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Speaking of all this Millionaire stuff...

Has anyone watched or planning to watch Oprah today?

There is a guy on there that has 8 "secrets" to amass extraordinary wealth.

I agree with most of them:

Eight Secrets of the Wealthy

Finance expert Ric Edelman reveals the secrets of the rich — and how you can find extraordinary wealth.

1. They carry a mortgage on their homes even though they can afford to pay it off.
Keep your money working for you. Every dollar paid to the bank is one less that you have to invest.
Your house will grow in value no matter what.

2. They don't diversify the money they contribute to their employer retirement plans.
Contribute the maximum allowed to your employer retirement plan.
Put all of your 401(k) in stocks, and don't touch this until retirement.

3. Most of their wealth came from investments that were purchased for less than $1,000.
It does not take a lot of money to make money.
A small amount of money (even a dollar a day!) invested over a long time will yield large returns.

4. They rarely move from one investment to another.
Buy quality investments and hold on to them for the long term (longer than five years).
Don't check your investments obsessively; in fact, Ric says you shouldn't even open the brokerage statements!

5. They don't measure their success against the Dow or S&P 500.
These indices are meaningless. Do you truly know what they stand for?
Track your own goals.

6. They devote fewer than three hours per month to their personal finances.
Making money shouldn't take a lot of time studying and planning.
Once you've done your initial research, don't look!

7. Money management is a family affair.
Don't make money a taboo topic. The earlier you start talking about finance with your kids, the better.
Tax your child's allowance; he or she will learn to appreciate how money is earned. Set the "taxed" portion aside in a mutual fund that will mature when he or she is 18.

8. They don't pay attention to the media.
You don't need lots of information to be successful.
The media have to sell magazines and gain readership, so they must continually present new stock tips. They're not in the business of giving you the same financial advice each day.
The media focus on the moment; you don't need to hear that.


I have a real problem with #1. Keeping a huge debt like a mortgage for 30 years just so you can invest the tiny amount (equivalent of 1 payment per year...his own words) makes NO sense to me. In my case that only works out to about $83 per month. I much prefer to pay off my mortgage within a couple years (say 10), keep investing the "extra" money I have from saving in other areas and then have a full $1000 to invest every month!! Imagine the hundreds of thousands in interest one could save over 30 years!! That alone adds to your bottom line when you retire!

Let me know if you agree

CassandraP


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I just finished watching today's episode of Oprah as well and had the same reaction to tip #1!! DH and I recently made the decision to start paying extra towards our mortgage on a monthly basis, so I was disappointed to hear this advice. I would have to agree with you - that the long term interest savings are the real benefit - and the psychological boost of "beating" the system and getting that much closer to owning your home free and clear!!
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<I just finished watching today's episode of Oprah as well and had the same reaction to tip #1!! DH and I recently made the decision to start paying extra towards our
mortgage on a monthly basis, so I was disappointed to hear this advice. I would have to agree with you - that the long term interest savings are the real benefit - and
the psychological boost of "beating" the system and getting that much closer to owning your home free and clear!! >

It may be a psychological boost to pay off your mortgage early. But from a financial standpoint it seems it would make more sense to keep the mortgage. If the interest of your mortgage is in the single digits, you should over time easily be able to earn more money by putting the money in equities (rather than pay off the mortgage). The historical return of equities have been higher than the single digits.

On the other hand, if this was the 70's with interest rates in the 20% level, the advice might different.

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Lots of fallacies in this set of 'claims'.


#1 big mortgage.....while Kiyosaki in RDPD advocates this, and many tax planners who want to minimize your current tax payments, rather than your long term financial health necessarily, advocate buying big house with big mortgage, you will find most millionaires and aspiring millionaires buy reasonable houses in reasonably priced areas, and STAY IN THE SAME HOUSE forever, and don't refinance. No moving up to bigger house because they need more 'mortgage interest deduction.

Similarly, houses don't always go up. Talk to people in Dalls in 1983, who bought at the peak....they are about even after the real estate crash of 1986, 14 years later...... most houses are 'poor' investments overall, especially when inflation is only a few percent.

A house bought in Dallas ten years ago is worth maybe 10-15% more now.

The secret is to buy LESS house than you can afford, and invest the rest.

You won't necessarily make more money in 'the market'. DOW, SP500, are down 10+% in a year. If you had borrowed money and sank it into market, you would have lost 10%, not made any money in past year. NO telling what this year will do either.....what worked in the 1990s won't necessarily work in the 2000s....

Every dollar you owe to the bank is a dollar of debt. It subtracts from assets. THe more you owe, the worse it is.
____________________________________________________


#2 - for young people, 100% stock is probably not bad advice....for someone within 5-10 years of retirement, it is high risk to be 100% in stocks.

You always want at least six months living money somewhere accessible.
_____________________________________________________

#3 could be, if they bought them 40 or 50 years ago....almost irrelevant unless they specify the holding time.....you could have invested $24 in the 1600s, and it would be worth trillions today....so what?
___________________________________________________

#4 Yes and no.....long term buy and hold is a great philosophy (and John Bogle says it very well, along with Malkiel in A Random Walk Down Wall STreet).

Look at your brokerage statement every month. Any error not caught within a reasonable time, usually 30 days, is considered a valid transaction. If someone zeroes out your account, and runs off with the money, if you don't look at your statements, it will be you, not the brokerage, responsible for the disapperance of your money!....

That is failure to do due diligence !

That said, don't worry about exactly what your investments do month to month...it is yearly trends that are important....
___________________________________________________

#5...Don't get hung up on SP500 or DOW, but if your investments lag, then you aren't doing a good job.....

INDEX INDEX INDEX..... see THe Asset Allocator......by Bernstein, or visit his site, the Efficient Frontier......

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1. They carry a mortgage on their homes even though they can afford to pay it off.
Keep your money working for you. Every dollar paid to the bank is one less that you have to invest.
Your house will grow in value no matter what.

I have a real problem with #1.


I just saw the show.

What's funny is, #1 was the only one I wholeheartedly agreed with. It may SEEM to make more sense to pay off your mortgage, but for most people it isn't. In your own example, it's a question of what you can do with that $83.

The way to look at is this. Your mortgage carries an interest rate of let's say 8%. If you put that $83 dollars toward you mortgage, essentially what you'd be doing is getting a return of 8% on your $83. Or you might choose to put that $83 in the market. You're probably going to make more than 8%. Possibly more like 10% to 15%.

Trust me the math works. (I've run spreadsheets on it myself).

But what I want to know is, what's up with Edelman's #5? Don't measure yourself against the market indexes? Well how that heck are you supposed to know if your money is in the best place it can be? The only way to do that is to measure yourself against some benchmark.

Edelman's "findings" are nice but I don't think they are very useful for the most part.
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Something else to keep in mind and I'm sure there will be differing opinions on this one.

YOU CAN'T SPEND YOUR HOUSE. Money invested in the market becomes spendable cash later. How does one spend the "equity" they've built up in their home. Well really there's only two ways to do so. 1. Borrow agains it and 2. sell your home. In either case, it doesn't really seem like you own that equity at all. Does it.

Remember, cash is king. Investing in the market is more profitable, more flexible and thereby more valuable than "investing" in your home/mortgage.
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Eight Secrets of the Wealthy

Finance expert Ric Edelman reveals the secrets of the rich — and how you can find extraordinary wealth.


I read this book and considered it a waste of money. I've also read The Millionaire Mind, The Millionaire Next Door, Think and Grow Rich, and a few others, all of which I would recommend over Edelman's book.

NukeJohn

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The way to look at is this. Your mortgage carries an interest rate of let's say 8%. If you put that $83 dollars toward you mortgage, essentially what you'd be doing is getting a return of 8% on your $83. Or you might choose to put that $83 in the market. You're probably going to make more than 8%. Possibly more like 10% to 15%.


Okay, I can live with that...but you must then subtract the 8% interest you are still paying on the mortgage (If you are getting 10-15% in one hand, but paying 8% out of the the other hand)...brings your gain down to 2%-7% LESS than if you were to just pay off your mortgage. Besides, there are plenty of other places to cut $83. I think the BEST investment is peace of mind. There is no better peace than living debt free!!

It's just bad advice! A previous poster made a good point though...buying less house than you can afford. That is the key! Live on less than you can afford, and invest the rest. My husband and I live very well, we have cable, a large boat, I drive a luxury car (used that we paid about 30% less for), eat steak, go to Europe every couple of years, have good savings...I do not promote living stingy and not enjoying you life now so you'll have money later....Some of the things I see on LBYM really make me sad. But don't go into debt to live a life that you'll spend the rest of your life paying for.

Okay, this has turned into a book...
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< I think the BEST investment is peace of mind. There is no better peace than living debt free!!>

It's hard to argue with that. But I think this is the difference between the millionaire mind and the peson without the millionaire mind.
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The way to look at is this. Your mortgage carries an interest rate of let's say 8%. If you put that $83 dollars toward you mortgage, essentially what you'd be doing is getting a return of 8% on your $83. Or you might choose to put that $83 in the market. You're probably going to make more than 8%. Possibly more like 10% to 15%.

Okay, I can live with that...but you must then subtract the 8% interest you are still paying on the mortgage (If you are getting 10-15% in one hand, but paying 8% out of the the other hand)...brings your gain down to 2%-7% LESS than if you were to just pay off your mortgage. Besides, there are plenty of other places to cut $83. I think the BEST investment is peace of mind. There is no better peace than living debt free!!


First off, I am one of those people who is paying down their mortgage as fast as reasonably possible. For me, I just hate debt of any kind. But there is more to consider than the 8% (or these days more like 7%) mortgage vs. your investment return.

If you take the tax deduction into account for your mortgage, your real interest rate is less than 7%. Depending on your tax bracket and your state taxes, let's say you are paying about 30% in taxes. If so then that mortgage interest deduction is like a 30% reduction in interest, so your actual interest rate is
7% * 70% = 4.9%

At this rate, it may make more sense to put your extra payments into a money market account than to pay down your mortgage. I still hate debt however, so I will continue to pay down my mortgage ahead of time.

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"The way to look at is this. Your mortgage carries an interest rate of let's say 8%. If you put that $83 dollars toward you mortgage, essentially what you'd be doing is getting a return of 8% on your $83. Or you might choose to put that $83 in the market. You're probably going to make more than 8%. Possibly more like 10% to 15%."

There are lots of 'ifs' in the above statement.....

But let us assume your mortgage rate is 8%.....

If you don't have lots of other deductions to get you above the itemized deduction threshold, or if you earn enough so your itemized deductions start to disappear (phase out), you are not getting any benefit from 'tax savings'......

If you have a $80,000 balance, with 8% interest, you have $6400/yr interest expense.....of which, most is not benefitting from being in that standard deduction range......so you don't benefit a lot..

The other thing, as many people have found, is that putting money in the market is not a sure thing....if you had gotten a big bonus in March of 2000, and rather than making a big payment toward your mortgage, you sunk it in the market in march of 2000, you would be down 10 or 20%, depending what you put it in...if you stuck it in high tech, you could be down 80%....

"trust me" the math works??? Yes, it does, and big time NEGATIVE. Try telling that to someone who did the above...it works, and your return was 20 or 30% less than if you had paid down your mortgage by that amount. You got a guaranteed 8% return on your money...vs a 10 or 20% loss.....nearly a 30% difference......

In times of high inflation (where you are paying back with less valuable dollars), then it makes sense to not pay back the loan quickly. In times of low inflation, for many people, it is a draw.....

Now, if we are talking of slowly paying down your mortgage, ie, double payments(chop mortgage by 3/4 or so) , or 13 payments a year instead of 12 (which will cut the mortgage in half), you will still be 'investing' in your house with each extra principle payment.

Since the best 'guaranteed' type rate of return on CDs or treasuries is now under 7%, getting 8% guaranteed isn't that bad.....

Then again, I would put extra money into IRA/401K first (get tax deferment and not pay current tax on the money, always a good idea), make sure you have at least a six month MM fund of emergency cash, participate in discount stock plan if you have it, and then consider extra payments toward mortgage.....

Having a 'paid for' house, especially when you are thinking of retiring, is a great feeling, and minimizes your monthly need for current income.....

Doing a house refinance, and taking money out is often the most stupid thing people do.....they take their 'savings' and 'investment earnings', and literally blow them of luxury goods they don't need..... that money, either left in, just refinancing the current balance, or taken out and immediately put into long term, index funds or equivalent, could be worth millions at retirement, and a 10 to 15 year EARLIER retirement date.

However, the temptation is there to 'release' all the equity in your house, and spend spend spend.......and most people do.....dooming them to work until 65 to pay for their lifestyle.....(of often 'frills').

If you can't afford it out of current income, and pay cash for it, you shouldn't be buying it (other than a first car, and a house).

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If you take the tax deduction into account for your mortgage, your real interest rate is less than 7%. Depending on your tax bracket and your state taxes, let's say you are paying about 30% in taxes. If so then that mortgage interest deduction is like a 30% reduction in interest, so your actual interest rate is
7% * 70% = 4.9%

At this rate, it may make more sense to put your extra payments into a money market account than to pay down your mortgage. I still hate debt however, so I will continue to pay down my mortgage ahead of time.


One thing I forgot to take into account in this, is that the interest you gain on your money market will be taxed, so maybe this isn't such a great deal. I would say it makes sense to fund your 401(k) or your traditional IRA and/or your ROTH IRA before you pay down your mortgage. $2000 gaining 5% tax free in a Roth IRA money market is adding to your net worth faster than the real interest rate of 4.9% by paying down the mortgage.

Since you have to pay tax on an after tax investment, it still may make sense to pay off the mortgage unless you can exceed the 7% (or whatever it is) mortgage rate.

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I think the BEST investment is peace of mind. There is no better peace than living debt free!!

Very Very Wise...
I couldn't have stated it better myself.

-Rob
Long time proponent of living debt free!!!
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I think the BEST investment is peace of mind. There is no better peace than living debt free!!

It's hard to argue with that. But I think this is the difference between the millionaire mind and the peson without the millionaire mind.

Nils44,

You're obviously not a millionaire and probably don't know many, if any. The person with a million doesn't want to lose that million either. A house is a safer investment in terms of potential creditor attacks than money in the stock market. Peace of mind comes from various angles.

I know millionaires who haven't paid off their house and I know millionaires who have, the ones who sleep better are the ones who have.

Just my observation from my small corner of the world.

e

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Nils44,

I just reread what I wrote in the previous post:

You're obviously not a millionaire and probably don't know many, if any.

Please don't take that as harshly as I read it now. I really didn't mean to attack you personally. It's just that a dear friend of mine, who is at this status is having creditor problems from a civil suit.

Please accept my appology.

e
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"But I think this is the difference between the millionaire mind and the peson without the millionaire mind. "

You have to be careful here. In Stanley's book, the Millionaire Mind, he is talking about people with a net worth of over 10 million dollars.....net worth....most of these people don't need to borrow a ffew piddling couple hundred thousand to buy a house...

I'm sure Bill Gates didn't have to borrow money to buy his 'house'. any of the 15 million......and likely didn't......his exemptions start phasing out at a little over $130,000......and at his level, probably count for nil......or Tiger Woods.....or Madonna....

In Stanley's first book, the Millionaire Next Door, most of the people in the book had net worth of a few million, and had gotten there, mostly by being successful business men and women. Almost none had inherited significant amount of money. Yes, they lived in houses commensurate with their income often...but many also had lived in the same house for 20 or 30 years. They didn't live in 'mansions', have a gardner, cook, and chauffeur.....

They didn't go out of their way to buy ostentatious houses, and I don't recall any comment in the book about people buying big houses in order to get big deductions. Quite the opposite was true...most of them had 'dull' lives compared to the fake impressions left on tv.... preferred Coke and beer to expensive wines.....didn't touch caviar......at the interviews he conducted....didn't wear Rolex watches or piles of gold chains or fancy diamond pinky rings....that is the stuff of TV stories, of "Who Shot JR", and all the follow onl shows.....

Anyone wearing 40 lbs of gold chains like Mr T on the A-team, trying to fight or run, would lose every battle....just grab a chain and choke him to death...or give him a push, and over he goes....hee hee..


So I would clearly disagree with your statement that the 'millionaire mind' feels it is necessary to pay big interest on a big mortgage.

That said, it should also be noted that many of the millionaires Stanley interviewed had their net worth in other than stock, so it wasn't immediately able to be converted to liquid assets. In many cases, they did use leverage, both in their business, and in a mortgage, to conduct financial transactions. BUt in most cases, they were very conservative.

It was interesting to note, that in Stanley's book, he noted that doctors are often among the highest paid people. They tend, as a group, to have very low net worth compared to their income level. They have typically adopted a high consumption lifestyle (big house, expensive cars, expensive country club, expensive habits, expensive kids, etc) that inhibits their ability to accummulate assets and net worth.
They are usually NOT among the people in his book.

I would think that Kiyosaki, the so claimed 'author'of rich dad, poor dad, who gives pretty rotten advice, would certainly subscribe to this statement in one part of his book....in other he says to be debt free ....he has it both ways.....then again, he was homeless for a few weeks, living in his car, with both he and his wife with college degrees, barely making ends meet (in his book Cashflow Quadrant)....so you can take his advice for what its worth.....

No, methinks you watch too much TV.....

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<<<1. They carry a mortgage on their homes even though they can afford to pay it off. Keep your money working for you. Every dollar paid to the bank is one less that you have to invest. Your house will grow in value no matter what.>>>

I highly disagree with this advice about carrying a mortgage, and I'm speaking from a position of experience. Two years ago I started a new job and wasn't eligable for the pension plan in the first year. Therefore I decided to set aside that "extra" money and start working on paying off the mortgage. After one year, I had saved enough to pay off the mortgage, 20 years early. I thought long and hard about what to do, mortgage or stocks, after all the market was screaming high returns. I studied all the arguements, pros and cons, and stayed true to my nature of fisical conservativism and payed off the mortgage, time November 1999.

Of course hind sight is 20/20, but even if the market would've returned 50% last year, there is nothing like the peace of mind of owning your own home. That and the freedom of being able to tell your boss/world to take a flying leap. I work because I love it, not because I have too. I still have my money working for me, what was once my mortgage payment is now my monthly investment money.

JLC


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1. They carry a mortgage on their homes even though they can afford to pay it off. Keep your money working for you. Every dollar paid to the bank is one less that you have to invest. Your house will grow in value no matter what.

I had just started taxable investments when I purchased my primary residence, a condo. I also thought hard and long on what to do: pull out the money from my taxable investments and pay cash, or leave my investments in place and get a 80% mortgage.

I decided to stay invested and take out a mortgage.

I was already benefitting from itemizing, so additional deductions would reduce my taxes at my marginal tax rate, and I am still a good distance away from the phase-out amount. So, after itemizing the interest payments at both the state and federal levels, my 7.375% mortgage looks more like 4.83% after tax deduction. On the other hand, taxable investments, assuming long-term annulized return of 10%, would be between 6.55% (ordinary income tax rates) and 7.35% (long-term capital gains rates).

To assign real numbers to the above percentages, I could pay cash and then the condo would appreciate at whatever rate it will appreciate at (currently about 7%). Or I could take out a $66,800 mortgage, pay $4905 in interest for one year, but with reduced state and federal taxes to the tune of $1691, or a net after-deduction interest payment of $3214. If I project 10% annualized return from investments, the projected earnings from that $66,800 would be $6680, with between $1769 and $2303 in taxes (hopefully closer to the lower tax number for long-term capital gains rates, but with managed funds some of the gains will be short term), so the after-tax projected returns would be between $4911 and $4337. The net result is that I would probably be ahead by between $1697 and $1123. Of course, some years the market will produce better results, and some years will produce lower results. I didn't expect negative returns from the market, but that is just part of the short-term noise in a 30-year plan. 8)

It gets better: the amount of money going to interest goes down each year, and, because I am reinvesting distributions instead of skimming off profits for spending, the investment balance and thus the returns will usually grow each year.

Alternatively, I could have used the $66,800 to pay off the condo in full. The condo would still appreciate at whatever rate it would appreciate at.

I also consdiered that I have a decent job and I don't need the returns from my investments at this time so it looks like I can remain invested and meet normal living expenses from my 403(b)-reduced wages and even then still have enough to max out my 403(b), Roth IRA, and still add a little each month to my taxable investments. I also have a 6-month emergency fund spread out in a money market fund, CDs, and now I-Bonds. Also, if I don't liquidate my Oregon PERS before I retire, even if I don't work for a Oregon PERS contributing employer another day in my life, my pension would give me a pay raise, so if I still have my mortgage when I retire, I would still be able to afford my mortgage payments.

I also like the liquidity of stock funds: if I need the money, I can sell a specific number of shares or a specific dollar amount and have the money within three business days (though if the market is down I might end up selling at a loss) and liquidate just enough to meet my needs, but as someone commented, to get equity out of my residence I either have to get a home equity loan (which may be impossible if my income had stopped) or sell my place (which could take weeks or months, have high transaction costs, and it is either sell none of it or sell the entire place).

I have seen the argument of taking out as much mortgage as one qualifies for and investing as much as possible, but that strikes me as being too leveraged--if one needs the return of investments to meet mortgage payments and the market is down (as is the case for the last 10 months), the investments would hit a duble whammy: low value plus selling low.

On the other hand, my housing expenses are reasonable and living conditions quite acceptable, and I anticipate being here for many, many years. My after-tax-deduction costs for living here are just $50/mo or so more expensive than the apartment I rented for a decade, but I think it is worth it, and I am building up equity at $54/mo. Basically, I view my mortgage as a replacement for my rent, only now I have more say on what I can do to the walls and floor of my residence.

Now different people are in different situations, have different tax profiles, have different comfort levels with various types of debt, so what I am comfortable with won't necessarily be good for someone else.
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Houses/Condos as 'investments'

Again, a lot of 'ifs'.

Housing is not guaranteed to go up each year. there have been many markets over the past 40 years where housing prices stagnated, or lagged inflation. There have been many markets (usually region specific) where housing prices dropped 30%. I hesitate to call a house an investment. Yes, it has net worth, but you can't count on appreciation, and log that as long term savings. It is like a individual stock.....no way can you project it is going to go up 10.8% /yr.

One should not assume a house will always appreciate, and certainly not 7% a year. I can tell you that houses in Dallas suburbs have gone up about 2% a year for the past 10 years - there is still lots of land (even more than in 1990) available to build new houses, and buyers prefer new to old. Prices of applicances and other systems are less than they were 10 years ago (production efficiencies).

Talk to people in California - in one year, house prices have gone from 30% over 'market price ' , ie, offer 30% more than asking price, to less than market price in just one year.....the bubble is burst.....if California keeps having energy problems, who knows what prices will do.
_____________________________________________________

Long term, 20-30years, the market has historically returned 10.8%. However, short term, it has not.....from 1928 to 1938, it didn't do too well.....if I recall, it took from 1929 to 1950s for the market to recover......and many stocks never did (bankrupt).

Over a five year period, it is a crap shoot as to whether the market will be 'up' or down , and how much.
_________________________________________________

That said, putting all your eggs in one basket, whether it is all equities and no equity in your house (ie, 95% mortgage), or all equity in the house, no stocks, is NOT a wise plan usually.

If one is aiming at a debt free, financial independent state, about the only annual itemized deductions one should have would be real estate taxes..... and as the mortgage balance drops towards zero, the tax 'savings' on mortgage interest also goes to zero...


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The previous post makes several good points about stock and house appreciation. And since people are throwing numbers around, I'll give a few to back up my choice for paying off the mortgage vs. buying stocks.

My house @90k when bought, at the end of 30 year mortgage would've paid a total of @270k. If house appreciation kept up with inflation it's value would've been @290k. Thus a net gain of 20k. Throw in interest payment deductions, etc., would add another 80-90k for my tax bracket, so maybe a gain of 100k.

Now take my mortgage payment of @$900/month for the next 20 years, even if I got a measley passbook/CD return of 5%, I'd have around 330k, take away capital gains and I'm still around 280k.

So to me, in my way of thinking, I'm 180k ahead, plus the big advantage of owning my home outright.

JLC
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I recognize some of the names in this thread from the Retire Early Home Page but not others. Here is one slant on the mortgage thing that has been discussed there from time to time. It is an argument for paying the mortgage off sooner rather than later.

When you retire you are presumably withdrawing money from your portfolio for living expenses. (The conventional wisdom seems to say 4% per year is a "safe" withdawal rate.) Let's say you have a need for $40,000 in pre-tax income with housing expenses included. Let's also say your house payment is $1000 per month with $750 being P+I. Let's say the mortgage balance is currently $90K. So you would need a nest egg of $1,000,000 to sustain you in retirement. But if you pay off your house, you no longer have to pay the $750 per month (or $9,000 per year) P+I. At the 4% withdrawal rate, it takes $225,000 in your portfolio to generate $9,000 per year. So, if you pay the house off early, you have eliminated the need for that $225,000 to sustain your lifestyle, thereby reducing your required nest egg to $775,000. (And it has only cost you $90,000 to eliminate that need.) At 4%, you are generating $31,000 per year in income which should allow you to live exactly the same as you did on $40,000 with a mortgage. For people who are trying to accelerate their retirement by a few years, paying off the house early can be a very good strategy.

jtmitch

Disclosure: I have not paid my house off early. I was regularly paying additional principal each month for while but I am now earmarking $X per month (the amount I was previously applying toward principal) for a "mortgage prepay fund". I use a fairly conservative balanced mutual fund and keep the money separate from any other part of my portfolio. When the time comes to retire, I will redeem that fund and use the proceeds to pay off the mortgage. I will not go into retirement with a mortgage, but I feel the stategy I am following gives me a little more flexibility prior to retirement.
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one of the other items.......

FOr those with a mortgage....the mortgage company usually (not always, but 98% of the time) insists that they set up an escrow account for your taxes and insurance.

In my case, these taxes today are about $4400 a year, and insurance is $1200/yr. Many in this town pay 50% more than that.

Let us just take $5500....the mortgage company starts charging you on Jan 1 of the year for real estate taxes they will pay at the end of the year (or the last possible date, maybe Jan 31 of 2002). THey pay the insurance premiums once or twice a year, so let us assume they are six months ahead at all times on that.

SO if we assume they have your $4400 for a year, at 7% interest, they are making about $150 a year on YOUR money, plus what they make on the insurance money until they pay it.

In addition, they sometimes charge you fees for this escrow account.

In some places, real estate taxes are $8000 or $10,000 a year!...so they make even more money on your money!

Of course, not many have the discipline themselves to set aside the money, so the majority probably appreciate the convenience of the escrow account...but you are getting taken for a ride!.

I did manage, when my balance was less than 50%, to get them to NOT escrow my money...I paid my own insurance and taxes...

Just more of the aggravating things that make you want to pay off your mortgage quickly.....
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The other thing, as many people have found, is that putting money in the market is not a sure thing....if you had gotten a big bonus in March of 2000, and rather than making a big payment toward your mortgage, you sunk it in the market in march of 2000, you would be down 10 or 20%, depending what you put it in...if you stuck it in high tech, you could be down 80%....

Of course NOTHING is a sure thing. But the scenario of the market going down 10% to 20% in any given year is kind of a short sighted way of looking at the "pay down your mortgage" quandry. All you can really do is go with probabilities. And the probabilities say that long term (not even very long) the return in the market will beat the "return" you'll get on your mortgage. Probabilities also say that the market goes UP 75% of the time. The odds seem to be in favor of investing in the market. And even if most people were to try and pay off their mortgage early, it might take them 10 years to do so. I doubt seriously that the stock market would have lost to mortgage rates over such a long period of time. (Although I guess it's possible.)

Further, even if the return you would get in the market were equal to the return on the mortgage, the fact remains that YOU CAN'T SPEND YOUR HOUSE. I think cash is always king. To me, that's peace of mind. And I think most of the millionaires profiled by Edelman and Thomas Stanley agree with that sentiment.
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Nils44 writes:

It's hard to argue with that. But I think this is the difference between the millionaire mind and the peson without the millionaire mind.

euphoriant writes:

You're obviously not a millionaire and probably don't know many, if any. The person with a million doesn't want to lose that million either. A house is a safer investment...


euphoriant,

Seems the studies and surveys conducted by Stanley and Edelman suggest that most millionaires choose to carry a mortgage. I'm sure if restless nights were a problem for them, they'd choose to pay that debt off. Most have the ability to do just that.

So maybe, just maybe, the Millionaire Mind is just a little different.
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I think he has some good ideas, but I also reacted with total disagreement with the rule about keeping the mortgage. And no, your home WON'T appreciate no matter what. Look at some of the possibilities for over-priced houses around Silicon Valley, for example. Or watch formerly good neighborhoods go to pot and you'll see there are lots of factors in appreciating value of real estate.

I would rather pay a little extra money for the peace of mind of owning my safe haven. If I'm ever out of work by force or by choice, that's a significant amount of money I won't have to come up with each month to pay the mortgage. In a market like this, it's comforting; I can ride it out and keep on my long-term investment track even if I do quit work or get laid off.

Besides, it simplifies things enormously.
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<<<Further, even if the return you would get in the market were equal to the return on the mortgage, the fact remains that YOU CAN'T SPEND YOUR HOUSE.>>>

Not to be a wise-a**, but how about reverse mortgages?

JLC
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<<<Further, even if the return you would get in the market were equal to the return on the mortgage, the fact remains that YOU CAN'T SPEND YOUR HOUSE.>>>

Not to be a wise-a**, but how about reverse mortgages?


6 in one hand, half dozen in the other. No matter how you slice it, there are only two ways to "spend your house" [use the equity you've built up].

1. Sell it. Problem with that is, you'll either have to live in the street, or buy another house. And greenbacks don't make for very good building materials.

or

2. Borrow against your equity. Basically, you pay someone else (the bank) to use what is supposed to be your money (your equity). Now how is it that you have to pay someone else to use what's is supposed to be yours? Sounds more like, it (the equity) is THEIRS! And a reverse mortgage is just that - a mortgage. It's debt. It must be paid back. Maybe not by you, but certainly by your heirs. That whole thing about the bank taking possesion of your house and selling it on behalf of your estate to get what you owe, is hogwash. [As Flava Flav of Pubic Enemy fame would say, "Don't, don't...don't, don't .... DON'T believe the hype"!] It's a last resort on the banks part. Do you want to saddle your kids with the burden of repaying a debt you created?

Question.

If paying off the mortgage makes such economic sense, why would the wealthy individuals in Stanley and Edelman's books choose to carry a mortgage even when they can easily pay it off?

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If paying off the mortgage makes such economic sense, why would the wealthy individuals in Stanley and Edelman's books choose to carry a mortgage even when they can easily pay it off?

First I must say that I haven't read any of these books, but I must ask how many people are in these books? Do you really think this is a representative sample of the population that we are discussing? I don't know; I'm asking.

The reason I'm asking is because I have known several millionaires over the years and none of them carried a mortgage on their house.

I have also known several people who had assets of over a million dollars, but net worths far less than that, who did carry a mortgage on their house, could this be the difference here?

Curious,
e
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Stanley's book, "The Millionaire Mind" surveyed over 1,000 indidividuals, 733 who were millionaires. To find the millionaires he used a search method called geodemography. A method develop by Jon Robbin, a Harvard professor. The surveys were sent to 2,487 neighborhoods (selected from 226,399 neighborhoods) all around the country that were most likely to contain millionaires.

In Stanley's book, "The Millionaire Next Door", the same search method was used. In that study, 1,115 responded from all over the country and of those 385 were millionaires.

To be honest, I have only skimmed Edelman's book while browsing Barnes & Noble. But I believe he based his "findings" on interviews with clients he's visited with over the years. I believe he mentioned a figure of 5,000 clients (included all years he's been financial planner).

NOTE:
Worth.com and Harris Interactive conducted a poll of wealthy individuals (defined as a net worth of $500,000) called the Wealth Pulse. If anyone out there has heard of this poll and has access to some of the information, I'm sure we could learn a lot from it. It's a very costly poll. $2,000. It can be purchased on Amazon in case one of you free wheeling millionaires doesn't mind purchasing it. :-)

http://www.amazon.com/exec/obidos/ASIN/097071520X/ref=cm_mp_wl/107-4893128-8849349?colid=2ECZ1NNSJZ87Q

The Worth.com Wealth Pulse was developed by Worth Interactive to examine wealthy Americans' values, attitudes, beliefs and intentions, and to determine if and how they differ from those of the general population. Wealth and Values is the first in a series of surveys that will comprehensively document the point of view of high-net-worth individuals in America today. Wealth and Values is the result of a survey conducted by Harris Interactive, Inc., the global leader in online market research. Harris Interactive surveyed a representative sample of adults and wealth-market adults online, obtaining their responses on a series of subjects including happiness, security, charity, religion, employment and politics. For this study, the wealth market was defined as adults aged 21 or over with a household income of $150,000+ and net assets (not including primary residence) of $500,000 or more. In keeping with Worth Interactive's view of the wealth market as a highly varied group, responses were analyzed by age, gender, source of wealth, recency of wealth and level of assets. Highlights include facts and figures on attitudes towards charity, financial security, religion, faith and spirituality, relationships,career/employment, politics and children.
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I can live with that...but you must then subtract the 8% interest you are still paying on the mortgage (If you are getting 10-15% in one hand, but paying 8% out of the the other hand)...brings your gain down to 2%-7% LESS than if you were to just pay off your mortgage.
It's all fun and games until taxes come into play.
Don't forget you get to pay 25-30% (federal and state) taxes on your 10-15% short-term gains.
So, if you have $1 invested and it brings you $1.15, you are paying $.15 * 25% ~= $.04 in taxes.
Your total gain is:
$1.15 - $1 (original investment) - $0.04 (income taxes) - $.08 (mortgage expenses) = $.03

So investing money instead of just paying off the mortgage gets you extra 3%, and that's assuming 15% return on investment. Let's say return on investment is historical 11%, taxes would be ~= $.03 and your total gain is:
$1.11 - $1 (original investment) - $0.03 (income taxes) - $.08 (mortgage) = 0!!!
So if investment returns are historical you are not getting anywhere financially investing money vs. paying off the mortgage!

[Disclaimer - these numbers can be tweaked further.
1) I assumed short term investment gains. If these were long term, the effective rate would be 15% for most people. that would bring taxes down to $0.02 in the first example(15% return) and to $.015 in the second one(11% return). So you would be getting somewhere
2) If you assume you can deduct all your mortgage expenses AND itemize deductions so that your mortgage interest deduction is not eaten by not having the standard deduction, your real after tax mortgage expenses would be in 5-6% region, not 8%
]
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"For this study, the wealth market was defined as adults aged 21 or over with a household income of $150,000+ and net assets (not including primary residence) of $500,000 or more"

From STanley's perspective, most of these people would be serious UNDERACHIEVERS of wealth. Making $150,000 and only having a net worth of $500,000, if you are over 30.

Stanley's seven factors of the wealthy are:


1) the live WELL below their means

2) THe allocate their time, energy and money efficiently

3) They believe financial independence is more important that displaying high social status

4) The parents did not provide economic outpatient car

5) Their children are economiclaly self sufficient

6) The are proficient in targeting market opportunites

7) They chose the right occupation

In the Millionaire Next Door, the 'typcial' millionaire is 57, maile, married with 3 children.

One in five is retired

Annual median income level is $131,000, while the average is $247,000. The ones with incomes of $500,000 and above skew the average upwards. The 'typcial' mllionare has a net worth of 1.6 million.

The average net worth is 3.7 million.

The annual budgets for these poeple is 7% of net worth. that is, they live on 7%, per year, of what their net worth is....so if they are worth 1.6 million typically, their annual 'income' before taxes that they spend is about $110,000.

The average value of the home is $320,000, and 97% own their homes. Half have occupied the home for more than 20 years (which means essentially little or no mortgage interest!!!!!!).

The typically millionaire invests 20% of income.

STanley's formula to determine if you are 'wealthly' is:


Multiply your age times your realized pretax annual income. Divide by ten. this, less any inherited wealth, is what your net worth should be.

Example.....if 41 year old Mr X makes $143,000, has investmetns that return another $12,000, he has total income of 155,000. Multiply that times 41, equalling 635,500. Divide by ten, his net worth should be 635,500.

If you are in the top qurtile, you are a PAW, or prodigious accumulator of wealth.

If you are in middle quartiles (25-75% range) you are an AVerage accumlator of wealth. AAW

If you are in the bottom, you are a under accumulator of wealth UAW


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"
1. Sell it. Problem with that is, you'll either have to live in the street, or buy another house. And greenbacks don't make for very good building materials.

or

2. Borrow against your equity. Basically, you pay someone else (the bank) to use what is supposed to be your money (your equity). Now how is it that you have to pay someone else to use what's is supposed to be yours? Sounds more like, it (the equity) is THEIRS! And a reverse mortgage is just that - a mortgage. It's debt. It must be paid back. Maybe not by you, but certainly by your heirs. That whole thing about the bank taking possesion of your house and selling it on behalf of your estate to get what you owe, is hogwash. [As Flava Flav of Pubic Enemy fame would say, "Don't, don't...don't, don't .... DON'T believe the hype"!] It's a last resort on the banks part. Do you want to saddle your kids with the burden of repaying a debt you created?"
_____________________________________________________

If you sell your house, you get a pile of money....and I assume apartments will still be around? Or you buy a second hand travel trailer, or mobile home, or whatever.....are you telling us all other forms of housing disappear?

You put your money in the bank at 6% interest, on selling your $100,000 house, and get $6000/yr, which should pay your rent plus more....or buy you a $20,000 mobile home......or rent you a $500/mo apt in Florida...

and in number 2, if you have ANY mortgage, you are already doing that. The bank has a lien against your house. You can't sell it or dispose of it, without making sure they get their money first....you get any remainder second. A reverse mortgage is the same....your house is collateral. You don't own it clear and free until there is NO mortgage of any kind.

As to kids having to repay the bank...hun???...kids to do not 'inherit' debt...sorry about that, but if the parents go bankrupt, outlive their reverse mortgage, no longer get SS...(I'm not sure why), sell the house to pay the bank back (and hopefully the house has gone up in value, so they will make money on it in 20 years of the reverse mortgage)... you comments don't make sense....worse case is parents outlive the reverse mortgage, and have to then deal with bank...they either pay rent on their former house, or it gets sold....and they get proceeds above what the mortgage value is. Then, they have to go live elsewhere on their social security and other income...but by then they are probably 90 years old anyway.......

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telegraph posted:
In Stanley's book, the Millionaire Mind, he is talking about people with a net worth of over 10 million dollars.....net worth....most of these people don't need to borrow a few piddling couple hundred thousand to buy a house...

I'm sure Bill Gates didn't have to borrow money to buy his 'house'. any of the 15 million......and likely didn't......his exemptions start phasing out at a little over $130,000......and at his level, probably count for nil......or Tiger Woods.....or Madonna....


Also, the largest home mortgage the IRS will let you deduct the interest on is $1 million. Actually, I think it went up a little this year.

Vickifool

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In the Millionaire Next Door, the 'typcial' millionaire is 57, maile, married with 3 children.

This gets me.

They tend to make a big deal about the supportive spouse, and how the family finances etc are a team effort for most PAW's. I don't see how you can then turn around and say the average millionaire is a male, married. Seems to me, if it was a team effort, the average millionaire is a couple.

ZK
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"why would the wealthy individuals in Stanley and Edelman's books choose to carry a mortgage even when they can easily pay it off?"

Let's look at the facts in Stanley's the Millionaire Mind.

First, the table 8-8, p355 Average Value of Homes by Networth

Networth Av Networth HouseValue
1Mil to 2.5Mil 1,470,533 220,796
2.5 to 5mil 3,392,416 354,043
5 to 10 mil 6809,409 545,499
10 mil to 20m 14,045,501 779,444

all 1 mil or more 2,938,515 277,640

Note that the average multi-millionaire, according to Stanley, lived in a house that was less than 10% of his net worth!!!!!!!!!!!

FOr those just over the million dollar level, they lived in average 220,000 house, with ave net worth of 1.47 mil, or about 15% of their net worth!......

For thos in their 40s and 50s, with a net worth of 500,000, that would mean they should be living in a house worth 75,000 bucks.

If their net worth is only 300,000, then in a house worth 45,000 bucks...

If they have negative net worth, then obviously they aren't going to be in Stanley's next book!!!
_____________________________________________________

Table 8-5
Outstanding Mortgage balance , sample size 733

Size of unpaid mortgage %of Mil cum%

No mortgage 39.9% 39.9%
<100,000 10.2% 50.1
100-299K 15.9 66
300-499K 13 79%
500-999K 16.3 95.3
>1mil 4.7 100

Thus, 40 percent have NO mortgage, clearly a major disagreement with the conjecture millionaires carry mortgages.

Secondly, over half have mortgages of less than half the vaule of their houses, and most people have been in their current houses for >10 years.

No, I disagree with any claims that millionaires buy 'lots of house' and then finance them up to the hilt.....the opposite is true...they buy houses way below their means, and don't carry a lot of debt.

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"
They tend to make a big deal about the supportive spouse, and how the family finances etc are a team effort for most PAW's. I don't see how you can then turn around and say the average millionaire is a male, married. Seems to me, if it was a team effort, the average millionaire is a couple. "

Perhaps you should get yourself a copy of Stanley's book in paperback at the second hand book store for a few bucks... the explanation is there...then again,the feminists are probably already after his tail, especially if they haven't read up to page 8 of his book.

for clarification, page 8 of TMND

quote:

Our profile of the typical millionaire is based upon studies of millionaire households, not individuals. It is, therefore, impossible in most cases to say wit hcertainty whether our typical millionaire is a he or a she Nevertheless, because 95% of millionaire households are composed of married couples, and because in 70% of these cases,the male head of the household contributes at least 80% of the income, we will usually refer to the typical American millionaire as 'he' in this book.

unquote.

Since the English language fails to have a word halfway between he and she, other than it, and most people don't like being referred to as it, I'm sorry if Stanley's note didn't make it into your knowledge sphere. Take it up with him and the feminists.

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re formatted so you can read it...darn HTML...

"why would the wealthy individuals in Stanley and Edelman's books choose to carry a mortgage even when they can easily pay it off?"

Let's look at the facts in Stanley's the Millionaire Mind.

First, the table 8-8, p355 Average Value of Homes by Networth

Networth///// Av Networth//// HouseValue
1Mil to 2.5Mil ////1,470,533//// 220,796
2.5 to 5mil ////3,392,416 ////354,043
5 to 10 mil//// 6809,409 ////545,499
10 mil to 20m ////14,045,501 ////779,444

all 1 mil or more ///2,938,515/// 277,640

Note that the average multi-millionaire, according to Stanley, lived in a house that was less than 10% of his net worth!!!!!!!!!!!

FOr those just over the million dollar level, they lived in average 220,000 house, with ave net worth of 1.47 mil, or about 15% of their net worth!......

For thos in their 40s and 50s, with a net worth of 500,000, that would mean they should be living in a house worth 75,000 bucks.

If their net worth is only 300,000, then in a house worth 45,000 bucks...

If they have negative net worth, then obviously they aren't going to be in Stanley's next book!!!
_____________________________________________________

Table 8-5
Outstanding Mortgage balance , sample size 733

Size of unpaid mortgage ////%of Mil ////cum%

No mortgage//// 39.9% ///39.9%
<100,000 /////10.2% /////50.1
100-299K /////15.9 /////66
300-499K ///13//// 79%
500-999K ///16.3 ///95.3
>1mil/// 4.7 ////100

Thus, 40 percent have NO mortgage, clearly a major disagreement with the conjecture millionaires carry mortgages.

Secondly, over half have mortgages of less than half the vaule of their houses, and most people have been in their current houses for >10 years.

No, I disagree with any claims that millionaires buy 'lots of house' and then finance them up to the hilt.....the opposite is true...they buy houses way below their means, and don't carry a lot of debt.

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Telegraph,

I think you're looking at the reverse mortgage thing wrong:

http://boards.fool.com/Message.asp?mid=14466856

From “The Mortgage Handbook” by William Kent Brunette

pp. 65-66

“Reverse mortgages typically allow owners and their spouses to remain in the home until death until they decide to move from the home. When the home is vacated…the mortgage and accumulated interest must be repaid, usually by the sale of the home or by a relative that inherits the home.”

Heirs inherit your estate. The estate will be responsible for handling any unfinished financial matters. An outstanding reverse mortgage would be one of those financial matters. Most lending institutions that deal in reverse mortgages stipulate the estate [heirs] will be the one responsible for satisfying the outstanding debt. Whether that be through the sale of the home or otherwise.

From “The Wall Street Journal Lifetime Guide to Money” edited by Frederic C. Weigold

p. 327

“The loan [reverse mortgage] usually is repaid by selling the house when you move or die…the payments you receive are based on life expectancy.

Outlive your life expectancy and guess what happens. The debt won't go anywhere but you will, either in the street or to the poor house.

So once again I'll say, you can't spend your house. And as for the contention that you can sell your home and move to a trailer park is simply humorous. The millionaires in Stanley's works are presently living in the homes they will die in.


Telegraph,

I also got something different than you did for Stanley's work

http://boards.fool.com/Message.asp?mid=14467149

From “The Millionaire Mind” by Thomas Stanley

p. 306

“I purchased my home [in 1986], and my family has lived there ever since. The approximate purchase price was just under $560,000. According to conservative estimates, it would sell today for just under $1.4 million.” That represents an appreciation in home value of 7% to 8%.

If you refer to the table 8-5 (p. 310) you'll see that although 39.9% of millionaires carry no mortgage, 60.1% carry some mortgage. In fact, 34% carry a mortgage that is at least $300,000!

So what we see from this information is that the typical multi-millionaire bought his present home for $560,000 and after about 15 years of living there has only paid down his mortgage to $300,000.


What this says to me is that the person who possesses the millionaire mind is less concerned about paying down his mortgage, or even buying a house that is below his/her means. THEY ARE MOST CONCERNED WITH BUYING A HOUSE THAT IS UNDERVALUED. The typical millionaire realizes an appreciation is his/her home's value of 7% to 8% while the average non-millionaire's home appreciates somewhere near the rate of inflation.

Bottom Line:

There are better places to “invest” your money other than your mortgage.
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“Reverse mortgages typically allow owners and their spouses to remain in the home until death until they decide to move from the home. When the home is vacated…the mortgage and accumulated interest must be repaid, usually by the sale of the home or by a relative that inherits the home.”

Heirs inherit your estate. The estate will be responsible for handling any unfinished financial matters"

The estate pays debts from the estate. If the people die owing money, or live to the last day of the reverse mortgage, and die, and the house is worth less than the amount owed the bank, and there are no other assets, guess what...the bank loses. The heirs are not responsible for the estates debts. They don't have to cough up money.

___________________________________________________


You also confuse Stanley's statistics.

Bear in mind that the average value, repeat average value, of ALL the millionaire homes in his study, was $277,000. To assert that a large percent have a $300,000 mortgage is ludicrous. Impossible.

Those folks who have a $300,000 mortgage own a 1.4 million dollar house and typically HAVE A NET WORTH OF OVER 20 million dollars. That is not your typical or average by his statistics.

Only 21% of his study group had a mortgage balance of $300,000.

If you read his book, you will learn the average millionaire realizes 3.3% of his net worth as income, to live on. If that is the case, I find it incredbile to hear you assert they are making payments on $300,000 houses (payments of how many thousands a month) when the average net worth of his study group is about 2.938 million, meaning they are living on $110,000 a year.

You will also find he suggests most millionaires do not buy houses that cost more than twice their annual income.

Which ties in nicely to his statistic that they get $110,000 a year income, and live in house now worth $277,000.

Your interpretation of Stanley (I assume you have copies to read, and are not just taking pieces from here and there?) is astounding.

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"So what we see from this information is that the typical multi-millionaire bought his present home for $560,000 and after about 15 years of living there has only paid down his mortgage to $300,000."

This is rather hard to believe since Stanley clearly states the average value of house for his survey group is $277,640 table 8.8

That is all 773 of his survey sample.

If I use your methods, since 40% have no mortgage, and 10% lave less than $100,000, then the average for the half of his millionaires is $20,000 outstanding mortgage balance, not $300,000. Of course, that is an average of the lower half.

You can also reference page 8, where is he is discussing a demographic survey...he says, quote:

"In spite of the high values of our homes, we generally have small outstanding balances"

You have to be very careful in Stanley's book. With the high end people (>20M) the median and average get skewed upward. Remember, his average net worth millionaire is around 3 million net worth.



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Only 21% of his study group had a mortgage balance of $300,000.

If you read his book, you will learn the average millionaire realizes 3.3% of his net worth as income, to live on. If that is the case, I find it incredbile to hear you assert they are making payments on $300,000 houses


Tele,

I'm certainly not making these statistics up. I'm looking at the same tables you are.
Table 8-5: From the Stanley study (N=733)
13.0% had mortgages of $300,000 to $499,999
16.3% had mortgages of $500,000 to $999,999
04.7% had mortgages of $1,000,000 or more
-------
34.0% had outstanding mortgages greater than $300,000

I'm not sure where you are getting the 21% from.

The average home purchase in this group of 733 millionaires in Stanley's study purchased their home for an average price of $560,000 (p. 306 first paragraph) and Table 8-2 supports this.

You seem to be taking Stanley's study of millionaires and combining it with the IRS study (Table 8-8). I don't think you can necessarily do that. The $277,000 average home value you mention is NOT Stanley's study, it's the IRS's.

I think the purpose of Table 8-8 in Stanley's book is simply to illustrate the point of millionaire wealth compared to their current home value. The IRS study suggests nothing about the purchase price of these homes or how these millionaires treated their mortgages. Stanley's findings, however, taken together do just that.

Also, among the 733 millionaires in Stanley's study the The typical meadian level of net worth was $4.3 million while the median income was $436,000 (p. 7). Thus the "income realization" figure is more like 10%, not the 3.3% you mention.
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This is rather hard to believe since Stanley clearly states the average value of house for his survey group is $277,640 table 8.8

That is all 773 of his survey sample...

You have to be very careful in Stanley's book. With the high end people (>20M) the median and average get skewed upward. Remember, his average net worth millionaire is around 3 million net worth.



You also have to be careful not to confuse Stanley's study of the 733 millionaires with other survey's of other millionaires by other groups. Like the IRS study of ALL millionaires (not the 733) in Table 8.8.
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"
You also have to be careful not to confuse Stanley's study of the 733 millionaires with other survey's of other millionaires by other groups. Like the IRS study of ALL millionaires (not the 733) in Table 8.8. "

It only takes adding in 100 billionaires in the IRS statistics to make things go completely bananas.

One Bill Gates, or Warren Buffet, or Ted Turner, with an income of who knows how many billion, skews statistics so out of proportion that you have to be careful of using "all millionaires".

Which is why I prefer to use Stanley's figures, and also use them mainly for the groups under 5 million net worth.

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"
You also have to be careful not to confuse Stanley's study of the 733 millionaires with other survey's of other millionaires by other groups. Like the IRS study of ALL millionaires (not the 733) in Table 8.8. "

It only takes adding in 100 billionaires in the IRS statistics to make things go completely bananas.

One Bill Gates, or Warren Buffet, or Ted Turner, with an income of who knows how many billion, skews statistics so out of proportion that you have to be careful of using "all millionaires".

Which is why I prefer to use Stanley's figures, and also use them mainly for the groups under 5 million net worth.

In that group, per his table 8-8

Millionaires with net worth between 1 and 2.5 million live in 220,000 houses.

Millionaires with a net worth of 2.5 to 5 million live in 354,000 houses.

If you are at, or aiming for the above 5 million net worth, you can play in the arena of Bill GAtes, Warren Buffet, and that very very small percentage of people in the multi-multi-million dollar category.

I think you are using the stastics of the super millionaire to try and show the 1-5 million dollar net worth folks are living a high consumption life style...they aren't.

Per page 335, quote:

According to the IRS databse, which encompasses all milionaire households nationwide (ed: including Bill GAtes), and thus includes certain deodemographic cateories not surveyed in my study, such as farners and others, the average value of the American milionaire's home is estimated to be $277,640. "

WOuld you like to argue with that quote?



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I too pay most attention to the 733 that studies.

So why ever mention the IRS study and $277,000 home value it talks about?

Also keep in mind that the median net worth of the 733 in Stanley's study is $4 million and the average is $9 million. Although the average is skewed upward, I don't think there are a lot of billionaires in that study.
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"34.0% had outstanding mortgages greater than $300,000

I'm not sure where you are getting the 21% from."

Can't add right it seems.....you are right....need better glasses to read the fine print.



Look spefically at the income groups, though, and there you see where the high net worth millionaires skew the 'average' way out of proportion.

Remember, more than half of all people lie below the 'median',, and they are concentrated between 1 and the median value. It is not bell shaped or any other regular distribution. A very long tail to the up side, very compressed to the down side, with an absolute cut off at 1 million.
_________________________________________________

"You seem to be taking Stanley's study of millionaires and combining it with the IRS study (Table 8-8). I don't think you can necessarily do that. The $277,000 average home value you mention is NOT Stanley's study, it's the IRS's."

He quotes it, includes it on page 355, and it is in his table 8-8.

Stanley determines his own value for the people in his study.

"Who has the most complete data on millionaires? Not yours truly - the answer is our own Internal REvenue Service"

IT is more inclusive than his study of less than 800 millionaires.

Which is why I think the TMND is a much better book to be using as a reference book. It did not include the >5 million folks, who really skew things upward.

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I think you are using the stastics of the super millionaire to try and show the 1-5 million dollar net worth folks are living a high consumption life style...they aren't.

The statistics I am using are from the 733 Stanley studied. Average home purchase occured in 1986 for $560,000 with a remaining mortgage of $300,000. The median wealth of this group is $4 million. The median income is $400,000. Never once did I use statistics from the ALL millionaire IRS study or the "super-rich"(as you're suggesting).

Per page 335, quote:

According to the IRS databse, which encompasses all milionaire households nationwide (ed: including Bill GAtes), and thus includes certain deodemographic cateories not surveyed in my study, such as farners and others, the average value of the American milionaire's home is estimated to be $277,640. "

Would you like to argue with that quote?


No I don't want to argue this quote. This is exactly my original point. That the IRS study, NOT THE 733 STUDY, is the one that suggested the average home of ALL millionaires was $277,000 (even with the Gates'). These are the statistics you used to make your argument, not me.

BOTTOM LINE: MOST MILLIONAIRES, AT ALL LEVELS, CHOOSE TO CARRY MORTGAGES WHEN THEY CAN AFFORD TO PAY THEM OFF.
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"I think the purpose of Table 8-8 in Stanley's book is simply to illustrate the point of millionaire wealth compared to their current home value. The IRS study suggests nothing about the purchase price of these homes or how these millionaires treated their mortgages. Stanley's findings, however, taken together do just that."

I refer you to page 28 of TMM, for STanley's summary of his results.

"Most of us have mortgages, but 40% have no mortgage at all. Less than 5% have an outstanding balance of 1 million or more. Only about 1 in 3 have an outstanding balance of $300,000 or more.

What is the median outstanding mortgage balance for those in our millionaire group? It is just under $100,000, or about 7% of the current market value of our homees. We are not, as some people refer to them, credit types."

endquote

And that inlcudes his super millionaires of over 5 milion net worth......

7% of house value as mortgage....7%......7%......7%....

And that is Stanley's figure....

If we take the IRS figure of average house value of a millionaire at 277K, and figure out that the average millionaire, the 2/3rds that still have a mortgage, and the remaining balance is, on average, $20,000.

I hate to burst your bubble......

Then again, that's what TV and marketeers promote...borrow, spend, like there is no tomorrow....

Like to refute Stanley's statement, page 28?





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"
The statistics I am using are from the 733 Stanley studied. Average home purchase occured in 1986 for $560,000 with a remaining mortgage of $300,000. "

Yes, but again you are playing with the average, which you already have indicated is skewed way out of proportion to a normal distribution. The average income vs median is 2:1.

You can only have an income 3 million under the median....but the up side is unlimited....30 or 50 or 80 million.

Yes, and no

40% of the people have NO mortgage. No mortgage. 2 out of 5 have NO mortgage.....

10% have 100K mortgage

Thus, More than 50% have under $100,000 mortgage, and if we assume some of these own the $560,000 houses, now worth 1.4 million dollars, then you see that they essentially have NO mortgage payments of signficance either.....

a $100,000 mortgage is less than 1/3rd of the after tax income of your 'median' millionaire. Do you fit that category?

More than half of all millionaires, then, have a mortgage they could easily pay off out of current income in less than a year, if they chose to do so. (according to the statistics).

The average mortgage is $20,000 or 7% of outstanding balance for those with net worth below the median. Remember , 50.1% have a mortgage of less than $100,000, and since 40% have no mortgage, that is 20K per millionaire in tht 50.1% group.

So, if you want to 'average', for more than half of the millionaires, 50.1% to be precise, their 'average' mortgage is under $20,000, and their average income is over $20,000 month, after tax.....so most millionaires could afford to pay off their mortgage in less than ONE MONTH if they chose to do so.

That they haven't is about the same as people after 20 years paying $150/mo toward their mortgage, and not getting that excited about paying off the last couple years worth.....they just pay monthly and know they already own 97% of their house, and are in no hurry to finish paying it off...it doesn't even dent their budget.

_______________________________________________________

": MOST MILLIONAIRES, AT ALL LEVELS, CHOOSE TO CARRY MORTGAGES WHEN THEY CAN AFFORD TO PAY THEM OFF. "

You also confuse liquid assets with 'net worth'. When you own a farm or a business, that might be worth 5 or 10 million, it is not cash which you can use to pay for your house.

Even in your example, with a median income of $400,000 yr, before taxes, that isn't enough to buy a $560,000 for cash....even saving 20% of net pay, would take 8 or ten years. Thus the need for borrowing to make a large purchase without liquidating the family farm or business or corporation.

Don't confuse 'net worth' with stocks or bonds or other liquid assets.....or proclaim 'they have the ability to pay off the mortgage'. For some assets, you cannot convert part to cash easily - or want to, if you are growing your business, or have business partners, or are a corporation - you can't liberate part of the corporation to buy a house.



"Average home purchase occured in 1986 for $560,000 with a remaining mortgage of $300,000. The median wealth of this group is $4 million"

Please note carefully the average home purchase, with the meadian income of 4 million, average income 8 million, that:

first of all 40% had NO MORTGAGE......the next group had small mortgages

second, they bought houses for a price worth less than 15% of their net worth today.

third, the majority have a mortgage of under $100,000, and of those, the average is under $20,000, or pennies vs their 1.4million net worth homes...

If we extrapolate that, half of all people living in a $140,000 house would have a mortgage of $2000 balance remaining...wow!....I'm excited.....real 'borrowing'....




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At the 4% withdrawal rate, it takes $225,000 in your portfolio to generate $9,000 per year. So, if you pay the house off early, you have eliminated the need for that $225,000 to sustain your lifestyle ...

Just to add a bit more accuracy for those who want to use such a calculation, the withdrawal rate may be significantly higher than 4% to cover a mortgage payment which ends in N years. (if N is 10, then it is something like 7% or so, for N of 30, it is closer to 4%)
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At the 4% withdrawal rate, it takes $225,000 in your portfolio to generate $9,000 per year. So, if you pay the house off
early, you have eliminated the need for that $225,000 to sustain your lifestyle ...


Just to add a bit more accuracy for those who want to use such a calculation, the withdrawal rate may be significantly higher
than 4% to cover a mortgage payment which ends in N years. (if N is 10, then it is something like 7% or so, for N of 30, it is
closer to 4%)


Not sure I follow; could you amplify?

jtmitch
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<<Just to add a bit more accuracy for those who want to use such a calculation, the withdrawal rate may be significantly higher than 4% to cover a mortgage payment which ends in N years. (if N is 10, then it is something like 7% or so, for N of 30, it is closer to 4%) >>

Not sure I follow; could you amplify?


The 4% "safe" withdrawal percentage is calculated using a "payout period" of 30 or 40 years. Since the payout period of a typical mortgage which has been held for a while is less than 30 years, then the "safe" withdrawal rate is higher.
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telegraph,

First of all, let me say that I'm glad you're as interested in this topic as I am. It has prompted me to look at TMM more closely and scrutinize the information for answers that I can apply to my own life. Hopefully, others will become as enthusiastic as we are.

I have responded to one of your latest posts in a new thread.

http://boards.fool.com/Message.asp?mid=14479504
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"First of all, let me say that I'm glad you're as interested in this topic as I am. It has prompted me to look at TMM more closely and scrutinize the information for answers that I can apply to my own life. Hopefully, others will become as enthusiastic as we are"<i/>

Yes, it would be nice if a few more board readers would grow their net worth to a million plus and join us early retirees. Just don't buy 'too much ' house because it consumes 'too much electricity, too much gas, too much insurance, too much tax, too much maintenence, and winds up being 'too big' for the people living in it". That 'too much' can mean their nest egg never gets to be 'enough'.

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ways to "spend your house" [use the equity you've built up].

1. Sell it. Problem with that is, you'll either have to live in the street, or buy another house.


...or rent. Sure, it's the American Dream to own your own home, but it's more of a luxury than a necessity as long as you can get housing.
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...or rent. Sure, it's the American Dream to own your own home, but it's more of a luxury than a necessity as long as you can get housing.

True. My point speaks more to the fact that your housing cost (apartment, trailer, home) never really goes away.

So the equity you've built up in a home will pretty much always be spent on housing. Whether all at once if you were to buy something, or spread over time if you were to rent.

You can make the argument that you can always "buy down" and save the difference. True, but your difference would have been larger had you not "invested" in a home.

There are advantages and disadvantages to any approach when it comes to housing. But I think the best is to buy/rent something you can easily and afford and invest your discretionary funds other places.
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I you're going to keep shouting YOU CAN'T SPEND YOUR HOUSE, I have to reply YOU CAN'T LIVE IN YOUR IRA!

When a house is paid off, there is no $600 or $1000 or $3000 that has to be sent to The Man every month. No one can kick you out, no sudden layoff or illness can turn your world into a nightmare. No 40% (I don't know the exact) taxes and penalties if you have to tap retirement funds. Having a paid off house and car can mean the difference between taking time to search for a good new job or direction in life, or having to grab something quick and killing.

Yes, we GET YOUR POINT but psychic peace means more than a 2% spread to some of us. And in the immortal words of Gerald O'Hara: "land, Katie Scarlett, land. It's the only thing that lasts" . Buthey, if you'd rather have Confederate bonds, that's cool.
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Yes, we GET YOUR POINT but psychic peace means more than a 2% spread to some of us. And in the immortal words of Gerald O'Hara: "land, Katie Scarlett, land. It's the only thing that lasts" . Buthey, if you'd rather have Confederate bonds, that's cool.

I don't think anyone is trying to get you to change your habits. If paying off the mortgage gives you peace of mind that is worth more than the 2% spread, then by all means do it. I am one of those that is trying to pay off my mortgage early just because I hate debt of any kind.

BUT this board is dedicated to the Millionaire Mind and what it takes to get to the millionaire status. From that point of view, the extra 2% will get you there faster. I think safety and "psychic peace" may not be that high on the list of many millionaires. Many of them have taken the chance on starting their own businesses even though most new businesses fail. Many of them have taken risks to get their rewards. Many of them ahve forgone "psychic peace" in the short term to attain financial independence. Even then, I bet many of them still like the risk taking even though they don't need to do it anymore.
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CassandraP,
Enjoyed your book. I want discuss the comment "...living stingy and not enjoying you life now so you'll have money later". Because its what I am doing in a way right now. My situation warrents me to live frugally in order to have money later. I dont eat steak, have a cell phone or travel although I would like to. In order for me to have money later, I feel like I havge to be frugal now.

My liquid assets (before tax) are in low 6 figures. I could eat steak, have a real boat, and go to Europe, or I could continue to invest/ re-invest and do it later. But I feel like I cant do both right now. I was wondering if you might share your age bracket- over 55 or under 55.

My question for discussion is- when or at what age does one stop being stingy and start "living"?
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My question for discussion is- when or at what age does one stop being stingy and start "living"?

I suspect that this is really a hard question. I think one problem many people have when they have spent their lives saving for the future is that they never learned how to live any other way. It is so engrained in them to save, save, save that they have real trouble changing their mode to spending even if they have plenty to spend.
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My question for discussion is- when or at what age does one stop being stingy and start "living"?

Set a goal. Occasionally reasess to see if the goal is still feasible or desirable. Once you reach the goal, then you can enjoy the benefits.

Saving just for the sake of saving is completely pointless.

For instance, a goal could be "Live year-round near the beach and not run out of money before I die, without having to use an annuity." It should be possible to calculate the price of beach-front property, taxes, living expenses, long-term care insurance, etc. The precise number will change each year.
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CassandraP,
Enjoyed your book. I want discuss the comment "...living stingy and not enjoying you life now so you'll have money later".


I've never written a book...but thanks anyway.

Just for your information, I am 30, married, have 3 children ages 11, 8, and 5. I work full time...just started back after over 10 years at home. I make just under 40k per year. My husband is a self-employed painter. We are not rich by any means, but the bills are always paid.

I choose to invest most of my income, (after paying $550/month in daycare, 500/month groceries, $160/month for health ins. and various other expenses for my children...) Everything else is invested. I contribute to my 401k, and Have an investment account for myself/spouse and one for my oldest child...the other two will be getting theirs soon.

We live well below our means, but are still able to live well. I do not wash out baggies. I am by no means stingy. I think that you are kidding yourself if you think you are going to live any better when you are older because you saved all your money now. Your beneficiaries will live very well...

My point is only to enjoy your life NOW. Travel NOW if you can. How do you even know you will live to the age of retirement???? I'm not saying to get into a bunch of debt to support a lifestyle you can't afford, but at least have a lifestyle!!!! If you work hard and have made a good life for yourself, enjoy that life....money is only worth what you can buy with it.

I think some people get into the trap of "collecting money" I collect memories. I will make sure we are not eating cat food when we are 80, but I won't eat cat food NOW to insure that....
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My point exactly!!! I just got done writing a "book" trying to get that idea across...
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I also don't agree with that point as houses DO NOT appreciate in value: they inflate. BIG difference.

"Appreciate" means an increase in real value. Houses do not do this.

Need proof? So your house is now worth $50K more than when you bought it. Sell it. Guess what you can buy now? One just like it; NOT one that costs $50K more (unless you're foolish enough to simply add debt to your life for a larger, nicer house).

Why? It INFLATED ... along with all the houses just like it within a 50-or-so-mile radius.

RAB
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Yes, it would be nice if a few more board readers would grow their net worth to a million plus and join us early retirees. Just don't buy 'too much ' house because it consumes 'too much electricity, too much gas, too much insurance, too much tax, too much maintenence, and winds up being 'too big' for the people living in it". That 'too much' can mean their nest egg never gets to be 'enough'.

Very well stated! If I cross-stitched, I'd put this on a pillow. As it is, I think I'll print it out and post it in our kitchen.

The creation of this board compelled me to finally read Stanley's books. I've just finished reading The Millionaire Mind after first reading The Millionaire Next Door. I found both books to be fascinating, informative, and surprising at times. I particularly liked the chapter on homes and economic households.

Looking forward to continuing threads and catching up on the discussion

FinancialFemme

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