September 11, 2013

Dear Member,

At the risk of pissing a lot of members off today, I want to go over 3 myths that I hear every day.

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3 Financial Myths You Need to Avoid

Your Home is Your Best Investment

Now this is a risky one for me to touch on, this is like going against religion. Americans believe this like nothing else.

Lets say you buy a $300,000 home and you put 10% down ($30,000) and you have a loan for $270,000 at an interest rate of 6%. Over the next 3 decades if you follow the plan (conventional wisdom), you will have paid $582,763 in mortgage payments, $180,000 in taxes (2%), roughly $50,000 in insurance, $50,000 for major repairs, and about $36,000 for maintenance ($100/month). In total, including your down payment, you could end up paying about $928,763 for home ownership.

Certainly the value of the home will go up, but I think many people have been jaded from what we saw over the last 2 decades, when the first wave of baby boomers started to peak in spending, between 1992 and 2010. If you look at home prices pre-baby boomers, according to Yale Economist Robert Shiller, from 1890 to 1990 the return on residential real estate was just about zero after inflation.

The experience of buying a home for $20,000 in 1970 and selling it for $200,000 in the year 2000 are the stories we hear from older generations, but we have to keep in mind that in 1970 a gallon of gas was 36 cents, by the year 2000 it was $1.50. So yes, home values will go up, but relative to other things is a home gaining value? For most people, the answer is no. Again this is a tough one to swallow coming off the heels of the greatest real estate bubble in history.

My advice: Buy a home for cash or one you can pay off in under 5 years; or rent, stay mobile and kick back and relax when something goes wrong where you are living, just call the landlord, they’ll fix it! Consider buying rental properties that can one day help you purchase your dream home.

Deferring Taxes Saves You Money

Your 401k and IRA is a DANGEROUS place to keep your wealth. Not because of the assets you can buy, but because they defer the tax you will be required to pay. With the national debt at $17 trillion, the FED buying $85 billion a month in bonds, and 1/3rd of the population entering their entitlement years, I have no doubt that taxes are going up.

The trend is more government aid and a permanent class of welfare dependency, both from citizens and large corporations. These programs all cost money and anyone who is productive enough to have a 401k is going to end up footing the bill.

My advice: Set up a Roth IRA or 401k, bite the bullet now and pay your taxes. You have no idea what taxes will be in 10, 20, or 30 years, but what you do know is that the trend supports taxes going up, not down. The counter argument is that you are supposed to be in a lower tax bracket when you retire, but this is foolish for a few reasons. #1, it assumes you will be able to retire and #2, it assumes you will not be wealthy. So I guess if you plan to be broke when you are 70 years old, then yea, stick with the regular tax deferred 401k.

Keep Your Mortgage to Maximize the Interest Deduction

Out of all of these, this one has to be the most annoying to me; I have actually had people look at me like I am stupid for paying off a house. The government mortgage interest deduction is sold as a tax deduction to help people own their own home by making it more affordable, but in reality all this scheme has done is given the banks a working class that pays mortgage interest for 30-45 years of their lives.

The math is simple. Let’s say for every $1 you pay in interest, you get 30 cents back with the mortgage interest deduction. This leaves the bank with 70 cents and you with 30 cents. However, if you pay off your home or rental property, you keep the dollar, and perhaps pay the government 30 cents. Either way, you end up keeping 70 cents as opposed to just 30 cents.

My advice: Work aggressively to pay off your home and any debt that isn’t supported with income generation. The only time I think debt is an option is when you are purchasing something that is going to generate enough cash flow to pay for itself.

Please feel free to reply to this email with any questions or comments and I will be happy to share your thoughts in next week’s weekly wealth digest.

Have a great week.

Daniel Ameduri