Jafari RastaMan
Well-Known Member
I almost exclusively hold Waco's opinion more favorably than yours, but your comments on finances and gun regulation has made me reconsider...
Savings&Mortgage or No Savings&No Mortgage
- Thread starter Jafari RastaMan
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I almost exclusively hold Waco's opinion more favorably than yours, but your comments on finances and gun regulation has made me reconsider...
typhoonpilot
Well-Known Member
I partially agree and partially disagree.
I would put down 20% then you don't have to pay PMI. Also you take the loan and have the tax write off versus cashing out all your equities and paying cash for a place.
If one is able to make 8% per annum on average in equities that would be considered very good looking back over the last decade. Stocks have basically been flat for a decade and are only now starting to rise. Whether that continues or we see another couple of decades of Japan like equity markets won't be known for, well another couple of decades.
Just look at the 5 and 10 year average rates of return for most mutual funds to get an idea how difficult it has been to invest over the last decade. There are obviously some people who are going to do better, whether by luck or skill is unknown, but it takes a lot of time. Time that most of us do not have when working a full time job.
I would agree with buying a place for the long term now. It is definitely a good time to buy.
TP
SlumTodd_Millionaire
Most Hated Member
PMI should really just be factored in no differently than interest expenses when trying to determine which method produces the best overall returns. Many people have an emotional aversion to PMI, but it really should just be part of an overall math problem. When doing the math, you also have to figure in that the PMI will end after a certain period of time when you assume that 80% LTV will be reached, using conservative estimates, and not continued for the full 30 year loan.
Looking at the overall market or at mutual funds in general is no way to determine what can actually be achieved. Sure, if you want to put in absolutely no time whatsoever in determining your investments, then that's the only way to do it. But if you're willing to spend 5-10 hours per week on stock research, then assuming greater than an 8% return is pretty much a given, provided that you follow value investing principals and don't chase silly growth ideas that guys like Jim Cramer spout.
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." - Warren Buffett
Investing is really quite simple. Sure, the guy with a full-time job and a 110 IQ isn't going to produce the 22% compounding returns that Buffett has managed for the past 60 years, but he can do a hell of a lot better than 8%. Anyone willing to read "The Intelligent Investor" by Benjamin Graham and "Security Analysis" by Benjamin Graham and David Dodd, and not let their emotions get the best of them when applying the principals learned from them, can make incredible returns in stocks. Where most people get screwed isn't in not having enough time, or not being skilled enough or smart enough; where most people get screwed is being emotional and buying and selling at clearly the wrong times.
I'm certainly not the sharpest tool in the shed, and I've been working not only one full-time job, but at times, two of them thanks to union work. But I've generated a 10% compounding return since I started investing in 2002, and the overall market produced only a 5% compounding return. It didn't happen because I'm so good, it happened because I just copied the methods of Graham, Dodd, and Buffett. Something that any idiot can do, by the way.
For those interested, here are Amazon links to the above books:
The Intelligent Investor
Security Analysis
Be sure to read them in that order. "Security Analysis" was written as a text book for Graham's classes at Columbia, so it's very dry and assumes a certain level of investing knowledge going in. "The Intelligent Investor" was written for a general audience, and after you've got that down, "Security Analysis" is a lot easier to handle.
stormchaser
Well-Known Member
I usually don't say much, but two of my loves are planes and money. NOT necessarily having lots of each, but in how they work, operate, crash, soar, etc.
Two thoughts to consider...
1. If you just paid your last mortgage payment on your house and own it free and clear today, would you mortgage the ENTIRE house again tomorrow in order to invest it in the market?
Read that again, and give it some serious thought, for THERE is your answer.
2. Do you know what being debt-free feels like? I'm not saying to have some, I'm not saying to not. Just ask yourself and EVERY financial person you speak to if he/she knows what it's like to be debt-free before heeding advice about carrying debt. After all, how can one give advice about whether to be debt-free or not if one has not been on both sides? It's like asking a college-aviation-degree student to describe the life of an airline pilot. Lots of truths, sure, but still missing the core substance.
Again, just food for thought.
Two thoughts to consider...
1. If you just paid your last mortgage payment on your house and own it free and clear today, would you mortgage the ENTIRE house again tomorrow in order to invest it in the market?
Read that again, and give it some serious thought, for THERE is your answer.
2. Do you know what being debt-free feels like? I'm not saying to have some, I'm not saying to not. Just ask yourself and EVERY financial person you speak to if he/she knows what it's like to be debt-free before heeding advice about carrying debt. After all, how can one give advice about whether to be debt-free or not if one has not been on both sides? It's like asking a college-aviation-degree student to describe the life of an airline pilot. Lots of truths, sure, but still missing the core substance.
Again, just food for thought.
SlumTodd_Millionaire
Most Hated Member
At 3.35%? Damned straight I would.
The problem with your question is that it's about feelings instead of numbers. Emotions need to be completely divorced from money decisions. All that matters is the math.
stormchaser
Well-Known Member
I fully understand your stance, trust me, as it works out on paper. My fair question is...do you? Not a jab or slant at all...but when you cut down $5000 off your mortgage, do you immediately take out a home equity loan for that amount each year at 6...7...8...percent...so that you can make more money on it (8-12%)? Your argument tells me you do...or should if you don't.
Frankly, from that argument, you should never, ever see your mortgage balance fall, as that would be just downright silly.I didn't realize it had a problem.
The only response I can give is this...I have yet to meet a person asking about money that wasn't a person. You love numbers, as do I. Let's take a $25,000 loan at 5.65% for 15 years...a monthly payment of $206.27. Let's also say you have $25,000 in the bank. Pay it off or invest...that's the real question at hand, right? If we pay it off, we will invest that $206.27 every month for an annual 8% return, fair? Well, I AGREE WITH YOU, the smart numbers thing to do would be to carry the loan, for after 15 years of 8% returns in a 28% tax bracket (don't forget those...all earnings are taxed!), I would make an extra $621.14 versus paying it off upfront. It makes NUMBERS sense. But rare a person I talk to would rather carry a loan for 15 years for a "smart-financial-no-emotions-only-numbers" savings of $41.14 a year. A fair question (foolish in a numbers-guy's-eyes, I know) would be to ask, "Would you be interested in being debt-free for the next 15 years at a cost of $41.14 a year"?To be fair, that was a personal loan situation. Rates have come down, as you said. So with your 3.35% on $25,000, what would that look like? Same scenario...payment is now $176.88. Over 15 years, I would make an extra $6463.64. Much better, I agree. So the fair question would then be, "Would you like to be debt-free for the next 15 years with little stress and no payments at a cost of $430.91 a year"? The verdict is out on what a person would choose...it's a personal decision.
Frankly, I'll concede. I can't argue math. I can't. And for that, we all know which is better on paper. And, frankly, I have no problem (none!) with you carrying a mortgage on a house into infinity in order to invest the money. But I also can't argue a husband or wife (each with ZERO financial merit in math on paper) who get peace of mind (again, understood, worthless in finance) and little stress for 5475 days of having no debt. Sure, the math return is less...
But I'll be forever happy to agree to disagree that the uncalculated return is far more.
jtrain609
Antisocial Monster
Yeah but...
Some folks aren't scared of debt, myself included. Debt is a tool that allows you to structure your finances in such a way so as to take advantage of the time value of money, among other issues. Let me give you an example that I was presented with recently:
You have $150,000 in student loan debt. You have two options where you pay the same amount of money no matter what you do: double payment for the first 4 years, which results in a total payment of $180,000. It would take a huge part of your salary to become "debt free." Or, you could pay the $180,000 over a 20 year period, which results in a fraction of your total salary (I won't bore with you with the technical details of how this works out and using what instruments, but for the sake of argument, go ahead and assume I'm correct with this). Which is the more reasonable option?
Well, what if you pay off the debt in 4 years and then in year 5 become totally and permanently disabled? If you had started saving that same $45,000 per year, you've only got $45,000 in savings (except you probably don't, since you continued to pay off debt and now you have nearly zero dollars). If you had strung things out over 20 years, and were saving (or better, investing) the rest, you'd have $180,000 sitting around. Better yet, if you had invested it, you're looking at around $235,000 if you assume a 10% return (favorable, certainly, but not impossible). That loan would be discharged in the case of total and permanent disablement, and you just hosed yourself if you paid it off too soon without making other investments.
An accountant who I'm friends with once told me, "If you can't handle your money, do the Dave Ramsey approach, you won't get yourself hurt. But if you're smart with your money, you come talk with me and we'll find a way to structure things in such a way that you'll come ahead."
Also, regarding mortgages, how do you defend against the obvious tax benefits of having a home mortgage? The only clear answer I can come up with is that you've got some business deductions that you can take to offset the lack of mortgage. Or it could be that you like paying more money in taxes, which is a-ok with me also. Personally, I want to minimize my tax burden to the maximum extent that is legally permissible, and if there are financial tools available that both meet my needs, and reduce my taxable income, then I'm all over that.
Some folks aren't scared of debt, myself included. Debt is a tool that allows you to structure your finances in such a way so as to take advantage of the time value of money, among other issues. Let me give you an example that I was presented with recently:
You have $150,000 in student loan debt. You have two options where you pay the same amount of money no matter what you do: double payment for the first 4 years, which results in a total payment of $180,000. It would take a huge part of your salary to become "debt free." Or, you could pay the $180,000 over a 20 year period, which results in a fraction of your total salary (I won't bore with you with the technical details of how this works out and using what instruments, but for the sake of argument, go ahead and assume I'm correct with this). Which is the more reasonable option?
Well, what if you pay off the debt in 4 years and then in year 5 become totally and permanently disabled? If you had started saving that same $45,000 per year, you've only got $45,000 in savings (except you probably don't, since you continued to pay off debt and now you have nearly zero dollars). If you had strung things out over 20 years, and were saving (or better, investing) the rest, you'd have $180,000 sitting around. Better yet, if you had invested it, you're looking at around $235,000 if you assume a 10% return (favorable, certainly, but not impossible). That loan would be discharged in the case of total and permanent disablement, and you just hosed yourself if you paid it off too soon without making other investments.
An accountant who I'm friends with once told me, "If you can't handle your money, do the Dave Ramsey approach, you won't get yourself hurt. But if you're smart with your money, you come talk with me and we'll find a way to structure things in such a way that you'll come ahead."
Also, regarding mortgages, how do you defend against the obvious tax benefits of having a home mortgage? The only clear answer I can come up with is that you've got some business deductions that you can take to offset the lack of mortgage. Or it could be that you like paying more money in taxes, which is a-ok with me also. Personally, I want to minimize my tax burden to the maximum extent that is legally permissible, and if there are financial tools available that both meet my needs, and reduce my taxable income, then I'm all over that.
stormchaser
Well-Known Member
My realization has been that "obvious tax benefits" are usually misunderstood.
The most-popular one that home-owners take is…
Deducting mortgage interest each year. It’s fairly simple. I get to reduce my taxable income by the amount of interest I pay to the bank for my home. Easy breezy.
Of course, if I didn’t pay interest (house paid for), then I don’t get to deduct the interest. I lose out on “obvious tax benefits”! I better get a loan! If I don’t, I have to pay more taxes due to a higher-taxable income! Agh!!!
But wait! I didn’t lose $5000 to the bank to begin with! So really, the mortage-holding-home-owner “saves” $1400 off of his lost $5000 for a total loss of $3600. $5000 to the bank, $1400 credited by government...$3600.
Yet the free-and-clear home-owner never lost $5000 to begin with (no interest)…and, yes, does NOT get to use that tax deduction. So he pays taxes on a higher taxable income…$1400 more in taxes than the other guy!
This is how loan officers, banks, fellow mortage carriers etc., sell this argument. I pay less in taxes by having a mortgage! It would be foolish to get rid of this mortgage, as it saves me money! So we keep mortgages for the “obvious tax benefit."
But at the end of the year, view the result:
Mortage-Carrying-Tax-Benefit-Home-Owner—Loses $3600 of hard-earned money
House-Paid-For-Non-Tax-Benefit-Home-Owner—Loses $1400 of hard-earned money
Since when did a "benefit" leave you with less money?!
(A simple example for a much-maligned argument for home ownership tax benefts. This takes into consideration no investing of money, no writing off of business deductions, etc. For simplicity's sake, just addressing the one of the most popular arguments for holding a mortgage.)
jtrain609
Antisocial Monster
First, I'll assume since you didn't respond to the other issues I brought up that you'll concede them.
Second, the mortgage interest deduction is *generally* the deduction that gets you in the door to getting over the standard deduction. There are certainly other ways, but it's probably the most common (though I'll admit, I don't have anything to back that up). Further, if I have to make a choice between sending an amount of money to the government, or an amount of money to a commercial institution that helps to drive our economy, I'll happily send my money to that commercial institution.
And in the end, what other methods do you use to get beyond the standard deduction?
Second, the mortgage interest deduction is *generally* the deduction that gets you in the door to getting over the standard deduction. There are certainly other ways, but it's probably the most common (though I'll admit, I don't have anything to back that up). Further, if I have to make a choice between sending an amount of money to the government, or an amount of money to a commercial institution that helps to drive our economy, I'll happily send my money to that commercial institution.
And in the end, what other methods do you use to get beyond the standard deduction?
SlumTodd_Millionaire
Most Hated Member
I fully understand your stance, trust me, as it works out on paper. My fair question is...do you? Not a jab or slant at all...but when you cut down $5000 off your mortgage, do you immediately take out a home equity loan for that amount each year at 6...7...8...percent...so that you can make more money on it (8-12%)? Your argument tells me you do...or should if you don't.
Frankly, I haven't had the opportunity. The only time I've really had the equity in a home to do it was in the mid-2000s, and home equity loans were going for around 8%. Working full-time as a pilot, and as a commuter to boot, I didn't have the time to research to be able to count on greater than a 10% annual return on investments. That's just not enough of a margin of safety. I'm a Graham-Dodd-Buffett disciple, so I absolutely insist on having a significant margin of safety, especially when debt is involved. With rates at 3.5%, the margin is clearly there. At 8%, it's just not.
After rates came down, I no longer had the equity because home values cratered. I currently have 20% equity in the home I live in, but try to get a home equity loan today for greater than 80% LTV. The qualifying process is about as pleasant as a prostate exam.
Not quite. Remember, these aren't really "earnings." These are unrealized returns. My portfolio turnover annually is typically in the single digits. I buy a stock with the idea of holding it for 10+ years. To quote Buffett (as I frequently do), "my preferred time horizon is forever." I don't pay any tax on a compounding return that hasn't been realized as capital gains. If I purchase a stock today at a split-adjusted price of $5 and it appreciates over the next 10 years to a price of $50, I've had a 900% return, but not a penny of it has been taxable earnings, because I haven't sold the shares.
True. I'm fond of saying that people are generally morons.
It's really no different than walking into the bathroom every January 1st, throwing $41.14 into the toilet, and flushing it. No one would actually do that, but they effectively do the same thing in how they manage their money. And sadly, the feel good about it, because they're allowing their emotions to cloud their judgment.But why? Why would you not argue it? Teach these people!!! We have a big problem in this country with so-called "gurus" like Dave Ramsey going around teaching financial pseudo-math and causing people to flush incredible sums of money down the proverbial toilet. Ramsey should be forcibly castrated just for dreaming up the "debt snowball" nonsense that he's been peddling for years. But the lemmings listen to him, and they they think they're doing the smart thing, because there's no one out there trying to teach them real money management. The best thing we could do for children in this country is to start teaching sound money management as part of a high school education. But that'll never happen. We're too busy teaching to the standardized tests. [/rant]
stormchaser
Well-Known Member
I actually didn't fully follow your loan scenario, and for that, my apologies. I did not want to respond to something I didn't fully understand.
It depends on the year. Like you, I deduct everything legally possible! (And with our government, it's not uncommon to pay only 5-12% in taxes after all is said and done...we have a very, very lenient government in terms of income taxes, but I digress).
For me, my three itemized biggies are the standard deduction, giving, and business deductions.
stormchaser
Well-Known Member
Best words spoken in this conversation yet. I wholeheartedly agree and have even thought about getting out of aviation in order to do so.
jtrain609
Antisocial Monster
How do you take the standard deduction, and also take a deduction for charitable giving?
drunkenbeagle
Gang Member
This is certainly the biggest misunderstanding about money in the US. Why would anyone want to pay $10,000 in interest to save $2,000 in taxes?
For the average person that would not itemize anyway, they may not be saving anything from the mortgage deduction in the first place.
rframe
pǝʇɹǝʌuı
LOL, the "problem" are people who actually save money, pay off debt, and live within their means?
Wow, this is the some of the bat-crap-craziest stuff I've seen from you yet!
Have you actually ever done financial coaching for anybody?
I thought you were a property manager? I'm now seriously questioning that as well, because if you were you'd see how horrendous the average persons debt, lack of savings, and credit rating are.
The "problem" in this country is not with people who actually want to pay off debt and save some money, it's with idiots using credit beyond their means and not fulfilling their obligations, then crying to the rest of society for help.
Jet
Well-Known Member
I wish I had this problem....
jtrain609
Antisocial Monster
A financial COACH? Now I've heard it all.
rframe
pǝʇɹǝʌuı
What's so amazing about that? Everybody can use some help and guidance sometimes.
I've coached dozens of people, I've seen couples go from the end of their wits, literally crying, facing the reality of tens of thousands of dollars in debt, to watching them go through the hard work of forming a plan, building a budget, cutting their expenses, selling crap they dont need, paying off their liabilities, celebrating their victories, and regain control of their life. You can visibly see the stress levels drop after about two months because they start to see that they actually can do it, just like working out physically, it might hurt a little, but in the end they feel amazing, have less stress, and more hope.
Number 1 cause of divorce = financial stress.
Financial stress virtually always comes when people are not on the same page, dont have an agreed upon plan to put their money to work for them, and instead become slaves to debt.
jtrain609
Antisocial Monster
It's just the term. I guess I'm not up on the new age terminology. Financial coach, life coach, career coach, etc. I find the term hokey, is all. And I'm not sure about the financial wherewithal of somebody who needs to pay somebody else to chart them out of financially treacherous waters.