I woke up around sunrise to find myself lying in the doorway, the door of my apartment wide open and my legs half way outside. My neck was stiff and my back hurt
Some time later I glanced at my watch and jerked wide awake. It was Friday and my last final exam was in less than an hour! I shuffled into the bathroom for a quick shower, threw on some dirty clothes and tossed my suit over my shoulder as I rushed out the door
Big clumps of dirt and grass were sticking out of the grill and wheel wells of my car… and it all came rushing back. I had finally finished my Senior Design project in the wee hours of the morning, but no amount of Mountain Dew and chocolate covered espresso beans could compete with 72 sleepless hours. I had passed out driving home and gone in the ditch at 50+ MPH. Apparently the adrenalin surge carried me only as far as my front door. Fortunately nobody else was on the road at 4 am
I was young and fit, but working 20-30 hours a week, taking 18 Credits in an Engineering program, and spending another 20+ hours working in the lab would kill nearly anybody.
Over the next 72 hours I somehow got an A on my last final, presented my Senior Design project to the review board, attended the Graduation ceremony, loaded up the moving truck, drove it 100 miles to my new apartment, unloaded it, and made it to Day 1 of my first real job at 8 am on Monday morning.
Debt Slave
A wiser man would have taken a week off, but wisdom was never my strong suit
Of course I was really excited about my new job. I was making an incredible $39.5k per year (~$55k today) and they even gave me a $1000 interest free loan to help with moving expenses. Sweet, right?
This was going to really help pay off the nearly $40k of debt I had accumulated in college. $35k of this was from 3 different student loans, with interest rates of 7.5% to 8%.
The rest was credit card debt for important college student accessories like ramen noodles and canned beans, a diet I would supplement with Saltine crackers stolen from the cafeteria. I had even paid the $600 deposit on my new apartment with one of those credit card convenience checks. Credit cards literally saved my life
Taking a week off wasn’t an option. Debt demanded I start working immediately
Young Money Mistakes
I never had great financial role models. Even my college accounting and economics classes didn’t register in my brain. I just knew from growing up on the edge of poverty that debt caused people serious problems and I didn’t want anything to do with it
So even though I had a 6 month grace period on student loans, I started making payments with my first paycheck. Interest was still accumulating
I was putting every penny I had towards debt, first paying off the credit cards and then extra payments towards the student loans. If I had $1.47 remaining in my bank account at the end of the month, I would send in an extra $1.47
Paying off that debt was even more important to me than making 401k contributions. I can save for retirement later, I have another 45 years to save. Mistake #1
All of the other recent college graduates started driving new cars to work. I only lived 5 miles from work, but that old beast I was driving just didn’t look cool compared to the sweet rides of my coworkers. And I think the brakes were going bad, so it wasn’t safe. I should get a new car too, I can afford it. Mistake #2
I did eventually start making 401k contributions, enough to at least get the match. But then I received a letter from my apartment building announcing the units were being converted to condos. I could either buy my apartment for some ridiculous price or move out
Advice from coworkers was plentiful. “You should buy a house!” “Buy the biggest house you can afford, it is a great investment” “A house is a great tax deduction!” What the hell was I going to do with a 3 bedroom house? I have no idea, but I got one. Mistake #3
The loan terms were really generous, all I had to do was put 3% down and pay an extra $98/month for Private Mortgage Insurance (PMI). And pay some fees. Lots and lots of fees. (“Don’t worry, we’ll add it to the mortgage”) I didn’t have that kind of cash lying around, so I took a loan from my 401k. Mistake #4.
And now instead of being within biking distance from work (but why bike when I had this cool new car?) I was now the proud owner of a 40 minute commute and a mortgage payment. Mistake #5
I wasn’t even 25 years old, and I was living the American Dream! The Ultimate Mistake
Time to Wake Up
This was obviously ridiculous. Despite being of average intelligence (I think?) I was making completely asinine financial decisions
I wanted it to change. I wanted the debt to go away. I wanted a reset button
I made spreadsheets that showed how I could retire at Age 65. I made other spreadsheets that detailed my mortgage and the supposed tax benefits, and another that modeled my car loan and student loans. I modeled the s&#t out of that debt… but it wasn’t getting me any closer to paying it off (I wish I could find those spreadsheets, I’d probably get a good laugh)
I didn’t want to be the guy that could manage his cash flow and pay extra towards his student loans, I wanted to be the guy that was the master of money. Whatever that was
I started trying to figure out how to do things differently
One of my coworkers was a big active stock trader. He loved talking about investing, and I talked with him at length. I learned a lot, but much like all of the “buy a house” advice I had received, I needed to unlearn it later (I don’t think active trading worked out well for him, I heard he still lives in his Mom’s basement)
But something had changed. I started to get creative. I was taking the first step
Beating the Banks
The specific details escape me, but I think I paid around $150k for the house. The bank had no business lending me that much money
Shortly after closing my mortgage was sold by the small local bank that screwed helped me to Bank of America, a lovely organization that I refuse to ever do business with again
But being the valued and respected customer that I was, some time later I received a credit card offer in the mail. Normally I tossed these in the trash, but something made me think it was a mortgage related document
Inside this magical envelope was an offer I couldn’t refuse. I was pre-approved for a $10k credit limit. And for a limited time, all balance transfers were completely free and interest free for 12 months
At this point, to eliminate the $98/month PMI payment on the mortgage I needed to increase my equity by about $10k. So I used my new credit card convenience checks from Bank of America to write a check for my mortgage, held by Bank of America.
I never had to pay PMI again. Take that BoA!
Over the coming months I had 2 other similar credit card offers, and used them to pay off my 8% student loan and my car loan. The danger, and the hope of the credit card companies, was that I wouldn’t be able to pay all of this off during the 12 month interest free period
But I was the master of cash flow at this point. Those spreadsheets did some good after all
Lessons Learned
I learned a lot in those first years out of college
If you are financially ignorant, lots of people and companies are happy to help you, for a fee. Never take financial advice from people that aren’t financially successful. Nobody will look out for your best interests better than you.
But most importantly, I discovered that learning about finances and being willing to be creative could yield untold rewards
It was just 1 more year before I finally clawed my way out of debt. Compound interest was now working for me instead of against me. A short 2 years later, Early Retirement became an official goal
No matter where you are financially, the journey begins with a single step
I really enjoyed this post. Please post what you did next as that’s the stage where I am right now! I finally paid off all my debt and now am starting the early retirement, wealth building stage. Thanks!
Congrats on paying off your debt!
I’ll write up the rest of the story in a future post. I made some more mistakes before I started to get it right
Didn’t you have to pay a transaction fee when you performed the balance transfer? Right now BOA has 3% transaction fee on balance transfers regarding my account. Seems high.
At that time, no. The offer was no transaction fee, no interest, which is crazy (and crazy awesome)
But even a 3% fee is better than paying more than 3% in annual interest, assuming you can pay off the balance within the time offered
Some other people mentioned current offers with no balance transfer fee, although we haven’t looked
Oh, for sure we could. Whomever we go with will probably only give us 10-15K balance transfer which can be payed in he allotted time lord willing.
We just got another promotion in the mail yesterday from Citi Bank. 18 months 0%APR but same flat rate. 3% balance transfer fee. I think one loan is 4.75% and the other is 2.75%. The 4.75% has a much higher balance than the smaller rate.
Great background story GCC. Although our stories aren’t exactly the same, yours resonates with me. I was taking advice from my more senior coworkers because they had some years on me (age equals knowledge, right?). I was funding my after-tax brokerage account to trade hot stocks instead of paying off my higher interest rate student loans faster or maxing out an IRA. It stinks that the only way to learn sometime is from your mistakes, but I feel as long as this is done in your early to mid 20s, you have plenty of time to recover. Also this great community of financially savvy writers has helped me ten-fold! Thanks!
Mistakes are a great learning experience. And now with the Internet, it is easier to learn from other people’s mistakes :) And agreed, hopefully those lessons happen in your 20’s rather than your 50’s
Me too. I’d like to hear what happened next.
I’ll write something up. Thanks for the feedback
Best advice to ignore: “Buy the biggest house you can afford, it is a great investment”. But think, you could own a really big, expensive house and still be working to pay off the huge mortgage… :)
I’ll have to do a similar post to this one some time. I used a $20,000 convenience check to pay for our current house at 2.99% fixed (along with $40k in cash savings and ~$50k borrowed from my parents at 5.25%). It’s funny how you can take debt and turn it from bad to good if used in a crafty manner.
One of my good friends bought the biggest house he could afford
He did well with stock options early in his career and built his (now) $6 million dream house on a lake near Seattle
His property taxes are more than our entire cost of living, and if he wants to stop working he has to sell the house first. Fortunately he loves his job and will probably work until a doctor forces him to stop
I’d say you did much better on the house purchase, although I bet his has a nicer view :P
I emailed you a pic of our lake view shot from my bedroom window. It’s not much, but the house wasn’t much either. :)
And we enjoyed yet another car free day in our wonderful little walkable section of town (walked to park, played tennis, walked to school for the even better playgrounds).
Even if we assumed his view is 60x better
($6 million / $100k) +/-
When factoring in that he works during most daylight hours and is traveling abroad for business 26 weeks of the year, I think you come out ahead in all possible ways
I would concur, and thought about the math just like that (he’d have to enjoy a 60x better view to receive a better value proposition than what I have).
Very similar to our story except that it took us two houses to figure out that a big house is not a good investment and 10 years of using a financial advisor and listening to mainstream financial advice to realize how much money we were wasting on fees and losing out on tax benefits of not maxing out tax-deferred accounts. If wisdom is not your strong suit, I don’t even want to think about what that says about me! At least we never fell into the expensive car or credit card traps.
I think that these posts are extremely valuable to help average people to figure out how bad that following conventional wisdom screws most Americans. It is unfortunate that for every 1 person that manages to find even the most successful blog in our niche like MMM or ERE there are hundreds of thousands of people that are being force fed BS advice by advertisers and mainstream media stories about how college loans are good debt, houses are good investments and you should use financial advisors who sell overpriced financial products because it is too difficult to navigate those waters on your own.
Great post and keep spreading your message!
Thanks Chris
I bought another house after this one, and also had a Financial Adviser for a time. I’ll write about that in another post since it seems there is interest in the rest of the story
It’s interesting that when an early retiree gets mainstream press (MMM, the Terhorsts, the Khaderlis, etc…) the comments are generally quite negative. People have a bullshit filter, and if something sounds too good to be true it probably is…
This is one of the reasons we are sharing our story. The more often people are exposed to an alternative, the more likely they are to truly hear it
My wife and I were always good savers but simply were so trapped in this conventional thinking that we never developed a real plan to retire early b/c it is so rare that we didn’t truly believe it possible. We were helped immensely by blogs like financialmentor and JLCollins in understanding the impact of investing costs and by Mad Fientist and you on the tax planning side.
Even seeking this info we did much additional independent research to verify the things you all were saying were actually true, b/c we couldn’t believe something this important and obvious is unknown to the vast majority of people like us.
It still amazes me how absolutely simple an approach of index investing and maxing out tax deferred accounts truly is and yet so few people instead pay money to the financial industry for expensive advice or chase get rich quick schemes.
We likewise decided to share our story to show not only that FI at an early age is possible, but for many people is ridiculously simple if you can just see through all of the distractions constantly force fed to people.
Jeremy – it would be interesting (heartbreaking!) to go back and calculate what all those mistakes cost you in total. And what that would be worth today if you hadn’t made them.
Not that I’m brave enough to do any such thing with my own mistakes of course.
On another note, I too have used those zero-interest credit card checks to pay down huge chunks of my mortgage (for the 2% fee on the money) and saved thousands in interest. A person who is both a master of cash flow and a master of a calendar can manage this!
I’ve never seen another offer for a no fee balance transfer / cash advance. Although it would still have been worthwhile paying off these loans even with 2% fee.
It would be interesting to look at the past, but I don’t have any interest really. Maybe we would have been FI a few years sooner, I don’t know. But no use crying over spilled milk
There is a worse alternative that could have happened. If I didn’t have mistakes and crushing debt as a motivator, maybe I never would have tried to get creative or develop an interest in finances. I could have just followed the herd for another 10 or 20 years, letting lifestyle inflation run its course… so in that way, I’m grateful I had the learning opportunities before it was too late
I think Chase’s Slate card offers 0% APR balance transfers for 15-18 months with zero transfer fees. New applicants only. Otherwise, the best I’ve seen lately is 15-18 months at 0% for a 2% BT fee.
Loved the background of your story and the hectic description of the last week of Senior Design and finals combo. I actually started working BEFORE I even graduated (well only a week) because they wanted to start four of us at the same time to be on the same training schedule. My boss did give me two extra days off though. That was to walk at graduation on Thursday and then move all my stuff out on that same Friday.
A lot of my friends had jobs that didn’t start for months and got that that final Summer vacation, but I think it ended up working out for me. Ended up with a few “extra” paychecks and those first few months were relatively easy with a lot of training! Luckily I started researching personal finance shortly after getting my first job so I did not fall into any other traps – my undergrad debt is enough by itself for that…
A lot of my friends had delayed starts as well. They also went somewhere for spring break, and had grand adventures over the summer. I was too poor and had to work
It was probably during this time that I developed my distaste for working for the man
Those first several years I had the option of cashing out my vacation days, so I didn’t take more than a day or two of vacation around holidays so I could get the extra pay. I think my first real break didn’t happen until about 6 years after graduation, which was also the trip that made me realize I didn’t want to work anymore
I just checked out your debt progress on your blog. Nicely done!
Thanks for sharing your story. I do think most young adults in college don’t understand money. It’s all about the short term. Loans can be repaid later.
Financial education in high school and college could definitely be improved
Although even if it was available, I probably wasn’t interested enough at the time to really pay attention
Debt is the root of evil. That’s what I can think of especially getting a debt without solid plans to pay off. I am debt free and love every single moment as I do not have any pressure from anyone.
BSR
Congrats on being debt free, that is awesome
I don’t think of debt as good or bad. It is a tool like any other, which can both help and harm.
Having access to debt helped me get a college education and not starve while doing so. That education provided a much higher income than I would have otherwise had access to
Taking on debt with no plans to pay it off is definitely harmful
Banks and other lenders that prey on the ignorance of consumers, that I might consider evil, especially when done under the guise of help
This sounds really similar to how I have been trying to battle debt. The problem is I didn’t start until 33. I was in grad school most of the time and I feel way behind. I wish I could go back and shake that 22 year old just leaving college. Lessons learned and these posts are great for teaching my students about how to start out their lives. You can bet I will be linking this for them next week.
I wasn’t sure if this was a case study or bad dream at first…it appears it was both. :) It was almost as depressing as the song “Jeremy” by Pearl Jam…but I digress. The next decade was and is triumphant,however. Adding GCC to the Above The Clouds Retreat is quite the pot sweetener. Don’t threaten me with a great time….
Did I forgot to mention the 24/7 Pearl Jam Karaoke sessions we will be having in Ecuador? haha
Once upon a time on a business trip to Japan, I was stuck in one of those after dinner Karaoke bars, in a haze of whiskey and cigarette smoke, business associates slurring the words of John Denver’s “Country Roads”…
When it was my turn, I belted out Pearl Jam’s Jeremy, complete with air guitar, head banging, and stage dive. If you’re going to do it, you gotta do it right :)
Were you paid while working 20-30 hours during college? You must have racked up the credit card debt on something other than ramen! =) I was lucky to have a relatively good financial mentor in my frugal father who also encouraged me to open up an IRA and contribute to my 401k. I never had credit card debt but did have student loan debt. But luckily I was able to consolidate them to very very low interest rates. (Most are between 2-3%) I do wish that I had learned of early retirement/FI earlier. I always thought that my retire at 55 (with pension) plan was early.
Yeah I was paid. Money also went for rent, gas, tuition, and books. I didn’t have time to spend money on anything else
I have made many similar mistakes up to this point, but definitely learning from them. Regarding debt (specifically fixed low interest ~2% student and vehicle) my current thought is that I’m better to keep it, pay it off slowly and invest the extra money. What are your thoughts?
The advice I gave to my brother on his 1-2% apr student loans was, do what the government does: pay the minimum and let inflation pay it off for you
At those rates, you could have a real negative rate of interest
The only reason I would pay off that debt would be if improved cash flow offered other advantages to you
Thanks Jeremy, glad to have some confirmation on my thinking. The cash flow is a great point. When we paid off the higher interest student loans the extra income that was freed up was nice to be able to invest.
Great story, it’s pretty amazing how many financial mistakes you can easily make when you’re freshly out of university. I think the school education system really failed us when it comes to personal finance topics. It really should be essential for the school education system to teach kids about money and how to manage money properly.
There is definitely great opportunity for improvement in financial literacy
A cultural shift has to go with it too. There is a tremendous amount of education around drugs and alcohol (“Drugs are bad, ok?”) but high school and college kids still use them because the culture endorses or rewards it
Months away from paying off my student loan debt and making even bigger 401k, HSA, IRA investments. For a financial person its almost like it’s going to be Christmas.
Money really is the best gift, at any season :)
Congrats!
We modified the advice of “buy the biggest house we can afford” to “buy the biggest house for less than half of what you can afford and approved for”. We wanted a big house in order to host gatherings. Which by the way at Thanksgiving we had 90 people over, and I highly recommend deep fried Turkey’s. The only take 3 min/pound to cook.
The mortgage debt on our house and rental is the only debt we have. But we are in the process of putting the mortgage on our primary residence to bed in 7 years or less (5 years if I have it my way). The wife is coming around to this idea.
Your credit card offers remind me of my online savings account at HSBC that was paying 5% interest. And I would get those credit card offers for 0% balance transfers and the convenience checks. I would prepay my dorm or tuition on my credit card and then use the 0% balance transfer of the new card to take advantage of the 12-month float. Borrowing at 0% and making 5% while my cash sat in the bank.
I really felt like I was sticking it to the banks when this was possible.
Cheers!
Now that you mention it, I recall doing something similar. I had some closed end funds that were paying 7.5%, and was effectively borrowing money at 2 or 3%. Being the bank is nice work if you can get it
Great post and like most other folks here I would like to hear the rest of the story
Great post! You should give talks to seniors in college about all of this. I know I would have truly benefited by having someone give a seminar in my senior design class (go engineers!) about finances/loans/retirement. Many students are so excited to be coming out of school and finally making money that they aren’t always thinking about the future. It’s amazing how much formal education you can have and still not be financially savvy because it just isn’t something people talk openly about (or maybe it’s that the people making the mistakes are doing all the talking!). I’m lucky that my dad gave me good advice and I found your blog (and the web of other similar finance blogs) at a young age. I’m on the path to financial independence and am super excited about it!
I’ve thought about doing this. I’ve heard from a couple teachers that they use our story in their classes, which is really cool. The way college grads enter the world now is like letting a bunch of undiagnosed diabetic children loose in a candy store
But I think the internet offers a much greater opportunity to reach those that are open to the idea, although some personal contact can be powerful
Totally know how you feel. Buying my suburban condo at the age of 24 (weeks before my 25th) with the new car and commute was the worst decision ever. Now, whenever I see a 20 something buying a condo or house, I want to shake them and say….”you have zero responsibility in the world, why shackle yourself down?”
Before I bought my condo, I only had my cell phone, groceries, rent for a studio apt, and a bus pass (paid for out of my paycheck). So really, 2 bills. That was the life of simplicity. Complicating it with a condo, new furniture, a car, car insurance, etc…..so, so stupid.
Young people out there…keep yourself lean.
Great article.
That is some great advice, Elizabeth. Stay lean, stay strong
Really enjoying these posts! Gaining some inspiration while reading.
p.s. Your senior design project was pretty sweet. You did one helluva job on that.
We did win some kind of award I think
Now you know why I was such a pain in the ass way back then :)
This is definitely a post that recent grads should read. I made some mistakes as well the 1st few years out of college. I’m glad that I learned from them and finally on the right track.
Maybe a short book of case studies like this would be a good college graduation present
Thanks for sharing your life experience. I can relate myself to your real life story, and I think, many of us have had gone through similar situation at some point of their lives. It takes lot of patience and perseverance to succeed, however the only thing matters is when you take the first step and stay focused.
In today’s world its hard to resist the temptation of using mortgages, car loans and credit cards, once your credit line is maxed out, you realize that debt is the super-villain! Saving money doesn’t deprive you of real happiness.
Your story is very inspiring. My income is very low, but my travel dreams are very strong. I would like to hear the next part of your story.
Strong dreams are more powerful than anything. Good luck!
I am recently out of college. I have JUST found your blog and it has reignited a passion in me that has been building in me since what feels like the day I was born. I have such an admiration and aspiration for your lifestyle its uncanny. For years I have said “I plan to graduate and work really hard living on next to nothing to pay off my student debts, and save endlessly until I can retire and travel the world” I have an entire rambling note on my facebook detailing how incredibly envious I am of people who can speak multiple languages and my plan to learn about 20 before I die and to teach my kids to speak multiple languages early. I’ve got some college to go as my academic goal is an MD, but I’d to retire approximately 10-15 years after medical school.
As an aspiring early retiree is there any advice I wont find in your blogs (which I plan to read more of(I’ve already read about 10 entries and put three books in my amazon shopping cart as per your recommendations)) that you would’ve told young you to better save and retire early?
Hi Alexis, thank you very much! Your comment made my day
For some advice to my younger self, start here:
https://gocurrycracker.com/clawing-out-of-debt/
you mentioned that you used the 10K from bank of America on your mortgage and you no longer had to pay PMI. Can you explain? the 10K did not pay off your mortgage right?
I get credit cards in the mail but none as awesome as no interest for 12months but I will keep an eye out.
I have a mortgage. I was thinking of moving into an apartment and renting it out to cut cost so I can save more money.
It did not pay off my mortgage, correct
What it did was reduce the Loan to Value ratio to below 80%. In other words, my equity was now greater than 20% of the value of the property / the mortgage was less than 80% of the value of the property
This was the threshold where the mortgage terms no longer required PMI
Ok thanks. Ive been in my house 8 years and they have yet to release my PMI from my mortgage :(
It might be worth calling them and asking. Even if you have to pay for an appraisal
I am scared to get an appraisal because of the market. I paid more for my house then what it is now worth. there are other homes in my area being foreclosed or sold for significantly less.
Are the foreclosures just because people have decided to walk away?
yes, they walked away
Hi,thanks for your sharing(“,)it’s really give me hope.can I know how u start your invest?what is the steps?go to bank open trading accounts or through online trading?thanks…
Step 1 is learn about investing. For that, I recommend Jim Collins’ Stock Series.
Step 2 is open an account at Vanguard and buy index funds
I love your blog and I know you decided that you preferred to rent vs buy a home. I prefer to buy a home but stay well within my budget an plan to retire in 10 year. Me an my wife both work and have a good income. Maxing out 401ks, HRAs and IRA contributions, the tax man still gets us for about 30%.
Standard advice is to never pay PMI and avoid debt, but I wonder if the tax benefits of deducting mortgage interest and PMI actually work in our favor due to our high income bracket?
Assuming we have $50k to put down and buy a $250k house, I tested these 3 scenarios with some estimated numbers and a 10 year time scale:
1) $50k down, 15 yr mortgage @ 3%. Mortgage payment of $1700/month
Equity after 10 yrs = $193k
Tax deducted Interest after 10yrs = $13k
Future Value = $206k
2) $50k down, 30 yr mortgage @ 4%, $1200 month & invest $500/month in equities
Equity after 10 yrs = $112k
Tax deducted Interest after 10yrs = $22k
Net Investment after 10 yrs = $76k
Future Value = $210k
3) $12k down, 30 yr mortgage @ 5% $1400 mortgage + PMI & invest $300/month
Equity after 10 yrs = $76k
Tax deducted Interest after 10yrs = $38k
Net Investment after 10 yrs = $107k
Future Value = $221k
I assumed 3% increase in home value, 7% return on equities, with a 30% capital gains on the investments
So in the end, it would appear that debt helps improve returns and the best option is to invest in stocks and pay more interest and PMI.
Do you think this is a fair assessment?
Once we retire in 10 yrs time, I would rather have the money invested in the stock market making me money vs sitting in the equity of the house.
There are always risks, but do you think carrying this much debt into retirement is a bad idea?
Thanks
Hi JH
You used the word “preference” which I think is the right word. If you prefer to buy a house, then that is the right decision.
I have a post coming about why we will be renters for life, but in the mean time maybe read through this post: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
I would also be wary of doing unnatural things to avoid taxes. The tax tail shouldn’t wag the dog
I think you mean PITI as opposed to PMI
That said, I think we can break your analysis down into two questions:
1) Does the mortgage interest tax deduction have value
2) Is it reasonable to use margin to invest in stocks
1 –
For a married couple filing jointly, you get 2 Personal Exemptions and the Standard Deduction. This is $20,600 in 2015
On a $200k mortgage, in the first year interest will be ~$6k. Add some property taxes and State Income Tax to that, and it is still probably less than $20k
Conclusion: On a $250k home, the mortgage interest tax deduction has zero value at current interest rates
In your analysis, you should change tax deducted interest to $0
Also include expenses for maintenance, property taxes, etc…
2 –
Over a long enough time horizon, stocks will (most likely) outperform residential real estate. Historically home prices have increased with inflation and stock prices have increased faster than inflation
The key concept is long enough time horizon. Who knows what will happen in the short term. 10 years from now, both stocks and houses could be priced lower than they are today
Using margin in general to buy stocks increases volatility and return/loss. If that works for you, go for it
A mortgage has the advantage of not being subject to a margin call, but it could also complicate life if you want to move to a new location (perhaps for a new job opportunity) but the stock market has suffered a major decline and you are less liquid. 2008 would have been a bad time to make this move
Also note, I wouldn’t assume a 30% tax on capital gains. If your goal is retirement in 10 years, the tax rate will be zero unless tax law changes
Great starting story! Love the comments about the wiser colleagues – thank goodness we didn’t follow ours to buy a house (“Safest investment, house prices here will never go down…”). We did unfortunately buy an expensive fancy car, but it was second hand and we sold it a few years later when we moved.
Biggest mistake I personally made, following an “expert” colleague’s stock market advice on some Uranium companies. Lost a few thousand dollars when the company tanked. Ouch! But at least I limited it to only a portion of our total investments and not everything!! A worthy investment in my financial education.
On home loans
My wife and I were floundering along, following the same dream of suburbia as everyone else with the purchase of a house. 30 year adjustable mortgage. Then one day my wife showed me a Lotus (Yep it was a while ago!) spreadsheet showing if we accelerated payments we could be done in under 5 years and save thousands in interest!
I was hooked! We were already by nature frugal but this looked like free money! We just used extra cash and budgeting and paid it off in 2 years 11 months. There was even an overseas trip in there somewhere! The best part was interest rates were high and climbing. By making lots of extra principal payments we realized the interest rate was irrelevant.
I still tell people that story and the reaction is the same. That’s impossible. I can’t do that in my situation. Uh-huh….
Nice!
This post just drives home that you have to be a bit “counter-cultural” in the U.S. if you want to build assets and achieve financial independence.