Posted on 01/01/2008 5:10:50 AM PST by Kaslin
If nothing else, it would help you spread some of the hidden risks of homeownership (like the risk of your home losing a lot of its value if your neighborhood or entire town going down the toilet) between you and the bank.
Let me see if I understand you correctly. You say I should borrow money at about 6%, invest it at 12%? Or should I simply skip the middle man (the loan shark mortgage broker/banker) and take the money that I would be paying to the bank at 6% and invest it directly at 12%? I think I would rather make 12% on my money rather than pay someone 6% to let me earn 12%. (Please understand that I just used 6% and 12% as an arbitrary number)
You might want to ask some of the more wealthy folks you know how much debt they have. My guess is probably none.
If you have $400,000 tied up in your house then where are you going to get the $400,000 to invest at 12%?
Are you a fan of Ric Edelman? He’s been a long-time proponent of carrying a big mortgage, for the reason’s you’ve stated. I tend to agree, in certain circumstances.
I am going to invest the cash that I would otherwise be paying to a loan shark banker for borrowing the $400K.
My rationale for carrying a mortgage is similar to his, but as a rule of thumb I would always recommend a wide margin of safety for any homeowner in terms of the size of the mortgages they can afford.
Let's say you have $400,000 in cash on hand and you'd like to buy a home that costs $400,000. Which of the following two courses of action would you follow:
1. Pay $400,000 cash for the home.
2. Put down $100,000 and finance the remaining $300,000 over 30 years at a fixed rate (let's assume that you can afford the mortgage payments without any difficulty).
Other mistakes I’ve seen:
—Getting in over your head on a house payment. I’m amazed at how many people decided a few years ago they had to have a bigger, newer house (when they had a perfectly nice one). They bought at the top of the housing bubble. Now they’re upside-down on their mortgages. One idiot I know at work got so in over his head he now works a second job and his wife had to go back to work. But that wasn’t good enough, so the made the next mistake:
—Taking out second mortgages on things like cars, credit card bills, home appliances. Nothing like paying for that stuff over 15-30 years!!! LOL
—Not contibuting the max to your company sponsored 401k.
—Not taking out long term care insurance, especially if your company subsidizes it. This is one thing that will help you protect whatever nest egg you may build up for retirement. Nursing home care runs from $180 to $300 per DAY, and Medicare DOES NOT cover it. By the way, 50% of people requiring long-term care are under the age of 65.
—Most importantly (for women LOL): stop hitting the malls 3-4 times a week. The less you shop, the less you want to shop (REALLY). The more you shop, the more you want.
“My one issue with David Ramsey is his focus on having people pay off their mortgages”
My husband and I paid off a 30 year mortgage in 11 years and our home is conservatively worth $400k. We save 30% of our after-tax incomes and have $1.1 million in the stock market and CD’s. We’re on track to reach $2 million by the time we’re 57 to 60 years old.
There’s tremendous financial peace of mind in having a paid-off home. We’re also able to save a lot now as well as spend on fun things like really nice vactions, etc. We made the sacrifices early in our marriage, now we’re enjoying the benefits.
Now, we are still debt free and are making up for lost time with investments. My job will be abolished by BRAC on Sep 15, 2011. At that time I will be 61 and will have sufficient investments to actually see an increase in take-home income if needed. As long as we keep our investments equal to or ahead of inflation, and we do that now, we will leave the principal to our children instead of a large debt.
Being debt free is one of the greatest feelings I know. When I see the numbers of folks living from payday to payday and know that all they have to do is try a little and sacrifice a lot, it makes me shake my head.
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When most of us make resolutions for the new year, we phrase them as "things to do": "I'm going to lose 10 pounds this year," or "I'm going to join a gym (and actually go)." But I'm taking a slightly different tack with my slate of 2008 resolutions. My list includes common mistakes people make when it comes to money - and when I say "people," I definitely include myself. Let's all resolve not to make these blunders in the new year. And make sure you get through the entire list: I've saved the most important point for last. - Spending without a budget. A surprisingly large number of folks don't really know where their money goes. A simple budget, income on one side and expenses on the other, will give you valuable insight into opportunities to cut spending as well as boost savings. - Keeping a balance on your credit card. Here's one of the more costly personal finance mistakes: Maintain a balance on one or more of your credit cards. Credit card debt is notoriously expensive. According to Bankrate.com, the average standard credit card interest rate is 13.42 percent. If you can afford to pay it off today, do so. If you can't, pay more than the minimum and get that balance down to $0 as soon as possible. - Not having an emergency fund. Remember what our parents taught us? "Save something for a rainy day." As old-fashioned as that sounds, it's a great idea for everyone to have something set aside for emergencies. A good figure is three to six months' worth of normal living expenses stashed in something very liquid and safe like a high-yield savings account. If you own a home, consider establishing a home equity line of credit; you may never need it, but if you do you'll be glad you have it. - Ignoring the necessity of estate planning. Most people know this: If you have children, you really need to have a will. But many people wrongly assume that estate planning is the province of the very rich or the elderly. It's painful to acknowledge your mortality, but it's important to make some decisions about how your assets will be divided when you die. Start thinking about your financial legacy - security for your spouse, education for your children, or donations to charitable causes. Get your wishes in writing with the help of a lawyer; if you are truly wealthy, enlist the professional advice of an estate planner. - Having too little (or too much) insurance. Insurance is a necessity of modern life, a way to hedge against risks: The potential catastrophic financial consequences of a major health issue, damage to your property, or loss of life. Most bankruptcies, for example, are caused by uninsured health problems. Take a little time this year to make sure you've got your insurance bases covered. And make sure you're not overinsured. Some people are so afraid of risk that they buy too much coverage. - Not investing, or not investing enough, for retirement. Thanks to the widespread adoption of tax-advantaged 401(k) plans, more and more people are investing for the biggest financial challenge of all: a financially secure retirement. Still, too many people aren't saving enough. As I noted in an earlier column, one survey found that about 60 percent of people age 45 or older have less than $100,000 in retirement savings. If you run the numbers for what retirement costs and what you're likely to get from Social Security, that's nowhere near enough. If you have the means to do so, contribute the maximum to your 401(k) or IRA. - Putting off tax planning. Every December, it seems that every financial news source publishes an article on "trimming your tax bill." These are usually filled with good advice, but don't wait until December to devise tax strategies. Throughout the year, select appropriate investments for your taxable and tax-advantaged accounts. For example: In tax-advantaged retirement accounts, consider investments that have the potential to generate a lot of taxable income; however, in taxable accounts, shift the focus to long-term capital gains and/or qualified dividend income. Offset realized gains with losses. Consider tax-free investments if you live in a high-tax state. And if your situation is at all complicated, you might do well by getting customized advice from a tax professional. - Not understanding risk. This is critically important: Risk and reward go hand-in-hand. If you're too risk-averse, your portfolio may not grow enough to help you meet long-term goals. Take on too much risk, especially in the short-term, and you might suffer catastrophic losses. Last year, the equity markets were quite volatile, and most market watchers expect more of the same in 2008. But remember that the markets' ups and downs are inevitable. If you're investing for the long-term (a minimum of five years), you should be able to endure the swings. If you're investing for a goal in the next few years, the equity markets are probably not for you. - Not having a plan. A lot of people manage their money by the seat of their pants; however, at the end of the day, successful personal finance requires planning. Craft a budget and use it to make decisions about spending and saving. Articulate your financial goals - calculate amounts and time horizons for college for the kids and retirement - so you can make appropriate investment choices. Plan your financial future to help you devise strategies for getting there. - Letting emotions govern financial decisions. Finally, I can't say this too forcefully: Try to remove emotion from your personal financial decision-making. Emotions are your enemy. They can cause you to buy at a market peak and sell at a market low, which is exactly the opposite of what you should do. If you can't make financial decisions objectively, consider working with an objective adviser who can help you avoid rash moves. I wish everyone the best - financially and personally - in 2008! |
I am not saying I agree with everything he says, or that he is always right. But, if you follow his advice, you will probably do well. The audience he seems to be trying hardest to reach are those people that are financially out of control, where their biggest battle is self control and getting a mindset to avoid debt. He doesn't spend too much time on the mathematics of building wealth beyond the fact that you should be collecting , not paying interest. His teaching has a lot of the tone of a 12 step plan and also much of the rigidity.
I agree that in certain cases a mortgage makes sense, but on the other hand, not having a mortgage or any outstanding debts does give one a tremendous sense of freedom.
I agree with you.
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