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telegraph,

One thing is for sure. People can look at the same information and draw different conclusions. Which is why I think discussion is good. Hopefully all will have a more complete understanding of the information before them.

The original threads

http://boards.fool.com/Message.asp?mid=14471364

http://boards.fool.com/Message.asp?mid=14471841

discussed whether or not millionaires as rule paid down their mortgages at an accelerated rate. In other words, do millionaires invest in their mortgages over alternative investments. After reading chapter 8 of “The Millionaire Mind”, and rereading it based on our posts, my contention is that millionaires do NOT concern themselves with paying down their mortgages at an accelerated rate. More than likely they carry their mortgages to full term.

1. You site Tale 8-5 (p. 310): Outstanding Mortgage Balance

40% of millionaires have NO mortgage &
10% have no real mortgage to speak of (less the $100,000)

Where you came away saying that 50% of millionaires have little or no mortgage thus they must pay them off early, I did not stop there. I went back and looked at Table 8-1 (p. 306): Year of Purchase of Current Home. Here we find that

10% of millionaires bought their homes prior to 1968 and another
15% of millionaires bought their homes prior to 1977

Thus 25% of millionaires have lived in their CURRENT home for at least 23 years. That's enough time to pay off the original mortgage without ever having to make extra payments. Simply, these are old mortgages and many of these mortgages were probably carried to term.

Let's assume that the 23-years-plus millionaires (183 millionaires) are among the 50% that have little or no mortgage (<$100,000). What you'll then find is that of the millionaires who have lived in their home for MORE THAN 23 years (550 millionaires), 80% CARRY MORTGAGES. In fact 45% of those remaining millionaires (<23 years) have mortgages of more than $300,000.

2. You site a quote from page 28 that states:

“What is the median outstanding mortgage balance for those in our millionaire group? It is just under $100,000, or about 7 percent of the current market value of our homes.”

I think the median mortgage of $100,000 dollars can partly be explained by the above. Some of these mortgages are simply old. I think it can further be explained by Table 8-2 (p. 307): ORIGINAL PURCHASE PRICE vs. CURRENT VALUE.

We see here that

30% of homes were purchased for under $300,000 and another
17% were purchased for under $500,000

Thus many of the original mortgages on these homes were not very large.

Table 8-2 also explains the why the outstanding mortgage balance is only 7% of the current market value of the home. From the chart we find that
31% of homes are currently value from $500,000 to $999,999 and
61% of homes are valued at over a$1,000,000

and further less than

3% were valued under $400,000.

Table 8-2 supports Stanley's statement on p.306 which states, “ The approximate purchase price was just under $560,000. According to conservative estimates, it would sell today for just under $1.4 million.” In other words, most of these homes enjoyed a huge increase in value (about 7% to 8% CAGR) over time. 50% of the homes starting out less than $500,000 in value and 60% ending up worth over $1,000,000.

The way the numbers work, many of the homes that were bought for under $300,000 had to appreciate to more than $1,000,000. Thus the 7% mortgage to home value was due mostly to appreciation in home value.

My mother bought her home 23 years ago for about $40,000 with my dad's VA (no money down) 25 year loan. They now have about $6,000 left on the mortgage without ever making extra payments. The home is now worth conservatively about $100,000. Thus the mortgage to value percentage stands at just under 6%. Over those 23 years they realized an appreciation in home value of about 4% per year, close to the rate of inflation.

Millionaires enjoy an appreciation rate on their home values closer to 8%. They would reach the 7% mortgage to home value threshold much sooner than my parents did without having to put an extra dime toward the mortgage.

Thus…

When I take in all the charts and information in chapter 8 I come away with the following:

- They find undervalued homes that are sure to appreciate nicely over time
- 50% of millionaires bought their homes for less than $500,000 and
- almost all, 93% of millionaires' homes are now valued above $500,000

- They tend NOT to pay off their mortgages early
- 60% of all surveyed carry mortgages and 80% of those that bought their homes less than 23 years ago carry mortgages

In other words, the low mortgage to home value percentage of 7% is more a function of TIME, BARGAIN SHOPPING and HOME APPRECIATION than millionaires paying off their mortgages early.

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"- They find undervalued homes that are sure to appreciate nicely over time
- 50% of millionaires bought their homes for less than $500,000 and
- almost all, 93% of millionaires' homes are now valued above $500,000

- They tend NOT to pay off their mortgages early
- 60% of all surveyed carry mortgages and 80% of those that bought their homes less than 23 years ago carry mortgages"<i/>

___________________________________________________

Stanley states his survey primarily targeted areas 'rich' in miilionaire net worth houses. It does not include the rest of America.

I disagree that you can make assumptions as to which 40% of the group has no mortgages. That isn't provided. You can assume, but have no idea. How many of those houses were bought for cash? never had a mortgage?

The IRS database, of ALL millionaire households, not just the 773 the agreed to STanley's interviews (and there were those 'not interested), suggests the average home price is $277,000.

That's a lot of other 'less house rich' people that have to be added in.

I live in a $200,000 house. I have been here 10 years, going on 11. The mortgage of $100,000 was paid down in six years out of current income. I retired 2 years, 3 months ago at 52.5 years of age. My net worth is over 1 million. I have seen less than 1% appreciation in real estate value in 10 years. The house is about 6.5% of my net worth.

If I knew 10 years ago what I know now, and the tax laws were different then, like they are now, I would be living in a $130,000 house. Less than 5% of net worth.

Then again, money in the stock market earned about 20% a year over the past 10 years. Fortunately, I also had a good amount of money in that, which lead to my early retirement.

For people in Dallas, a house was a 'rotten' investment over the past 10 years, and if they bought 1980-1985, they have lost money.

- almost all, 93% of millionaires' homes are now valued above $500,000

<i/>

Again, the IRS statistics say the average is $277,000.

Throw in INTERCST, who doesn't even have a house, guess his is a ZERO, in that category, and it has to drop the average.











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tele,

I'm very comfortable with my assessment of the information about the 733 millionaires. After looking at it several times, I think I'm right on. I continue to say I don't think you can "mix" that study with the general millionaire population that the IRS concentrates on.

I did once download from the IRS site some statistics regarding millionaires. If I can find it again I'll bring it up here. It will make for great convo.

BTW, spread the word about the folder. I'm wondering why intercst hasn't been here.

LF
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We maybe missing a point, and it just dawned on me. Possibly why these people aren't paying down the home mortgage, is that they're paying down "other mortgages". Remember that their major investments were their own businesses. It could be quit possible that any extra monies were used to pay down business debts or used to reinvest/expand the business.

JLC
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"We maybe missing a point, and it just dawned on me. Possibly why these people aren't paying down the home mortgage, is that they're paying down "other mortgages". Remember that their major investments were their own businesses. It could be quit possible that any extra monies were used to pay down business debts or used to reinvest/expand the business"

Good point.....

Not only that, I don't recall an age distribution. In TMND, I believe the typical millionaire was 57.....and 20% were retired, so 80% were still working. That means they had businesses or farm to run and operate and generate their income from. Some of the millionaires could have been in their 30s.....and some in their 80s......(and it is quite likely to be a fair number of seniors, as the stock market has propelled many with only some stock holdings into that category...ie, anyone invested in 1990 saw one heck of a ride for 10 years...in many cases, seeing their stocks go up 500%.)

You might also take note, that 'doctors' who are high income people, are, as a group, very poor at accumulating wealth. They make a lot, spend a lot, and never grow their net worth, certainly not in proportion to their income level.

The surest way I see to get to be in Stanley's next book is to LBYM....that means buy Less house, not more....buy less car, not more....and invest the rest in assets.



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I've been reading this board for a while now and I think that people may find it a bit more fruitful to go in a different direction with the debate about paying down your mortgage. Perhaps we need to think about opportunity cost in lieu of thinking about whether or not people actually carry mortgages.

I would contend that the way millionaires think about this is to consider the relative returns and risks of paying down their mortgages relative to putting the money elsewhere. Thus, someone with a high risk tolerance might take the money that they otherwise would have applied towards extra payments on their mortgage and put it towards growing their business or into the stock market. Alternatively, people can think of making extra payments on the principal portion of their house as having a guaranteed return--they are guaranteed to save money on future payments (assuming that they stay in their house). I think that this assumption is warranted by TMM, as evidenced by the large amount of appreciation the average respondent has experienced in the value of their house.

Personally, in deciding whether or not to put extra towards the principal on my house, I would compare my mortgage rate against treasury rates (since I would get taxed on treasuries and get tax deductions on mortgage interest payments, I believe that the two rates are roughly comparable). If my mortgage rate were higher, I would consider paying down the principal on the mortgage a better investment, while if the treasury rates were higher, I would consider putting my money there in lieu of putting it into extra payments on the principal portion of my mortgage.

Perhaps if in your quest to becoming wealthy you think about the relative returns of investments and choose to invest based on those returns (and their associated risks) you will find yourself further down the road in your quest than if you blindly follow the results of a survey. Of course, YMMV.

food for thought,
naugust
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"Personally, in deciding whether or not to put extra towards the principal on my house, I would compare my mortgage rate against treasury rates (since I would get taxed on treasuries and get tax deductions on mortgage interest payments, I believe that the two rates are roughly comparable). "

That is partially true.

1) If you have few itemized deductions (if your property taxes are low), you are not getting the tax benefit of having mortgage payments.

If the standard deduction is $5000, and you have real estate taxes of $1000, and maybe other itemized deductions of $500, then there is $3500 left.

The first $3500 a year of mortgage interest then gets no tax benefits. Thus, you have to subtract that amount from your yearly interest, then figure the tax benefit on that.

Many people really don't get the tax benefit they think they are.

2) However, even using the 'treasury rate', that is not necessarily a good guideline unless you intend to leave the money in the treasury until maturity. The value of the bond (treasury) that you buy can drop 30% in two years. Thus, your 'interest' on the original amount stays the same, but if you had to liquidate the bond, you would lose 30% of principle amount. TAlk to someone who had a 7% bond, when t-bill rates went up to 14%. They lost 50% of the value of their t-bills if they had to sell.

You need to use the historical returns of t-bills. Some years up 20%, some down 20%.

Of course, your house could also drop 30%. That is less likely - and irrevelant if you aren't planning on moving anyway. Then again, you should not consider your house an 'investment'. It is a housing cost. It is an asset, that has value, and counts toward net worth.

There is a lot to be said for being debt free.

Again, one doesn't have to either pay down the mortgage, or invest. One can do both, just to a lesser degree for each.


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Not only that, I don't recall an age distribution. In TMND, I believe the typical millionaire was 57.....and 20% were retired, so 80% were still working. That means they had businesses or farm to run and operate and generate their income from. Some of the millionaires could have been in their 30s.....and some in their 80s.....

You're right. TMM doesn't give an age distribution. Just and average age of 54 (p.6). I would bet that there aren't many millionaires in their 30's though. In fact, in intersct's report "Drive Your Financial Advisor's Porsche and Retire Before 40", he sites a study by the VIP Forum. They found that less than 1% of 33 year olds had a net worth of $1,000,000 while at least 5% of 47 year olds did (year 1998).

Personally, I think even a 1% rate for 33 year olds is somewhat high. I work in an industry that pays young MBA's extremely well yet I know none that age that are millionaires yet.

We maybe missing a point, and it just dawned on me. Possibly why these people aren't paying down the home mortgage, is that they're paying down "other mortgages". Remember that their major investments were their own businesses. It could be quit possible that any extra monies were used to pay down business debts or used to reinvest/expand the business

Some of the other findings (pp.8-9) in TMM are that 32% are business owners, 16 % are corporate executives, 19% are either physicians or lawyers and the rest are from many different backgrounds (which includes those who are retired).

Interestingly, business owners overall are the richest of the group (p.8). Most millionaires credit selecting the right vocation as the main factor in explaining their economic success (p.22).

The idea that these millionaires are probably investing their money in places other than their own home mortgages I believe is correct. If you look at Table 2-6 (p.72): STOCK INVESTING VS. ONE'S OWN BUSINESS the factors "being my own boss" and "investing in my own business" outrank "living below my means" as being important factors in explaining their financial success. I would put paying down one's mortgage under the LBYM factor.



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<<<You might also take note, that 'doctors' who are high income people, are, as a group, very poor at accumulating wealth. They make a lot, spend a lot, and never grow their net worth, certainly not in proportion to their income level.>>>

I can give some insight into this connundrum, being one of those doctors.

#1--on average, doctors graduate with 50-100k of debt from undergrad and medical school combined. In otherwords, a mortgage that must be payed off. In times past, the interest and payments could be deffered until after residency (3-7 years), but in 1991 the law was changed to where payments were due after med school graduation. Some take out new loans, often at higher rates, that allows them to "delay" payments, and thus increase the total amount due.

#2--during college, med school, and residency, we more or less lead a life of deprivation (within reason). We've had to study more and party less, work long hours, sometimes 24-36 without sleep and little rest, drastically pare down our list of "important" things that we can't live/do without, and missed birthdays and anniversaries. After this lengthy deprivation, we want to finally live it up, and often that equates into expensive material things: cars, houses, clothes, trips, etc.

#3--there is a certain public perception of what doctors should be like, just like the perception of what a millionaire should be like.

#4--higher rates of divorce and drug/alcohol abuse than the "normal" population. Remember, divorce was one of the strongest preventers of accumulating wealth. Drug abuse, eventually you don't care about your practice and loose your patience or loose your liscence to practice.

The above is not an excuse for the poor accumulation of wealth by physicians, just some insight.

JLC
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"#3--there is a certain public perception of what doctors should be like, just like the perception of what a millionaire should be like."

Maybe every doctor should have The Millionaire Next Door as required reading??????

Hollywood does portray millionaires as spendthrifts and high consumption lifestyles, when the opposite is true for most.

Even middle income people, especially 'managers' and above, get caught in the 'status trap'. " You can afford it " type marketing..."you earned it, you deserve it".

Doctors get marketed to...they are high income earners....who do tend to go hog wild and consume....and therefore accumulate little net worth compared to their earnings. (Under Achievers of Wealth). They also feel that they can and will keep making big bucks year after year, so no need to save for a rainy day.

More reading on this in TMND.....

telegraph....never owned a car that cost more than $20,000 new.......or a Rolex...or a Lexi.... retired early......

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<<<Maybe every doctor should have The Millionaire Next Door as required reading??????>>>

Are you kidding? (tongue in cheek) During med school and residency I can't recall having picked up a book for recreational reading. I remember having poured through 500 page books in an evening for lecture the next day.

Unfortunately, the brokerage houses and investment firms do a "wonderful" job of marketing to doctors after residency training.

JLC
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Maybe every doctor should have The Millionaire Next Door as required reading?????

I have handed out my copy of TMND to any medical resident or medical student willing to listen. On slow nights on call, when we aren't discussing a patient or an interesting case, I usually end up turning the discussion toward personal finance. I'm shocked to hear about the amount of med. school debt that some of these folks carry. One resident and her husband that I have talked to have $500,000 in medical school loans between the two of them. Imagine a $5000/month payment for 10 years on any level of income, how could anyone save but a small amount until they were done paying it off. That leaves only 15-20 years to accumulate sufficient retirement funds, instead of the usual 30+. It aint easy folks!

Adenovir
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One resident and her husband that I have talked to have $500,000 in medical school loans between the two of them. Imagine a $5000/month payment for 10 years on any level of income"

If they are successfull and each making $125,000 or $200,000 apiece, I'm not sure that is an impossible situation. I expect that these folks expect to more than make back their educational costs.

The secret is to also not get into the habit of living a $250,000 or $400,000 joint income lifestyle......

Then again, if they can pay $60,000 per year to pay off loans for 10years, just think what $60,000 per year into retirement accounts would do if they continued that for another 20 years.

A lot of people manage to live on $30,000 or less each year, and many many many on $40,000 or $50,000/yr.

So making $125,000 and having to pay $30,000 a year back in loans isn't going to break the bank......

With two together, they have over $60,000 easily to live on.

Looked at another way, the $250,000 debt apiece is only twice their expected yearly salary, and if they are good specialists, maybe only 1 years worth of debt. Still sizeable, but certainly manageable since 80% of americans take on that much debt to buy their house (sometimes 2 or 3 times their income) and manage to pay it back.





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<<<f they are successfull and each making $125,000 or $200,000 apiece, I'm not sure that is an impossible situation. I
expect that these folks expect to more than make back their educational costs.

The secret is to also not get into the habit of living a $250,000 or $400,000 joint income lifestyle......

Then again, if they can pay $60,000 per year to pay off loans for 10years, just think what $60,000 per year into
retirement accounts would do if they continued that for another 20 years.

A lot of people manage to live on $30,000 or less each year, and many many many on $40,000 or $50,000/yr. >>>

Thier is so much to say about this........so here goes.

Physician income depends on two things, what specialty you're in and where you're practicing. If they're both pediatricians they might be lucky to have a combined income of 200k. However, if they're both invasive cardiologists, 1M would be easy.

Now for the rest. Everyone must remember that each physician is a walking/talking corporation. Like any corporation you have gross sales/income, and then net income or EPS (earnings per share). First you have to subtract things as: malpractice insurance, office space rental, staffing salaries, equipment, etc. These things obviously vary according to practice and area of practice. My malpractice alone is about 10% of gross, but better perspective is about two to three times the average income in my area. It is easily concievable that 1/2 of gross goes to running the corporation and the other 1/2 is CEO pay, which 1/2 goes to Uncle Sam for being a succesful, self-sufficient, productive citizen. Therefore, only about 1/4 of gross earnings comes home.

For the invasive cardiologist, it's not too bad a deal, but for our married pediatricians life will be difficult. While they may be "living" off of 50k, imagine having 3 mortgages (a house and two student loans), trying to save for retirement, and children's college funds. Whenever a neighbor's kid asks me about medicine as a profession, I say I don't regret the choice, but there is a much easier ways to earn a living.

JLC
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"Whenever a neighbor's kid asks me about medicine as a profession, I say I don't regret the choice, but there is a much easier ways to earn a living."

Maybe they should spend a year or two in Silicy Alaska?
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oops, can't type....Sicily Alaska, aka the doc, Northern Exposure, part of medical education courtesy gov't program......
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<<<Maybe they should spend a year or two in Silicy Alaska? >>>

I loved the show Nortern Exposure and watched it religiously while in med school and residency.

I had several friends that wound up joining military reserves/regulars as a way of debt "forgiveness". However, the big drawback is that it further delays your residency completion and thus the establishment of your career. But some didn't have any other options.

JLC
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One resident and her husband that I have talked to have $500,000 in medical school loans between the two of them. Imagine a $5000/month payment for 10 years on any level of income"

If they are successfull and each making $125,000 or $200,000 apiece, I'm not sure that is an impossible situation. I expect that these folks expect to more than make back their educational costs.


...If only these were the starting salaries for pediatricians and internists. Around here, the average starting salary for a pediatrician is $70,000-$90,000/year. An internist wouldn't make much more, but I don't have numbers. The pediatrician could expect to make up to $120-150,000/year eventually, if their pracice becomes especially successful, but only after a number of years (15+). This means that at the time of repayment, their salary will only begin to approach $100K. Keep in mind that the $30K/year repayment comes off pre-tax (interest is tax deductible for the first 5 years of repayment).

This leaves them with 70K/each, taxed at the 28-39% federal tax brackets. Don't forget that malpractice insurance can cost $10,000-$20,000/year. Also keep in mind that they can expect to work 6-7 days/week and at least one night/week.

$50-60K/year is not bad of course, but consider that they had to go through 7-8 years of post-college education to get to the point of making a decent living. I guess what I'm saying is, if you want to go into medicine, do it because you really want to help people, it's not the pot-o-gold that some people think it is.

Adenovir

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Well, I may have an interesting perspective on this considering my situation in life.

My father-in-law, Dr. Ernest N. Carlsen, M.D., Ph.D., developed a technology called "gray-scale imaging" many moons ago while working at Loma-Linda University Medical Center. For those that don't know what that is (I certainly didn't when I first heard the story), it is the core technology that makes "ultra-sound" possible.

He then used his undeniable expertise in this emerging field, and his natural entrepreneurial drive, together to forge (and any doctors reading this will understand why I used that word) a private practice that at it's peak spanned more than 20 mammography/radiology clinics here in Southern California.

Life was good. $3-$4M per year was not unusual. Neither were Porsches, big houses and vacations in Monaco, Europe and the Carribean just to name a few. Stock purchases, index mutual funds and money market accounts weren't necessary though, you see, because he was Dr. Carlsen and there would be always be next year (his words, now).

Then he ran afoul of just a few corrupt Health Department officials during a particularly nasty malpractice lawsuit ... and now he's just Ernie Carlsen (he surrendered his license rather than be driven completely bankrupt by the system).

He did manage to pay back his medical school bills, only to have them replaced with over $500,000 in legal bills which have not yet been repayed.

Then there's me.

I'm 32. One of these days I really do intend to get my high school diploma. I'll have to slow down a bit though. Being a CIO is rather time-consuming. Particularly as the network I am responsible for spans a good portion of North America and includes technologies from virtually every manufacturer "in the book". Plus I have 13 direct reports (what takes most of my time; I usually don't get to play with the toys anymore).

I'm one of Rush Limbaugh's "Technological Cognoscenti"; I actually understand the box. Plus I've learned to work with people so I'm an effective leader in the IT space.

I'm a digital cowboy; a rouge. I didn't follow the traditional educational paths, neither did many of my compatriots.

This means that I have no debt, yet I have a ~$200K/year salary. Unfortunately, I was a highly dedicated consumer for many years so I have lost valuable asset-gathering time (I'm better now; we live on under 30% of our income now).

The moral? My Dad worked hard, followed the rules and quite literally got screwed out of his life's work (what he's working on now blows it away though, quite frankly - want to SEE inside the human body ... in real time ... in color ... with no needles or probes?). I didn't. I was the rebel. I chose to go outside a system I still see as absolutely lacking in redemptive traits.

Guess what Dad tells my 3 boys to be when they grow up? Network Engineers like their Dad.

Being a doctor is one of the world's most honorable professions. Period. But until we can successfully tie the government's (and the lawyers') hands, it's a lousy way to make a living.

Sure, you can achieve great cashflow; but at what cost? Crushing debt? Insane malpractice insurance rates? Regulations that only a lawyer can love?

If you're a doctor, you have my deepest empathy.

Sorry; needed to vent. Read this whole thread and "saw between the lines" from several medical professionals' stories and I just sort of lost it a bit.

What the system does to doctors ought to be a capital crime.

RAB
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