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Rent vs. Buy vs. Buy Bigger

Posted by Kevin on March 17, 2013
Posted in Money  | No Comments yet, please leave one

Found myself questioning the standard statement “You house is your biggest investment” last night.  Got up this morning and created a spreadsheet to see if its really true:


Lets start with a basic definition from http://www.dictionary.com:




1. the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

The key here is that an investment is suppose to MAKE YOU MONEY, not COST YOU MONEY.  The spreadsheet up in Google Docs shows how a house will cost you money… you can play with the parameters and come up with your own conclusions.  Note the spreadsheet does not take into effect things like the Home Mortgage Tax credit those of us who itemize can currently get (and which is under review to be eliminated).  That tax credit simply impacts how much a house cost you, not that it does.

OK – so what does this show:

Tab 1, Rent vs Buy, shows that owning a home is somewhat cheaper than renting a home.  It presumes you have the fortitude to put your down payment into the stock market and let it sit for 30 years.  If you don’t, renting is a lot more expensive, even after taxes, insurance, repairs, etc.  That makes sense.  The people owning the house have to make a profit to stay in business.

Tab 2, Buy vs Buy Bigger, shows just how bad of an “investment” a house is.  Its an Expense, not an investment, and the bigger the house the greater the Expense.  This tab compares a moderate home with one that cost $100,000 more and shows what would happen if you simply put the difference in down payment ($20,000) into the stock market for 30 years.  Net result, your HALF A MILLION dollars better off living in the smaller house for those 30 years due to stock market investment returns, lower taxes, lower repairs, lower insurance, etc.

So why the push to buy mini-mansions?  I’d venture to say that is being driven by the banks wanting to make more money, the government wanting to stimulate consumerism and collect higher taxes, and peoples nature desire to live-for-the-day in as much luxury as they can afford.

Have fun with the spreadsheet and let me know what you think.



The basics of personal finance

Posted by Kevin on March 16, 2013
Posted in Money  | No Comments yet, please leave one

The basics of personal finance are really VERY simple and have been well documented since Babylonian times:  Earn 10 dinars and spend 9 and you will be wealthy.  Spend 10 (or 11) and you will be poor.  Its really that easy – live within your means and you will be fine.

Honestly, that 10% savings rate represented by earning 10 dinars and only spending 9 is also basic, solid, advise.  You WILL need more money than you earn someday, and/or you will want something you can pay cash for instead of borrowing for.

Alas, beyond that, its gets much more complicated.  I can provide a few tidbits:

1)  Ignore “the Jones” – advertisers get paid HUGE dollars to make you think you need things you don’t – be it special shoes or purses to mini-mansions.  Cars are the largest, next to homes, target:  Simply remember this – ALL cars are Expenses, not Investments.  I once had a friend tell me BMW’s were investments because they held their value better.  That friend needs a lesson in personal finance – anything that loses value is NOT an investments – investments are suppose to MAKE money, not lose it.  That said, in my hayday, I owned a BMW Z3 (bought used) – it was a great car when I was single.  Loved that car.  Lots of fun.  But I knew it was an expense.  Actually turned into a reasonably priced way to get around – Oil changes were $69 at the dealer, but only needed to be done every 15,000 miles, which matched the cost of Jiffy Lube for “once every 5000″ mile vehicles.  Brakes however were a killer – about $2000 every 50,000 miles or so.  Tires were not cheap either – also about $2000 a set every 50,000 miles.  And don’t even THINK about driving it in the snow.  But hey, convertables are a blast…  consider one an every-day entertainment expense – great if you can afford it.

2)  ALWAYS pay off your credit cards every month.  NO EXPECTIONS!!!  There is no faster mainstream way to piss away money than giving it to credit card companies.  If you can’t pay it off, you A) are likely living beyond your means and/or B) Are not saving 10% of your income.  Emergencies happen – cars break down, water heaters need replacing.  Emergencies are not “but there is a sale at Macys!”.  Related:  Never pay for a credit card.  Oh… but you get POINTS on SouthWest Airlines if you use their credit card… and you pay what?  $79/year for that privlege?  Suspect you could get a lot more points just flying to Florida or someone cheap once a year – or better yet, forget the points and pocket the cash!

3)  If you are unfailing at #2, never use a debit card.  Find a credit card that pays cash back, NOT POINTS, and enjoy the bonus every year or so.  Visa has free cards that pay 1% cash back, and if you sign up every quarter, 5% cash back on things like gas (typically 2 out of every 4 quarters).  5% cash back on gas is HUGE – your going to buy it anyhow, if the pump says $3, know your paying $2.85…  BP use to have a great card that did just that, but they changed it to some “cash back at the pump” scheme that really pays you less than 1% now.  Only kicker on cash back is that its not instant – get over it.  Most allow you to collect anytime you have $20 or so in credits.  ALWAYS take the cash, don’t use your points to buy overpriced junk merchandise on their website.

4) It use to be considered a fact that a house would be your largest and best investment.  Anyone who has owned a house since, oh, 2006 would beg to differ with you.  Elsewhere on this blog you will have read about our rental home business (Evia and I own 6 “starter home” class single family homes.  I bought them all around 10-15% below then market value.  None are worth what I paid for them today, but their mortages are still based on purchase price).  Recognize that even if you own a home, paid for, without a mortage – you really don’t.  Don’t believe me?  Try not paying your property taxes for 3 years and see if you still own that home… You rent it from the government.  So:

5)  To own or rent?  Owning a moderate home is comforting.  With luck, you can pay it off fairly quickly and not pay the banks 2-3+ times the cost in interest payments.  Go to sites like http://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx and play with the numbers.  A $100,000 loan at 5% for 30 years cost you $193,255.78.  Think of what you could do with that $93,255.78 if you had paid cash, or some serious fraction of that if you had bought less house than you could afford and paid if off quickly.  Rates are low now, but still well above inflation, and inflation is all you should hope your income will raise by – shy of you increasing your worth to your employer or a very unexpected shortage of workers.  Homes are expensive – expect to pay about a 1/3rd of your mortage in taxes and insurance – something with no intrinsic value.  The more expensive the house – the higher the taxes and insurance.  Then there are the water heaters, and AC repairs, and siding repairs – not to mention yard care.   If you rent, you still have that yard care, but not much else to worry about – other than the landlord raising your rent – and market pressures prevent that.  If your fiscally solvent (e.g. you have been saving that 10%), and the landlord wants to charge you to much – you can always go out and buy something.  In the meantime, at least for a year at a stretch, you know what it will cost for the roof over your head.

6)  You biggest expense catagory in life isn’t what you likely think.  Its not your house or car payment, its TAXES!  They tax you when you earn it, they tax you when you save it and earn on that, they tax you when you spend it, they tax you after you spend it (Personal Property tax for cars, real estate taxes for homes), they tax you for your future (Social Security), they tax you for your future medical needs (Medicare) – and thats just the Feds.  Then the state does the same thing, and the local community does it again.  Yes, governments need taxes to pay for essential services, but they waste it horribly as well (Remember Bush saying that Desert Shield was going to cost $50B?  That regional war that never seems to end is approaching $2T now – a meer miscalculation of 40X).  Think about $2T and realize we have about 300M people in the USA.  Cut out half for children and the elderly, and another half for single family wage earners, etc. – so about 75M taxpayers.  That war effort therefore cost each family about $26,666… for each and every family in the USA.  OK, this is sliding into politics, so I won’t rant on that anymore.

7)  Financial bleeding to death:  Inflation.  Nothing is more evil, except perhaps for taxes.  Its incideous and eats away at your savings every minute of every day nostop.  Remember the “Rule of 72″:  When years*inflation rate = 72 your money’s real value is cut in half (This is sometimes called the Rule of 70 or the Rule of 69 – they are all close enough for ballpark math and vary based on how often the compounding happens.  For continuous compounding, like inflation, the Rule of 69 is probably more accurate, but I’ll go with the more commonly used Rule of 72).  So, in the 70s, and again in the 80s, when inflation was around 12%, every 6 years the value of money halved.  See:  http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ for a nice table of historical rates.  Right now (spring of 2013) we are hovering around 2% – but banks are paying less than 1% on CDs and money market accounts (and as little at 0.01% on savings – $1 a year on a $10,000 deposit!).  Beware rates advertised that are higher than that – there is usually a catch, like requiring a $10/month checking account or having a cap on how much you can save and earn that rate.  Bottom line:  Money placed in banks is losing value.  Save that 10% and you more than compensate, but don’t be fooled into thinking your MAKING value – your just losing it slower than if you stuffed your mattress with cash.

8)  The stock market is legalized gambling.  Do your research, and realizing that if you make more than “the market” you just got lucky.  Highly suggesting reading the Vanguard site.  Seriously SERIOUSLY think about no-load mutual funds but don’t invest until you understand why.  Compare 20+ year historys for alternatives.  Realize that every year 90% of the mutual funds out there, and espeically those you pay loads on, do not do as well as the market.  Compound that with the knowleged that who makes up that 90% shifts every year.  Sure XYZ stocks may be hot – but by the time you read about that, its probably too late.  “The Market” itself is what I pretty much think of as the real inflation rate – not the number the government publishes.  So to protect your value, it probably needs to go into the stock market – but only for long term value.  The great recession should be all the proof you need of that.  Don’t plan on getting rich there – just be happy if you get lucky, and hope you counter inflation.  KNOW BEYOND ANY DOUBT that there is no such thing as a “Hot Stock” – your ability to discover it, buy it low, and sell it high, as an individual is about as likely as stricking it rich by investing in lottery tickets.  There are a lot of professionals, with multi-million dollar computer programs crunching numbers, looking for those “Hot Stock”s.  You can’t compete with them and your a fool if you think you can.  So buy the market and hope we don’t have another global depression.

9)  Easy money:  Buy low, sell high.  Its that simple.  Its also incredibly hard to time right.  Something called “income averaging” helps.  Say you want to invest in some mutual fund but don’t know when to do so.  DO NOT drop all your savings in day 1.  If you have something like $10,000 in savings, invest $1000/month.  If the mutual fund value is low, your $1000 will buy more shares.  If the mutual fund value is high, your $1000 will buy less.  Over time, its rather self correcting towards giving you the best value.  Of course, if your lucky, and you invest all $10,000 when its low, your golden.   If you do this with something like silver, which has historically varied ALL OVER the place, like from $5 to $50 an ounce and back again, and you have the fortitude of a 200 year oak tree, set a max price and only income average invest when its below that.  Maybe that is $25 an ounce.  If its $25 an ounce or less you buy $500 worth every other month.  When people go nuts buying silver and it jumps to $35 or $50, you just hold off firm in the belief it will come back down.  If silver falls to $5 ounce, you still have 20% of your value – double what you would have had if you continued to buy all the way up to $50.  Oh, on silver – buy 0.999 rounds or bars.  Period.  Screw 90% silver coins or “investment” grade collectables – they vary from meerly being overpriced to being total ripoffs.  If your buying metal, buy the friggen metal, not some highly marketed “better” (per the marketing company that is profiting) version of the metal.  Also know how to do the math, or at least how to have Google do it for you.  Don’t get confused with grains vs. grams for instance.  And please, PLEASE, don’t buy silver or gold jewelery as investments.  Oh, reminds me of my favorite marketing gimmick:  “Buy your finance an INVESTMENT grade Diamond to tell her you love her.”  What?  She is going to sell it someday?  If she does, was it really a good investment for you?  Diamonds are nice.  Find one you like the looks of and go for it, but realize its jewelry, not an investment.  e.g.  The the flaws require a 10X loop to see, who is going to see it besides your jeweler?  (Oh, other side note discovered long ago:  There is a HUGE (like 10X) markup on diamonds.  What you pay $1000 for would wholesale for perhaps $100.  Sure, if you want to insure it you should for $1000, since that is its replacement value.  But if you need cash, and you think you will get $1000 for that diamond, you are going to have a very unpleasant surprise when you try and sell it.  Some jewelers will even guarentee you your purchase price if you want to trade up later.  Note the “up” part of that – ask them if you can trade down and pocket the cash and see their reaction.)

10)  Risk vs. reward:  This is the classic balance.  Want safe (well, at least reasonably?)  Earn 1% in a money market account (much better than any bank savings or checking accounts so long as you don’t access it more than a few times a month.  I use ours to feed out checking account – deposits going into the money market, and once or twice a month I take out living expenses and move into checking where all the activity occurs – its trivial with todays modern online banking tools.  Short form – the bulk of my cash sits in a higher paying account.  I leave a small amount, like $500, in a bank savings account that my ATM card can access for emergency cash.)  Want a great reward, invest in pork futures – and realize you might lose everything if you can’t back your options.  The options in between are numerous and varied such as the stock market.  Over 50 years, it has exceeded the inflation rate the government publishes (but some claim its growth rate is the real inflation rate since it relflects a large chunk of the countries money supply), but either way has exceeded bank savings rates.  On the flip side, although the DOW is back to where it was 7 years ago, it would have been a tough 7 years if you depended on that money to pay your medical bills, and tapping into it during the lull would have been the opposite of “buy low, sell high”.

11)  What to do – Kevin’s approach:  I’ve coming to believe the only way to truly accumulate weath that taxes and inflation won’t destroy, or to at least have a fighting chance at that (since taxes can always be used by corrupt governments to destroy anyone they want to), is to invest in hard assets – things that won’t go away.  Examples include gold and silver (risky since they could be make illegal, and the prices swing a lot), land (they are not making any more), and solidly constructed homes that should last generations (think 12″ log homes, stone homes, concrete homes, maybe post&beam – NOT stick homes which have about a 50 year lifetime.  Go look at 200+ year homes and see how few are around.  None were built with 2x4s and drywall).  Alas, you will still need to pay taxes, and for that I’m gambling:  I have some in hopefully solid dividend yielding stocks (where I get a check even if the stock price goes down), some TIPS funds, some mutual funds.  I do have one professionally managed IRA (my former employers 401K funds) which did better than the market during the down time, but not so hot since.  Seriously thinking of switching that to a no-load mutual and be done with it.  Last words on investments:  take to heart two classic sayings 1)  Past performance may not reflect future earnings, and 2) Hindsight is 20/20.  It easy to look back and show what should have been done, and even create fancy mathematic models that match that, but its incredibly hard to project that forward with any sense of certainty.

Hope you found some of this rambling useful,