Opportunity: The Mortgage Process

This is the first post in a series I’m planning on writing that identifies real-world opportunities.  If you haven’t read the post discussing opportunities, read it here first.

My wife and I just recently bought a house.  Throughout the process, I actually saw quite a few opportunities.  I’ve labeled anywhere I noticed an opportunity (potential for profit).

We bought our house for $207,500. From it we took a $166,000 loan at 3.375% interest over 15 years. Over 15 years, our mortgage lender, Southern Living Mortgage (SLM), would make $212,000, or a $46,000 profit on their investment. {OPPORTUNITY}

However SLM was not interesting in keeping and maintaining that loan and wanted to sell it off. So they sold the loan to Franklin American Mortgage (FAM) for a certain amount. While I don’t know what amount it was, let’s just say it was $172,000. This means that SLM just made a profit of $6,000 just for servicing the loan (meaning setting us up with it). Not bad for a week’s work for SLM! {OPPORTUNITY}

FAM was still going to make $40,000 on the loan over the 15 year period. Still not a bad deal for them. {OPPORTUNITY}

Let’s say FAM didn’t have the $172,000 in cash, or wanted to get some cash in their pockets again to get some more loans. They then start looking for investors in their loans. They’re not wanting to sell outright like SLM did, but are instead looking to find people to loan them money and in return give out a part of the $40,000 profit they’re still planning to make.

This is where Mortgage Backed Securities (MBS) come into play. An MBS allows people to invest in a mortgage company’s mortgages. A single investor with $10,000 can’t buy out a whole $172k loan, but can put in his $10k for a small return.

Let me switch to percentages for this part. Our original mortgage was 3.375%. When SLM sold to FAM, FAM essentially held a $166,000 mortgage at a 3% rate (= $40,000 profit). Now that FAM wants to offer an MBS to investors, they offer the investors a 2% return and can still keep a 1% return for themselves. {OPPORTUNITY}

Granted those percentages at the end aren’t the best, but we did have a particularly low interest rate and opted for a 15-yr vs. a 30-yr. Just for comparison, that $46,000 profit at the very beginning would turn into $146,000 for a 30 year loan at 4.75%…. Yikes!

The benefit of investing at any point along this process is relatively safe. SLM is pretty much guaranteed to make a profit as there are many mortgage companies that would love to take the mortgage off their hands. FAM is pretty safe as well since if any homeowner stops paying, they can foreclose on the house and come out with a [$207,500] house. In addition, most MBS investments are government backed, meaning the government will help cover if the market goes south.

The only loser in the whole thing is the homeowner. They’re the ones having to pay the $46,000 (or $146,000 in a 30-yr loan) for all this to work! Of course, they don’t completely lose out as the mortgage process allows them to buy a house in the first place.

So from one transaction, there were 4 potential opportunities.  Did I miss any along the way?

Learning to See Opportunities

I’m going to start a series of short blog posts any time I see opportunities pop up. Maybe they’re business opportunities, maybe they’re sales opportunities, maybe they’re investing opportunities, and maybe they’re job opportunities. Maybe they’re job opportunities than can turn into a business. So I want to start pointing out the ones I see in order to help you see opportunities on your own and in your own life.

An opportunity is any possibility of making a profit. 

In most transactions, one side is making money, the other side is paying it.  The goal is to see where these opportunities for profit.  A couple quick examples include:

- Mowing lawns or shoveling snow (depending on if you live in the north or south).  This would be a job opportunity.  Or if it gets big enough, a business opportunity.

- Investing in a new company that needs some additional capital.  This is an investment opportunity.  Good due diligence is needed to ensure any sort of return.

- Create an app.  Not the hardest opportunity to identify.  Coming up with the idea and executing it are obviously the hardest.

- Write a book.  Similar to an app, not hard to identify it as an opportunity, but writing good content and publishing it are not trivial.

- Buy rental property.  Yes the upfront cost is pretty high, but the long-term returns can be quite good.

 

The whole point though, is to start seeing opportunities as they exist.  Sure, having the time, skill, ability, or capital to seize the opportunity may be hard.  But you can’t even start until you learn to recognize opportunities.

What are some opportunities you’ve seen around you?

7 Steps to Debt Freedom

I’ll just start off by saying; I’m a huge Dave Ramsey fan. I think he has some of the best common-sense approach to getting out of debt, getting your personal finances in order, and discovering financial peace. I can’t say I’ve seen a good solid plan for where he goes after getting out of debt and how to invest well, but that’s the point of this blog!

Dave Ramsey lays out 7 steps to financial freedom. Unfortunately the step missing from those 7 steps is what has to happen before embarking on that journey. He talks a lot about it, but it’s really the “Step 0″ of getting debt free. And it’s simple:

Live below your means. Learn to say “No”.

So many people live paycheck-to-paycheck. As soon as they get a raise, they take on more debt, more payments, more subscriptions. They’ll spend every last penny they have and then wonder why they have no money left and can’t get out of debt. They can’t say “no” when a new shiny doodad shows up, or buy the latest car, phone, house, or TV.

This is probably the hardest part of the entire process. You have to be able to say NO. You have to give up trading in to get a new car every year or two. You have to cut out a lot of extra, wasteful spending. I had written earlier about how not losing money is one of the best ways to get wealthy. But it starts with you. YOU have to decide to stop keeping up with the Joneses, to cut back on what you buy, to learn to go lean.

That’s the big step zero, and it’s hard. It may take a full-blown lifestyle change. But trust me, it’s worth it. Even if you don’t go all the way to being “Wealthy”, being debt free is just awesome. It’s absolutely liberating.

So once you make that big leap, here are the next 7 steps to financial peace. Yes, these should look just a LOT like Dave Ramsey’s 7 steps. I’ve added my own interpretation on them to give a second perspective.

0. Stop spending wastefully. Live below your means! Chop of credit cards if you can’t control your spending. Free up some cash so you can proceed through these steps. If you’re spending every last penny, you can’t even take the first step.

1. Put $1000 in the bank. This is your first emergency fund. When little things break or go wrong, don’t put it on a credit card. Pay with money you already have earned. This $1000 helps buffer you from all the little things that would otherwise divert your efforts.

2. Get out of debt (except for the house). Make a list of your debts, smallest at the top, biggest at the bottom. Keep paying the minimum on all your debts (I’m not advocating not paying…) Print out the list! Include everything but the mortgage – we’ll get to that later. Credit cards, personal loans, medical bills, retail cards, student loans, home equity loans, whatever. List them all out smallest to largest. Then start paying them off, smallest to largest. This helps you enjoy some quick wins. Remember when I said print out your list of debts? There’s nothing more exciting than drawing a big red line through a debt when it gets paid off! Post that list somewhere where you can see it every day. After you cross off the first one or two, then it get super exciting! Dave Ramsey uses a terrific term called the “debt snowball” to help you get out of debt. After you take out that first debt, put the money that was going to that loan to the next one on the list! Let’s say you had a loan of $600 with a payment of $50/month and a second loan of $1000 with a $100/month payment. Let’s also say you had freed up $200/month from the step zero. That means you can pay of the first loan in 3 months. Then when going at the second loan, you suddenly are paying $250/month towards it, paying that loan off in 4 months. Then when you go for your next loan, you have $350/month to knock out the next one. On and on it goes until you’re out of debt. Now, some of you might ask about paying off the high interest ones first. My wife and I did that with a couple of our loans, and it still works. But it’s also very important to get those early wins in to get your momentum going and build that snowball.

3. Build your emergency fund. You’re debt free!!!! It’s an amazing feeling. From some statistics I’ve seen, you’re now ahead of 70% of ‘Murica! The cool part is, your debt snowball has probably built up to a pretty considerable amount. When my wife and I reached this step, our snowball had reached around $1000 per month! Now is the time when you want to inflate that $1000 emergency fund to 3-6 months of expenses. That way if you lose your job, have a major expense, you’ll be pretty well covered. For us, this was about $10,000.

In addition, I also started a “car fund”. Shortly after getting married and were still paying off college loans in step 2, my wife and I had a car die on us. We weren’t about to go into more debt for it, but $1000 wasn’t quite enough to get another car. We got lucky in that we had just pulled out an old college-days mutual fund and had built enough cash on hand that was all going to pay off a loan. There was just barely enough there to pay for a new (used) car. From that day, though, I said I would never put myself back in that situation! So I started saving a couple hundred a month and putting it into a low-risk mutual fund. That has now grown enough over a few years that when our next car goes out (which it will… cars don’t last forever), we’ll be ready for it. Similarly, I started a house repair fund, for any major repair needed on our house. Some day the A/C is going to go out. Some day the roof is going to need replacing. And rather dip into the 3-6 month savings, which I prefer to keep in case of layoffs or other misfortunes, I’d prefer to have a separate fund for that too.

Here’s the deal though. You can’t touch these funds for anything but emergencies!!! Christmas presents aren’t emergencies. A new baby isn’t an emergency. Kids needing new clothes isn’t an emergency. A car engine going out more than likely is an emergency. Also, if you have additional funds such as a car, or home repair, or vacation fund, or whatever you choose, those funds are to be used ONLY for those purposes! Don’t dip into the emergency fund to help get a downpayment for your house. Don’t use your home repair fund to buy a fancier car. Don’t dip into the vacation fund to remodel your kitchen! These savings are hard-earned, and important to keep on track. Last note, keep these savings liquid – in other words cash under the mattress or in a bank’s savings account. You’re not trying to get money back on these. Emergencies happen very quickly, and you need to be able to pull them out quickly, and without any penalties.

4. Invest in retirement. Dave Ramsey recommends putting 15% of your income into retirement. While I’m totally on board with doing that, I don’t quite put all that in. Here’s what I personally recommend. If your employer offers 401k options, take advantage of them. Many companies offer matching funds on the first 5% of your income. Totally max that bad boy out! Nothing like a 100% return the instant you invest it! Also max out your Roth IRA contributions. For most people that’s currently $5,500 per year. After maxing both those out, you’re welcome to invest even more into retirement. However for this blog, any additional cash will be necessary for future investments. Hopefully lots more on that later…

5. Invest in education. If you’re planning on having kids or already have some, they’re going to school at some point. School’s not free. High school, college, even grade school can be expensive. Take advantage of some tax-protected investment opportunities and start putting money aside for their education.

6. Pay off the house. Here we are again in debt payoff mode! The exciting part is that once you finish step 3, you almost immediately jump to step 6! You’re almost finished! Just one last wall in the way to being completely debt free. Keep that debt snowball from step 3 rolling and knock out the house early. Every bit that you put towards your house helps as it reduces the amount of interest you end up paying too.

7. Give even more, and build wealth. You’ve finally reached that pinnacle of being completely debt free. Everything you were putting towards debt and then the house is now suddenly freed up! Now is an even easier time to really build more passive and investment incomes. The really fun part is being able to give even more than before. All along this process, giving is always important. Hopefully you’ve been tithing, giving, and helping people. But now that you’re completely debt free, it’s even easier to give more and bigger!

Getting debt free isn’t an easy process. It’s absolutely worth it though! The hardest part is learning to say no and live well within your means. Once you get into the debt snowball, it’s a lot easier and pretty exciting to see those debts start to disappear!

Also, be sure to reward yourself along the way. Obviously don’t go into additional debt for it, and I even highly recommend saving up in advance for it. But give yourself a little something when you finish step 3, or step 6. My wife and I, when we finished step 3, took a long weekend trip to Florida. We finished step 3 with about a $1000 snowball, saved that for about a month and a half, and then spent that on the trip. It was totally worth it, and was an terrific reward for paying off our debt.

So start today. Take it one step at a time. Start on that step 0. Start to say NO.

Mind Your Own Business!

It’s so easy to bump along through life, letting it pull you along and have no true grasp of your personal finances.  Sure, you keep up with the bills, contribute to your retirement funds, keep that 30-year mortgage at bay, and give a little here and there.  It’s not a bad life, but at times you just feel so overwhelmed by it all.  A car breaks down, an air conditioner needs fixing, the roof needs replacing, a kid needs braces… You’re just one step away from financial distaster.

Could you imagine running a business like that??  Imagine a business that’s not really trying to track income or expenses, that doesn’t have short-term and long-term goals, just bopping along hoping the business doesn’t go bust.  That would never work!  In running a business, whether it’s a small business or a big business, it’s important to keep close watch on how it’s doing - the market, the finances, the customers – and make sure it continues to succeed.

So what if you treated your personal life like a business?  Would your “business” succeed or fail?

You are your own CEO

So treat your personal finances like you are your personal business’s CEO or CFO!  Minimize those expenses, find ways of writing off taxes, maximize your income, plan for the future, save for emergencies, and keep an eye on the market.

If you treated a business like you treat your personal finances, would you succeed or bust?

The Fastest Way to Increase Your Wealth

In another post, I talked briefly about the way to get wealthy.  The concept is pretty simple, really:

Maximize passive and portfolio income

Minimize expenses

But I want to go a little deeper into how to get there from here.  The biggest question most people have is “How do I start?”   How do you go from no passive and portfolio income and big expenses to wealthy?  Well the passive and portfolio income may take a bit of work, but the minimizing of expenses is much easier.  So start there!

 

The best way to have more money is to stop throwing it away!!

 

As mentioned above, the way to wealth is to maximize passive and portfolio income and minimize expenses.  However it’s VERY hard to make any investments into your passive and portfolio income sources if you’re strapped for cash from the start!  So in order to even get started building that income, it’s important to have cash available to sieze opportunities as they arise.  In order to build this cash, your current J-O-B income can help get you there.  But if you’re spending all of it, there’s no room left to invest in passive and portfolio income.

There’s no better way of keeping money than to stop spending it all.  And here’s how.

I plan to talk in more detail about keeping track of your personal finances, but for now start by listing out your expense categories.  These typically include: giving, food, restaurants, gas, household items, car repairs, house repairs, education, insurance, utilities, phone, internet, mortgage, credit cards, student loans, car payments, medical bills, and so on.  Some of these can’t or shouldn’t be eliminated, some can be reduced, and some can be eliminated altogether!

Keep:

- Giving.  This includes tithe, charitable giving, and any other generous donations you make.  Getting to a wealthy state doesn’t mean you’re a tightwad!  I strongly suggest keeping up with your giving habits (unless they’re spinning wildly out of control) and find other places of minimizing expenses.

- Education.  Don’t sacrifice on education.  The only thing in the world that you can change is you.  So invest in your own education!  Now obviously be careful what sort of education you get and how much you spend on it, but rarely will good education go to waste.  I’m personally not a huge fan of “traditional education” (although it’s usually necessary in getting a J-O-B and have a Master’s degree myself), but specialized online courses, seminars, and real-life experience are typically much better bang for your buck.

- Saving.  I didn’t include this in the “expense” category, because it’s technically not an expense.  Outflow, yes; expense, not really.  However I did want to mention it quickly here.  It’s important to keep saving!  Retirement (especially if you get matched 401k donations from your employer), Roth IRAs, and just general saving are very important.  However, once you’ve reached a comfortable level of savings, I’d recommend using that money toward the “eliminate” category below.  And of course, these savings are part of the foundation needed to build your passive and portfolio income.

Reduce:

- Consumables.  This includes food, restaurants, gas, household items, and utilities including phone and internet.  Do you really need to eat out every day?  Or buy the latest toy, tool, gadget or other doodad for your house?  Do you really need to be driving an Excursion instead of a Hyundai?  Or go do Disney every year?   This is probably one of the biggest areas to save money on.  Sure some of those categories such as food won’t change much, but there certainly are ways to reduce how much you spend on it, such as buying things that you need when they’re on sale (if you buy something you don’t need, you just got SOLD), or buying off-brand items instead.  There are entire blogs dedicated to this though.  Or how about cutting back on how much you spend for your smartphone?  Or negotiating the price of your internet service (yes, that is definitely possible!).  I’m not advocating eating rice and beans every day and never going on vacation!  There is a time and very important place for all of that.  But try to be more frugal.   There are so many areas in this category where just a little savings can add up quickly.  It’s worth taking a very close look at.

- Repairs.  Sure, you can’t control when things break down.  But you can help prevent these repairs by – go figure – preventative maintenance.  I’m suggesting you spend a little more on preventative maintenance which will help cut down on overall repair bills, be it for your car, house, or otherwise.  Nothing like being stuck with a $5,000 engine repair because your oil got too low in your car.

Eliminate:

Ok, this is where it may get painful for a lot of you.

- Car payments.  I’m just going to rip this band-aid off.  Car payments are NOT a necsesary evil!  It is possilbe to buy a car – albeit a cheaper and slightly older car - with cash.  Interest is one of the most painful ways of losing money.  Partly because it’s so invisible, partly because for some people it feels like they’re doing “the right thing”.  “But a new car has a warranty and won’t cost you anything for repairs.”  While true, it certainly does not outweigh the cost of owning a new car and losing out on the depreciation and interest.  Trust me, I’ve run the numbers and would be more than happy to show them to you!  “But I got it at such a good deal!”  I bet I can get an even better deal used and a couple years older.  Every time.  “I can’t afford to buy a car with cash.”  True it takes a little bit of saving.  I currently put aside a bit of money every month into a savings account (actually a bond-based mutual fund) and call it my “car payment”.  Except instead of paying a lendor, I pay myself.  In reality, you can’t afford to buy a car with a loan.  It’s hard, it’s painful, but car payments are one of the biggest wastes of money.  Pay off your current car, sell and buy a cheaper one, do whatever it takes to get rid of that car payment.  And then keep it that way!

- Credit card bills.  Ouch.  Another biggie.  Although this one is a lot more simple.  If you don’t have money in the bank, you can’t afford it.  Don’t buy it.  I’m still amazed that people are willing to pay 18% interest just to have it now.  It’s not like you’re not going to pay for it at some point in time!  You still have to pay for it, now you’re just adding 18% a year onto that!  My wife and I still use credit cards, but have always paid it off every month.  Stop overusing your credit cards!

- Mortgage.  Surely not!  It’s impossible to pay off a house!  Well… no, not exactly.  It may take awhile, but it certainly is possible to get a house paid off.  My wife and I were debt free for about a year after paying off our student loans.  We were still paying rent at the time, but what an amazing feeling it was to be completely debt free!  We’re very eager to reach that state again, and as soon as possible.  Imagine also the possibilities of being able to save and invest everything that WAS going to your mortgage once you get it paid off!

- Student loans.  Similar to the mortgage, it’s certainly possible.  Also since the interest rates are even higher than mortgage rates, it’s even more important to get these paid off quickly.

- Home equity loans or other personal loans.  If you haven’t gotten my drift yet, let me be a little more explicit…  Get out of debt as soon as possible!

 

Summary

The easiest way of getting more out of your income is reducing or eliminating as many expenses as possible.  I’m not an advocate of living bare bones, but I do believe most people have quite a number of areas that can be reduced.

Avoid loans as they continually suck money away from you.

How to get Wealthy – It’s pretty simple!

Ok, so in a previous post, we defined what it was to be wealthy.  If you haven’t read that one, go read it first!

“Wealthy” means your passive and portfolio income is greater than your expenses.

 There are two ways to get to this definition of wealthy.

Maximize passive and portfolio income

Minimize expenses

In order for your incomes to be greater than your expenses, you either have to increase your passive and portfolio income or minimize your expenses.

It’s really as easy as that!

Maximizing passive and portfolio income means increasing what you make through any other source other than your normal job.  One of the long-term goals of this blog is to find ways of doing this.

Minimizing expenses is probably one of the easiest ways of reaching a wealthy state.  Look at your monthly financial summary (you have one of those, right?) and see where your money is going.  Probably a bulk of it is going to a mortgage or rent.  Other sources of expenses are food, utilities, entertainment, bill (credit card, student loan, car) and so on.  Look through these and see what is possible to cut out.

Can the “food” category be eliminated?  Please no!  How about utilities? Well they can be lowered by being smart about energy usage.  But what about the mortgage?  Obviously I don’t advocate not paying your mortgage!  However this expense can be eliminated with a bit of effort by paying it off.  Same with student loans, credit card bills and car payments.  Pay them off!  Become debt free.  These expenses are some of the best ways to minimize the gap between your income and your expenses.

For example, if your expenses are $4,000 a year, it may be pretty difficult and take awhile to get up to $4,000 of passive or portfolio income.  However if your expenses go down by $1,000 to $3,000, that means you only need to earn $3,000 of passive income.  Much easier!

The more you lower your expenses, the easier it is to match it with passive and portfolio income.

In another post, I’m going to walk through a balance sheet (it’s really not that scary, trust me!) which will help visualize this process even more.

What Is “Wealthy”?

Everyone talks about it…  “I want to be rich.”  “I want to be a millionaire.”  “I want to win the lottery.”  “I want to be wealthy.”  “I want to have a comfortable retirement.”

But what do we actually mean when we say that?  Is a million dollars really enough?  How much is truly wealthy?

I came across a great definition of wealth based on Rich Dad Poor Dad that works very well.

“Wealthy” means your passive and portfolio income is greater than your expenses.

In this post, we talked about the 3 sources of income.  The last 2, passive and portfolio income, need to be maximized to become less dependent on typical work income.

Examples:

1. Let’s say you have $2,000 per month in expenses (rent, food, fuel, giving, insurance, entertainment, savings, etc).  And you work a job that earns you $2,500 a month, but that is your only source of income.  No passive income, no portfolio income.  By my definition, you’re not wealthy.  Most people reading this blog more than likely fall into this category.  At least for now…

2. Now let’s say you write an eBook that sells well and own a rental property, as well as having some investments that earn you some monthly dividends.  Just for grins, let’s say the eBook sales are earning you $500 per month, the rental gives a net profit of $300 per month, and your investments earn you $50 per month.  This totals $850 in total passive and portfolio income.  While not quite up to your $2,000 a month expenses, it’s at least progress!  You’re just $1,150 short of being truly wealthy!

3. Ok, so you’ve gotten the hang of finding and acquiring assets, and have really built up your passive and portfolio incomes.  Now you own a business that works FOR you (passive income) and earns $1000 per month.  The eBook sales have tapered off a little bit, so they only earn $300 per month.  In addition, you were able to pay off the the rental property mortgage now netting you a monthly profit of $800 per month total.  You’ve also built up a decent portfolio that earns you $200 per month in dividends and interest.  So now that’s a total of $2,300 per month.  This is above your $2,000 per month expenses!  You’re wealthy!!!  At this point, you could quit your normal “day job” and still be able to live comfortably as all your passive and portfolio income.

It’s that simple, really.  If your passive and portfolio income are higher than your expenses, I consider that wealthy.

How close are you to being “wealthy” by these standards?

A Simple Definition of Assets and Liabilities

I promise to not use much technical jargon on this blog.  But there are a couple terms that are useful.  Today those terms are “asset” and “liability”.  In this post, I talked about how you use your assets and liabilities to determine your net worth.

However, I want to slightly change the definition of an asset and a liability.

 

An Asset is anything that puts money in your pocket.

A Liability is anything that takes money out of your pocket.

 

When I understood this new definition of assets and liabilities, my view on wealth completely changed.

 

In this journey towards wealth, the goal is to gain assets and minimze liabilites.

 

It’s really that simple!  Find and acquire things that gain you money, and minimize any of your losses.

- Wealthy people acquire assets and minimize liabilities

- Middle class people buy liabilities thinking they’re assets

- Poor people buy liabilities

 

Let me give some examples of assets and liabilities.  This may be a bit revolutionary and I suspect a lot of people won’t necessarily agree.   But under the above definitions, these are exactly right.

ASSETS:

- Owning a business.  A successful business that is…  This one should be pretty obvious – your business makes a profit, you gain money at the back end.  Yes there are expenses, but they are balanced out by the profits.

- Rental property.  If your rent income exceeds your expenses, you get a positive cash flow.  By definition, asset.

- Books or ebooks.  The profits from the sale of these books brings in money.

- Investments.  The higher the return and lower the risk, the better.

- Your brain.  Ok, not exactly the squishy grey matter, but the knowledge, experience, and education you have inside.  This is always a good place to invest in.  This may be a little bit of a stretch to call it an asset in terms of it bringing you money, but it’s pretty close.

- Lots more.  That’s part of this journey – finding and acquiring assets.  This is a very limited list, but my goal is to continue to find an buy assets.

Acquire assets!

 

LIABILITIES:

This is where it gets surprising…

- House.  Do what??  I thought a house was supposed to be an asset?  Well according to the definition above, my house is costing you hundres or even thousands of dollars a year.  Taxes, utilities, mortgage, repairs – they all take money out of your pocket.  By definition, this is a liability.  But what about appreciation?  Yes it’s true your house may be going up in value, but unless the appreciation of your house is greater than the expenses (which would be very unusual), it’s still losing you money.  Also, prices of houses aren’t going up significantly; if anything they’re stagnate or even going down a little, depending on the economy.  Rental property is different – you’re able to gain money from renting it out.  Unless you take on boarders in the house you’re living in, it’s still a liability.

- Rent.  Rent takes a chunk of change out of your pocket every month, so it should be pretty easy to see that it’s a liability too.  So if both renting and owning a home are liabilities, what are you supposed to do?  Find the one that loses you the least amount of money every month.  Minimize your liabilities.  Rent vs own is a completely different topic that I can get into another time if there’s any interest.

- Car .  As much grief as I might get for this, a car again takes money OUT of your pocket, and doesn’t put money IN your pocket.  Car payments, fuel, repairs, insurance, depreciation – none of these are earning you money.  “But without a car, I wouldn’t be able to work?  See, it does earn me money!”  Unless you’re a cab or bus driver, your car is not earning you money.  Your car takes you TO the place where you earn money.  Big difference!  In order to minimize liabilities, it’s good to have a cheaper (lower car payment if you have those still, lower insurance costs), economical (lower fuel costs), older (minize depreciation), yet still a quality (minimizes repairs and depreciation) car.

- Debt.  Pretty easy here, debts cost you money.  Sometimes a LOT of money such as credits cards, and sometimes less, such as mortgages.  But they still take money out of your pocket.  Minimize any debt you have!

Minimize liabilities!

 

So if you haven’t gotten it subliminally, here it is again:

ACQUIRE ASSETS!

MINIMIZE LIABILITIES!

 

A very easy litmus test for whether something is an asset or a liability is to realistically see if it puts money IN your pocket or takes it OUT.

If it puts it in, it’s an asset.

If it takes money out, it’s a liability.

Easy as that!

How to Easily Calculate Your Net Worth

Your Net Worth is an easy calcualtion to see how well you’re doing financially.  This isn’t the end-all in terms of financial growth, but it’s one means of finding out how things are going.

Net worth is simply the difference between your assets and liabilities (positives and negatives):

 

Net Worth = Assets – Liabilities

 

An asset is anything that counts as a posive, such as checkbook balance, savings, retirement accounts, house, car, etc. Consumables, such as food, clothing, computers, etc don’t count.

A liability is anything that counts as a negative – mortgage, car loan, credit card bills, student loans, tax debt and so on.

 

So if you own a $200,000 house and have a mortgage for $150,000, your net worth would be $50,000.  If you only have student loans and credit card bills and are renting a house, your net worth is negative.  This is not a good place to be!

Of course, the hard part is that there are some things that you can’t put a value on.  Patents, books, experience, knowledge…  all of these are very useful and potentially HUGE assets, but without a dollar figure, it’s hard to figure them into a net worth calculation.

 

Ok, let me give you a personal example.  We have a number of checking and savings accounts, a Roth IRA, a 401k, and we own a home.  Our only liability is our mortgage (yay for being debt free other than the house!)  So our net worth is calculated as follows:

ASSETS:

Cash accounts: $35,000

401k: $28,000

Roth IRA: $27,000

House: $207,500 (what we paid for it a couple months ago, prices haven’t changed significantly recently)

TOTAL ASSETS: $297,500

 

LIABILITIES:

Mortgage: $165,000

TOTAL LIABILITIES: $165,000

 

NET WORTH:

$297, 500 – $165,000 = $132, 500

NET WORTH: $132, 500

 

 

Not too hard, is it?  So go ahead, find out what your assets and liabilities are and let me know how it turns out in the comments!

The ONLY 3 Sources of Income

Probably about 98% of us have a normal job.  Or as Dave Ramsey likes to say, a J-O-B.  For most of us, that’s about the extent of our income.  All the money we make is from our J-O-B.

But are there more places to make money?  How do the people living in those enormous mansions make their money?  Do they just have really, really good paying jobs?

When I was in college, I worked with my dad doing remodeling and construction.  It was enjoyable work; he never liked to get stuck in one particular line of work, so one week it was putting up siding, another was putting down tile, another was buliding a deck.  On this particular day, we were putting up drywall and listening to Dave Ramsey.  We got to talking about money, and he asked me point blank, “where does money come from?”  I didn’t have a satisfactory response, so he gave me the answer,

“Hard Work”

Which is very true.  Money does come from hard work.  But is that all?

Nope.

There are actually 2 other ways to get income.  Unfortunately for most of us, we end up just pursuing that 1 single way.  We get a job.  Hopefully a good paying one, but still just a single source of income.  There are actually 3 different ways of earning money.  They are:

 

A Job

Portfolio Income

Passive Income

 

 1. A Job

A job is just what it sounds like.  Your typical 8-5 40-hour workweek.  You make a salary or an hourly rate, and don’t have to worry about the rest of the business.  You have a J-O-B.  Keeping your education current, job security, certifications, raises, stability, benefits; all these are important to you.  Unfortunately most people stop here and don’t realize there is more.

2. Portfolio Income

Some of you may have a portfolio of investments.  These are Roth IRAs, 401k’s, stocks, bonds, CDs, mutual funds, savings accounts, etc.  Basically anything that earns you money because you have money.  That sounded confusing…  What I mean is that because you have cash, you can “loan” it out to someone else – a bank, a stock broker, etc – and they’ll use it to build additional money.  You don’t have to do a thing.  All you do is have to give your money to someone and they should earn a return on it for you.  Sure there may be some risk, but earning money just because you have money is great!  Most of these returns are based on interest of some sort.

Retiring relies on this type of income.  The money you’ve put away for retirement will hopefully ballooned to the point where you can comfortably live on just the interest alone.  In other words, if you’ve managed to save up $1,000,000 by retirement and can keep it earning 8% per year, that means you’ll earn $80,000 a year without doing a thing.  More importantly, you won’t have to touch that $1,000,000 nest egg!

3. Passive Income

This is where it gets good.  I’ll make it easy and just list some examples of passive income.

Book or ebook sales, rental property income, business income, art sales… the list could go on.

The concept is that you put in a lot of effort up front.  Write a book, make sellable art (microstock photography comes to mind), buy an apartment complex or a second house and rent it out, start a business that works FOR you.  That takes effort.  That takes a lot of hard work.  But then you reap the benefits!  Sure you need to maintain a little bit, but for the most part you’re just collecting the reward for the work you’ve done.

The great part is that this income is typically very scalable.  Once you’ve done one, there’s nothing stopping you from doing another.  Once you’ve written one book, you can write a second and collect on that one too.  Once you have one rental property, there’s nothing stopping you from buying another and earning additional rent on that.  Sure at some point you may reach a cap, but it’s certainly a lot higher than most jobs out there.

 

I could go on about different types of portfolio and passive income, but hopefully this has at least opened your eyes to see that there’s more than just 1 way to make money!  Once I realized this, I spend less time chasing more ways to squeeze more jobs into my life, and started looking at ways to build the other two sources of income.

Also, the last 2 are really the only way to get wealthy.  At least get to what I define as wealthy…  More to come on that later.