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Maxing out your 401k & ROTH IRA are great habits to have but if your credit card interest is > 4% then you should be allocating your income to pay off the credit card debt before you add to your investments.
More about credit card debt, it all really depends. If you are using low rate balance transfers for purchasing investment property, investing in guaranteed high return foreign bonds, or any other method of getting ahead (other than the risky stock market or a casino), then utilizing this credit is GOOD (start a business, buy a business). Short term rates have been historically low for quite some time and they still are. You should certainly utilize "free money" to your advantage. I do say free because after adjusting for inflation, that’s exactly what it is. Just be wise and pay the balance off or juggle to another low rate card before rate expiration. I currently have $58k in credit card debt at 0.99% until January, 2009 and I'm using that cash to expand my business. It would be silly to pay it off before the rate expiration. Sure beats getting a commercial loan from a bank! Then again, don't max out your cards or that will be counterproductive and will lower your FICO. I'm currently at 15% of available credit since my combined revolving credit limit is $369k.
I can also help you some with what NOT to do. Don't invest on margin in the stock market, especially full margin. You can be right 9 out of 10 times, but the one time you are wrong it will wipe your account clean. Heck, on margin, you can even go negative depending on where the stock opens. I know because I've had this happen to me TWICE and I lost hundreds of thousands of principle each time. Felt like a major break up, like you just lost someone or something you really loved. This added a few gray hairs to my head the 2nd time this happened, and I was 28. You pick yourself up and you realize you can earn it back though, especially when you are still relatively young. I just turned 32, so probably no more high risk ventures for me!
Other financial blunders to avoid:
Having kids. Just have one if you're financially wise. I have none.
Avoid divorces. Fortunately, I’ve had none, but I’ve never proposed.
Choosing a loyal, motivated, and financially competent wife/husband/partner is one of the most important decisions you’ll ever make your lifetime (so I’ve heard).
As someone already mentioned:
15 year fixed mortgages will build rapid equity. My primary residence and 4 investment properties are ALL on 15 year fixed loans. By 2012 I'll have $800k+ in equity, assuming Memphis real estate prices stays flat. Now if nominal prices would just rise on par with inflation, then that would provide an extra $200k in equity.
This is probably the hardest part, but the most important. You know how people say diet is 80% of being fit and your workout is only 20% of getting the results? Well, how you allocate your spending is probably 80% of becoming a millionaire. A household or individual could have a consistent six figure salary, but if they are “living large” and not saving or investing (buying assets) then they probably aren’t getting ahead, they are just big consumers who help keep GDP high. Just like if some moron is working out like an Olympian but he’s on a friggin pizza and beer diet, he’s obviously not going to have the physique of an Olympian.
And yes, your health is priceless. Avoid HGH, steroids, recreational drugs, alcohol, cigarettes, Propecia, Viagra, male birth control (it’s technically a weak steroid), fast food, ice cream, and chocolate. Invest in quality filtration for your air and water for your home. Don’t let your dog(s) or cat(s) sleep on your bed (I fail at this). Exercise 4x or more per week! Most importantly of all, eat healthy: vegetables, 8 glasses of water per day, organic food and milk. Avoid stress, it’s all a frame of mind anyways. Just as there is no such thing as roid rage, it’s all in your head and as modern human you can choose to have control over your emotions. Don’t dwell on past mistakes or the past in general. Why waste time on a closed door? You’ll miss the opportunities in front of you.
Other ideas:
Wear the same clothing for EVER (until patching the holes is no longer possible). I practice this to some extent. If you’re in great shape it really doesn’t matter what you wear. Ignore coupons and gas prices. It's a waste of time and so minuscule that the penny counting is virtually irrelevant. Besides, coupons encourage spending.
Warren Buffett, currently world's richest man and perhaps the best investor of all time, claims that his best investment was his education.
If you can't afford to pay the net cost of something, you certainly can't afford to pay that price plus credit card interest. Is the item really necessary? Buy it only if you need it.
Buying a home used to be the best way to accumulate income, but that has recently changed a little. Some homes are going down and not up. I would question some of the information in the post about the house rental idea. There was just something about renting and still getting to sell the house tax free that does not seem right.
I can tell you that being rich does not necessarily bring happiness. Nothing wrong with being a very conservative, responsible person though. Good luck. Get rid of the credit card debt.
I would question some of the information in the post about the house rental idea. There was just something about renting and still getting to sell the house tax free that does not seem right.
To the best of my knowledge, a person must claim primary residence in a home for at least two years (in a five year period prior to the sale) in order to keep tax free gains. If you bought a home and lived there for two years, then rented for two and sold the property you would qualify. If you lived in the same property for two years, but then rented it for five years you would not qualify.
Take this for what it's worth. Get married - one against the world is living tough! And stay married! It's true that never divorcing will save you big bucks, but if you never marry in the first place, you likely won't get the big bucks! This is a world of two's, and you will miss a lot of social opportunities without a spouse.
And children...they are not just expenses! There is more to "wealth" than just money. A good life lived is 30 years of wealth to look back on - and to look forward to! You may curse having to support a family, but that necessity will force you to earn and save what needs to be earned and saved. It will all come back to you, in spades.
Take it from one who's been there. You don't begin to accumulate real wealth until you settle down with the right partner (choose wisely), and become a parent. If nothing else, it forces you to grow up!
Hey, there's one problem with your point and that is you gotta be good looking enough to get married, like have some sex appeal, you know. After all, there's some guys out there that girls wouldn't want to touch with a ten ft. pole.
Ignore coupons and gas prices. It's a waste of time and so minuscule that the penny counting is virtually irrelevant. Besides, coupons encourage spending.
Great post, and good point about coupons and penny counting.
I see this all the time in people that have virtually nothing. Lots and lots of penny counting, trying to save $1 here, $.50 here. There's nothing necessarily wrong with saving money, but I think penny wise/pound foolish type thinking can be a trap.
I see it in people I know who use ebay, listing tons of stuff only on .10 cent listing day. If you're in debt or paying 15% on a credit card, the .10 cents doesn't matter.
Or trying to save money on gas. Or trying to find the highest savings rate or money market fund. They all pay within a percent or two of each other. It's negligible if you dont have much money to start with.
I've also read somewhere, that people who go bankrupt or are really deep in debt ($50 or $75 k, and they can barely keep their head above water), one of the big factors they all had in common was that they couldnt think ahead by more than a day or a few days. I think it was written by someone that worked in a credit counseling office?
I've seen some people that are brilliant in some areas, but flat broke. They never seem to accumulate anything. And there are other people, not so smart, medium IQ, but they plug away, and end up with a nice nest egg.
Except in rare cases, I dont think its ever just one thing that does you in financially. Its a pattern of behavior.
I applaud your determination. A couple of words of advice. If you want $10 million in 30 years, assuming a conservative 7% annual return, you'll have to save an average of $105,000 each year - starting right now.
To reach your goal, you'll have to use every available option to build wealth. Take for example the current tax code that enables a single person to live in a home for 2 out of the last 5 years and sell it, keeping up to $250,000 of the gain tax free. It's $500,000 for married couples. So, consider buying an older home in a good school district where prices are pretty high and have a good track record of increasing. In other words, find the best neighborhood you can and buy a 3-4 bedroom home with a good yard. Get a couple of roommates and charge them rent. They'll help pay for your house. Over time, fix the place up - don't let your roomies trash it or treat it like their frat house.
When it's time to get married, refinance the house, taking only the minimum amount of cash out to purchase a basic home for you and your wife that can be fixed up over time. Continue to rent your previous house. As you improve your new house, keep an eye on the market. When you notice homes around you selling for what you think are high prices, put your home on the market - and yes, sell it yourself. You can get a good closing attorney to help you with the documents. If you can't get a good profit, at current market rates, then stay for another year or so. When you do get a good profit, roll it into a better home in a better neighborhood without taking on much more debt. If you get to a price range where a few years appreciation will equate to $250k to $350k, you can move every few years and sock away a substantial amount of money tax free. When you finally decide to have kids and stop moving around so much, buy an affordable home in a good school district and pay cash. You should have a few dollars left over. Take the money you had been spending on a mortgage and buy another rental home. You will get wealthier investing in real estate that virtually any other investment vehicle. And you'll always have more tax laws in your favor, such as the 1031 exchange allowing you to "swap" properties and avoid the tax penalty.
For example, let's say you buy a $250,000 home and put 20% down. On a 30 year 6.5% mortgage, you'll pay about $1265 per month, excluding taxes and insurance. If you rent each bedroom for $500 per month, your cost will be only $265 per month, plus taxes and insurance. Who knows, you may be able to get more. Now, you only put down $50,000. But every year you are reducing the principal portion of your mortgage about $2000. And if the value increases, let's say 4% per year, that's another $10,000 per year. (That's another reason you'll have to take good care of the place!) Add those together and you've got about $12,000 per year return on your $50,000 investment, or a 24% annual return. And you're getting to write off the interest on the mortgage against your income while somebody else pays the majority of the debt for you.
I agree with you on the above. I knew a girl who bought a 5 bedroom home in Fort Lauderdale in 1979. A lot of my co-workers laughed at her but she did exactly that - rented out the 4 bedrooms at $400 per month - and years ago, sold the home for a nice profit. I met up with her a few years back and she is still not married but doing so well financially. Smart move.
Last edited by Bette; 04-08-2008 at 03:48 PM..
Reason: Changed a wrong word!
I recently read a book called The Wealthy Barber and I found it amazing how compund interest works. My goal is to still invest in Real Estate some day on top of investing in Mutual Funds and so on but I'm wondering if anyone out there has a personal finance plan that has been a major success. I'm 29, and recently just maxed out my Roth IRA for 2007 and plan on maxing it out every year. On top of that, I put 10% of my net income in Mutual Funds and put 6% in my 401k since my company will match 50% up to 6% once I'm completely vested. I'm curious to see how other people invest. My goal is to be worth at least $10 million by the time I'm 60. Anyone have a recipe for success that could make this possible?
Well... I'm 30 and married so I might approach things differently than others. But here is how my husband and I do things:
We max out our Roth IRA's every year. My husband puts his gross income 13% into 401K (his company also does 6% matching). We try to shelter our money from taxes (paying med expenses & preschool through flex accounts, mortgage interest deductions, etc.). We also sock away money for college for our girls, have an emergency fund, a low debt to asset ratio, and no credit card debt. We live modestly - don't buy fancy cars (my car is reliable but 5 years old) but we do buy real estate income property. The income property is by far the biggest money maker of all of our investments combined and this is not including appreciation (even w/ the recent housing slump - the cash flow has still steadily increased). We believe in "passive income" and that is what we go after.
Hey, there's one problem with your point and that is you gotta be good looking enough to get married, like have some sex appeal, you know. After all, there's some guys out there that girls wouldn't want to touch with a ten ft. pole.
I would dis-agree.
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My exact words also....
