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We did all three, invest in paper assets, invest in real estate, and pay down debt. And all of those things worked out well.
Our highest returns were on real estate. But those investments required extra work. Higher risk, higher reward, more work.
The paper assets also did well, but not as well as the real estate. However, there is almost no work involved in investments in paper asssets. Easy peasy.
Paying down debt also contributed to a growing net worth, but this gave us the lowest yield financially over the years. However, the psychological yield on zero debt is very high. So for the peace of mind, also highly recommended. Lower risk, lower reward (financially speaking), but so worth it.
If you want to develop extreme wealth, real estate can lead you down that path. But you can lose it all if you don’t know what you are doing. Like most aspects of investing, the risks tend to balance out with the rewards.Click to expand…
How aggressively did you pay down RE mortgages? Where did it rank above your regular mortgage vs paper assets vs saving for college?Click to expand…
In our younger years, we focused on maxing out all of the tax deferred accounts, which we have also done every year since. After that, we put 20% down on real estate investments in a market where I had good knowledge and could be fairly certain of quality tenants and positive cash flow. In fact, our first real estate investment was made two years before we bought our first personal residence. We did not do prepayment of either personal or investment property mortgages in the earlier days.
As the excess income and cash started to build up, we started to pay down the mortgage on our home with extra payments and ended up paying off the 30 year mortgage in 15 years or so. Mid-career we added more investment real estate, again leveraged, because we had experienced the positive returns and positive experience of our earlier investments.
We did not do specific college savings, but rather timed payoff of investment property mortgages with college for the kids. With the cash flowing rental income and no mortgage, we planned to cash flow the college expenses and that plan ended up working out well.
Later career with rising rental income and plenty of extra cash, we did all three. We continued to max the tax deferred space, bought more real estate, started building up significant taxable accounts, and also accelerated paying off real estate debts both personal and investment. The total cash on cash yield on the investment real estate goes down when the properties are not leveraged, but the positive cash flows build nicely, adding passive income and increasing financial independence.
Now in a debt free state, financially independent but still enjoying work (in between the many great trips we take every year), all we fund at this point is tax deferred and taxable. Although my yields could potentially be better on investment real estate, a primary goal at this point is promoting simplicity. We already have more than enough.
A NY Times subscription is $1.50/week if you are an educator. As in someone with a .edu at the end of your email address.
My apologies if this NPR piece that I linked to is bad information. As I said in my original post, I don’t know much about the PSLF program, but all I hear in the news is how it is failing people.
It is a sad state of affairs how poorly some of these government programs are run.September 5, 2019 at 3:28 pm MST in reply to: PSLF Caution! PSLF appears to be failing 99% of applicants! #244013Yum! Do you cook your green beans the healthy way or with little new potatoes and bacon grease? (iow, were you raised in the South?)Click to expand…
We like them Asian style, sautéed string beans with garlic sauce.
The question, “Why net worth?” is where I would start. Net worth is everything you own minus what you owe. But I divide it into buckets. The business value is some theoretical number that might potentially be converted to liquid assets at some future point….. or not.
So current net worth buckets that help with FI? First is liquid assets: stocks, bonds, cash. Second is income producing real estate cash flowing monthly income.
Another current net worth bucket that could potentially be converted to liquid, that might then contribute to FI? Business value. The business value I use for total net worth is based on the opinion of my CPA, so who knows how accurate that is…. He uses his gestalt, which is an educated guess based on a combination of EBITDA, annual earnings times a multiple, and what similar businesses have sold for in the past.
Then the final net worth bucket is personal use real estate, which could be considered more of a current cost, but could be sold and replaced with less costly housing, with the net proceeds then added to liquid assets and contributing to FI.
Or maybe an eBike? How is the weather where you live?
Where I live we have 4 seasons but I do still tend to bike every day, even in winter.
As a well compensated professional, the lowest possible hassle factor is worth so much to me. I seek out low maintenance choices, giving me more free time. For many years I drove the highest rated and most reliable Japanese models. These days, most newer cars are very reliable, but Honda remains my all time favorite. In your shoes, I would buy something modest and brand new, then drive it for many years. Maybe a Honda Pilot?
Now later career with too much in the retirement and other accounts, I switched to Tesla. I like the fact that there is no maintenance schedule needed as that saves time, and I like that I charge every night in my garage. Charging at home saves the minor inconvenience of stopping at gas stations. I feel it might be reasonable to take a Tesla for a check up once every couple of years or so, but if it just needs topping off of the windshield washer fluid, I can easily add that at home once a year before the winter season.
Our garden has been going strong this year. Here is one day’s harvest.
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When I was single I lived in a tent in the summer, by choice. It was a really nice tent, and it was very near my friend’s house with great modern plumbing. Then, as half of a couple, young and childless, we lived in a 450 square foot one bedroom. Later we moved to a very small 600 square foot 2 bedroom in the center of the city, also while in training. Life happens and a few abodes later, we now find ourselves living in a large, luxurious home with every amenity imaginable.
But…. I have to say the bottom line is we were absolutely just as happy in the little tiny places as we are in the current castle. Even when I lived in the tent, those were great times and I hold many fond memories. Do we need all the current space? In a word, no. We have zero financial worries, but I have to say that for me, I would love to live in a smaller, simpler space, to “make do” with what is there. If I had to do it over, I would let the kids live in closer quarters with one another, in a smaller house, and let them spend more time outside, in particular if I was in Cali with the beautiful weather.
Looking back on a life lived first as a child surrounded by family and siblings, then as a young single, followed by life as a young, childless couple, to a family with kids, and now a more often than not empty nest, I would vote for living in the barn, having less space and less stuff, with an excess of financial freedom. Perhaps I would go ahead and add on a bedroom or two.
And yet I can understand why I might end up tempted to go ahead and build that beautiful new house, because perhaps it is what my spouse would prefer, or because I somehow might be convinced that the bigger, nicer house would be quite nice for all of us, that we would somehow be happier there. But then I pause and look back at life, and say, resist that fallacy. Resist the bigger, brand new house, because it isn’t at all necessary to be happy. And a low stress life with less stuff and more ability to relax, to reflect, to appreciate that “I have enough!” could be even more valuable. Life lived, lessons learned.
Good luck with your decision!
15M in liquid assets would provide 600k/year at 4%. Excludes illiquid assets like homes or businesses. That sounds like real wealth to me.
5M would provide a very comfortable 200k/year, which I would consider entry level wealthy.
Cash out refinancing, yippeee! This was the rallying cry in 2007 before the crash. My house is an ATM and I can go wild with the cash! You sound like a typical American from that 2007 era.
I would ask a different question. Why do you need to take that 60k out now? Remember, you will have to pay that 60k back in the future. When you refinance from one 30 year mortgage to another 30 year mortgage, you stretch the payoff date to a later date, meaning this cash out refinance could delay your financial independence. If the cash out is for a very good purpose, something that you truly need or that will help you build financial stability and wealth, then it might make sense. If the 60k cash out is simply for a downpayment on a Lamborghini, then I would think twice before pulling cash out.
Another possibility to consider… You could potentially refinance at a lower rate without taking any cash out and either, 1) lower your monthly payment, or 2) lower the duration of the mortgage to pay it off sooner, or 3) both of those. This type of refinance does help you build future wealth.
It is way cheaper to use a specialized payroll service than the CPA. When we had limited numbers of employees, the cost for the payroll service was quite reasonable. The only thing the CPA did was double check the quarterly payroll reports.
A 1M home in my area is 8000sq ft.Click to expand…
That must be nice. Around this neck of the woods, 1M will get you 1700 sq. ft. and 35k in annual property taxes as the icing on the cake.
We did a bit of both. We funded all retirement space to the max every year since residency. We paid down the mortgage a bit. In the early years, investing was the bigger priority, much more important than prepaying the mortgage. In the later years, finishing the mortgage payoff became more important. I guess it was mostly investment early years, mostly debt retirement later years.
We now have a big net worth number to show for our efforts with zero debt, spouse already retired early, and I am theoretically ready to retire if and when I decide I want to.
In your shoes, I would likely lean towards 75% of extra funds to investment and 25% to debt payoff.
No RMD issue as I described above – Roth conversions save the day with RMDs, unless you have so much money that Roth conversions make no sense for all of it (say around $10M or more). Under $5M, Roth conversions are probably the best tool you got to minimize RMDs.Click to expand…
Thanks for this Kon.
Can you explain further? What is the role of Roth conversions if income and marginal tax rates remain very high all the way through age 70.5? And what is the role of Roth conversions if the tax deferred accounts are over $5M, or over $10M?August 27, 2019 at 8:10 am MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241978