wealth

Right Of Passage: Why Don’t We Celebrate More?

February 21, 2011 By Jon Griffith Leave a Comment

My philosophy on money is strongly rooted in the laws of mathematics. I can form metaphors to help describe how I see money moving around in our lives, but the bottom line is this: one builds wealth by spending less than they make. It doesn’t matter if you make $10.00/hour or $200.00/hour. If you spend less than you make, you will grow your nest egg. The focus of your financial wealth is to build a nest egg that can grow itself in the amount of time you anticipate having left on this planet.

The first step one can take towards thwarting this goal is borrowing money. The largest loan that most of us ever experience is the home mortgage. The crisis that our nation has experienced over the past few years wouldn’t exist if we didn’t borrow money.

So why is it that we nurture our youth in the ways of borrowing? Why is it that parents have good intentions but seem to miss the mark more often than not when it comes to saving for our kids’ futures.

There are so many lies that we are told every day by the people around us who believe the lies themselves:

I’ll always have a car payment.
You can’t go to college without a student loan.
It’s impractical to buy a house without a mortgage.
You need a credit card to rent a car.
You need to be worried about your credit score.

Lies.

I am not under the illusion that I can change a culture with one single blog post, but I sure would like to treat homeownership differently in this country. In fact, what if…

…what if owning a home was a right of passage from youth to adult-hood? What if we didn’t encourage our children to enter into contracts with banks, and instead, taught them the power of building wealth with their income by saving, so they were able to purchase their home with cash? What if we were to teach them that it’s okay not to over-extend our wallets just because everyone else is doing it too so that they will have money when it comes time to make that big move? What if we showed them that we don’t have to have it now!

I believe that owning a home free and clear is a goal that everyone can achieve, if they simply reduce their lifestyle and stop behaving badly. A single man out of college who lands his first job earning $30,000 would be better off living way below his means while he builds up enough savings to purchase his first home without borrowing a single penny from the bank, regardless of what his friends are doing. Not realistic? Well, if you believe that, then you believe other lies about money too.

Imagine the celebration that a family could have as they push their son or daughter from the nest into a paid for house! It would be something that would become a blessing, not a curse.

But, unfortunately, people don’t believe they can do it…so they won’t.

Filed Under: Personal Finances Tagged With: borrowing, home, money, wealth

The Debate Continues: One User’s Opinion on Renting vs. Buying

September 23, 2009 By Jon Griffith Leave a Comment

As with anything, there are pros and cons that change with every complicated variable involved. The concept of buying being better than renting is relative to the context of each side of the equation at any given time. No two situations are the same, but generally speaking, assuming certain conditions are already met, owning a home is MUCH BETTER for long term wealth building than renting.

In an article that I wrote back in 2008 on the SonoranHouse.com blog, I illustrated the financial benefits of renting vs. buying. Here’s what one user had to say, along with my thoughts on the response:

WRONG… Renting is FAR better and Cheaper than buying a house.

Not so fast. There are too many variables involved, and each situation is different, but the principle cannot be disputed. Owning is a long term prospect. Not short term. In order to conclude that owning is better, one must assume that the property will be held for as long as possible.

1. The down payment is $20,000 OUT OF YOUR POCKET on day one. SO by purchasing a house you are immediately $20,000 POORER the day you buy your house. In contrast, you can RENT and only pay a SMALL deposit equal to 1 months rent and keep the rest of your $19,000 to use as a safety net to pay the rent with and live an easy STRESS FREE life knowing you have the rent covered for 19 months if it’s a $1K a month rental.

When you pay a deposit to a landlord, it is a fee that can never be recovered. When you put money down on a house, you are instantly investing your hard-earned cash in an appreciating asset. You are not spending the money. Again, if your investment mindset is short term and you sell your home too quickly, you will certainly cut into your initial down-payment unless your property experiences unheard of appreciation in a short time period. Not likely to happen again. Buying real estate is a long term wealth building investment.

A rule of thumb for an emergency fund is 3 to 6 months worth of living expenses. If your rent is $1000.00/month, you have 19 months of rent paid for, but that doesn’t take into account the rest of your expenses. If a down payment on a house depletes your living expenses, they you are not ready to buy. Your down payment should be above and beyond your 3 to 6 months. So, if your expenses are $2000/month, you should sock away about $12,000. The rest can be used towards your future down payment. This all assumes that you are completely out of debt. If you aren’t, then you shouldn’t be buying a house in the first place. Most renters do not have this much money saved up and they live paycheck to paycheck, so they feel they NEED to have some sort of financial buffer to buy them time.

The problem with this is that they never get OUT of the rat race by behaving this way, and they never put their money to work for them. They will live the rest of their lives working for their money. What would be the difference between having 19 months of STRESS FREE living in a home that is appreciating in value versus apartment living with the same amount of a safety net? The difference is that part of your monthly payment is being added to the home’s equity. Some of that payment will be recovered. NONE of the rent will.

2. The Tax Deduction is nonsense… You spend $1.00 in Mortgage Interest to deduct .10 cents off your tax bill. HARDLY a “savings” at all. Your still LOOSING .90 CENTS in interest!! WAKE UP PEOPLE!!

Tax Deductions are a poor excuse for people who are poor to continue to be poor. The argument here is that it makes sense to pay the bank $1.00 in interest to avoid paying the government ten cents. Obviously that is flawed thinking. Spending 90 cents to save 10 is absolutely ridiculous. That is why the largest mortgage anyone should be financing is a 15-Year fixed. Obviously paying cash is the best way to buy a house.

3. When you own a house you pay PROPERTY TAXES each and every year. These taxes are about 1.5% of the value of your home or around $3000 a year. That’s $3K a year your LOOSING if you own a house.

Hmmm…let’s see. Property taxes at $3000/annually, deductible at your tax bracket rate, or $12,000 wasted on rent. Personally, I’d rather put the remaining $9,000 in growth stock mutual funds to offset the perceived loss, because by the time my $9,000 per year is invested over 30 years, it will pay the property taxes a few thousand times over.

4. When you own a house you pay Property INSURANCE on your house each year. This will be about 1% of the value of the home so figure $2000 a year on a $200K house.

I own a $200K home. Taxes and insurance annually do not exceed $3000.00. In fact, they don’t exceed $2000.00. This has everything to do with location and tax rates. Again, I’d rather cough up $2000/year for insurance than blow $12,000/year on rent. So based on points 3 and 4, which add up to $5000.00, I’m still ahead with $7,000 invested annually in growth stock mutual funds. Come to think of it, my down payment of $19,000 as used in this example will be reimbursed fairly quickly.

5. When you own a house you pay for ALL MAINTENANCE/REPAIRS/REMODELS. This means spending about 1.5% of the value of your home EACH YEAR to keep it in livable condition so figure another $3000 a year on maintenance/upkeep.

Nobody forces remodeling, so we’re going to remove that from the equation. Deferred maintenance is a price that everyone has to pay for, whether you own, or you rent. As the king of your castle, you determine what’s used on your property to improve and maintain it and you have a choice over the cost/savings realized from it. By renting, you have no control over these things, and the cost of rent is at the discretion of the landlord, who can easily raise it high enough to force you out to make room for someone else as a result of increased management costs. Owning your own home offers greater long-term housing security.

6. In order to “get your money back” out of your house you will need to SELL your house. This means FINDING SOMEONE ELSE TO BUY IT. You’ll have to pay Closing Cost, Real Estate fees, etc. and it can take a LONG TIME to find a buyer. THEN even if you sell, you will have to live somewhere so you would have to turn around and buy ANOTHER house or do what most smart people do in the first place… RENT.

False. As a long term investment, the asset appreciates and the value of the loan decreases over time. If you paid cash, you have an instant money making machine creating passive income. If you didn’t, you’ll eventually reach a point at which renting your home to someone else will generate positive income above what you owe on the mortgage payment. The tone of point number six seems to emphasize the dependence upon cash in the bank to provide a safety net. Obviously if you’ve been able to save $19,000, you’re making more than you’re spending, so the time that it takes to sell should be irrelevant unless you’re forced to move via relocation or other circumstance beyond your control. It’s true that if you sell too early, you’ll erase your gains because you didn’t have a long term mentality. There is so much more risk to buying a home when you borrow, but if you are able to pay cash for a home, then I’d say you’re living well financially. One’s intelligence is not a factor determined by the decision to rent or buy. One’s wealth, however, is. If you want to get rich and live free like nobody else, then you’ll invest wisely. Renting is not investing.

Owning a house ONLY makes sense IF you could pay CASH for it. Even then, your still going to “Throw money away” on Taxes, Insurance, Maintenance, and the excess bills that come from owning a house when if you RENTED many of those bills are included in the rent.

Paying cash for a home ISN’T THE ONLY time it makes sense to buy a home. It is the BEST practice for sure, but you’re not throwing money away on taxes because your home is appreciating in value, and in theory, you’re renting that home out, collecting $1000.00/month rather than spending it. Can you imagine how nice it would be to be able to put $12,000.00 less a few expenses every year without having to work for it?

The fact that there are additional bills when you own versus renting is also a false assumption. Do the math over a long period of time. Take the appreciation of real estate and the potential passive income from owning a rental and see where it would be in 30 years if invested wisely, long term. Compare it to the real costs of owning. Remember, we’re talking about ownership versus renting. We’re not talking about owning a high cost property that has no potential to generate future income. That would not be a wise investment. Of course, you could just keep on throwing your hard-earned money away. In fact…

…I’ll look forward to renting one of my properties to you because you sound like the perfect tenant.

Filed Under: Personal Finances, Real Estate Basics Tagged With: appreciation, Buying A Home, equity, investment, ownership, Renting, Rich, wealth

There Is No Secret To Getting Rich

August 13, 2009 By Jon Griffith Leave a Comment

Think about it. There are thousands of millionaires. Some of them fell into it; some of them worked hard to earn it. Those who worked hard, probably still have it. The most powerful wealth building tool that you have is your income.

When you fill a bathtub, you plug the drain. If you don’t, all the hard work of pumping that water from the well is wasted as the water simply slips away through the plumbing.

There are two ways to change this situation. Increase your income, or decrease your expenses. You have far more control over a decrease in expenses than you do an increase in income, so don’t hope for a raise to get you on track.

So what does the cash flow of a wealthy person look like? That all depends on how you define wealth. Before you can be “rich” you need to adjust your lifestyle so your expenses are less than your income, and you need a clear, written plan.

This isn’t rocket science. In fact, here’s a little chart that I created that outlines a pretty good plan that will place you on the highway to wealth.

Assumptions

You give to your church.
You give as little as possible to the IRS every paycheck and save your annual taxes in your own interest bearing market rate account.
You have ZERO debt, except for your mortgage.
You have 3 to 6 months total expenses saved up for emergencies.
Your salary is around the national average of $50,000.00
Your mortgage payment is no more than 25% of your take home pay and is a 15-year fixed mortgage.

Based on the assumed $50,000 annual income, your monthly gross income is $4166.66. You make enough to land you in the 25% tax bracket. Your tax bill for the year at $50,000 will be about $8,688 or $724.00/month.

So, after taxes, you’re left with $3442.66 every month. What are you going to do with it?

The key to following this model is applying it to whatever income situation you are in. Whether you make $25,000 or $90,000. Granted, your tax bracket will change the calculations, but the model should remain the same. If you are unable to do this, then you may have an income crisis, or you’re spending WAY too much money on things you don’t need to be spending money on.

This model is obviously a guideline, and can be modified to suit your particular situation. I’d love to hear your thoughts on this and why you may agree or disagree with the structure. Spending in this country is out of control, and there’s a serious lack of financial discipline being exercised in our lives. Writing out a plan for your money, such as this, will help open your eyes to what you really can and cannot afford.

Filed Under: Living Debt Free, Personal Finances Tagged With: budget, Cash, cash flow, mortgage, Rich, spending, wealth

Leveraging Your Money to Get Rich Part I

September 18, 2008 By Jon Griffith Leave a Comment

Can you get rich by borrowing money? Can you avoid risk by getting rich by borrowing money? Is it possible to buy a house without borrowing money?

The answers are Yes, No, Yes. But we have a more fundamental issue at hand aside from all that we hold dear to our hearts in this capitalistic world. The issue is that we’re greedy and we’re impatient. Realize that investing is a long term process. It requires patience and persistence. We’re not talking about wasting away our retirement in two seconds at the craps table. We’re talking about creating long term wealth for you and your family and their children and their children.

Can you get rich by borrowing money?

You bet you can. You can get stinking filthy rich. How? By using a little bit of money to push around a large amount of money.

Let’s say you had $20,000.00 to your name. That’s it, $20,000.00, no more, no less, and you wanted to purchase a home priced at $200,000.00. Do you have $200,000.00? No way, but you were patient and persistent enough about your spending to save 10% of that. Should you be rewarded for this type of behavior? Probably not. It’s just savings. Good for you. So how do you acquire an asset worth 10 times as much as you have in the bank? And, why would you want to do that?

Well, that’s easy. Firstly, you find someone who is willing to cough up the difference of $180,000.00, you pay them a premium for it over time, and voila, you have your $200,000.00 house. By the time you’re done paying for it, assuming you buy now, you will have paid $400,000.00 for your $200,000.00 home. Well, that’s sounds stupid. Why would I do that? Here’s your answer:

When you use a small amount of money to leverage a large amount of money, you have the potential to realize gains calculated on the larger amount rather than the smaller amount. So by the time you’ve paid off your loan in 30 years, it is likely that your home will be worth far more than the $400,000.00 that you paid for it. Let’s say that after 30 years your home is worth $620,000.00. You paid $400K for it, so your $20,000 grew in 30 years to $220,000.00. Not bad.

Stay tuned for the next in this 3 part series…

Filed Under: Real Estate Finances Tagged With: Leveraging, wealth