Financial prep - don't rely on Social Security

[USMC1911]

The thing is, you still need a roof over your head

I think you totally missed my point. My point was that capital is king and paying cash is not always the best way to create wealth. Financing is sometimes better than paying cash let your money make you more. I never advocated for not buying a house, just that paying for it in cash might not be the best use of that cash. YMMV

 

[The Heretic]

The smartest thing I ever did was pay off all of my debt.

I believe that for most people, it is a much better thing that the only things they finance are those things they absolutely need now, and cannot afford without using a debt instrument.

Since I paid off my debt, I have only paid cash for my cars or guns or anything else except my property/house. The latter I bought with a mortgage because I needed a roof over my head, I had no debt otherwise, I had the cash to make the down payment, I had (and still have job security) and finally lived where I wanted to (instead of 200+ miles away from my family).

Being without debt (before I bought my house) allowed me to take risks, such as moving to a different location, and taking different jobs. It also allowed me to weather times of unemployment, while at the same time having savings to take care of unexpected expenses.

Stuff happens, jobs go away, people get sick and/or injured.

Last year I had $50K of medical expenses. Insurance paid 90% of that, but that left me with $5K of medical bills. I also paid about $15K of med bills for a family member. This year I was in a car wreck that cost $12K to repair the car - fortunately insurance paid for all of that. Just before that accident, I put $3300 in repair/maintenance into that car. Just last week I injured myself and had to go to the ER - $$$ med bills from that too (at the very least deductible which I paid before I left the ER). Last week I had to new tires for the car - $850.

I don't like debt at all. I don't like paying twice for something. I would much rather have the cash in something relatively liquid that I can cash out, than have debt that I pay interest on.

YMMV.

 

[GWS]

Plus one on being out of debt. Best course would be not get into debt in the first place, but life happens.
Getting out from under is a great feeling.

 

[USMC1911]

I get life happens and debt sometimes can't be helped. When I'm 47ish house should paid for as I only owe 150ish. Now the LLC that the comercial property is under not a chance just so much debt involved. Its cash flow positive by a good amount but I'm still leveraging it to buy more when and if the time is right. If I told you how much debt at 41 I'm in you would poop yourself. The plan is to have most of it paid around 55 and retirement about the same time. Doing my best to make it happen but life can always get in the way.

 

[The Heretic]

Business debt is different - especially if you are protected from personal bankruptcy and/or the debtors going after your personal assets by having that debt owed by a business entity instead of you personally. Often to make money you need money.

No - I am talking about personal debt.

Myself, I am not an entrepreneur or even a manager - although I will say I could do a better job at either of those than many people I have worked for, if I chose to do so. No, I am a techie and I much prefer to just offer my skills and experience to the highest bidder and let them worry about paying the bills, handling customers, etc., while I do my what they hired me to do. When their business fails, then I can move on and put their crazy ideas about what is marketable behind me while depositing my severance check and getting a raise at the next gig because now I have even more experience and skill that is in demand.

To each their own. My older brother is a business owner and successful well beyond what I make - by an order of magnitude. That is not for me. What works for one person is a foolish endeavor for another. I like low risk, low stress, concentrating on what I like to do.

 

[The Heretic]

BTW, the plan is 15 more months - then I retire.

I may work beyond that time (if I think I need to stash more cash), but if I do, then I will probably cut my hours down from 40 to 30 (the minimum to have benefits, like insurance), and work at least one of those days from home. That would also mean delaying SSI, which in turn means more $$$ per month later.

I get more done at home - at the office it is not uncommon for people to be lining up at my desk to ask me questions about how something works or how to do something (I hope by next year that will be less common, but it comes with the job - *sigh*). The downside of living out in the boonies is the commute time. If I can cut that down by only going into PDX twice a week, then so much the better.

 

[DB is Here]

I'm also a believer in no debt outside of real estate. Andrew Carnegie one of the wealthiest of his time said. "Pay cash for things that depreciate and pay on time for things that appreciate."

 

[The Heretic]

I'm also a believer in no debt outside of real estate. Andrew Carnegie one of the wealthiest of his time said. "Pay cash for things that depreciate and pay on time for things that appreciate."

Over the years I adopted the philosophy that unless I absolutely had to have it (not just wanted it, but really needed it), that if I didn't have the spare cash to buy it, then I didn't buy it. The main reason a LOT of people get into financial trouble (and/or don't have retirement funds) is because they bought something trivial on "credit" (debt) - like a brand new car (or fancy wheels for their car), or TV, or furniture, or cell phone, or a cruise, etc.

 

[USMC1911]

I for the life of me will never understand the paying cash for anything over a few thousand bucks. I'm not talking about a credit cards but things likely to be financed. Let's look at a truck. Say you purchase this truck for $30,000 in May 2013. No money down at 5% for 72 months. Your payment would be around $483 and at the end with intrest the total would be $34,787. Yup you paid $4,787 in intrest.

Let's say you did not finance this truck instead you took money out of your Roth or 401k or whatever to buy it. Any idea how much money you just left on the table? The S&P 500 returned 82.5% over that same time period. Your $30k you took out so you didn't have to pay that interest rate just cost you almost $25,000 in compound intrest. Almost enough to pay for the truck by itself. I'm not advocating buying things you can't afford and getting a bunch of debt just to stay up with the Joneses but financing is sometimes smart.

 

[DB is Here]

Over the years I adopted the philosophy that unless I absolutely had to have it (not just wanted it, but really needed it), that if I didn't have the spare cash to buy it, then I didn't buy it. The main reason a LOT of people get into financial trouble (and/or don't have retirement funds) is because they bought something trivial on "credit" (debt) - like a brand new car (or fancy wheels for their car), or TV, or furniture, or cell phone, or a cruise, etc.

Self discipline...Often as common as common sense...

 

[DB is Here]

I for the life of me will never understand the paying cash for anything over a few thousand bucks. I'm not talking about a credit cards but things likely to be financed. Let's look at a truck. Say you purchase this truck for $30,000 in May 2013. No money down at 5% for 72 months. Your payment would be around $483 and at the end with intrest the total would be $34,787. Yup you paid $4,787 in intrest.

For some it's about risk aversion. If you lose a revenue stream (Job, Business or passive income) and can't make your payment, then the bank comes and gets it. However if I own everything (have title) then I keep it or can sell it to live if need be. To me payments on anything that doesn't appreciate is the one single thing that gets in the way of creating true wealth. I've met folks that are rich of paper, then the economy burped and they we're left in ruins...that always scared the crap out of me.
It's about pride of ownership vs. pride of possession, for me at least.

 

[2ndtimer]

I get life happens and debt sometimes can't be helped. When I'm 47ish house should paid for as I only owe 150ish. Now the LLC that the comercial property is under not a chance just so much debt involved. Its cash flow positive by a good amount but I'm still leveraging it to buy more when and if the time is right. If I told you how much debt at 41 I'm in you would poop yourself. The plan is to have most of it paid around 55 and retirement about the same time. Doing my best to make it happen but life can always get in the way.

I understand what you are saying, that leverage can work and looks great on paper, IF everything goes according to plan. The problem is that sometimes, the plan doesn't work. And the paper wealth goes poof!
Example: Back in late 2007, my brother, sister and I received our inheritance from our parent's estate. The stock market had been averaging around 11% growth over the past 5 years. My retired brother handed his inheritance to his financial advisor, who invested it in equities. My sister and her husband invested half of hers in the market, and put the rest in CD's. I paid off our house, and kept the rest in cash, figuring I would dollar cost average it into our Roth IRA's over the next few years. Do you recall what happened in 2008? My brother saw about 40% of his inheritance evaporate, my sister took a 20% hit, and I basically had a risk free 4.75 % return over the next 7 years by paying off my mortgage, as well as investing as the market slowly recovered.
Buying highly leveraged commercial property carrie's a similar risk. If the economy tanks, and you lose tenants, how long can you feed it to keep it? And if the local market tanks, and there are massive foreclosures, how quickly can your equity disappear?
Yeah, I listen to Dave Ramsey, and while I don't subscribe to everything he promotes, having no debt and a paid off house at 52 worked out pretty well for us. I have zero regrets at "missing out" on the opportunity to have invested that money hoping for an 11% return in order to keep paying 4.75% interest to the bank.

 

[USMC1911]

For some it's about risk aversion. If you lose a revenue stream (Job, Business or passive income) and can't make your payment, then the bank comes and gets it. However if I own everything (have title) then I keep it or can sell it to live if need be. To me payments on anything that doesn't appreciate is the one single thing that gets in the way of creating true wealth. I've met folks that are rich of paper, then the economy burped and they we're left in ruins...that always scared the crap out of me.
It's about pride of ownership vs. pride of possession, for me at least.

Imo you just made my point for me. Why would you take money out of something that is appreciating to save a tiny bit on intrest? People have different strategies and different risk tolerance.

 

[DB is Here]

People have different strategies and different risk tolerance.

Nailed it. As you stated, you should have a plan and do what works for you.

 

[USMC1911]

I understand what you are saying, that leverage can work and looks great on paper, IF everything goes according to plan. The problem is that sometimes, the plan doesn't work. And the paper wealth goes poof!
Example: Back in late 2007, my brother, sister and I received our inheritance from our parent's estate. The stock market had been averaging around 11% growth over the past 5 years. My retired brother handed his inheritance to his financial advisor, who invested it in equities.

We can use this timeframe as an example.
Say you invest 100k in the S&P in December 2007 right before the meltdown.

Your investment would now be worth.... $195k
I get it investing is not for the impatient. Know what you own.

Edit:
At your 4.75% intrest rate on that same 100k you would have paid $31,385 in intrest in the same time frame. You just left 60k on the table.

 

[USMC1911]

One more thing if you brother was retired and his financial advisor was telling him to invest into equity's his advisor was the WORST! Risk is for the young folks that have time to recover if stuff goes bad not the ones that will need steady retirement income soon.

 

[The Heretic]

For some it's about risk aversion. If you lose a revenue stream (Job, Business or passive income) and can't make your payment, then the bank comes and gets it. However if I own everything (have title) then I keep it or can sell it to live if need be. To me payments on anything that doesn't appreciate is the one single thing that gets in the way of creating true wealth. I've met folks that are rich of paper, then the economy burped and they we're left in ruins...that always scared the crap out of me.
It's about pride of ownership vs. pride of possession, for me at least.

A particular idiom comes to mind; it isn't how much you make, it is how much you keep. Or conversely, it isn't how many toys you have, but how much you owe on them.

I have a friend who has a brother that is always teetering on the edge of homelessness. When I was moving down here from Seattle, I gave this brother a bit of money to help me pack up my stuff and load it into a moving 'Pod'. We were talking and he was lamenting how he had very little (he was sleeping in his car with all his possessions). I asked him if he owed anybody any money and he answered "no". I commented then that he was ahead of 90% of the country then, because while he had very little, he owed nothing to anybody, so he was at least in the black, whereas most people's debt outweighs their assets.

I have debt, but my assets/equity is over double my debt, so I am well in the black. My equity is my real estate alone is equal to my debt - at least on paper.

Plus I have guaranteed income (SSI, not to mention income from my IRAs and 401K) for the next 20 or so years (yes, SSI is not going away) - so even if I lose my job tomorrow, I won't lose my house. I can survive, make my mortgage payments and buy groceries with SSI. My 'interest' income alone from my retirement funds should be enough for everything else and then some.

 

[The Heretic]

I too lost 40-50% of what I had in the market - twice. Once during the Dot com crunch (I lost my job that time, to boot - I was unemployed for 2 years - TWO years without a job, and $40K in CC debt) and again in 2008.

On paper.

Economics 101:

1) Buy low, sell high.
2) Don't put anything in the market that you aren't willing to let ride should the market tank.

2011 rolls around and a past employer is liquidating their assets. I needed to roll my funds into an IRA. The funds I had in a 401K in 2001 went from one employer, to the next who had bought them, to yet another (they wound up in Kodak who had bought the co that bought the co I used to work for). When I finally tracked it down, my funds had doubled - I had let them ride.

From 2008 to 2012, not only had the other funds come back, but they made up for going down and then some.

Over time, the market on average makes about 7% a year. But you gotta let it ride - rule #2. If you panic and sell when the market tanks, you will lose money because you violate rule #1.

In fact, whenever the market tanks, that is when I double down, because the price of the funds has gone down, so I can buy low. I know the market will come back (like it did this year) and the lower I buy, the more money I will make when it comes back.

My plan though is to not touch it if at all possible, or touch it very little. I want to leave it alone for at least 10 years to let it hopefully double so my daughter has something to retire on in 10-20 years.

 

[CoastRange57]

Really? And why is that?

A 401K is free money that you can put to work for you.

 

[parallax]

Last loan i ever had was in 1993 when i bought a new truck, within 2 months i paid it off, and have never borrowed again, like the heretic, if i cant pay cash i wont buy it. i currently have a few C.D.'s that i rotate on a 6 month basis, that make around 2.3 to 2.5 percent and are FDIC insured. I am still working and saving, i have large 401K and I.R.A's that i cannot use till later years in life. I have a few years left before i can collect social security as i am still too young. but plan on keeping my taxed income down so i don't have to pay taxes on it, thru use of cash savings and interest bearing c.d.'s. Since the government at this point in time cannot tax a person on savings withdrawals , that will be my living expenses to keep my actual earned income down to avoid tax. until a point in time when i will be forced to actually take 401k, I.R.A. and S.S. monies. hoping to get some of that S.S. money back if the system doesn't implode. Last year i discovered, somehow my S.S. contributions where double what they should have been, I called S.S.I. they were totally useless and clueless as to why this happened, i called my accountant, he said " dont worry about it," all i can assume is someone was using my S.S.I. number and where making deposits into my account.