Tag Archives: compound interest

How To Collect Dividends Like Pac-Man Collects Power Pellets

Pacman, Pac-Man, Adventure, Funny, Game

The air is crisp, summer is now in our rear-view.

Like Aesop’s The Ants and the Grasshopper, we must prepare our bank accounts as winter is coming.

When I woke up this morning, it was 44 degrees. Sweater weather indeed my friends. You know what also needs shelter from being left out in the cold, your money! Affluence is your duty.

Affluence Defined

I will define an affluent person as any adult that is saving and investing more than 25% of their income; with more money coming in than going out.

When you have enough income to pay your bills, save, and invest the difference, then you are rich compared to the rest of the world as most are living check to check.

Once you are able to save and invest more than 50% of your income, have more than $2 million in assets and receiving dividend income of $100,000 or more you are fairly wealthy.

When you make more in capital gains than you would from W-2 wage work, then you can kiss the working world goodbye after hitting a goal of $50,000 or more in income.

A salaried adult makes on average $40,000-$50,000 annually. Getting your investment income to this level means, you have created a passive income source large enough to replace a paycheck.

Good for you.

The bigger the gap between income and expenses is the difference between being rich and poor

Recently, I read two books; Evicted and $2.00 a Day: Living on Almost Nothing in America.

The premise is that welfare is dead and families no longer have access to cash assistance.

Those that do eke out a meager existence on modicum amounts of cash, SSI benefits and food stamps.

Within the book it also discusses how landlords were making a mint off the dregs of society, “the poor,” with one making $447,000 a year after expenses meaning he is part of the 1%.

Another landlord had an estimated net worth of $2 million.

The differences in their lifestyles versus their tenants were stark.

The difference between eating everyday or going hungry was just one of many. If this doesn’t scare and motivate you to save more money, then like Poncho’s owner in 101 Dalmations said, “no evil thing will.”

Image result for cruella deville door gif

Evictions are on the rise all across America. Why? The reason is that there is no rent cap.

Rents are going up about as fast as a four-year college degree.

Having more than 50% of your income going out in rent leads to one word: Despair.

You must have cash in the bank.

I know that the price of everything feels like it has shot up overnight.

You are in the red and bleeding out money faster than a corpse does on The Walking Dead. However, you must save. The possibilities of something requiring your immediate cash assistance are endless!

All of the sudden Aunt Edna needs a new roof, the dog needs his shots, the basement flooded (for the third time this year) or junior needs braces.

I once had a Harvard educated orthodontist quote me almost $8,000 for treatment. And that was just for my teeth!

The human body has 206 bones and not any of them are receiving service from this guy. After, watching or hearing more stories of outrageous prices from car loans to purses (a Louis Vuitton handbag could set you back $400 or more), I knew that having liquid savings was the answer.

I’m as serious about saving money as Sarah Connor is about eliminating Terminators!

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Cash. There is no substitute.

I refuse to lock up all my money in investments, but I know better than to just have all my cash sitting around earning no compound interest or dividends.

Pac-Man shows us how to get the job done

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If you have ever played Pac-Man, then you know how the game is played. The player navigates Pac-Man through a maze with no dead ends.

Pac-Man’s favorite snack pellets — the tiny dots he munches as he moves around the video game board — were originally cookies. The “power cookies” are now the larger pellets he uses to eat the ghosts. The maze is filled with Pac-Dots, and includes four roving multi-colored ghosts: Blinky, Pinky, Inky, and Clyde.

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The game was not designed with an ending.

You know what that tells me, that your money too should be looked upon as having no ending. You should save as if you are going to live forever.

I hope that last statements lights the fire you need to start saving this paper.

Using Pac-Man as an example, I want you to imagine the four ghosts are the following: debt, despair, denial and broke.

Your job is to eat as many power pellets “dividends” as you possibly can. The only way to do this is by investing your money.

You may be unsure where to start. I want you to start by opening up a brokerage account with a discount broker such as Vanguard, Fidelity, E-Trade or Charles Schwab.

Just FYI: Interactive Brokers (NASDAQ:IBKR) and Schwab (NYSE:SCHW) got rid of stock trading commissions, creating a major shake-up in the brokerage industry, and competitors TD Ameritrade (NASDAQ:AMTD) and E*Trade (NASDAQ:ETFC) quickly followed suit. Robinhood had already been offering this service, but now the big boys are getting in on the action.

Once you open up your account, you can purchase any 500 index or index fund that owns all shares in Mr. Market. If using Vanguard, that would be the VTSAX.

You put in enough money in Mr. Market and he starts to pay you for showing up in class everyday 365 days a year.

You earn money just for raising your hand and saying present.

How compound interest works

Compound interest is the difference between the cash you contribute to an investment and the actual future value of the investment.

In this case, by contributing just $8,000 per year with the annual contribution being increased by 1% per year (cumulative contributions of $278,779) you are able to accumulate $1,080,688 over 30 years. Compound interest makes up $801,908 of your future balance.

If you start saving $8,000 a year and earn 8% on those earnings, look what happens. You will notice in the beginning you earn only $680 bucks, but by year 30 you are earning $80k a year!

You must chomp away at collecting money to invest it and start collecting dividends.

YearBeginning BalanceSavings @ 1%Interest @ 8%Ending Balance
1$500$8,000$680$9,180
29,1808,0801,38118,641
318,6418,1612,14428,946
428,9468,2422,97540,163
540,1638,3253,87952,367
652,3678,4084,86265,637
765,6378,4925,93080,060
880,0608,5777,09195,728
995,7288,6638,351112,742
10112,7428,7499,719131,211
11131,2118,83711,204151,251
12151,2518,92512,814172,991
13172,9919,01514,560196,566
14196,5669,10516,454222,124
15222,1249,19618,506249,826
16249,8269,28820,729279,842
17279,8429,38123,138312,361
18312,3619,47425,747347,582
19347,5829,56928,572385,724
20385,7249,66531,631427,019
21427,0199,76234,942471,723
23520,1099,95842,405572,472
24572,47210,05746,602629,132
25629,13210,15851,143690,433
26690,43310,25956,055756,748
27756,74810,36261,369828,479
28828,47910,46667,116906,060
29906,06010,57073,330989,961
30989,96110,67680,0511,080,688

Playing for keeps and dividends

Let’s say you start a Roth IRA at 20 and save $6000 annually, thereby maxing it out.

And please if you are going to max out anything, let it be a IRA and not a credit card.

Earning 10% interest, you would have $105,187.

Then you decide to stop investing and let it ride.

After about 23.5 years, you would have over $1M.

After 24 additional years of parking your money on the financial equivalent of Park Place with a hotel, you are sitting pretty on $1,036,063.83.

Investing your money for only 10 years would allow you to stop and not have to worry about your golden years.

Just some food, I mean power pellets, for thought.

Lipstick Confessions: Confessions Of A Teenage Waitress

Lips, Taboo, Secret, Silence, Mouth

You read that right.

Like Usher, these are my confessions.

Lipstick Confessions that is. đź’‹

Not Confessions of a Teenage DRAMA QUEEN. Even though I was a teenager, but of a TEENAGE WAITRESS!

Being a waitress was a humbling experience.

After reading about Financial Samurai working for $3.50 an hour at McDonald’s, I was inspired to share my story of making $2.39 an hour + tips while waiting tables at Shoney’s.

It was early experiences like that that shaped my attitudes toward money and work today.

It is also a reason why I try to tip well.

I believe in being a good tipper because that is how people make their living. My father always says tip well enough for people to feel it. I concur.

A waitress is a pretty grueling job.

You are on your feet for hours on end. You must constantly be moving and taking orders or picking up food. Then there’s the nonstop cleaning, folding of napkins, packaging silverware, putting ketchup, salt and pepper and other condiments out and etc.

That early job experience was enough to make me want to work and study so hard while I was young, so that I would not have to when I was older.

This job and other hardships are what drove me to dig my way out of debt and start saving over 40% of my after-tax income.

I have always been thrifty and a saver.

It is because of that, I knew I could not marry someone that is fiscally irresponsible and stay married to them. It just wouldn’t work.

See my post on Why I and Halle Berry Save Soo Much

I have never had the urge to go rent a Mercedes-Benz, drive down to Vegas, buy lottery tickets at every 7-eleven along the way, buy a $4,000 Cartier wrist watch just cause you know bosses gotta be on time, visit a psychic who says my lucky numbers are 4,5, and 6, and then bet it all on black.

Nope. I have not given any of that any thought at all.

Except maybe that the color of the S-Class Mercedes with a 3-layer fabric top is impeccably crafted for coupelike comfort, sleekness and outward views when it’s up, or vanishes in under 20 seconds, even as you accelerate to 30 mph should be silver.

Other than that, no thoughts whatsoever!

See my posts

Finance Lessons From Flipping Vegas

Mega Millions Win Or Bust

At age 17, I was a teenage waitress.

It would be six years before I began my career working in finance, banking, and loans.  

And a full decade after that waitressing job, before I got hired to work at a top-tier private university with excellent benefits.

But first I had to pay my dues.

SLINGING HASH TO MAKE A BUCK

I looked down at my bank receipt.

I had about $10 bucks in my bank account. I was BROKE!

I needed a job.

Being only 17 didn’t provide me with too many options, but as they say, “beggars can’t be choosers.”

I heard the local Shoney’s was hiring wait staff. To my surprise, I applied and got the job.

We went in for training at around 9 am the next week after being hired.

My uniform was black pants, white button shirt, sneakers, a small bow-tie and a black apron.

I only worked there for one summer.

That was long enough to realize I did not want to make my career in the food service.

I knew this was going to be the first, last, and only job I ever took that dealt with serving or making food.

See my post Fast Food Nation

After reading the book Nickel and Dimed, I felt that the author expressed my views on how she and I observed the treatment of low-wage workers was pretty spot on!

Image result for nickel and dimed

The job: take orders, greet customers, keep the restaurant clean, and serve food.

Sounds simple right. Wrong.

We had a busy body manager. Chaotic shifts. And lulls in customers.

Shoney’s was an eat-in restaurant (mostly was a buffet place) that started in Tennessee, but had restaurants in the Mid-Atlantic region.

Image result for shoneys
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So many people opted for the breakfast mostly leaving afternoons and dinner times pretty sparse inside. 

That means little to no tips!

Not something I was told upon being hired.

Some of the food on the menu looked better than it actually was in-person, but all the food was at least good.

And no matter how hard I worked, it never felt good enough to our nitpicking manager who was always so concerned about how she looked in the eyes of the suits at corporate.

She was too busy kissing their a$$ to worry about us lower employees on the totem poll.

Little good it did her.

She was a ball of constant worry and stress, a chain smoker, and overweight. This was our manager. Our fearless leader?

Is this what management is supposed to look like in America or was this just her issue?

There has to be better ways for her to almost be eligible for food stamps and make a buck, but what do I know.

My lunch break was the only thing I looked forward to because it was the one-time no one could give you any orders and you could get off your feet and rest.

I usually ate a Philly cheesesteak because it was just so good. Calories be damned!

Even some of the cooks seemed disgruntled. They liked to flirt with waitresses and I think one was dating one of them! Whatever.

I just needed the cooks to be happy so that I could get food out piping hot and fast so I could make this money.

I need those tips!

After calculating the $2.39 an hour, working 40 hours a week would only get me $95.60! And that’s gross not net! 

Anyway, I now had to deal with the situation.

The goal was to have spending money to hang out with my friends and buy all the cool stuff I always wanted but could never afford.

To be so young and naĂŻve. If I would have been thinking, I should have started tucking money into a Roth IRA. I would probably have had less anxiety when I got my first REAL job!

If I would have saved just $2,000 a year from ages 16-26, without adding another penny, in 40 years that money could have turned into $1,586,894.95 at a 10% return with compound interest! That would have required me to only stash away $22,000!

Just some food for thought right there. Start investing young!

WELCOME TO THE WONDERFUL WORLD OF TIPPING

Like the first episode of Buffy the Vampire Slayer, “Welcome to the Hellmouth,” I was welcomed to how cheap people really are.

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Tipping is the holy grail of waitressing and bartending.

See my post on Money Tips From Buffy The Vampire Slayer

Make that money honey.

I had a wide range of tips, as anyone who works for tips can tell you.

My range was this: $0 to $27.

The highlight of my night was always counting up my tips when I got home. I think the highest I ever got was $100 bucks in one day!

I know that may not sound like a lot, but to a high school kid in the 90’s that was good money.

Things were also cheaper back then as well.

You bought the item, like a pair of shoes or video game, and then the transaction was over.

Not like subscription mania that has now swept across the nation.

See my post America is the land of subscriptions

One of the smallest tips I ever got was from 2 girls I went to high school with. We were not friends but I didn’t expect to only get a $1.17 tip! That was basically the change from the meal they just ate and paid for. Maybe they should have put in an application to work here too!

I remember one time in college when I got a ride home from a weekend class I was taking (I was doing 6 classes that semester), telling me she worked at her brother’s restaurant and she made sure to be on point in order to get that $20 tip!

My days at Shoney’s was long gone by then, but I remember thinking it is far better to work at a higher end restaurant like her because you can make more money.

Lesson Learned: Focus working or catering to high-end clientele that can afford to pay for your services.

SAVE LIKE YOU WILL LIVE FOREVER

Have you ever heard the saying “Live like tomorrow is your last day on earth?”

Well, I like to save like I am going to live forever.

I learned this lesson, like James Brown said, you have to Pay the Cost to be the Boss.

That song and The Payback made me want to get my act together.

I put a plan into action. I was going to save money out of every paycheck.

It took years to make happen, but I went from saving nothing to putting aside 9% of my income. Then from saving $1 a day to $13,000 a year!

The plan had been to stop living paycheck-to-paycheck. 

That was okay, but I needed a goal. Something to aim at.

So I picked a number. $13,333 was that number.

I chose it for a few reasons: 1) The number 3 is my favorite number; 2) I saw that another blogger was saving that amount per month so I aimed to duplicate that, but started smaller; and 3) I did the math and discovered I could have over $100,000 cash if I did this for about 7.5 years.

I also knew it was possible that if I invested $100k in the stock market that after 30 years without adding another dime, I could have $1 million shored up for retirement.

Considering that about 20% of Americans have $0 saved for retirement, I knew that I better prepare because tomorrow does come.

The future is going to happen.

If I was going to bet on anything, I would bet on that. Forget Vegas. You can bet the farm the future is coming. And it’s coming fast!

Remember that 9% I mentioned earlier. Well that small sum turned into a small nest egg of $25,000!

And most of that sum is invested in just a few stocks!  

The power of compound interest baby!

Pro Blogger IRA # 1 of 3 (Personal Finance)
Traffic Estimate: 50,000 pageviews
Pinterest Estimate: 48,000 monthly viewers
Stock Price Stock Quantity Current Balance
AAPL $201.35 37.256 $7,501.50
AMZN $1866.86 5.000 $9,334.30
Total
    $16,835.80

Source: GreenbacksMagnet.com

I hope this post inspires people to understand the value of a dollar and that paying off debt and saving are far better than blowing all your money on things. 

Invest and watch your money grow!

Money Lessons I learned from Jay Leno

Photo: Forbes.com

Everyday and in every way, invest in yourself. Invest in your health and education to help build your wealth. With money comes power and protection. The wealthy are protected. Build up your knowledge and money coffers. A war money war chest is your way to ditch the 9 to 5 and get out of the rat race.

Jay Leno gives advice on how to do just that.

MONEY LESSONS FROM JAY

Jay on starting out

“I wasn’t a millionaire when I started.”

“I would alternate between the two, so it was cars and hamburgers, which are actually still two of my passions.”

He started his career working for minimum wage at McDonald’s in Massachusetts. Jay also worked at a Ford dealership. He discovered the key or secret sauce (pun intended) to getting rich: Developing multiple streams of income.

Jay on working more than one job

“I always had two incomes.”

“I’d bank one, and I’d spend one.”

“I had two jobs because I realized that was the quickest way to become a millionaire.”

“When I got ‘The Tonight Show,’ I always made sure I did 150 [comedy show] gigs a year so I never had to touch the principal.”

He has worked two jobs simultaneously since he was 16.

And there you have it. Basically, if you want riches, then you have to put in the work. If you work 40 hours a week, then find a way to work 50 or 60. Gotta make that paper.

Jay on saving money

“When I was younger, I would always save the money I made working at the car dealership, and I would spend the money I made as a comedian.”

“When I started to get a bit famous, the money I was making as a comedian was way more than the money I was making at the car dealership, so I would bank that and spend the car dealership money.”

“Then I got to the point where the comedy money was, like, five times the other money, so I decided to flip it around and save the comedy money.”

“I would always spend the lesser amount of what the two were.”

Therefore, if you are working 2 jobs or more, then you bank the bigger paycheck and spend the smaller checks. Bank the bigger of the two checks and live off the other.

Forget the pundits that tell you not to save. There is value in saving. You need an emergency to help in case of job loss or illness. Life is full of hiccups. Once you have saved reasonable amount, then you start investing your surplus income.

The key is not to only save, but to also invest. Savings help you live your life to the fullest. In addition, savings can help you fund your dreams. Not having to go to the bank for a loan is an incredible feeling.

Jay on living on one salary

“I pretended as if I didn’t even have the ‘Tonight Show’ job.”

“You know, when you start making money, you get lazy. I wanted to make sure I always had that hunger, so I never looked.”

“It would go directly into a bank.”

Simply put, bank it and forget it.

Jay on patience

It took 22 years to accumulate, “a nice little nest egg.”

You heard it here folks. Building wealth takes time. In many cases, it takes a couple decades. There are no get rich quick schemes. There’s is no free lunch. There are no shortcuts. You do the work, get paid, invest the surplus incomes, and wait to earn interest.

Jay on retiring

“If you do something and it works, then keep doing it.”

You do not have to retire early unless you want to. If you are passionate about something, and can make a living doing it, then do it.

Jay on Buy-And-Hold

“The McLaren F1, I paid $800,000 for it in 1998. The last offer I got was $12 million. … The nice thing is, if you buy what you like, and it doesn’t go up in value, you still like it.”

Warren Buffet likes to buy-and-hold forever. Therefore, don’t even part with your cash, if you don’t want to keep an item to infinity and beyond. Just don’t even open your wallet.

Jay on avoiding credit cards

“I barely use credit cards.”

Words to live by. Either use credit sparingly for a purpose and get it paid off ASAP or don’t even bother using it at all.

Jay on house buying

“I didn’t buy my house until I had cash. When you own something and you don’t have to write checks every month, you’re just better off.”

I learned from James Brown, Dick Clark, Jay-Z, Oprah, JK Rowling and Michael Jackson to own what you do. You can control your earning potential and life, if you own. You can continue to make money off the things you own and control for many years to come.

Regardless, of whether or not you’re still working. You can still earn royalties from work you have done in the past. That is how the rich get richer. Earnings on top of earnings.

Jay on debt

“I don’t carry any debt. I don’t write checks at the end of the month for anything.”

“I didn’t buy anything I couldn’t afford to pay for in cash.”

“Here is the money, give me the thing, transaction over.'”

Jay hates installments, as do I. His cash only solution is what the world needs to adhere by.

I have literally saved for two years or more to purchase items or services I wanted or needed.

When I wanted Lasik, I used my flexible spending and waited about 3 years before I did the procedure. It cost between $4,000 to $5,000. And was worth every penny. Paid cash, not credit.

When I needed dental work done, I saved for 2 years. Paid cash, no installments.

Don’t buy on credit, build a fortune.

Jay on Retooling

“Since high school, I’ve always had two jobs. I worked at a McDonald’s and I worked at a car dealership. … When I was doing the Tonight Show, I’d be on the road at least two to three days a week because I thought, ‘We’ll see how long this lasts.’ ”

Do not ever get too comfortable. Things can change. Always have more than one way to earn a living.

Jay on owning

“I own everything. I own my buildings. I own my cars. That way, if it ends tomorrow, I know what I’ve got.”

His conservative money philosophy gives him peace of mind. When you are out of debt you just feel better. Take control of your finances and this too will help give you some peace of mind.

Jay on old-fashioned values

“I’m not a big splurge guy, partly because I had Depression-era parents: “They just frightened me to death, saying, ‘You gotta save every penny!'”

“It’s a little old fashioned, I suppose, but it seems to work pretty well for me.”

No impulse buying. This is the debt trap. Plan your expenses. Budget just means you plan where your money goes and it gives you permission to spend. Use it.

Jay on Taxes

“I just pay. Fine, I’ll get another job, I’ll work harder. That’s probably not very good tax advice. I don’t have money in the Cayman Islands or any of that nonsense.”

Always pay your taxes. Period!

Jay on being frugal

“McDonald’s sent me these Happy Meal coupons, so one day I’m in the McLaren and I’m going to McDonald’s. I say, ‘Give me two Happy Meals.’ And I give them the [coupons].”

“Now I look like the cheapest guy in the world driving this multimillion-dollar McLaren and I’m trying to get a free hamburger.”

“I’ve never touched a dime of my ‘Tonight Show’ money. Ever.”

He hates spending on clothes and has not touched one dime of his Tonight Show money. At one point, he was earning around $30M a year! It pays to be frugal.

So, you just avoid the mall, invest the money you would spend on clothes and start earning your way to a fortune with compound interest. Delay your gratification. Discipline is the key to wealth. Once you have it, no one can take it from you. Then you can save money to invest. Easy as pie.

Jay on Shifting Gears

“So many friends of mine, all they ever did was the TV show. When the TV show ends, suddenly their life ends, because that was their whole life. I was never that guy.”

It’s great to have hobbies and interests outside of work. See if you can turn a hobby or side gig, into an income. At the very least, have something to do after one thing ends. Remember, no idle hands.

Jay on shopping

“I’m not a big shopping guy. I’m just not interested in clothes outside of the essentials.”

“To me, it seems like a complete waste of money. I just want to have enough clothes to cover legally what parts I have to cover.”

Hear, hear! I used to like shopping. Until I didn’t. That happened once I learned I was losing a small fortune for that new purse or shoes.  Read my post How Millennial Money inspired me to start saving $13,333.06 a year for more on that topic and see how I quit shopping for good.

Jay on Fixing Things

“When you’re in a business like show business, everything is subjective. Some people think you’re funny, some people think you suck. …When something’s broken and you fix it, no one can deny it’s running.”

Very true. Always be tweaking or working toward expanding and doing better. People notice you the harder you work.

Jay on setting high standards

He, like Coco Chanel, believe in setting high standards for yourself. Chanel said, “keep your head, heels, and standards high.”

Jay learned this attitude while working at McDonald’s. A key pillar of success: You can never go too far to ensure you’re producing a great product.

He would go home every night after work and write jokes. Jay would go through hundreds with his staff and get it down to the top 20. He would record himself and then re-listen for timing. Tedious? Yes, I know. But effective. The hard work paid off.

Jay on idle hands

“I meet with the writers at about midnight or so and work until about 4:00 a.m.”

“I sleep four hours, maybe five.”

The way he saw it was, “if you have time to complain, you don’t have enough work to do.”

I am notorious for going to bed thinking of work and getting up to work. Sometimes I get up in the middle of the night to write down ideas about work. I work so much I barely have time to breathe.

I learned that from Pat Benatar who was a workaholic in the 80’s.  But guess what? She wrote hits songs for like a decade. When there are times I need a break or pick me up while working, I’ll listen to her songs Invincible, Shadows of the Night or Love is a Battlefield.

For those who may not know or remember those songs, check out the links below. Good stuff.

Jay on failure

“You learn a tremendous amount from the mistakes.”

I have learned to fail better. It makes you stronger. It also humbles you and makes you more empathetic to others.

Jay on money to blow

“So many people get to be the age I’m at now and they’ve got nothing because they just blew it all.”

“I put my money in a hammock and say, ‘You relax. I’m going to go work.’ And when I come back, I put some more money in the pile.”

It’s your money. Don’t blow it.

Jay on Life

“Life is not that complicated … if you’re kind and decent, and try to be honest, it’ll probably work out. Yeah, you’ll get screwed once in a while. I certainly have, but that’s okay … don’t dwell on it.”

Pick yourself up, dust your wallet off, and get back into the grind. Don’t rest on your laurels. Put your head down and work. Stay humble and stay hungry. Generate multiple streams of income, diversify your earnings, increase your savings, and build your wealth. Get that net worth pumping in that interest faster than Arnold Schwarzenegger did lifting weights in Pumping Iron and you will start rolling in the dough!

Just FYI: Jay is worth over $300 million dollars. Has no debt. Is a self-made millionaire. And still works at the age of 68.

How not to be house rich, cash poor

“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” —Edmund Burke

I remember watching an episode of Property Brothers and they were telling this couple that you do not want to spend too much or overspend on a home and end up being house rich and cash poor.

They instead wanted the couple to buy a fixer-upper, do some sweat equity, renovate the home, and put that money into their pockets.

Basically, when you buy a turn-key home, the work has already been done and you are paying the homeowners for the money they put into the home on renovations.

However, then you buy the house at a markup.

This is due to the fact that they may pay $20,000 for renovations and then the property may increase in value by $40,000 or double what they paid. Thus, allowing them to increase the purchase price of the property, ergo you pay them to renovate.

That’s pretty steep for move-in-ready.

If you do the work yourself, you get to keep the value that the home increases by.

This means buying a fixer-upper for $300,000 and putting in $20,000 for renovations will push the home value to $340,000 and let you keep the $20k in equity for yourself instead of putting it in someone else’s pocket.

If you read my last post, Save $10,000 by Avoiding PMI, then you know I am all about saving that paper.

So, let me show you how not to be cash poor, but house rich.

WHAT DOES HOUSE RICH, CASH POOR MEAN?

According to Investopedia, “house poor is a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities.”

Basically, you are paying more for your home than you can afford or simply buying too much home.

If you have to pay more than 40% of your income for your dwelling, then you will become cash poor.

Matter of fact, if the value of your home decreases, you can be both house and cash poor.

When you are house rich that means all your money or wealth is tied up in your home. The home equity may be something like $150,000, but you only have $1,500 in the bank. That is not even enough to cover one month’s mortgage payment!

https://twitter.com/AP_Lifestyles/status/1051911392704499713

In order to shift this, you would want $40,000 in the bank, and to owe less than $150k on your home. That $40k would be enough to pay one year’s worth of expenses including mortgage payments ($1,600 x 12 = $19,200).

You would need a fixed rate mortgage to help you do this.

STAY AWAY FROM VARIABLE RATE LOANS

The ARM, or “adjustable rate mortgage” loan is too dangerous. Any loan product that can change at the drop of a hat and without a moment’s notice is too risky.

Let’s think about this for a second. Why is anything at a drop of a hat so bad? Well, did you ever see the movie Tombstone?

The idiom is likely to have come from the Old West, when duels would begin with a signal consisting of a man grabbing his hat and thrusting it toward the ground, before weapons are drawn.

Is this any way you want any part of your life to be lived?! Absolutely, not.

Entertaining in the movies sure, but not for real life.

This type of trickery should be left out of the equation.

First, lenders approve you for wayyy too much. Second, they tell you it’s okay to only pay the interest when it’s really not. As you cannot get out of debt, without paying off the principal of a loan.

And going for the trifecta of trickery, the third thing lenders do, and this is the hat trick, your mortgage payments jump so high Bryce Harper couldn’t catch it!

Your mortgage payments spikes upward too sharply for most folks to keep up.

A reasonable $1,600 mortgage payment could reset and go up to $2,400 in a single month!

That’s no joke.

I had a conversation with someone this actually happened to. Shocks like this are hard for most people to fathom and continue to live comfortably.

A fixed rate loan allows you to plan the monthly budget in advance.

When you how much you monthly nut has to cover, you are just better off.

HOW TO BE CASH RICH

Buying a home for less than you can afford is a start.

If you are approved for $400,000, then slash this amount by 25%. This equals $400k x 0.25 = $100,000!

You heard me. Then bank says $400k, and then you say:  I’ll go $300k.

In one fell swoop, you both cut the amount of home you buy and monthly payment by 25%

You then take that $100,000 and over the course of the 15, 20, or 30 years you are paying your mortgage, you put this same amount into mutual funds.

You could do the S&P 500 index. Do whatever you want.

The goals are to simultaneously invest that money and pay down your mortgage.

For instance, that $100k over 30 years translates to investing $277 per month for 360 months. That would allow you to save anywhere from $500,000 to over $1 million depending on your rate of return through compound interest.

That means over a 30 year time period you have paid off a worth an estimated $300,000 or possibly more as home value may increase during this time and have an additional $800,000 in investments.

You would have a net worth of $1.1 million and would put you in the top 10% of wealthy households in America. See my post; Join the top 10% club for more on this.

WORDS OF WISDOM

A few words of wisdom to follow:

  • Buy less home than you can afford
  • Spend no more than 25% of your income on the housing payment
  • Invest the difference of the savings you received from not paying the full amount approved for
  • Stick to a housing budget
  • Have a god size emergency fund of 8 months or more

It sounds so simple, but most folks are actually living beyond their means and buying my house than they can afford. I have actually seen people in their 50s signing up for 30 year mortgages! Holy crap! The odds of paying off this home are slim at that age.

If you can follow the advice I give above, you could find yourself at the top of the economic pyramid.

Don’t believe me? Read my post Join the top 5% club and find out!

Avoid paying interest and get rich

If you use a credit card, you don’t want to be rich. – Mark Cuban star of “Shark Tank”

According to CNBC, Americans have an average credit card balance of $6,375 and owe a record breaking $1 trillion in credit card debt, which is the most ever recorded in history.

Investing that money instead could net you anywhere from $50,000 to $200,000, depending on how long you invest it and getting a return on investment of around 9%.

And that does not include an employer match or if you invest more. You could save and invest your way to a small fortune thanks to compound interest.

Here are some ways to avoid paying interest.

MAKE IT AUTOMATIC

I’m sure to many of your out there this is not new advice. However, how many people are actually doing this is another story.

Setting your bills up on automatic payments is a great way to avoid missing payments.

Credit card companies can levy a hefty fee for missed payments. The most recent I read was $38! Forget that. I rather use that money for gas or some other function. Anything is better than paying fees.

In addition, credit card companies can ratchet up your interest rate to 29.99% for missing a single payment!

That means almost near perfect timing of paying all bills.

The closest you can get to doing this is to make all your payments automatic.

Set up everything you can on autopay.

You can put the gym membership, cell phone, utilities and insurance payments on a credit card. Then set up automatic payments with your bank to pay that credit card off at the end of every month and you’re done.

PAY DOWN YOUR DEBTS

Paying off high interest debt is a must on the road to wealth.

Every dollar you spend towards interest cannot work for you compounding interest instead.

Think about it. If you pay $700 per month servicing debt and pay 50% of that in interest, that money is gone. Dust in the wind my friend.

If you can do the polar opposite, investing the entire $700 and earning interest instead, you have a clear path to building wealth over time.

That is the equivalent of $8,400 a year you are investing as opposed to using that amount to pay debt in which $4,200 goes to principal and the other $4,200 in interest and that money you never see again.

CONSIDER BANKING WITH A CREDIT UNION

If you read my posts, about the Unbanking of America and New Banking Rules: clear a check payment in a day, then you understand where I’m coming from.

Many may not know this, but credit unions are not allowed to charge more than 18% on loans or credit cards (unless you default).

The savings gain alone from not having to pay some credit companies 22-27% interest is huge!

You could save anywhere from $50-150 bucks or more per month with a lower interest rate. That’s another $600-1,800 per year!

Just something to consider.

REFINANCE YOUR MORTGAGE

If you can lower the interest rate on your mortgage, you can save $100’s or $1,000’s of dollars a year.

In addition, if you can change your repayment period from 30 years to 20, 15, or 10, then you can save a ton of money.  Maybe not tons of money monthly or right away, but over the life of the loan.

For example, a $250,000 mortgage at a 3.92% rate over 30 years will cost $425,533. You reduce that to 15 years and total output is $331,058. That is a difference of upwards of $100,000!

If you take that $100,000 and put that into index funds, you could have anywhere from $600,000 to $1 million dollars over 30 years with a minimum 6% return on investment.

Many folks will buy at least 2-3 homes in their lifetimes. If every new purchase resets your debt-free mortgage clock by 30 years, then you are likely to spend most of your working years in debt.

I hate to be the bearer of bad news, but this is actually the norm for most people.

You do not want to be normal. You want to be different and extraordinary because that gets results.

If more folks put down 10-20% and got 15 year mortgages, you would be better off in the long run.

Paying on one item for 30 years is a long time.

A lot can happen in 30 years. Heck, a lot can happen even in 10 years!

Retire that debt ASAP or as fast as you can.

You can build an in-law suite, swimming pool, and remodel the kitchen after the debt is gone and the home is paid off.

People used to have mortgage burning parties, after paying off their home. Let’s try to bring that back shall we.

I have recently read in the news personal finance experts expressing their concerns over mortgage payments that Americans are making.

Most wanted the debt paid just before you retire. Others said get rid of it in your 40’s. Like around age 45. Why you ask? Since, this is the point where you are halfway through your career, it is best to spend the second half of it working toward building capital to fund your nest egg.

That is excellent advice.

Basically, you spend the first 20 years paying off all you owe, and the last 20 years building up your retirement accounts you will need in your golden years.

SUMMING IT UP

All you have to do is follow these four steps and you can avoid paying interest or at least a whole lot less of it.

Remember these 4 steps:

  1. Make it automatic
  2. Pay down your debts
  3. Bank with a credit union
  4. Get a 15 year mortgage

Sounds pretty simple right?

Well, you would be surprised by how many people are not doing any of the things stated above.

Therefore, if you can start doing even one of these things now, you are well on your way to building up your bank account.

And in the illustrious words of Porky the Pig, “That’s All Folks!”