Info on building wealth and debt management

[Bob Smith]

There was an excellent discussion going on in the mutual fund research thread, but I figured I would give the wealth-building side its own thread in order to get more exposure.

To continue on my mission to convince people to get out of debt, let me give you a perfect example of why never to have a car payment.

The average car payment in America is $380. Im sure most people who buy a new car (I would never ever lease) will easily have a payment that is $450+. But in this example I will use the national average.

If you take that $380/mo and invest that into an account that averages 10% return per year (the market has averaged 12% since it began), you will have quite a bit of cash. Or you can think of it this way, but not investing and instead buying the car on payments, it will cost you way more than the sticker price.

Starting with $0 (nothing) and investing $380 per month at 10%, in 20 years your account will be worth $ 288,000. Thats a damn expensive car, if you ask me.

In 30 years, $ 859,000.

In 40 years, $ 2,403,000.

Right now, that $380/month is just slightly ($45/mo) above the maximum IRA contribution for 2005 ($4,000).

Now imagine my scenario in a 401k with an employer match. Still using $380 of your contribution and $380 from your employer (which should certainly be easily attainable based on every employers matching policy that Ive seen.)

20 years at $760/mo: $577,000

30 years: $ 1,718,000

40 years: $ 4,806,000

The same numbers could be accomplished if you maxed your IRA contribution and put $4560/yr (same total contributions as my previous example) into a 401k or other account, at 10%.


Besides the examples I just showed you on why making car payments isnt a good idea, also consider that a car is typically the most expensive item a person will ever buy that goes down in value. Like a rock. The average new car loses ~50% of its resale value within the first 3-4 years. Even if your car is well above average and ONLY loses 30%, that is still not a good investment. Im not saying to never own a nice car, Im just saying to let someone else take the major hit in the first 2-3 years. And pay cash.

[Bob Smith]

Why you should pay off your house early.

Ive heard for a long time that its good to keep a mortgage on your house for the entire length of the loan, or even to refinance and extend it past the original 20-30 years, in order to be able to deduct the interest expense from your taxes. Sounds like a good idea, right? Think again.

To use simple numbers, lets say you pay $10,000 per year in mortgage interest. All of that can be used to lower your taxable income. So you are sending the bank $10,000 per year in order to reduce your taxable income, say from $50,000 to $40,000. Wohoo, you just saved a ton of money! Buy lowering your taxable income by $10k, you saved yourself from sending the government about $3000 (it would actually be lower than that, but Ill use $3k for round numbers). Wait a minute, that doesnt sound like such a good plan....

Give the bank $10,000 in interest.

Refrain from sending the IRS $3k in taxes...

That means you still wasted $7,000 dollars. Hell, send me $10k and Ill pay $3k of your tax bill, its the same thing with what people do by deducting their interest. You'll be out the $10k and Ill have $7k to spend. The math works out the same.

Moral of the story: pay off your house as soon as possible. Not only will that save you a ton of money in interest, it also frees up a boatload of cash in order to invest.

[oldtimer]

Great thread, thanks Bob!

That's exactly what I do when I invest these days. However, for small amounts of money, it's usually difficult because you can't find a good investment that would take only 380$ per month. If it's 10k+, you take a loan even if you had the cash, pay 5% per year in interest (depending on where you are it varies), and get 15%-25% in return, remove the 5% for the bank, and you end up with 10%-20% in your pocket, and you paid nothing.

-OT

[cinnabar8521]

Way ahead of you Bob, and their's nothing better then when the guy at the dealership asks you how your gonna pay for that new truck, and you ask if they'll take a personal check? And there happy too

[cinnabar8521]

Oh and one more thing, if you wanna have lots of money don't have kids, one example, $780 a month in daycare alone...... But worth every penny!

[bigla]

excellent info Bob any more info would be greatly appreciated., so one would save and buy a car with cash, what if i don't have all that money. Please help my lease is up next year....take care ....larry

[Bob Smith]

Originally Posted by oldtimer

Great thread, thanks Bob!

That's exactly what I do when I invest these days. However, for small amounts of money, it's usually difficult because you can't find a good investment that would take only 380$ per month. If it's 10k+, you take a loan even if you had the cash, pay 5% per year in interest (depending on where you are it varies), and get 15%-25% in return, remove the 5% for the bank, and you end up with 10%-20% in your pocket, and you paid nothing.

-OT

The problem with that, OT, is that your return on investment is not guaranteed. There are tons and tons of investments that will take $380/mo, particularly if its a mutual fund or a retirement account. Being that youre not in the US, I dont know if you have options like a 401k. Does the company you work for, a US company, offer a 401k to foreign workers? They will surely allow for $380/mo contributions.

Now, if you are referring to your garage, then $380/mo isnt going to do much as an investment. In your scenario, it does cost something in terms of risk. BTW, how is business going with the garage?

[Bob Smith]

Originally Posted by bigla

excellent info Bob any more info would be greatly appreciated., so one would save and buy a car with cash, what if i don't have all that money. Please help my lease is up next year....take care ....larry

Start saving your money. Then pay cash for whatever car you choose. Depending on what your income is and other debt etc, you can pick up a pretty nice car in the $4-8k range.

[Beefy]

Hey, great thread Bob. I'm very interested in investing, particularly stocks and mutual funds. I admit I don't know enough about either to make smart investments. What's frustruating is that my business is turning over a decent profit and all I am doing so far is letting it pile up in the bank. What are some books you would recommend to learn more about investing?

I read Rich Dad Poor Dad a few years ago and I found it inspiring, but it didn't have enough factual info. I'm also still in college, working toward an associate's degree in management. What college courses would help me in the relm of investing and money sense?

[Bob Smith]

Beefy, whether its personal or business related, you always need a cash emergency fund. Always, as in no exceptions. Ever. Money in the a checking or money market account, that you never touch unless its an emergency, is a type of personal insurance if something unexpected pops up. I recommend no less than 3 months of expenses for personal money management and more than that for business. If, for example, you are in sales and income is unstable and unpredictable, then you certainly need more than 3 months of cash on hand. Six months would be better.

The first book in the Rich Dad series is good and inspirational. It shows that you dont have to be an MBA to become wealthy. On the other hand, I disagree with Kyosaki's ideas of using massive amounts of leverage to run your business. That is a bankruptcy waiting to happen.

For books on investing, I always recommend "The Intelligent Investor" by Benjamin Graham. The Motley Fool has some decent books.

Overall, I think everyone should start with either "Financial Peace Revisited" or "The Total Money Makeover", both by Dave Ramsey. Beefy, pick up one of these two books (or both) on ebay for under $10 and that will get you going in the right direction with your money.

As far as college classes, it greatly depends on what your school offers. Most finance classes (I have a finance degree) are all about leverage (aka debt). Im pretty much against personal and business debt, so I cant say that I would really recommend finance classes for the sake of learning about running a business. On the other hand, finance, econ and accounting classes will give you a much better understanding of how interrelated everything is and what to look out for. Some colleges offer specific classes on real estate investing, stock analysis, and similar.

For learning about mutual fund investing, Im sure there are some good books on it, but I dont know what they are. Mutual fund investing is much easier, IMO, than picking individual stocks, so most of your learning can be done from online articles and sites like Morningstar.

[Beefy]

Thanks alot, bro. I'll see what I can do and get back with you on how it goes in a few months.

[bigla]

thank's for the info Bob, i'm gonna take a look at those book's you mentioned...take care....larry

[Kayz]

Originally Posted by Bob Smith

Beefy, whether its personal or business related, you always need a cash emergency fund. Always, as in no exceptions. Ever. Money in the a checking or money market account, that you never touch unless its an emergency, is a type of personal insurance if something unexpected pops up. .

Along with my IRA, I also have an emergency cash fund set up at my credit union. I have $35 a week taking out of my check that goes into this fund...and I NEVER touch it. I just keep letting it build. It's for if my tranny goes out in my car or the roof of my house springs a leak or my furnace goes out.....shit like that.

However, if in a few years I have not used it (and it will be over $10K), I'd consider taking some of it and using it towards a new car purchase.

I agree Bob that car payments and mortgage payments suck, but they are necessary to many of us. I don't have $100K to buy a new house in cash, so I have to finance. But that is still better than renting because you are building up equity. Also, a house, depending on the condition and area, can appreciate in value so that you make money upon sale.

Good advice Bob.

[Kayz]

Also.....if you are not responsible to have credit cards and pay them off EVERY MONTH (IE: NO FUCKING INTEREST/FINANCE CHARGES)....then get rid of them.

I have never once paid a single dime in interest in credit cards....I always pay them off. But they are nice to have because they enable you to establish credit and build up a credit record.

[RobbieH02879]

Originally Posted by Bob Smith

Start saving your money. Then pay cash for whatever car you choose. Depending on what your income is and other debt etc, you can pick up a pretty nice car in the $4-8k range.

I have managed a few franchised car dealerships, and I'm also an Investor. I have been educating myself on investments and wealth since I was 12 years old, and Bob is 110% correct!

My advice is to start reading some investment books, Peter Lynch is a good bet for trading. I have read so many books over the past 11 years it isn't funny, and I have gotten something out of just about every one of them. It is never too late or too early to start investing or learning how to build wealth. At 22, I had close to $80K in investments(I was making great money in the car business). I was forced to cash in all of it to afford my medical care and expenses after my accident last Jan, so I am starting from scratch again...but I built that portfolio with a lot of work and proper investing, even while having an avid social life. It is possible to build wealth, never think otherwise. I have helped my parents build a solid retirement plan, and they didn't start until they were in there 40's! Never think that it's too late for you.