenants generally don’t trash the place; they pay most of the outgoings; they shoulder the lion’s share of the maintenance burden on the property).

Since most people are too scared to invest in commercial (so, they fight each other – in most ‘normal’ markets – to invest in residential real-estate) overall returns, in my experience, are generally much better.

What do you think they key difference is?

How to see the future …

A Get Rich Slowly reader shared his financial advisor’s advice when asked whether he should go with mutual funds or index funds:

“ 2008, as banks stocks were dropping rapidly, if they were a part of an index like the S & P 500, they were still held by the fund,  while a  manager of a fund could lower the funds exposure to this sector, thus attempting to limit the downside risk to the portfolio.”

This, of course, is a classic case of trying to time the market … and, we know what happens when anybody (except for Warren Buffett and a select few others who aren’t giving you their advice) try and time the market …

… for example, the famous Dalbar Study shows that people who attempt this reduce their returns from 11.9% to only 3.9%.

In their latest report, Dalbar says:

The unprecedented ups and downs of 2011 drove up the aversion to risk and investors succumbed to their fears. They decided to take their losses instead of risking further declines. Unfortunately, as is so often the case, this occurred just before the markets started on a steady trek to recovery.

So, the idea of ‘taking bank stocks’ out of your portfolio just as they are crashing is very enticing, but simply means that you also need to work out how to put them back in when they are climbing …

… and, if you really could pick when stocks are climbing or falling, you’d be off living the high-life in Monaco.

You certainly wouldn’t be selling your advice to us ordinary folk, now, would you? 😉

A financial playbook for professional athletes …

A couple of weeks ago I wrote about the dismal financial track record of professional athletes:

78% of NFL players and 60% of NBA players are bankrupt within two years of leaving the game.

Before you jump to the stereotypical conclusion that sports people have had one too many hits to the head, realize that the IQ of professional athletes is no better or worse than yours or mine:

The l.Q. of superior athletes ranges on average from 96 to 107

That’s why I think the reason is simple and generic: anybody who gets money quickly loses it almost as quickly.

To prove my point, look at the financial longevity of lottery winners, who should represent a fair cross-section of society [AJC: setting aside that you must have a low IQ to want to enter the lottery]:

More than 1,900 winners of a Florida lottery who won between $50,000 and $150,000 went bankrupt within five years.

So, if making money too quickly is a sure indicator of later financial disaster, what do you do? Refuse the money?

Not likely!

But, the one advantage that pro-athletes have over the rest of the pupulation is their ability to follow a playbook …

… so, here is the $7 million 7 years playbook for dealing with Found Money (i.e. any large amount of money that suddenly falls into your lap):

If you’re lucky enough to receive such a windfall (e.g. win the lottery; land a professional sports contract; star in a major motion picture; get acquired by Google; etc.), you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work rather than luck).

But, the amount you spend should be a reflection of how much Found Money you have, up to a maximum of 50% of the amount that landed in your lap. For example:

– If you find $20 on the street, buy yourself a latte and a magazine and then put the other $10 in your end-of-month savings ‘cookie jar’

– If you sell your business for $2 Million don’t spend $1 million

– If you get a $200 a week pay increase:

… do spend $100 immediately (enjoy!)

… don’t spend $100 extra a week (unless you HAVE to)

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you suddenly come across:

[HINT: For the money that you do want to spend, still apply The Power Of 10-1-1-1-1, but reward yourself with a little from each box e.g. spend $10 today; $100 tomorrow; and, so on (in total) up to your spending limit from the table above.]

If you find yourself toward the high end of this table (e.g spending $1,000 or more), spend it on something – or, some things – that you will remember for a long time.

Oh, and if you’re not a professional athlete … well, you can still follow a playbook as simple as this one, can’t you?