"SHOW ME THE MONEY" VIEWS on HOW to make MONEY GR

[MJZiggy]

I wanna guess and tell me if I'm right. Anything is better than nothing especially at the beginning of the loan.

[pittstang5]

Bretsky and retailguy,

Thanks for the help and response, but as retailguy put it, I think I'm SOL. This happened over five years ago (yeah, I know) and the late payment occurred over 90 days after the bill processed...however I never new I had a balance. Long Story short - I was young, in college, naive and trusted a friend. The thing that irritates me, the bill couldn't have been for more than $30. But, like I said, I was able to get a mortgage and a car payment with no problem. Since then I make it a habit to pay bills way before they are due.

Thanks again.

[Bretsky]

Essentially, I do not believe that a "homeowner" who purchases a home on a 30 year mortgage with zero down and faithfully pays the payment for the entire 30 years has made an "investment". He's merely rented from his bank instead of a landlord, his bank made a profit, and he's lucky if he broke even in real dollars. Undoubtedly, he could have invested the difference between the mortgage payment, taxes and upkeep versus what he could have paid in "rent" in a good mutual fund and blown the doors off his return on the "house" he invested in.

So how much extra should be put on a mortgage payment each month? I know you will say ...as much as you can, but are there some general "rule of thumb" figures? I'm in my first year in my house. I pay extra every month....about enough to amount to a little over an extra payment a year. Is that amount going to make any great difference in the end?


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Absolutely. You only put extra in there if you are comfy doing it. I don't have the numbers in front of me, but if you stay there 30 years, and make one doublepayment each year at the first payment from the beginning of the mortgage (etc...close in June, make a doublepayment from the start every August of every year)............you will cut around 7 years off the end of the mortgage.

And if your rate is not that good and you can improve it by a point or so, shave that 30Yr down to a 15Yr in the future. Then each payment really puts a dent in the principal.

[Scott Campbell]

Essentially, I do not believe that a "homeowner" who purchases a home on a 30 year mortgage with zero down and faithfully pays the payment for the entire 30 years has made an "investment". He's merely rented from his bank instead of a landlord, his bank made a profit, and he's lucky if he broke even in real dollars. Undoubtedly, he could have invested the difference between the mortgage payment, taxes and upkeep versus what he could have paid in "rent" in a good mutual fund and blown the doors off his return on the "house" he invested in.

So how much extra should be put on a mortgage payment each month? I know you will say ...as much as you can, but are there some general "rule of thumb" figures? I'm in my first year in my house. I pay extra every month....about enough to amount to a little over an extra payment a year. Is that amount going to make any great difference in the end?


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That Givens book I quoted earlier (Wealth Without Risk) supports Retail. If I remember it correctly (it's been 15 years or so), he made an unbelieveably strong case for the 15 year fixed rate mortgage. The amount of money saved was staggering. The rate used to be about a half a point lower than the 30 year fixed, and the principal was paid down so much quicker that payments are not even close to double that of a 30 year. Bretsky or Retail could probably calculate what the additional payment percentage is, but I want to guess that it was around 20-25%. It was tough, but workable.

I did the same exact thing B did, but I'm a few years older. Bought the first modest house on a 30 year fixed. We made extra payments and as soon as it appreciated enough so that we had 20% equity, we refinanced to a 15 year and were able to drop the damned PMI. What a waste of money that is. Then we upgraded to the big house in 95 with enough equity to skip PMI altogether this time and did the 15 year fixed again. The new house was paid off 5 or 6 years ago, and I barely remember what a mortgage payment is like. It kind of pisses me off that I never got in on those ridiculously low rates in the 5-6% range over the last couple of years, but that's just quibbling. Paying off your home early works. Don't get sucked in by the government subsidizing your interest rate with the tax break.

Re: "So how much extra should be put on a mortgage payment each month?"

How much you got? Don't take money from your 401K or Roth to do it though.

[Partial]

so essentially, the jist that I am getting is as soon as you're out of college, max out your Roth IRA and put as much into your 401k that your company will match. Then, while I'm still young and in the process of getting settled, live in a craphole for a few years, and avoid having kids until I am 30.

Then, once I am settled and decide to buy a house, buy something modest while the kid is young, and after I max out my IRA & 401k matched-amount each year, then pour the rest of the money that I can reasonably afford to into the mortgage to get that mofo paid off. After I get about 50% paid off, I should refinance the mortgage to get a lower rate over less years?

Then, once that is paid off, I do some simple fixes myself (i'm pretty handy) IE paint the walls, put new counter tops, sinks in, and ideally convert the basement from a storage area to a finished area and sell this mofo off for some modest profit.

About 5 years out of school I want to go back and get my MBA so I can move from being an engineer to managing engineers and making the big bucks for a big corporation.

I figure i'd buy another a keeper house around 40, design it myself and have a company build it how I want it, and pour as much money as I can into it to try and pay it off within like 10 years.

Is that a good idea to just pay off your mortgages right away while maxing out the IRA/401k? Or is it better to take the mortgage a little slower and get some stocks and mutual funds?

What is the best way to pay off student loans in this?

What if at 27 I decide to take on the additional burden of 10,000 a year for 2 years to get an MBA. Would it be wise to pay this out of pocket, or take out a low interest loan student loan like a stafford loan?

I guess I don't really understand the value of a dollar because I haven't learned much about investing in school, and where as taking out a 5% loan on 20,000 dollars seems like a good idea in theory if I could invest that 20,000 into something and make 20% interest on it, however I have no idea if that is how the real world works.

[retailguy]

Bretsky and retailguy,

Thanks for the help and response, but as retailguy put it, I think I'm SOL. This happened over five years ago (yeah, I know) and the late payment occurred over 90 days after the bill processed...however I never new I had a balance. Long Story short - I was young, in college, naive and trusted a friend. The thing that irritates me, the bill couldn't have been for more than $30. But, like I said, I was able to get a mortgage and a car payment with no problem. Since then I make it a habit to pay bills way before they are due.

Thanks again.

Pitt,

It wouldn't hurt to dispute it. If they validate it, you are still in the same position that you are in right now. If it is over 5 years old, it is probably not affecting you, especially if the rest of your credit is solid. You'd be amazed at the things people do to their credit.

[retailguy]

I wanna guess and tell me if I'm right. Anything is better than nothing especially at the beginning of the loan.

True. Good guess.

Think of it as the power of compound interest in reverse. Once you "pay" that $50, or however insignificant of an amount you pay, the bank cannot continue to charge interest on it. So you may only save 10 cents (interest savings) a month, but each time you pay $50 extra, you save the same amount, and it adds up much faster than you think.

[retailguy]

So how much extra should be put on a mortgage payment each month? I know you will say ...as much as you can, but are there some general "rule of thumb" figures? I'm in my first year in my house. I pay extra every month....about enough to amount to a little over an extra payment a year. Is that amount going to make any great difference in the end?


-

Yes, it'll make a big difference. Use excel and an amortization spreadsheet, or use a calculator on the web. Insert the extra that you make on your payment and you'll see what I mean. Even a modest payment makes a HUGE difference.

The rule of thumb is dependent on your personal situation. As I recall you are buying the home and raising kids by yourself. My hats off to you. That's not easy.

However, if you can figure out what it takes to pay off the mortgage you have in 15 years, and you can make that payment, you will improve the "financial value" of your investment. The difference in money "invested" in your home will stagger you.

For example, a $150,000 loan at 6.5% interest on a 30 year loan gives a payment of $948.10, whereas the payment on a 15 year loan is $1306.66, a difference of 358.56. That's a difference of 38% on the original payment. Nowhere near double the payment. As your income increases, it should become easier to make that payment, then as you do, the interest you pay the bank drops dramatically, placing more of your payment against the principal balance.

In short, I think Scott Campbell said not to take money from your IRA or a Roth, and I agree. Other than that, paying down what you already have is a great idea.

[Scott Campbell]

After I get about 50% paid off, I should refinance the mortgage to get a lower rate over less years?

There is a reason I used 20%. The mortgage company can no longer require you to carry expensive and worthless PMI once you have 20% equity in your home. Two things affect your equity. The amount of principal you've paid down, and appreciation. We had our home appraised after we had been in a couple of years, and made sure the appraiser knew exactly where his appraisal needed to come in so the math would work out correctly for the 20% equity. We used the excess cash flow from not having to pay PMI to qualify for the 15 year loan and paid down the principal quicker.

If you have been in your home for a couple of years, you may have already seen enough appreciation to get rid of your PMI.

[Partial]

I've never taken a finance class and don't have to for my major. Would that be a good decision to take that or can I learn what this stuff means/tips on all of this stuff from reading "the millionaire next door"?

I've taken microeconomics, but I had a liberal hippie for a teacher who preached about adam smith and a bunch of other contemporary liberals and how their views dispute trickle down economics and capitalism in general. Essentially, it was a bullshit class where nothing was learned. Amazingly, we did not use any math at all during the course. In fact, the only numbers I saw were labeling my outlines with letters, numbers, and roman numerals to keep track of notes!!

[retailguy]

so essentially, the jist that I am getting is as soon as you're out of college, max out your Roth IRA and put as much into your 401k that your company will match. Then, while I'm still young and in the process of getting settled, live in a craphole for a few years, and avoid having kids until I am 30.

Check with your financial planner for Roth vs 401K. The decision is dependent upon the type of 401K you have available. I see the 401K as more important than a Roth, provided the employer does some type of "match". Matching funds are the biggest blessing an employee can hope to get from an employer.

When you have a 401K available, find a way to contribute the amount required for the max employer match immediately. Then structure a "plan" to get to the maximum you can invest. One painless way to do that, is to take a portion of your annual raise, I suggest 1% or 2% if you got a great raise, and add that percentage to your contribution EVERY year up to the max allowable. You still get a "raise", and your take home paycheck never falls. It is as "painless" as it gets.

I don't know your situation, however, I might be inclined to steer you from a Roth at this early point, and have you save in a common sense mutual fund first towards a down payment. The reason for that, is, that while single and earning a good income, you are in the worst tax situation you could be in. I could honestly advocate you purchasing a home with less than 20% down, because of the tax ramifications for you. You will actually see a tax benefit in the early years, whereas a married couple with a child may not see any tangible benefit in tax savings with a home purchase.

I still wouldn't recommend purchasing with less than 10% down, HOWEVER, you could make that work fairly well if you can achieve an income of $50K as you stated. I'd think in 1 1/2 -3 years you could accumulate $25K for a solid down payment, maybe more depending upon your lifestyle choices.

Whatever you do, resist the urge to buy that $40K set of wheels. PLEASE. Get a sensible car, pay it off early and drive it until the wheels fall off.

Five years of good planning will leave you "set" for life. I'm not kidding.

I've got more for you later....

[pittstang5]

Partial,

A little friendly advise concerning your MBA. Get this done as soon as possible. At the least, take a class here or there to stay with it. Some companies, if you're fortunate will even pay for all, most or even some of it. Sometimes they require you to stay with the company for X amount of years.

But, I vowed to get my Masters 2 - 3 years after college and I'm 5 years out, got married, have a mortgage and we're going to try to have kids in the next year or so. No MBA for me in the future. Get it done while you're young, if you can.

[Scott Campbell]

For example, a $150,000 loan at 6.5% interest on a 30 year loan gives a payment of $948.10, whereas the payment on a 15 year loan is $1306.66, a difference of 358.56. That's a difference of 38% on the original payment. Nowhere near double the payment.

I think the difference between your 38%, and my 20-25% was that I was able to shave an additional 1/2 point off my interest rate by moving from the 30 year fixed to a 15 year fixed. I'm not sure what the spread is today.

[retailguy]

I've taken microeconomics, but I had a liberal hippie for a teacher who preached about adam smith and a bunch of other contemporary liberals and how their views dispute trickle down economics and capitalism in general. Essentially, it was a bullshit class where nothing was learned. Amazingly, we did not use any math at all during the course. In fact, the only numbers I saw were labeling my outlines with letters, numbers, and roman numerals to keep track of notes!!

But.... did you "feel" better when it was over? That is the really important point.

You experience "trickle down economics" every single day.

Capitalism proves that the "economy" is not a zero sum game.

Microeconomics could have been a great class to explore the "hideous" effect of a capital gains tax, which is probably the most egregious tax out there, even at the 15% maximum that the Bush administration was able to get. Oh, Ronald Reagan, I miss you...... <sigh>

[Fosco33]

Partial,

A little friendly advise concerning your MBA. Get this done as soon as possible. At the least, take a class here or there to stay with it. Some companies, if you're fortunate will even pay for all, most or even some of it. Sometimes they require you to stay with the company for X amount of years.

But, I vowed to get my Masters 2 - 3 years after college and I'm 5 years out, got married, have a mortgage and we're going to try to have kids in the next year or so. No MBA for me in the future. Get it done while you're young, if you can.

Make sure if you want an MBA that the industry your in values it. An MBA in Marketing or Sales is basically useless. Also consider the opportunity cost (plus the cost of school) in your decision. Let's say you go to a good school (20K/yr) and don't work your previous job (say 65K) - the cost of that degree just went up to $150K! Plus, you may be missing out on nice ROI on your income. If it makes sense, go for it - but you can always get an exec MBA later in life if you desire to be a C suite type guy.

[retailguy]

I think the difference between your 38%, and my 20-25% was that I was able to shave an additional 1/2 point off my interest rate by moving from the 30 year fixed to a 15 year fixed. I'm not sure what the spread is today.

Yes, I assumed that there was no change in rates. You're right that there used to be an advantage, but you don't even see anyone advertise 15 year rates anymore. It's been so long since I've had a mortgage, I just assumed that there is no difference. B?

Even a half percentage difference would put the figure in your 20% range. Maybe less than that.

[Scott Campbell]

Five years of good planning will leave you "set" for life. I'm not kidding.

This is very true. I retired for the first time at 40, and it was primarily due to knowing the basic outline of my financial plan when I graduated college at 25. Well part of it was knowing the plan, and part of it was just being used to living on nothing.

[Scott Campbell]

Check with your financial planner for Roth vs 401K. The decision is dependent upon the type of 401K you have available. I see the 401K as more important than a Roth, provided the employer does some type of "match".

I'm going to divert from conventional wisdom here. I'd max out both the 401K and Roth, and also include a company Employee Stock Purchase Plan if you have access to one of those. And that's for one of the same reasons you love the 401K plans. Companies usually subsidize your purchase, which conceptually gives these plans the same advantage as matching funds, but without the tax advantages. And you can always sell twice yearly if you really need the money for cash flow, or want to invest somewhere else.

I view the Roth as incredibly critical because once your money is in there, it and all of it's earnings will never be taxed again. The first year it was available (98 or 99) they allowed you to roll over any existing amount you had in a conventional IRA into the new Roth plan. The catch? You had to pay taxes on the entire amount as ordinary income. Ouch. They might have let me spread it out over 2 years - I don't exactly remember. I had money from a previous 401K that I had rolled over into a conventional IRA when I left that job. We swallowed hard and came up with all that extra tax money to give to Uncle Sam. The payoff? It was 1999,and I quadrupled the money in less than a year. And Uncle Sam won't get even one red cent of those earnings or any future earnings. Not now. Not ever. Well, unless I tapped it before age 55 and triggered a penalty. Even if you do need the money, you can tap original contributions without penalty. You just can't touch earnings without paying a 10% penalty and treating the withdraw as ordinary income.

In terms of asset allocation, many people will likely have their house, and their 401K which is typically invested in highly diversified mutual funds, and their Roth. The house and the 401K were the "safe" and well diversified portion of my investments. For me, that meant the Roth was the place for owning individual stocks. I can trade there unburdened by tax consequences. I've never owned more than 4 at a time as I just can't follow them adequately enough to take on more than that. That's the part of what I've done that I believe most financial planners would strongly disagree with. It is not for the faint of heart. But the Roth is the best place for your biggest upside investments because Uncle Sam won't demand his cut of your earnings. IMO.

[retailguy]

SC,

Don't disagree with your analysis at all. I just think my point is a bit different.

Partial is 20, maybe 21? Somewhere in that arena. While I see the value of compound interest, I also see that he won't be "using" that money for the next 40 years or so. "using" a small portion to fund the purchase of an asset is not such a bad deal.

From my vantage point, he gets tax free earning with his 401K plus a company match. Yeah, he's gotta pay taxes on that money at some point, however, if done right, those taxes will be at a lower income than they are right now. Also, the larger principal enables the money to "grow" faster since those are "pre-tax" dollars.

But, the stuff you said about the Roth. Agree, totally. Roth's are a wonderful vehicle.

[Scott Campbell]

I've never taken a finance class and don't have to for my major. Would that be a good decision to take that or can I learn what this stuff means/tips on all of this stuff from reading "the millionaire next door"?

I'd skip the classes even if such a class was available, and just use the widely available resources at the library and on the web. A word of caution about Millionairre Next Door - it's very conceptual - 30,000 foot overview type stuff. It helps you understand the mindset and financial culture of people that have done very well. But there's no real detail. It's a great read though, and should help get you excited about doing the right things.

You are beginning to invest in your understanding of personal finance, and that might be the most important investment you'll make. It takes some time and effort, but it's really not that hard. I don't believe in running to professionals for the relatively easy to understand "no brainers" that we are discussing in here. You can and should take the time to figure that stuff out on your own. It'll raise your financial IQ so that when you do need professionals for the high degree of difficulty type stuff like setting up trusts, you'll be better equipped to deal with them. No one will look out for you like you will. There's bad advice and bad people out there sprinkled among the good. Without investing in your own knowledge, you might not be able to spot them.