“It’s better to rent instead of buying a house and then you can invest the difference in the stock market.”

Logic Behind the Advice

Often, this advice comes from someone who has “Run the Numbers” and determined mathematically that you will be ahead if you invest [...]]]> Here is the worst financial advice I have ever heard:

“It’s better to rent instead of buying a house and then you can invest the difference in the stock market.”

Logic Behind the Advice

Often, this advice comes from someone who has “Run the Numbers” and determined mathematically that you will be ahead if you invest the difference between renting and owning in the stock market, instead of investing in real estate.  This advice is even more popular in a dropping real estate market, like we have right now.  On the surface, this argument may sound convincing.  If the historic returns of the stock market exceed the historic return of real estate in your area, then why wouldn’t you be ahead?

Errors & Omissions

Invariably, this bad advice is based on a number of important factors, which have been naively or conveniently omitted.  Factors such as leverage, taxation, inflation, appreciation and local market conditions all play a huge factor in long-term investments and they usually benefit the investment in real assets over financial assets. 

Special Circumstances

It’s easy to point out housing markets like Detroit or Philadelphia and argue that real estate is a bad long-term investment.   The same could be said for the people who recently bought in market bubble areas, such as Florida, California and Nevada.  But, if you look beyond these special circumstances and consider the overall market from a long-term perspective, real estate has consistently outpaced inflation and will likely continue to do so well into the future.  Barring some spectacular catastrophe in the economy or the population, there will definitely be a future demand for prime American property.

Death by Taxes

Everyone’s tax situation is different and the interest deduction from a house will vary greatly, based on your income and deductions.  One thing is fairly certain; your tax benefit from purchasing a property will greatly exceed your renter’s credits.  And, since you pay for housing in post-tax dollars, you will have to earn $1.30-$1.50 of income for every dollar of housing costs.  So, why pay extra taxes to the Government, when you can invest it in your house or some other worthy goal.

Interest & Inflation

Interest and inflation may seem like a small percentage, which doesn’t add up to much.  But, over the course of an adult lifetime, they can compound into a significant factor.  It’s been my experience that rent and housing costs seem to double every 10-15 years. 

Soon after you buy a house, a couple of magical things start to happen.  First, your mortgage payment stays roughly the same, while everybody else’s rent keeps going up.  Second, your interest expense keeps going down, and more of your mortgage payment goes back into the principal.  This assumes that you get a good fixed mortgage and you don’t keep refinancing your house.  As time goes by, inflation and interest start to work in your favor, because your house is gaining value at the same time your loan is shrinking.

Retiring in Style

Nothing in the financial realm terrifies me as much as paying rent or a mortgage from a fixed income, when I retire.  The real goal of buying a house should be to pay it off completely before you reach retirement age.  Then, you can retire in style and spend your housing money for recreation.  You may still have to worry about your property taxes and insurance going up, but that’s nothing compared to the future price of rent.

I can almost guarantee you that anyone who has supposedly “Run the Numbers” hasn’t calculated how big of a nest egg it will take to pay rent fifty years from now after getting taxed on the proceeds from their IRA account or 401K plan.  And if they have, I would be very curious how they calculated the future cost of rent.

I’ll make it easy and “Run the Numbers” for you.  I’m 43 years old and live in California.  My retirement age is 67, which happens in the year 2032.  Estimating that rents will almost double twice in the next 24 years, rent will cost around $6000 per month for a small apartment.  That means rent will cost $72,000 per year after taxes, so it will take $100K in income, just to pay the rent.  And then, the cost will almost quadruple again, during my life expectancy.  If you are younger than me, then it will cost you even more.

The Bottom Line

The bottom line is that bad financial advice is everywhere.  Many people weren’t taught sound financial principles nor do they have the discipline to stick with a financial plan that makes sense.  People working in the mortgage, real estate or financial services industries, may have an incentive to recommend products or investments that benefit themselves and their employers, instead of you. 

Any financial advice that is based on convenience, risk or gratification probably isn’t going to work out too well.  Stick to the proven methods of building wealth and you will be rewarded in the future.

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We all love the convenience of using our credit cards.  You walk up; buy something, swipe your card and you’re on your way.  Credit cards come in very handy for frequent purchases like gasoline and groceries.  They are great for automatically paying recurring bills, like utilities.  And, they are indispensable for dining, travel and entertainment.   [...]]]> The Love of Credit…

We all love the convenience of using our credit cards.  You walk up; buy something, swipe your card and you’re on your way.  Credit cards come in very handy for frequent purchases like gasoline and groceries.  They are great for automatically paying recurring bills, like utilities.  And, they are indispensable for dining, travel and entertainment.   Another popular use, is in covering unexpected expenses, like your car breaking down in the middle of nowhere.

The Mounting Debt

Nobody expects to wind up in debt.  The problem usually starts small, with a broken car, a sick child, a lay-off or a vacation you can’t afford.  Then, Christmas rolls around and the debt starts to swell.  Most people can’t afford to pay their balance off completely, so they make a big monthly payment and try to work the total down.  But, the interest gets tacked on, along with a couple of new purchases, and the balance seems to rise steadily.  Pretty soon, you may be facing debt that seems insurmountable.

…the Root of All Evil

The forces of Evil appear from out of nowhere at the worst possible time.  As soon as you are late on a payment, go over a limit or reach a mysterious debt ratio, the forces of Evil attack.  Soon, you are besieged with cascading fees, your interest rates skyrocket and balance transfer offers quickly disappear.  You have now entered the dark underworld of the subprime borrower.  You will be bled financially and tortured mercilessly.

The Trap is Sprung!

Unknown to you, the forces of Evil have been waiting and hoping for this moment.  Using insidious devices, such as Trigger Lists and Universal Default, they are well aware of your delicate financial situation and are they ready to take full advantage.  The trap is sprung!  You have now become a dreaded wage slave.  You may be trapped for years or even decades, making minimum payments.  Any attempt to escape is futile, since your bankruptcy protection has been recently gutted.  Your politicians will consider you to be irresponsible, while encouraging your consumption to drive the economy.  You have been betrayed.

Free Yourself

Your only hope is knowledge.  Your only salvation is discipline.  Your only way out is to free yourself, using every means at your disposal.  There is hope in many forms, as long as you have the desire to break free.  You must expect that your bank, your creditors and your politicians will all maneuver to benefit themselves.  You must also maneuver to benefit yourself.  Fortunately, you are not alone in this struggle.  There are many who are willing to help, as long as you are willing to help yourself.

I will cover many debt relief strategies in future posts.  This will include snowballing, refinancing, balance transfers and credit counseling.  To cover these topics in detail, it will take a full post per topic.  I will also detail the underhanded tactics of the lending industry, in a future post.  I guarantee that post will be both entertaining and enlightening.

___________________________________________________

Update – 3/2/07

Citibank announced today that they will be discontinuing “universal default” and “any time for any reason” rate increases.  This is a huge benefit for consumers and Citibank should be applauded for abandoning these incredibly unfair practices.

My suspicion is that the Democratic Congress, who has vowed to protect consumers from predatory lending, combined with a dramatic increase in delinquencies and foreclosures, has compelled Citibank to protect themselves from pending legislation.  In any case, I believe Citibank should be applauded for this move and other credit card issuers should follow suit.

If your credit card issuer still has universal default, perhaps you should consider voting with your feet.  Declining profits from lost business is one thing that banks will generally understand.

Disclosure -I have been a Citibank customer since 1990.  I originally selected their card because I travelled on business and their customer service was outstanding.  However, in recent years, I have been extremely disappointed that they seemed to be employing subprime tactics.  I am very happy to see Citibank returning to their roots of providing a credit card that has value and prestige.

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These statistics aren’t only grim, [...]]]> Here are some basic statistics on wealth and poverty:

• 2% of the adults in the world own half of the world’s wealth.
• 10% of Americans own 72% of the wealth in America.
• 28% of Americans are living paycheck to paycheck.
• 10% of Americans age 65 and over live in poverty.
• The personal savings rate for the average American is -1%.

These statistics aren’t only grim, they are incredibly sad. America is by far the wealthiest nation that has ever existed on the face of planet Earth.  And yet, 28% of Americans are living paycheck to paycheck.  Similar statistics could be cited for most of the rest of the developed world.  And, even though many countries have more socialistic policies and taxation, the wealth disparity still exists.

Incredibly, it has always been this way throughout thousands of years of Human history.  A quick reference to the Bible, ancient Chinese writings, the Greek classics or the clay tablets of Babylon will all confirm that this wealth disparity has always existed.  Throughout various times in history and under many different forms of government, the wealth disparity remains a constant.

The reasons why are debated continuously. Certainly, there are socio-economic factors, such as where you are born, how you are educated, how much you will inherit and what resources are made available to you.  There are certainly political factors, such as your country’s form of government, GDP output, trade status and taxation policies.  There are definitely external factors, such as war, famine, health and natural disasters.  There may even be religious factors, such as the caste system or the disparity of economic opportunity for religious majorities and minorities.

Beyond all of the factors listed above, there is another factor that everyone has complete control over.  That is, your own personal beliefs about money and wealth.  Unless you are facing some of the many negative factors listed above, your beliefs may be the single biggest factor in whether or not you accumulate wealth.  Believing that you are capable and deserving of wealth is critical.

It’s generally up to you, whether or not you choose to be wealthy.

I know this is overly simplified.  But, I believe that it’s accurate.  Most of the wealthy in America today weren’t born to privilege.  They were self-made.  They saved diligently, invested wisely or gravitated towards businesses and opportunities that generate wealth.

Self-employed Americans are four times more likely to become millionaires, than those who work for others.

That’s why millions of refugees risk their lives to get into developed countries, simply for an opportunity.  Meanwhile, most Americans (and Europeans, Asians, Canadians, Australians, etc.) cannot grasp their unbelievable fortune at having been born into a wealthy society.

I cannot wrap up this segment without a discussion of the responsibility of the wealthy to the impoverished of the world.  In a capitalistic society, the wealthy aren’t necessarily obligated to the impoverished, beyond the large amount of contributions they donate in the form of taxes.  I believe this is the correct approach.  Wealthy and even not-so-wealthy people from developed countries have proven to be very generous to the impoverished and the misfortunate.

Of course, there is always more that can and should be done.  I believe relief is something that can be done most efficiently by individuals and Non-Governmental Organizations.  Whenever any Government gets involved, money seems to disappear and good intentions are strangled by red tape.

I am planning a series of posts on philanthropy, so stay tuned.

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