What comes to your mind when you think about early retirement? Do palm trees and salty breezes come to your mind? How about traveling the world on a private yacht or parasailing in the Caribbean? Or sitting around the house just waiting on death? Or limitless shopping at your local Hobby Lobby or Foot Locker? What if I told you it’s none of the above or all of the above for some!
When I tell my family, friends, and coworkers about my plans to retire by the ripe ole’ age of 45 or sooner, they must envision me propping my feet up, waking up late, and just doing the things I love…hunting, fishing, boating, etc…They inquisitively ask questions like, “What are you going to do with all of that time?” “How much money do you need?” “How are you going to afford to retire at age 45?” or the dumbass question of “You’re not old enough to retire?” Next time you are around the “baby boomer” generation, mention early retirement and watch how pissed some become!! Most can’t fathom a 25 or 35-year-old person retiring from the workforce!
People don’t understand that early retirement isn’t time to give up work, hobbies, saving, or investing. Retirement isn’t the time to run away on limitless vacations worldwide or spend everyday recreating or shopping. Early retirement should consist of a “transition time” when you go from full-time structured employment to a part-time work structure. This part-time employment will cover the necessities and may even allow you to continually invest in your portfolio to keep increasing your mailbox money supply!!
Retirement has many meanings, but “early” retirement, for most, would be a hybrid form of part-time work that I enjoy. Again, to reiterate, I wouldn’t stop working, but I would begin working the hours I desire!
I have developed a strategic plan that I will discuss in the next few posts about how much money you need to retire, part-time opportunities, and how you can still save and invest while using a systematic approach to this dynamic subject of “early retirement”!
Many wrongs don’t make a right. In this post we will discuss “3 wrongs” or mistakes present in almost every household in today’s society, keeping people living paycheck to paycheck or worse, working well into their 60s or 70s. Even in the personal finance realm, a savvy investor can make many blunders that can derail his/her financial independence journey. Still, recognizing these three wrongs can be the difference between retiring at 45 or 70 years old. Yet, after reading this post, I hope the “Three Big Wrong’s” can be brought to light and avoided. Let us jump right in to help expedite our journey to financial independence.
Spending Habits Many people are drenched in those expensive purchases. Take a minute and look around in your closet. How many name brands are there? How many empty shoeboxes do you have? What “kinda” car do you drive? Do you operate a Mercedes instead of a Honda? Now you don’t have to answer, but I bet you are a “healthy spender”! It’s a flawed ideology if you are; however, it’s even worse if you don’t recognize the problem and stop it!
Bad Relationships Over 50 percent of the United States population have endured a divorce, and it’s even higher with negative, consuming relationships. A bad relationship or divorce can be a great learning experience for many, and it was for me. A bad relationship can not only drain you emotionally, but it can be a train wreck on your finances. Remember reading about the Lottery winner that is now broke but bailed her “baby daddy” out of jail for millions of dollars? A divorce is a strict divider; it will split your hard-earned net worth down the middle literally, especially here in the bible belt! Recognize bad relationships and move on sooner rather than later for your sanity and finances!
Adult Children That’s right, adult children are not only an oxymoron but can be a collapse to your financial structure and retirement strategy. When I talk about “Adult Children,” I refer to those “live at home” adults who never grew up to be adults. Yes, I’m talking about a 35-year-old son that is no longer in college, not contributing to society, living in the attic, aspiring Bon Jovi music addict that is costing his parents monetarily for his negligence. (true story)
Don’t fall victim to these three wrongs, and you will be well on your way to financial independence!
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Up until now, you have read my other blog posts discussing how a home was a “money pit.” There is no definite age or income to make that large home jump, but my recommendation is to buy a home using these rules. Follow these guidelines before jumping into that next home purchase.
Rule 1
As a smart, successful investor, you should only build a home when you have established your net worth goal. That’s right; build not buy! Coincidentally, you will probably reach your goal around the same time as retirement. The reason for this rule is that a home is not only a “money pit” with unknown expenses that will detour your path to financial independence, but it can lock up large amounts of capital (i.e., down payments, equity) that can make the compounding formula invalid. Remember, my home only yielded average 2.0-2.5 percent returns yearly since 1993, whereas the S&P 500 has yielded 10 percent yearly returns.
Rule 2
Only buy a home when it’s cheaper to buy vs. rent. It will always be cheaper buying in some location in America, but maybe not in your area. If this is the case, continue to rent until you can retire. Move then build!
Remember to use the 20x rule to determine if renting is cheaper than buying.
Take your Annual rent and multiply by 20. Suppose your rent is 1000 dollars a month or 12000 dollars per year. Take 12000 dollars and multiply by 20. If you cannot buy a home for $240,000, then renting will be cheaper (most of the time). We all know that buying is always cheaper than renting in some areas, but maybe not your area. This is why rule #1 is so important. Gain your wealth first, then pick that cheaper area to build that small energy efficient home away from those expensive city cess-pools.
Rule 3
Only build a home when you are ready to retire (settle down). Unfortunately, in today’s society, jobs and relationships come and go. No job is set in stone or guaranteed tomorrow. This should be clearly evident after the pandemic and the massive lay-offs. No employee knows if their job is 100 percent certain or if they will be living in the same location in 1 year. So remember, until you are completely in control of your financial independence, you are at someone else’s mercy, and you should be renting as cheap as possible and stowing that extra cash away in high yielding funds (not real estate markets). The real estate market is a slow-growing sector (in most areas) that will slow your progression to financial independence.
Rule 4
Design and build your own home instead of buying a used home. That’s right. Don’t buy someone else’s aging “money pit.” People sell for many reasons…What was the reason they sold it to you? Designing your own home is not only satisfying, but it allows you to select energy-efficient plans, location of rooms (master bedroom on the ground floor), and easy accessibility for repairs. This process also allows you to select quality materials that may have lifetime warranties (i.e., metal roofs or brick facades)
The home I sold was a money pit designed and built in the 1990s when windows were wood, the siding was masonite, and plumbing was polybutylene. These old materials were ticking time bombs ready to explode my bank account.
Rule 5
Since you will be retired when building this home, a commute will no longer matter to and from a workplace. Select an area with cheaper property taxes (not within the city limits) and lower cost of living expenses. Why not check out South Dakota?! This state is one of the most retirement friendly states due to income tax rates, subsidies on prescription drugs, etc.
Rule 6
Consider modern conveniences. Design and build your home within driving distance to healthcare facilities, grocery stores, etc.
Rule 7
This rule is probably one of the most important rules of the list. Do not build a home larger than what you will need. According to the engineering toolbox, an average person only needs 100sq-400sq in an apartment to feel comfortable. I repeatedly see a husband and a wife and (2 children) in a 3,000 square foot home, or empty nesters in a large two-story home.
You can decide what makes you happy, but for me, A 1400 square foot cabin tucked away in the woods would make me grin from ear to ear!
1.) Determine how much you can afford. (Your total transportation expense) should only be 10-15 percent of your bring home pay (not gross pay).
Example: If your take-home pay is 3,000 dollars monthly (after taxes), your car payment, fuel, automobile insurance, car maintenance should only be 300-450 dollars per month. What percent of your income do you WASTE on your vehicle? Remember to calculate all fees associated with the car. Categorize each vehicle expense into these categories.
A.) Vehicle Payment (includes interest)
B.) Taxes, tags, fees
C.) Parking
D.) Fuel/Maintenance (cleaning, oil changes, tires, etc.)
E.) Accessories
2.) Find the vehicle that suits your personal needs. Forget those fancy brands and focus on the utility/functionality of the car.
3.) Purchase a used car, if at all possible. New vehicles lose about 20 percent the first year, then 15-25 percent each year after that. Based on this analysis, it’s best to find a car 2-3 years old and purchase. Consider pre-owned vehicles with warranties!
4.) Finance cars when interest rates are less than 5 percent. Never pay cash. I hear ole timers say, “I paid cash for it.” I repeat, finance if possible. Your money can make you more in an investment instead of a depreciating asset. Why pay cash for a car if you can take that cash and invest in the S & P 500 and gain 7-10 percent returns and finance that car for 1.99 percent interest? Only an illerate investor would!
5.) Know your credit score prior to your purchase.
6.) Purchase a vehicle with the future in mind. If you are thinking about a family, don’t purchase a subcompact car or corvette!
7.) Get a pre-approved loan. Figure out your interest rate before you even begin car shopping. If it’s higher than 5 percent, DO not purchase a vehicle. Do things to get your credit better before purchase.
8.) Never purchase a vehicle on the same day of test-driving or window shopping. Always walk away and leave emotions aside. Don’t be afraid to use prices from one dealer to pit against another dealer to get the best deal possible.
9.) Don’t negotiate on payments. Negotiate on the bottom line. When a car salesperson keeps asking about “the monthly payment” you are looking for…RUN! This is a sales tactic.
10.) Avoid any vehicle loan over 60 months. Buyer Beware! If you have to finance longer than this, you cannot afford your vehicle.
We are now beginning this journey together to achieve financial independence through passive income. We cannot discuss passive income without discussing personal economics. Hopefully, thus far, you have gained valuable information about your finances, from major home purchases to those nagging “Hinder me” expenses. As we begin to evolve with this train of thought, You will ultimately start to think twice before purchasing once. Hell, maybe three or four times!… Remember, the more we think about purchases before purchasing, the less likely we will make that dumbass impulse purchase. The fewer purchases we make, the more fresh capital we can unleash toward our “real investments.” This thought process, metaphorically speaking, should turn our financial investment portfolios into a money machine that will run well into the future.
As the title of this post suggests, we now must discuss automobile purchases. Besides your home, an automobile purchase is the second most expensive purchase we will make in our lifetimes. Most of the time, the dumbest purchase we will make in our lifetime. I once overheard a friend boasting about his new shiny purchase. Ford Motor Company equipped his new purchase with a leather interior and the best trim package available at the time. Wow!! It was sparkling, polished, and damn it smelled fantastic! The purchase may not have been the smartest decision financially one could make, but he told everyone how “he got a good deal with equity” on his purchase because of a trade-in! Man, I sat and pondered at that famous expression, “trade-in, good deals, equity and cars,” with a meek appearance. Those words shouldn’t intermingle together, much less verbalized in the same sentence in an open forum for others to hear.
At that instant, the minute hand on the clock seemed to stop, my eyes opened, and I realized how stupid people are! I’m not the only one either! Next time when you are racing around town in your shiny car, paying those endless bank notes, look to the right and left at that red light. You will see BMW, Jaguar, Mercedes, Tesla, etc. with many aftermarket upgrades. I don’t bet often, but I will make a bet here. I bet many of these cars belong to people who make less annually than what the vehicle is worth! But I guess if they are building equity in that BMW, why not? (joke)
Now, like we have discussed previously in many posts, there are hinder-me and help-me expenses with every purchase. An example of an automobile payment would be a “Hinder Me” cost if you bought a car/SUV/truck, and the price or payment is not as reasonably low as possible to achieve the same result.
An example of “Hinder Me” Car Expense:
You need to buy a car for transportation to and from work.
Instead of purchasing a used low mileage Toyota Corolla several years old, you go out and buy a brand stinking new BMW 6 series (MSRP $70,000)
A Corolla will perform the same function as a BMW 6 series to commute around the city. Why spend $70,000 when you can achieve the same goal (commuting) for under $15 grand. Are you trying to keep up with the Jones? Are you trying to be someone you are not? Are you trying to play the rich game and keep up with the Jones? Listen, if you are still working a 9-5, everyone knows you are not wealthy. Please stop pretending.
As you can see, The Beamer is a “Hinder Me” expense because the BMW 6 series payment is not as low as reasonably possible. A corolla payment is as low as reasonably possible. Remember this!
Now, let’s dive into my coworker’s situation above; First, Ford is a terrible brand to purchase because it loses value far greater than its Toyota, Subaru, and Honda counterparts. Second, you will always get screwed when trading in a car. You are better off selling the car privately. Third, you should look at the overall price of a vehicle compared to your earnings. We will discuss this later.
7. Ford Fusion Energi (plug-in hybrid): 69.1 percent
8. BMW 6 Series (luxury car): 69.0 percent
9. Jaguar XJL (luxury car): 68.9 percent
10. Chevrolet Volt (range-extending electric car): 68.1 percent
Now, as a savvy investor, there are other factors you need to consider in addition to depreciation data. Here is a simple list you should consider when purchasing a car, whether new or used. Most of the time, it’s better to buy an automobile slightly used but not always (depending on finance rates).
1.) Purchase Price (always compare to KBB) Use link here to determine fair market value: https://www.kbb.com
2.) Financing (Interest rate)
3.) Maintenance costs
4.) Depreciation Rate
5.) MPG
6.) Safety rating
7.) Car insurance rate
Let’s assume you are in the market for a commuter car. Highway/City driving. Let’s assume you are interested in a Toyota Camry, but you are leaning toward a new BMW 330i sedan. Let’s see the breakdown…
As you can see from the chart, the Toyota Camry is a way smarter choice. It is a safer, cheaper, more reliable car due to lower maintenance costs. It may not kick the Beamer’s ass with horsepower, but it does in almost every other category.
The only category that the Beamer is better significantly than the Camry is the depreciation rate. It appears the three series BMW depreciates at 40 percent at five years compared to 49 percent at five years with the Camry. Does this category matter? Let’s do the math.
You would save $755 over five years on the Camry (just in maintenance costs)
Plus another 16,280 off the sticker price.
Plus another $1,856.25 in interest
The Camry would have saved you approximately 19,000 dollars. As you can see from these calculations, the Camry is the best option. The 19,000 dollars properly managed could grow even larger if invested correctly. So does depreciation rate matter? It does, however, not exclusively.
Conclusion:
Don’t “Keep up with the Jones”! Keep your emotions out of automobile purchases; don’t overpay for logos or names! Use the checklist above to see the actual expenses before making a purchase. Try this approach before your next Big car purchase. Research, research, research. Never make an impulse buy. Remember to Think Twice; before buying once!
Let me know your thoughts? Subscribe and comment! Stay tuned for more posts!
Like I said in my previous blog post, to take control of your financial freedom, you must list all of your expenses, then categorize each expense into “Hinder or Help” me expenses and eliminate the shitty “Hinder me” expenses. In today’s society, people are overburdened with debt and costs, making them slaves to their jobs. This is a vicious cycle that keeps the honest working person, in my case, “dude” in the corporate world dealing with all the bureaucracy and bullshit. These entitled, egotistical bastards want to keep the “underdog” slaving away so the “top-dogs” can sit back on their lazy asses while reaping the benefits of the underdogs. (merit, top-tiered pay scales, etc.)
Luckily for the dividend dudes and dudettes out there globally, most recognize that financial freedom is at our fingertips, but it seems so distant due to societal pressures. Sometimes financial freedom may seem as remote as Mars or Jupiter on a cloudy night. Hopefully, after deciphering this post and applying some of these principles, you can control your financial destiny too!
Remember, “It doesn’t matter how much you make; all that matters is how much you spend.” Achieving financial freedom is quite simple: spend less than you make and invest the difference.
Using this categorical approach to your expenses will allow you to see which “hinder me” expenses are not necessary to your life existence and may be eliminated or deviated. By deviated, I mean to depart from the usual expense (i.e. decrease/cut).
I recommend categorizing your expenses as shown below in the chart. I would recommend getting an average amount (over one year) on fluctuating bills (groceries, personal care, etc.) due to increased accuracy. You know, the costs that change monthly. Most understand that bills fluctuate depending on your purchases. My grocery expense is roughly $400 monthly over the last year. Groceries, I define as “Help me” expenses in this post (as long as the grocery expense is reasonably as low as possible) because food contributes to your health and well-being. Simply put, you cannot survive without food.
By calculating annual averages, it gives a more actual representation of the expense. However, If I purchased caviar and fine wines, the expense would skyrocket. At this point, with my monthly budgeting “financial awareness,” I would understand that my grocery expense suddenly became a “Hinder me” expense, thus not making the same mistake again! Let’s dig into my expenses before selling my home, “the ole money pit.” which should be enjoyable for everyone!! We will take a look at the average monthly cost in each category over the last year.
“Hinder Me Expenses”
The chart represents all of my expenses before selling my home. Every cost highlighted in red is a “hinder me” expense. The values highlighted in blue represent a “help me” expense. Some people may say, how is a mortgage payment a “hinder me” expense? Well, for a full breakdown, I can tell you to read my previous blog posts “the ole money pit,” but to quickly determine if this expense is a “hinder me” expense, just ask yourself a simple question… “Can I cut/decrease (deviate) that expense”? If your answer is yes, then it’s a “hinder me” expense. My answer to that rhetorical question about my mortgage payment is “Hell yes”!!
I am a single man, for starters, so all I need is a one-bedroom apartment (which I can easily rent in my area for $850 per month, including internet and cable). I proved I can easily “deviate/decrease” that mortgage expense. Another expense highlighted “red” is HOA or homeowner’s association fee. I eliminated this ridiculous bill by moving into an apartment. GONE! Moreover, my truck payment could be decreased by choosing another mode of transportation (bus, uber, taxi, cheaper car, etc.)
Recap of “Hinder Me” Expenses:
To determine if an expense is a “Hinder me” expense, ask yourself two questions…If your answer (yes) to either; more than likely, it’s a hindrance expense.
1.) Can I live without it?
2.) Can I eliminate, deviate, or decrease this expense?
“Help Me Expenses”
My “Help me” expenses are highlighted in blue in the chart above. My student loan is classified as a “help me” cost because it’s allowing me to be a high-income earner and supercharge my journey to financial freedom. If my student loan payment was being paid and I was in a different non-related field that didn’t pertain to my degree, this would obviously be a “hinder me” expense. For instance, if you received a Communications Degree from Timbuktu University (joke) and worked a minimum wage job at Lowe’s Home Improvement with student loan debt. Don’t forget, folks; college is a business. They don’t care if you find a job or not; these rogue scholars want your money.
Other items highlighted blue are required for my lifestyle, and I cannot lower, for example, car insurance, groceries, water, internet, etc. One may argue that I could consider groceries a “hinder me” expense since I spent $400 on average per month. My rebuttal to this argument is I’m already super frugal and don’t spend lavishly on crab legs etc. Therefore, I know for a fact that my grocery bill is as low as reasonably possible.
If my average monthly expenditure on groceries is $400, then a monthly increase “spike” to $500-600 or say $800 in one month, the grocery expense would be skewed toward a “hinder me” expense because it’s not as low as reasonably possible. As discussed above, this would be a “red flag” in financial awareness.
Recap of “Help Me” Expenses:
To determine if an expense is a “Help me” expense, ask yourself two questions…If you answer yes to both questions, then more than likely, it’s a “Help me” expense.
1.) Do I need this expense to make money, survive, maintain a modest healthy lifestyle, or for my well-being?
2.) Is this expense as low as reasonably possible?
I posted a simple algorithm to help you decide before making those purchases!
Take a-ways:
· It doesn’t matter how much you make; it matters how much you spend and invest!
· Categorize each expense you have
· Before making a purchase…Determine if it will “Help or Hinder” you
· Your “Help me” expenses should be higher than your “Hinder me” expenses
· If it’s a “Hinder me” expense…You don’t need it!
As we begin this journey together, we can share life experiences that will enrich our minds while we work together to achieve financial independence one cent at a time! Sit back, grab a Coca-Cola, relax, and enjoy this post!
First, let me ask you a question. How many “Hinder me” expenses do you have? How many “Help me” expenses do you have? If you don’t know the answer to these simple questions, I need your undivided attention before you descend into a financial spiral.
Let’s begin by defining each expense category.
“Hinder Me” Expenses: These are expenses that hinder “or hold you back” from your financial goals. These make your journey to financial freedom much more strenuous and stressful. You may be asking yourself what an example of a “hinder me” expense is? It is as simple as “an expense that you can eliminate/lower and maintain the same relative lifestyle.”
Let’s dive right into what a “hinder me” expense is… It’s a very complicated answer. There is no Merriam Webster dictionary definition for “Hinder me” expense. Go ahead, check, and see. I’ll wait… However, you will find a definition of Hinder and Expense.
Hinder: To make difficult, resulting in delay or obstruction.
Me: refer to him/herself.
Expense: the cost for something, the money spent on something
Now let’s combine these terms and get our definition…
It costs you money (monthly, daily, yearly, etc.), making your journey to financial freedom (more) complicated. These expenses are sucking fresh capital away from your investments (like a sponge). Most costs that fall into this category can be eliminated or decreased without disruption to everyday life, health, and well-being. Like I said before, remember this…Any bill that you can stop/lower without disruption in everyday life is a “Hinder me” expense.
Some examples:
Example 1: Eating out every day for lunch instead of bringing your bag lunch. On average, eating out for lunch will cost between 8-20 dollars compared to 2-5 dollars when you get your lunch (soup/sandwich/frozen dinners) from home. A whopping savings of 6-15 dollars daily!!
Example 2: Buying soft drinks/coffee instead of drinking water or making your coffee. At most restaurants, water is free of charge or at-most 50 cents, when comparing with Dr. Pepper, Mountain Dew, coffee, etc. ($1.50- $3.00) A healthy savings of 1-2 dollars per drink.
Example 3: Expensive cable tv packages (100-300 dollars monthly) Try Netflix, Hulu, etc.
Example 4: Expensive phone plans (when a prepaid phone may be a better option or a lower data plan) Don’t forget about financing those fancy phones…
Example 5: Expensive organic foods (when compared to non-organic foods)
Example 6: Alcohol/drugs
Example 7: Expensive cars (BMW, Mercedes, etc.) compared to Honda, Toyota, etc.
Example 8: Credit card (debts)
Example 9: Excessive spending on clothes/shoes etc.
Example 10: Unneeded vacations (close and far)
Example 11: Haircuts, nails, etc. (personal appearance)
“Help Me” Expenses: These are expenses that help you achieve your financial goals. These make your journey to financial freedom much easier. You may be asking yourself…What is an example of a “help me” expense?
Let’s dive right into what a “Help me” expense is… It’s a very complicated answer. There is no Merriam Webster dictionary definition for a “Help me” expense. Go ahead, check, and see. Like before, you will find a definition for Help and Expense.
Help: To make it easier for someone to do something (For us Financial Freedom)
Me: refer to him/herself
Expense: the cost for something, the money spent on something
Let’s combine these terms with seeing what a “Help me” expense is. It costs you money (monthly, daily, yearly, etc.), making your journey to financial freedom easier. Most expenses that fall into this category can not be eliminated or decreased without disruption to everyday life, health, and well-being.
Some examples:
Example 1: Grocery Bill
Example 2: Student loan debt (Only if you are using your degree to earn money)
Example 3: Cell phone (cheapest phone plan as possible)
Example 4: Electric bill
Example 5: Car payment
Example 6: Gasoline (within reason)
As you can see, there is a delicate balance between “Hinder and Help” me expenses.
Some limitations:
1.) A bill that commonly categorizes in your “help me” expense column can quickly become a “hinder me” expense without proper discipline. Example: A gasoline bill can quickly help or hinder you. It depends on how much you drive. If you drive to work, it will be a “help me” expense because it helps you earn more money. On the flip side, If you drive to the beach on an “unneeded” vacation, it is a hindrance (not to mention the vacation costs itself).
2.) Every person has different “hinder or help me” bills. Example: Cell phone bill may be a “hinder me” expense if this person never uses it, whereas someone with children, elderly parents, etc. may find this bill as a “help me” expense.
3.) Some bills may be both “a help and hinder me” expense. Example: Vacation may be a stress reliever but may hinder your financial journey.
4.) Some “hinder me” bills can become “help me” as circumstances change and vice-versa. Example: A medical condition may require certain drugs to be consumed to help a particular medical condition, which was a waste of money beforehand (Mary-Jane).
Conclusion:
Thanks for reading this post. The purpose of this post is to make you aware of your expenses. To control your financial freedom, it all begins with recognizing your expenses, creating a budget, and adhering to it. I challenge you to grab a piece of paper and jot down your expenses. Then, categorize these expenses into “Help me vs. Hinder me” expenses. Once you have identified those “hinder me” expenses, try to eliminate them. If you cannot come to terms with elimination, then deviation (decreasing) is the next step. For example, if you determine that your 175 dollar cable package with sports add-on features is a “hinder me” expense, but you cannot eliminate it to maintain your sanity (joke). Maybe reduce the package (i.e., eliminate some sports) to cut the cost. Trust me when I say this, I can say this with 100 percent certainty…No-one has ever died from not watching sports or cable TV.
Thanks for reading. Stay tuned for my next post, where I will break down my budget. Subscribe, share, and comment below.
Thanks again for stopping by The Dividend Dudes Blog. I recently discussed homeownership with my neighbor and told him about the mathematical analysis I found when crunching numbers associated with homeownership. It was astounding. My last post demonstrated how much I lost personally by purchasing my home for just three short years. Now let’s examine how much the prior owner lost or gained during his stay at the “Ole Money Pit” for 24 years! Without a doubt, I should prove if owning this home was a good investment from the previous owner? Some people call home an investment? Let’s see. I understand that geographical location has a lot to do with price appreciation. Still, this home’s location is actually in the top real estate markets in the state of North Carolina. Just imagine homes in rural areas with negative appreciation.
The background of this home:
· Single Family Home in an upscale neighborhood in Cary, NC.
· Year built: 1993
· Heating: Forced Air, Gas
· Cooling: Central
· Parking: 2 spaces
· Lot: 0.56 Acres
· Price/sq. ft: $184
The previous owner built it in 1993 on a lovely spacious ½ acre lot. The home and lot were purchased for $278,500 in 1993 and sold for 475,500 in 2017. That is 24 years on this “so-called investment.” Let’s say the previous owner put down 20 percent ($55,700) and financed the remaining balance of $222,800. Now let’s take a look at the interest rates below.
Interest Rates in the 1990s: Average 8 percent
Interest Rates 2000-2005: Average 7 percent
Interest Rates: 2005-2010: Average 5 percent
Interest Rates: 2010-2015: Average 4 percent
Let’s take the lowest of these interest rates (4 percent) for a 25-year mortgage. Interest Paid =$130,006
Homeowners Insurance: $28,000
Average Maintenance/Repair Percentage on Home is 1-4 percent of Total Value (let’s use a conservative 2 percent) =$113,040. This equals 4,710 dollars annually for repairs and maintenance, including grass.
Property Taxes (estimated): $73,407
HOA dues (estimated): $15,000
Purchase Price
278,500
Property Taxes
-73,407
Loan Interest
-130,006
Repair/Maintenance
-113,040
HOA
-15,000
Home Owners Ins.
-28,000
Sold Price
475,500
Purchase down payment
55,700
Sale Proceeds
141,300
Gross Expenses:
-359,453
Total Loss:
-218,153
I classify all expenses into two categories:
1.)Help me expenses (Help build wealth)
2.)Hinder me expenses (Hold you back from wealth)
Help Me expenses of a home would be renovations (only if they increase resale value), principal payments on loans, etc. These are actual expenses that help you get ahead with a home appreciation known as equity (in this case).
Hinder Me expenses are most of the costs above in the chart (property taxes, loan interest, Repairs/maintenance, HOA, etc.) These don’t help with home appreciation and are dead weight in your budget.
Now, let’s determine the home appreciation average from 1993-2017.
The home appreciated roughly 2.2 percent annually ($6127 per year), although it cost the previous owner approximately 14,977 dollars annually to live in the house just in “Hinder-me” expenses, as shown above in the chart.
With each passing year, $8,850 or $737.51 monthly was not in Dave’s pocket living in this home (just paying hinder-me expenses). Those unsettling expenses were never recovered even when sold, resulting in a loss of over 200K in 24 years. It is safe to say; most home ownerships are negative investments. You may ask yourself, why would someone invest in a negative investment? Are they listening to society? Have emotional attachments to their home? Some want a piece of land and home paid in full, so they can sleep better while losing their asses. Some gauge financial success by having a home that is paid off!
How much would the previous owner have if he rented and invested for 24 years (assuming an average 10 percent return)?
If he rented instead of buying, he would have had the down payment of $55,700 to invest instantly in 1993. That sum of money would have turned into approximately 600,000 thousand dollars by 2017! Wow! Just imagine, this isn’t even considering fresh money that would have been invested monthly by not having to pay all of those “Hinder me” expenses. Instead, he lost approximately $218,000 (which would have been even more if that would have compounded).
Conclusion:
After reviewing this home’s average market appreciation percentage of 2.2 and comparing it to the S&P 500 index of almost 10 percent over the last 30 years, there is no doubt that it would have been a smarter move to rent and invest the remainder into index funds, etc. Before purchasing a home, examine the real deal intrinsically and extrinsically. If any purchase (house, car, etc.) has more “hinder me” expenses than “help me” costs, the purchase probably isn’t the best financial move. Besides, who wants an aging home that is only gaining 2.2 percent annually, meanwhile property taxes, repairs, etc. are increasing at unimaginable levels; meanwhile, the S&P 500 index is averaged at 10 percent consistently even through recessions. Remember, the average repair costs range from 1-4 percent of the total value of the home annually. Where do you think a 20+ year-old house will fall in this range with repair/maintenance? My guess is on the higher end (closer to 3-4 percent). Remember investing involves consistency, and many home-related expenses are inconsistent from month to month. My personal opinion is owning a home is only a good investment option if you are not diligent enough to save monthly; otherwise, homes aren’t good investments due to multiple reasons described above.
I want to begin by saying thanks for coming to check out The Dividend Dude’s Blog! Please subscribe if you haven’t already! Recently I made a big move toward financial independence, and it didn’t involve moving in with my parents!! Not at all. It involved eliminating a “money pit.” When I told my dearest friends, I was selling my home or The “Money Pit” to supercharge my Journey to financial independence; I was met with stark resistance. I’m sure you have heard by now that renting is “paying off someone else’s mortgage” or, even worse, “throwing your hard-earned dollars down the drain.” Is this true?… Or is this a statement blown out of mythical proportions? Let’s put those emotions aside and let the mathematical equations tell us the truth.
In 2017, I purchased a 24-year-old home for $475,500 with a $52,000 down payment in an upscale neighborhood where the Tesla, Volvo, and Mercedes Benz drivers zipped around in their shiny cars flaunting to others how much money they have, and the occasional sighting of a Range Rover or Jaguar speeding to the grocery store or the local school. The sidewalks were crowded with stay-at-home and work from home parents exercising most hours of the workday. The sound of mowers and edgers from landscaping companies trimming the grass and bushes of adjacent homes, I would only catch a glimpse when rushing home to take a 10-minute lunch break before busting ass back to work to make another payment on the “ole money pit.” Who has the best yard, home, car, clothes, extracurricular activities? Who gives a shit? I sure don’t! Does this sound familiar? Does this sound like most middle-class suburban neighborhoods?
In 2020, just three short years later, after a new divorce, home repairs, and minor verbal altercations with neighbors, I was able to sell the home for $545,000. To the unskilled investor or conventional thinker (those who think a home is a good investment), they may say, wow!!!! You profited 70,000 dollars, Not a bad score considering it was only three years!
Let’s take a step back and see the breakdown.
That’s a savings of $3208 per month by getting rid of that “money pit” or annually $38,497.33. Now, do you still think homeownership is a significant investment? I believe that homeownership can be a good investment in certain instances, but only when you follow the takeaways below.
With each passing month, I will invest this cash into dividend-paying stocks that will generate passive cash flow and should propel me to financial independence in a few years. As you can see, you may be paying for someone else’s mortgage by renting. Still, in specific scenarios (if renting is cheaper than buying (20x) rule), it allows you to allocate more free cash into other investment vehicles that will yield a more astounding return year over year. Thoughts? Comment below.
My take-aways about purchasing a home…
1.) Use The 20x rule–Take your annual rent and multiple by 20 to find out what home price you should buy (to save money instead of renting).
Example: My annual rent is $7200 a year x 20–I should keep renting until I find a home for $144,000 (which isn’t happening in this shitty city area)
2.) Don’t buy a home until you are certain you will be there for at least 10 years.
3.) Avoid PMI insurance (if at all possible)
4.) Buying isn’t always better than renting (as you just seen above).
5.) Consider the age of a home (homes older than 10 years old will require costly repairs at some point).
6.) Do what’s best for you and don’t listen to other people (especially if they still keep their life savings socked away in savings accounts yielding less than 1 percent a year).
7.) Never buy a home larger than you will need. Actually, a family of four only needs a home less than 1800 square feet.
Just for shit and giggles, Let’s play this last scenario out. Let’s pretend it’s 2017 once again, and instead of buying my home and losing over $40,000, I would have rented with the same living situation. Let’s assume 7% returns based on the historic S &P 500. Wow! I would have invested over 196,000 dollars in just three short years, which would yield approximately $650 per month in dividends (assuming a 4% average dividend yield).
Welcome to my blog! Here at The Dividend Dudes blog will be geared toward financial independence through the passive income of dividends. Over the last year, I have endured many life-changing experiences. Let’s jump right into the meat and potatoes…What were the steps I took toward financial independence in the year 2020 at 33 years old? What could that be? Hmmm…Did I get rid of my gold digger wife (Que Gold Digger by Kayne West), get rid of my three thousand square foot home in an upper middle class suburban neighborhood near the capital city of North Carolina, or eliminating my fervent in-laws offering broken promises and overzealous spending habits that would have sequestered myself to a life of hard work until at least 65 years old or older…. Wow, I’m exhausted, just saying all of that! It was all of the above. Over the last year, I have got a fresh new start on life hence the title. I am recently divorced, sold my home, and got rid of those nagging in-laws. Moreover, I have decided to take drastic measures shaping and shaving my finances to become financially free at the ripe ole’ age of 45. Time is not on my side, but I have 12 years to get my shit together while squirreling away a nest egg of over 1 million dollars, that should theoretically cover all of my expenses through dividends. My blog will be geared toward sharing my life experiences as a mid 30s dude starting over. I will share stock and investment strategies, frugal lifestyle measures, and anything about finances. With only 12 years remaining on this plan, Let’s take this exciting journey together and get the ball rolling!
