Roth IRA... a good time?

[Rolo]

imported post

Ouch (on the tech burst there).

Yes, if there is only one book you read on finances, make it Ric's. Hisare good books to read first. I still keep The Truth About Money handy for reference. They also make for an extra high school graduation gift since schools'teaching of finances goes only as far as balancing a checkbook. (Checkbooks? Do they still make those? heh)

I have my next home's down payment money in VLCCF, hehe, a stock thatI heard about from a fellow PT owner on PTCrew.

 

[tsptalk]

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They also make for an extra high school graduation gift since schools' teaching of finances goes only as far as balancing a checkbook.

Excellent idea.

 

[Pete1]

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I read Ric's "Ordinary People, Extraordinary Wealth" about 2 months ago and decided to refinance my 15 year and go with a 30 year. I'm investing the difference of $360 per monthinto Dodge and Cox Balanced viaRoth IRAs for my wife and I. I'm dollar cost averaging viathe automatic monthly investment program. Ric's books areawonderful read. Hopefully, this strategy will pay off. I am being really conservative with D&C Balanced. D&C has a nice international value fund that I may use as well.

 

[Pete1]

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Another tip from Ric - invest allnew contributions into the stock funds of your 401K. Not sure if this idea works for timers but it is a very good buy and hold strategy.

 

[Rolo]

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I really could not keep up with that pasted argument, because I believe the premise to be wrong, which makes it difficult to remain attentive to the dry, convoluted reading.

Instead, I kept it simple with an Excel spreadsheet with which you can plug in your own numbers. Feel free to check my work, but I think I got it. (I almost forgot to add investment contributions in full after the 15-year mortgage ends.)

Four scenarios: 30-year vs. 15-year, and to make a huge down payment or not?

My thinking is that if you are going to "pre-pay" then get as close tobuying it outright as possible by financing it for 15 years and making as large of a down payment as possible. Why do I say this? There are fundamentally two approaches: "Borrowing money is good." and "Borrowing money is evil." I do not go for mamby-pamby, 50/50, ride-the-fence decision-making-based-on-undeciciveness. Make a plan, check the plan, and execute the plan 100%. "In or out"

Simple premise: You have $100K. You wish to buy a house that costs $100K. The "good" proponent will keep the cash and finance the house. The "evil" proponent will pay cash and start investing all over again. The spreadsheet lets you use your own figures to to see which plan works best for you.

It does not take into consideration the tax advantages from interest payments. First, it was not necessary in order to see which is the superior approach. Second, I do not know how to do that and it would take me a long time to figure out how. I would like to have tax savings in there and to have those tax savingsfund theinvestment. If anyone has any advice or wants to edit it, please do so. Third and last, I wanted to keep the spreadsheet (and argument) simple--you can just bear in mindthat financing will let you keep a few extra dollars in your pocket.

In my "out-of-the-box" example I used nice, round numbers. [1] is what the house costs. [2] and [3] are mortgage rates; 15-year rates are normally lower. Do not enter your down payment as a dollar amount anywhere, but rather as a percentage [4]. Scenarios 3 and 4 take your Investment Balance [6] and adds it to your down payment amount calculated from that percentage. Do not edit the loan term unless you edit the Future Value formulas.

[5] is how much you are paying into your mortgage and investments. Imade it the same amount as the 15-year mortgage payment for a direct comparison. Do not edit the Investment or Mortgage Payments, they are calculated automatically.

I chose 14.4% for [7] since it is a nice round figure for doubling your money every five years as you can see by Scenario 2. (And you thought "14.4" was not a round figure, tee-hee.) Incidentally, it is an average of large and small company stock returns quoted in (Note 3) above.

You'll notice in my example that sticking with a regular 30-year mortgage, keeping your cash invested, and investing the difference of a 15-year mortgage payment yields the best results. This is true as long as you abide by the tip in [7] below. The main reason is that you have your investment balance's momentum continuing to grow uninterrupted.

You can also see that making a large down payment (paying cash) is evil. Aside from losing money, another ramification is that you no longer have your investments nor the options that go along with having cash on hand.




[line]




Edit: The table did not paste like I hoped it would.


[1]
Total cost of item to be financed, I.e. house


[2]
Loan rate for Scenarios 1 and 3


[3]
Loan rate for Scenarios 2 and 4


[4]
Down payment as a percentage of total cost; 0 for none


[5]
Combined total to be disbursed towards loan and investments


[6]
Current worth of portfolio


[7]
Annualised rate of return of portfolio
Tip: It better be more than loan rate!

 

[azanon]

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thinks, you made that paying off mortgage vs investing money way too complicated, than it needed to be. Its really quite simple:

If one pays off any amount of any loan, you effectively "earned" exactly the rate of the loan by doing so - at least up to the point that you would pay it off normally. For example, my loan on my house which i bought a year ago is 5.96%. If i make an extra principle payment, then from that point on, that exact amount of "extra money" will hypothetically earn 5.96% up until such time as i would have normally paidthe loanoff. Does that make sense?........ And that's not taking into account the deduction i would have gotten had i not paid it off early, so the real earning rate is effectively something less than 5.96%.

In contrast, if i invest that money instead of making a house principle payment, then I earn whatever my investment would make.

So can i beat 5.96% investing my money elsewhere? I should hope so!

Seriously, no excel is needed. A loan is a loan, except in a house's case, the interest is deductible, so less the reason to pay it. Its the same as your credit card, your student loan, anything.

So.....The questionis the always the same, and is simple when facing paying a loan vs investing: Is the rate on the loan higher than what you can earn in an investment. Answer that, and you know exactly what to do.

 

[azanon]

imported post

Rolo, great writeup - I really enjoyed it, and agreed with 99% of it too.What's the 1% I disagree with?? . I'm not sure i agree with you or the writer you're paraphrasing, that your house is an expense, and not an asset.

IMHO, not only is your house an asset, but its an appreciable asset. If you've ever run across a rent vs buy chart, you'll see that the longer you intend to say in one place, they recommend buying because it is assumed your house will appreciate over time (if you bought in a good location, and real estate, as an investment, is on the rise). What that means is your investment really is paying off. People every day turn around and sell the house they bought 5 years ago for 20K more than they paid for it. Sure, most people dont buy their first house for the sole reason of investing, but that doesnt make it not an investment. If your house appreciates in value, then it is an "asset" that can be liquiddated, or borrowed against (via an home equity loan), at any time that the owner so chooses.

 

[Rolo]

imported post

azanon wrote:

thinks, you made that paying off mortgage vs investing money way too complicated, than it needed to be.

Good G-d man, I wish I had a nickel for every time I've heard that.



azanon wrote:

If one pays off any amount of any loan, you effectively "earned" exactly the rate of the loan by doing so ... In contrast, if i invest that money instead of making a house principle payment, then I earn whatever my investment would make.

So can i beat 5.96% investing my money elsewhere? I should hope so!

Precisely! The part I substituted with the ellipsis did make sense; did I redeem myself by simplifying your simplified argument?

With many people with normal emotional capacity, it is not so simple. Sometimes you have to practically be Moses coming down from the mountain in order to get over the emotional hurdle--and sometimes you will wind up smashing the tablets in frustration anyway, hehe. You can spot them right away when you ask, "Why do you want to pay off your mortgage early?" and they revert to the child-who-got-caught-doing-something-wrong behaviour, replying,"I dunooooo...."

But, yes, you hit the logic right on the head. That is how I think when I use margin, "Can I beat 5.45%?" I hope so, I am fully margined. :shock: (hehehee...even started out with it, never done it before...against what "they say" to do...I look at it as a pretty strong incentive to not f--mess up!)





azanon wrote:

Rolo, great writeup - I really enjoyed it, and agreed with 99% of it too.

Thanks. I get a lot out of reading here and hope to "put back".



azanon wrote:

What's the 1% I disagree with?? . I'm not sure i agree with you or the writer you're paraphrasing, that your house is an expense, and not an asset.

How dare you!:X hehehe, kidding.

Robert Kiyosaki's Rich Dad/Poor Dad books, which are excellent and great for challenging perspectives.

Basically, it's all about the cash flow.

[align=center]Anything that puts money into your pocket is an asset.
Anything that takes money out of your pocket is a liability.[/align]
Place items in the proper column. Period.

Which does your house do? It costs you: mortgage, taxes, insurance, upkeep/maintenance. Does it earn money for you? No.

Yes, your house is an equity, but the fact that it has a somewhat arbitrary, market-controlledvalue attached to is is not relevant here. "It will likely go up in value" is completely meaningless when it comes to cash flow, only in/out, asset/liability matters.

Make it analogous to another equity: stocks. They have value, and will likely go up in value, and you can borrow money to acquire them. Would you consider them an asset or a liability? It depends.

Stock 1: No margin, No dividend. Inconsequential, like that Babe Ruth baseball card in mint condition you wish you had. It neither costs nor earns money, even if it has appreciated in value. It is an equity and it goes into the "Net Worth" footnote of a financial statement.

Stock 2: 6% Margin, No dividend. It costs you money, you pay interest every month on it, it is a liability. This is like your house.

Stock 3: No Margin, 10% dividend. It is an asset, for it earns you money.

Stock 4: 6% Margin, 10% dividend. It is still an asset, earning 4%.
​

Granted, we don't generally put every individualstock in our portfolio on a financial statement, but it illustrates the direction of money flow.

Let's say you boughtone shareof Stock 2at $84K on6% margin interest rate. Is it an asset or liability? (you are thinking, "It depends on what I made when I sold it." nuh uh, it is a liability regardless, itis costing you $420/monthto find out if it will go up in value.

Instead of a stock, let's say it was a house on Berkshire Hathaway Avenue. Same question, same answer. Liability. You cannot include "what-may-happen"s here, no chickens before hatching.

Let's say your selling price for the Berkshire Hathaway equity was $69K. You alreadypaid $5K interest, so that is moot in regards to selling the equity.

Let's say you sold it for $84K. Did you "break even?" Yes, you did, you sold it for the same price in which you paid for it. "What about the interest?" No, your argument is based on the equity's value, so there you go, you broke even. It was not a liability as you say.

Let's say you sold it for $95K. It was still a liability when you owned it. Your profit is only realised when you sell it. When you sold it, you no longer had the montly interest liability. Separately, you made $11K profit off of the transaction due to appreciation. Ultimately, when youcompare the two, you are $6K ahead, for a net gain of over 7%, but that is only after a particular sequence of events had occured.

Assets provide income, liabilities take it away. Your house is not putting money into your pocket, it is a liability. When you sell the house, you no longer have that liability. If it appreciated in value, then you recovered your costs, but they were still costs.

If I still have not won you over, then try the "appreciation/it's an asset" argument the next time you have a margin call. "You have $x due immediately for a fed maintenance call." In lieu of writing a check, just send them a note, "But it'll appreciate in value!" to learn what goes in what column.

 

[Rolo]

imported post

azanon wrote:

then it is an "asset" that can be liquiddated, or borrowed against (via an home equity loan), at any time that the owner so chooses.

That is crap! (not against you, but against the institutions that propigate that propaganda)

They say you are "borrowing against" your "equity", but all that is is collateral, and it is not "any time". Try getting a home equity loan without any source of income. Many have learned the hard way that you cannot, for you are actually "borrowing against" your income, your house is only insurance for the loan.

How is borrowing more money "against" something that you already borrowed money to have putting money in your pocket? That is like calling your credit card an asset, especially when they raise your limit. It is also a similar trap for John Q. I-maxed-my-card-but-glad-they-raised-my-limit-in-time, thank heavens for this MasterCard asset!

It sounds absurd, but that is what happens when we misapply terms. Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.


[align=center]The mantra[/align]

[align=center]Income = asset
Expense = liability[/align]

[align=center]Repeat until you agree. hehe. :dude:[/align]

[align=left][/align]

 

[tsptalk]

imported post

Can you guys slow down? I'm trying to take notes.

Great stuff! Am I allowed to call you guys assets to the site?

 

[azanon]

imported post

Well let me make a few follow-up comments rolo

Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.

As a preface, i think this is to a large extent, this is a semantics issue. How so? Lets do it this way..... Tell me the lamens term formula for net worth. Its assets minus liabilities, is it not? What if you owned a house? Are you going to put your owned house in the liability column? I should hope not!

Ok that out of the way, I believe you said "expense" in the original statement i objected to - not exactly the same thing as the terms you are using now, equity and liability. I would definitely not object to characterizing a house as an "equity", but liability? I still hesitate to say that and i'll try to explain why:

For starters, what are the alternatives? I'd feel self-conscious to toss around the word "expense" and "liability" when referring to a house, because someone might get the mistaken impression that renting is a better long-term solution. Ya know - you've got to live somewhere.

My second objection is based on this: Do you know what the average person's #1 asset is when they retire (ok, you prefer equity )? Yep, you guessed it. Their house. Really, unless you bought in a poor location, or didnt take care of it, it really isnt that difficult to liquidate into cash. I've never heard of a "liability" that can be liquidated for massive amounts of money and you not owe anyone for it after you did so (assuming you owned the house). To that point, and i know you will throw it out, I wouldnt even call a car a liability. Its also an asset (equity); granted a depreciating one in almost all cases, but if it has value, its an asset(equity).

Well, anyway, i see your point. A owned house doesnt generate cash flow, but as you said, neither does a stock that doesnt pay dividends. Regardless, home ownership is one of the wisest things one can do with one's money. If you must, its the "liability" that trumps just about every asset you can think of.

Re: the home equity loan. I've never done one of those, but my understanding is that what you're doing, in effect, is selling the house back and in the process, being paid for it. So why would it matter if you have income or not? For whatever amount of money you're gettingmonthly or all at once, you gave equivalently just as much house equity back to the lender - the lender then gave you the cash at the same time. Even trade and no risk to the lender

Azanon

Great stuff! Am I allowed to call you guys assets to the site?

Thanks man!

 

[Rolo]

imported post

tsptalk wrote:

Great stuff! Am I allowed to call you guys assets to the site?

hehe...As long as you don't trail off on the "-ets" part. :dude:



azanon wrote:

Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.

As a preface, i think this is to a large extent, this is a semantics issue.

Yes and no. When we lose precision in the terminology, we lose perspective on the roles the things the terminology represents.Truths become half-truths, and eventually, we are 180° from where we need to be. Religion is a good example: how many diametrically opposed "semantics" come from the same Book?

{heh, grenade!}

azanon wrote:

Tell me the lamens term formula for net worth. Its assets minus liabilities, is it not? What if you owned a house? Are you going to put your owned house in the liability column? I should hope not!

I did not emphasize this enough but merely hinted at it by calling Net worth a footnote on a financial statement. Net worth is an entirely different subject and largely trivial. Net worth does not say anything about income, it only says "If I were to sell everything right now at these values, I would have this much cash." That is a lot of if's.

This very topic came to mind today when I was talking to a guy this morning who is filing for bankruptcy. There were a lot of circumstances that caused his situation, but the number one mistake was calling his investment properties assets. What gave that away? When I asked how the heck did he wind up in that situation, the first words out of his mouth were, "Well, everything looked good on paper..."

His plan was sound and all, but the reality is that onlyhalf of his properties were true assets since they generated income and the other half were liabilities. Yes, their fair market value was double of what he paid for them, but that is not relevant and he did not get FMV when he sold them for a lesser profit.

Net worth is completely hypothetical; it has no place in the income/expense financial statement.

azanon wrote:

Ok that out of the way, I believe you said "expense" in the original statement i objected to - not exactly the same thing as the terms you are using now, equity and liability. I would definitely not object to characterizing a house as an "equity", but liability? I still hesitate to say that and i'll try to explain why:

For starters, what are the alternatives? I'd feel self-conscious to toss around the word "expense" and "liability" when referring to a house, because someone might get the mistaken impression that renting is a better long-term solution. Ya know - you've got to live somewhere.

But you are carelessly tossing around the word asset and people get the impression that their primary residence generates income. booyah! hehe

Renting v. buying is an entirely different subject. In some cases, renting would be better. But, that is not even tangentally related here and it is that asset word that makes people think it is.





azanon wrote:

My second objection is based on this: Do you know what the average person's #1 asset is when they retire (ok, you prefer equity )? Yep, you guessed it. Their house.

Oh, I was gonna say "personality", hehe.

You are half-right, for that is a half-truth. Their house is the average person's #1 money-hole. Why? What income did that house provide? None. It is an equity that has value, but it still costs. The value is not related to the money flow.

Here is an example of a primary residence being an asset: Buy a multi-family building, say a duplex. Live in one side, rent the other. If the rent income pays for the entire mortgage plus taxes, insurance, and maintenance with a little left over, then you have an asset--positive cash flow. Lose the tenant, and it becomes a liability. I will concede to saying that breaking even still makes it an asset, since it is not costing you anything and it is providing a residence for free.

isnt that difficult to liquidate into cash. I've never heard of a "liability" that can be liquidated for massive amounts of money and you not owe anyone for it after you did so (assuming you owned the house).[/quote]

Or if interest rates rose and the real estate bubble pops, one's "asset" could severely depreciate. Did the condition of the "asset" change? No, but the market did, and the market is what sets the value, hence my calling it somewhat arbitrary. The market also affects liquidity. In this case, when the valueis falling, would you then consider the house a liability?

azanon wrote:

To that point, and i know you will throw it out, I wouldnt even call a car a liability. Its also an asset (equity); granted a depreciating one in almost all cases, but if it has value, its an asset(equity).

Yes, cars are also money-holes and illustrates my point as well. Most people do not consider a car an "investment" and rightfully so. Some cars do appreciate in value, but they are still liabilities...just liabilities that may recover your expense in owning them and possibly turning a profit. Even then, it is still a liability, whether it is an equity that appreciates in value that is eventually realised is moot.

My PT Cruiser, of which I am very fond, has a market value that is higher than what I paid for it (I negotiated a great deal), not to mention the modifications that add more to its value. However, it is still a liability since is costs me to own it--tohold that beautiful, shiny, fast, tangerineequity.

Yes, you can say that the car/house has value and it is the loan that is the liability. There are two things wrong with this. 1. The equity still has an expense, whether it has a loan against it or not. 2. The loan and the equity are married, you would not have the loan without the equity.

azanon wrote:

Regardless, home ownership is one of the wisest things one can do with one's money.

If done properly, and for most people, yes, I agree. However, many people do it improperly, largely thinking that it is an "investment" when it is really usurping their cash flow and they come to a point when they ask, "I have all this net worth, so why am I broke!?"

booya!, hehe)

Also, stop paying full-coverage insurance on your car and let your lender know. I think they will seriously object. Explain to them thatit isyour car, it isyourasset,and you will do as you please! :dude:



If I lost you somewhere in this tome (hopefully from chuckling rather than sleeping), the point is:




[align=center]Your house, your car are assets on your bank's financial statement
Your house, your car are liabilities on your financial statement[/align]

 

[azanon]

imported post

Well, i appreciate your viewpoint, but its ultimately one we just disagree on. (remember, we agree on 99%, lets think positive here!)

Reading from my dictionary here, an "asset" is 1. anything owned that has value 2. A fine or valuable thing to have. A house is definitely #1, and subject to opinion, is also #2. So, the only impression i'm creating is one that agrees with my dictionary. Further, I've read several finance books, and honestly, i've never heard "asset" conditioned as requiring that it generate income, or that it generates more income than expenses. So, clearlywe'renot talking about the same kinds of "asset".Problem is,its the only one i'm familiar with though, and apparently webster hasn't been clued in on your type of asset either . (sorry if that sounds like a jab, but i'm just trying to emphasis my point) Seriously though,maybe we need a new word for an equity that, over time, produces more income than expense?

Now, i do understand your viewpoint on this, and i think its one that means well; by making someone understand that financial commitments that generate more income than they absorb have a special kind of value as an ..... equity :^and should types we all seek out. But that being said, i think your viewpoint also inherently casts a negative light on all "liabilities", at leastper your definition, and i just think that's ultimately a bad thing. Specifically, for long-term housing (meaning an intention to not move for several years), home ownership is almost always the right solution. The "rent vs buy" graphs ive seen have on one axis how long you intend to stay there, and after a certain amount of years, there's no condition under which these graphs recommend renting over buying.

Lastly, I want to note i'm not in the minority here, even in a professional sense. Net worth and assets minus liabilities is literally the home page for quicken software (the one i use, and the most sold even over microsoft money). Ok, they reworded net-worth in the 2004 version (forgot the new term - Financial something or other), but its the same as always; assets minus liabilities yields the final talley at the bottom.

* I just have another thought as i was about to post this that may shed some light: It seems your definition of asset is "casting in good light" on realized income and looking negatively at unrealized income. Like stocks, the historical record of real estate is not only positive, but so positive that it is considered one of the best investments one can dabble in. When you say a house doesnt generate income, its only because the owner of that housesimply chosenot to realize the income that is already a reality "on paper" - just like a stock gain. Sure, real estate can depreciate, but so can stocks. That's no reason to brand them liabilities!

Take my house for instance. I already know its risen by 10K in value, cause i've had it surveyed. Are you saying, its not an investment simply because i continue to own it and not realize the income via a sell? I think if one avoids investments simply because they only gain value through capital appreciation, then you'll miss out on some of the best investment opportunities. You know, most small cap stocks dont pay dividends, but small cap stocks historically are the best types.

How bout the tax advantages of investments (like that over asset?? ) that produce only unrealized "income". You have to pay uncle sam's share every year if you focusonly on assets that producerealized income and avoid the "liabilities", as you define them, simply because you only realize their income when you sell them.

Ahh well, we are probably going in circles by this point. I'm enjoying the discussion though.

(edit) I will concede this: Lodging is an expense. It costs me money to live somewhere, and ultimately even in personal home ownership, there's an unrecoverable expense associated with that. As you said, the lights have to be paid, the property taxes have to be paid, etc and so on and so forth. So that concession i make.......... But buying a track of land in an areayou think will grown in value, buying a house for the sole purpose of selling it for more money later, etc is, without a doubt, an asset you own after the fact and also an investment.

 

[thinks]

imported post

Rolo, nice ride!!!:^You definitely don't need'pimp my ride'(the tv show)... looks like you're doing nicely on your own. Wow, is all I can say! I'll show my dh this weekend... thanks for your link. I'll have to search 'n see if there's a site for our car as it looks like your community shares good things on what's worked for changes, etc. You should have your hot pepper flames in your picture under your name here.Didn't see a picture of you in any of the pictures.

Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.

You two made a good point of doing what's 'discipline' and by knowing yourself.... some people are better off just doing 401k/tsp and not doing IRA because if they have to do it themselves it doesn't get done but by the company doing it then they don't have it.

I'd like to comment more on/in/about this thread but off to bed for me right now but see some GREAT information to think about in here. Thanks to all for great insights and mind provoking posts!! Will come back later... till then have a great holiday weekend!

 

[Rolo]

imported post

thinks wrote:

Rolo, nice ride!!!:^You definitely don't need'pimp my ride'(the tv show)... looks like you're doing nicely on your own. Wow, is all I can say! I'll show my dh this weekend... thanks for your link.

Thanks! I really could use another market rally, for I have many plans for the PT. :u

thinks wrote:

You should have your hot pepper flames in your picture under your name here.Didn't see a picture of you in any of the pictures.

That's a good idea! When I get home (heh, I am at work now) I will do that.

I'm in one of the pics! Er...well my shadow is...and, no, we didn't have six more weeks of winter.

thinks wrote:

Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.

Ya, another forum would be nice for that. hehe, scope creep.

thinks wrote:

You two made a good point of doing what's 'discipline' and by knowing yourself.... some people are better off just doing 401k/tsp and not doing IRA because if they have to do it themselves it doesn't get done but by the company doing it then they don't have it.

There are a lot of people who do not even do TSP/401(k). Yet, many people will fantasize about winning the lottery. I try to foster awareness and motivation. It seems to be working since everybody wants my financial statement spreadsheet, which is the "War Room" to my financial planning and execution, hehe.

As for myself, I find that, once I got started, maintaining the discipline was easy; the motivation is self-sustaining. "The value of a dollar" takes on a whole new meaning when you have applied the principles of compounding/investing with your very own numbers. I do not have to force myself, "Blowing an extra $3,000 on a wardrobe todayinstead of funding my IRA will cost me a fortune later." is always in the back of my mind and my desires look down the road. Keeping my finances as efficient as possible is fun and helps me to achieve my long-term goals.

This is all quite a statement since I have an addictive personality and seriously lack impulse control. Now I just wish I can get in half as much physical shape as I am in fiscal shape. :l

 

[Rolo]

imported post

azanon wrote:

Well, i appreciate your viewpoint, but its ultimately one we just disagree on. (remember, we agree on 99%, lets think positive here!)

Roger on the 99%...no negativity here...'cos I know I'm right! :l (hehe...I am all for quips and jabs, BTW)

azanon wrote:

Reading from my dictionary here, an "asset" is 1. anything owned that has value 2. A fine or valuable thing to have. A house is definitely #1, and subject to opinion, is also #2. So, the only impression i'm creating is one that agrees with my dictionary. Further, I've read several finance books, and honestly, i've never heard "asset" conditioned as requiring that it generate income, or that it generates more income than expenses.

Aw, now, see, you had to go and drag Webster into this, muaha.

as·set
n.
A useful or valuable quality, person, or thing; an advantage or resource: proved herself an asset to the company.
A valuable item that is owned.
A spy working in his or her own country and controlled by the enemy.
Accounting. The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.
The entire property owned by a person, especially a bankrupt, that can be used to settle debts
​

Note that it says "balance sheet" vice "financial statement" and that it "can cover the liabilities", so the two are together.

li·a·bil·i·ty
n. pl. li·a·bil·i·ties
The state of being liable.
Something for which one is liable; an obligation, responsibility, or debt.
liabilities The financial obligations entered in the balance sheet of a business enterprise.
Something that holds one back; a handicap. <-- snicker
Likelihood.
​

Another "balance sheet" item.

eq·ui·ty
n. pl. eq·ui·ties
The state, quality, or ideal of being just, impartial, and fair.
Something that is just, impartial, and fair.
Law.
Justice applied in circumstances covered by law yet influenced by principles of ethics and fairness.
A system of jurisprudence supplementing and serving to modify the rigor of common law.
An equitable right or claim.
Equity of redemption.
The residual value of a business or property beyond any mortgage thereon and liability therein.

The market value of securities less any debt incurred.
Common stock and preferred stock.
Funds provided to a business by the sale of stock.
​

"Residual value" (not tangible cash), "less any debt incurred" (very tangible negative cash), "Funds provided...sale" (now we're talking real cash, after the sale)

I will not argue that your home is not an asset on the balance sheet, but that is moot in light of this discussion, cash flow is the only relevant thing in regards to the income/expense portion of the financial statement, upon which financial planning is based.

The definition of equity is much more suitable over asset. Value does not equal income. The debt and expense that comes with that value, however, directly affects income.

I am not suggestinganything is wrong with the terminology or definitions, but the application of them. On the lower part of the financial statement, the balance sheet, yes, you have your house/car in the asset column, and you have the loans against them in the liability column.

However, your asset does not contribute to the income column, but the liability costs in the expense column, hence, in this context, your house/car is a liability by very definition: "The state of being liable...Something for which one is liable; an obligation, responsibility, or debt....financial obligations...Something that holds one back; a handicap."

Oh,from finance books is where I got this perspective.

azanon wrote:

Now, i do understand your viewpoint on this, and i think its one that means well; by making someone understand that financial commitments that generate more income than they absorb have a special kind of value as an ..... equity :^and should types we all seek out.

That would be an asset since it generates income. Applying the first definition to your income/expense financial statement, "A useful or valuable quality, person, or thing; an advantage or resource: proved herself an asset to the company.", implies that the asset is a contributor.

azanon wrote:

But that being said, i think your viewpoint also inherently casts a negative light on all "liabilities", at leastper your definition, and i just think that's ultimately a bad thing.

And the common viewpoint casts a dangerous positive light on "liabilities". nyah!

azanon wrote:

Specifically, for long-term housing (meaning an intention to not move for several years), home ownership is almost always the right solution. The "rent vs buy" graphs ive seen have on one axis how long you intend to stay there, and after a certain amount of years, there's no condition under which these graphs recommend renting over buying.

I am not implying that buying a house is bad, only that it impacts cash flow. Your primary residence negatively affects it, and investment property can go either way. This is one fiscal faux pax I am trying to point out: you must consider the gestalt and not just one graph. Context will determine if renting or buying is a good idea. Saying that buying is always better than renting is not looking at the complete picture.

Example: A single 22-year old moving to a new city. House loan payments would be $825/month plus insurance and taxes. Apartments cost $575/month. The time horizon is seven years. Let us see what a rent vs. buy graph says:

• 
  $100K mortgage, 2% down payment
  
• 
  Difference invested at 10% annual growth
  
• 
  
  
  Results:
  Based on the information you provided, buying a home looks like a smart move. Over 7 years, it would increase your net worth by $15,108.14compared with renting.
  
  
  1st Month's Payment
  
  Rent Buy Difference
  
  Monthly Payment $575.00 $824.54
  Tax Savings ($90.62)
  Appreciation ($327.37)
  
  
  Net Payment$575.00 $406.54 $168.46
  
  
  
  Increase in Net Worth After 7 Years
  
  Rent Buy Difference
  
  $17,635.92 $32,744.06 ($15,108.14)
  
  ​
  There's that "Net worth" again! "Gee, $15K difference is better!"...not!
  
  Here is why:
  
  1. 
     A bird in the hand is worth two in the bush. Which does a 22-year old need more: cash on hand, or net worth?Someone starting out definitely needs cashon hand, reserves.
     
     
  2. 
     This mentality will have you believe that you are only paying $406/mo. This precisely epitomises my point: You are still paying $825/mo., do not fool yourself otherwise. The value of the home does not contribute to cash flow.
     
     
  3. 
     The sale of the home will trigger a huge taxable event--unless the person buys a larger home. This is the trap in whichmany fall. You will either forfeit ~25% of that $32K, reducing it to $24K, or you will put all of it into another house. Sure, your "Net Worth" will increase, but so will your mortgage payments. Not only will you have less cash flow, you still have zero cash! Hope nothing happens to where you need cash while you are building your net worth.
     
     
  4. 
     $333.33 of the $350 difference can be invested in a Roth IRA to gain the tax advantages, making the investment grow faster and paying less in taxes. Or you can fund a traditional IRA for the income tax break, keeping ~15% more in your pocket now, making a positive effect on cash flow, which you can turn around and fund a regular taxable investment with the remainder of the$350, which is an added $50/mo. into your investments.
     
     
     
  5. 
     You are invested in the market longer and with more cash and can capitalise on more opportunities with more leverage.
     
     
  6. 
     The renter has more options which keeps him out of financial crunches. What if, in year 3, his transmission falls out of his car? He has the cash to get running again. The buyer will inevitably put it on his credit card, creating more negative cash flow.
     
     
  7. 
     Fine, you have cash now, but what about at retirement age? The renter's $17K will grow to $308K in thirty years. If the buyer buys a larger house, he still has zero invested. If the renter funded a traditional IRA, the extra $50/mo. will be another $56K at retirement, for a total of $364K.
     
     If the buyer takes the cash,his $24K will only grow to $220K at retirement (23 years, since he had to wait seven years to cash in his equity) and without tax advantages afforded by an IRA.
     
     $364K vs. $220K, a 65% increase.
     
  8. 
     The renter will have seven more years experience in investing and learn responsibility with small amounts first, rather than risking one large amount.
     
     
  9. 
     Cash is king!
  
  How isa homepossibly an asset and not a liability to your cash flow?

 

[Rolo]

imported post

Oh, yeah,

BOO-YAH!


​

I really enjoy these stimulating conversations and exercises, too. I think everyone learns from them in all cases, as long as you keep an open mind. Either you reinforce what you know or learn what you didn't know, a true win-win situation.I think it is necessary to thoroughlyconsider contrary arguments to keep from getting locked into your own mentalities and stagnating, a check-and-balance. Plus, it can be entertaining!

 

[Pete1]

imported post

Rolo,



Do you know any good books regarding selling your home in a more expensive area in order to move to a less expensive area and buy ahome outright? Are there ways to protect the accumulated equity from taxation? Upon retirement, we will probably sell our home in the city to move to a less expensive locale. Home values in our area are growing at around 7% and we have about 31% equity already. 14 years from now (my MinimumRetirement Age of 56), we expect to have a lot of equity built up with the plan being to pay offthe remaining liability on the 30 year fixed loan and use the equity to buy a house outright in a less expensive locale(locale stillTBD ). Any ideas?

 

[Pete1]

imported post

Just wanted to add that the other piece to the above puzzle would be to use our Roth's (which we just started) in order to fund the first few years of retirement and start drawing on TSP funds at age 59.5. In essence, the Roth funds saved by going from a 15 to a 30 year are expected to fund our initial retirement years and we expect to be able to pay for our retirement home outright in conjunction with my MRA and so, we are trying to eat our Roth cake and buy our house outright as well.

 

[Rolo]

imported post

Pete1 wrote:

Do you know any good books regarding selling your home in a more expensive area in order to move to a less expensive area and buy ahome outright? Are there ways to protect the accumulated equity from taxation?

Books? No, I have not read anything about real estate yet. I just started reading The 16% Solution, which talks about tax liens.

To answer your question, I believe up to $500K of the sale of your residence is exempt from capital gains. I think this is a one-shot deal, probably created for the very reason of which you speak. I'll consult my Ernst & Young Tax Guide when I get home.

Pete1 wrote:

...the plan being to pay offthe remaining liability on the 30 year fixed loan and use the equity to buy a house outright in a less expensive locale...

D'oh! I realise this is "The Neverending Thread", perhaps you missed my May 22d post whilegetting popcorn? I implore you to run the numbers before deciding to buy outright. Perhaps using the attatchment in said post.

Woot! Work is over...BBL!


[line]


Okay, resuming...

You can exclude $250K single/$500K joint from capital gains tax. You only report it when you exceed the exclusion. You can only use it for one home in a two-year period. There are other qualifications. See IRS Pubs 523 and 530. This is chapter 16 of Ernst & Young Tax Guide 2003, which I like since they give practical examples to illustrate how to apply the convoluted tax law.

I would suggest keeping your cash gained from the sale of your home and use it to increase your principal on your investments and just get a regular mortgage for your new home. Borrowing money is not always evil. Really. Of course, it all depends on your numbers and on your circumstances, but "count the cost"--you may be better off with a mortgage and more robust investments than "being out from under a mortgage", which is emotion talking.