Tag Archive: american dream

Starting from Scratch – Part 1

scratch_beginnings We had a special guest today on The Bigg Success Show. Adam Shepard is the author of Scratch Beginnings. After graduating from college, he conducted a real-life experiment, by starting out homeless with only $25 and the clothes on his back, to see if the American Dream is still alive. His book chronicles his year-long journey. Here’s a summary of the conversation …

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marylynnI loved your book, Adam. There were times when I couldn’t put it down because I was worried about you! I can’t imagine what your mom and your dad must have felt.

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adam_shepard
They definitely did not sleep much on that first night … that’s for sure.

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george
I can imagine, because your first night was quite traumatic.

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adam_shepardI was in Charleston, South Carolina. There’s the Rhett Butler “Gone with the Wind” side of town, but then there’s also the other side of town. I arrived in a pretty shady part of town, so I think my parents were right to be a little bit nervous.

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The “Scratch Beginning”

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marylynnLet’s go back to the “scratch beginning” because you didn’t have to be homeless. You had just graduated from college.

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adam_shepardYeah, I graduated from college and told my mom and dad I was going to be homeless for a year. The project was for me to start with $25 and the clothes on my back, in a city randomly chosen out of a hat, to see if in one year I could have $2,500, a car, and a furnished apartment. For me, that was the idea of the American Dream.

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marylynn
You had some rules. You weren’t able to use your old contacts, your credit, or anything.

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adam_shepardRight – and no college education. The whole idea is that I was starting from scratch. I had to take blue-collar work. I couldn’t just go out and get a job as an accountant. I tried to level the playing field as much as possible.

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marylynn
And why? Why did you want to do that?

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adam_shepardI wanted to represent a story that many people can resonate with. I didn’t want to use any special skills or talents. I’m just a regular guy and that’s what this story is all about – regular guys that I met along the way that are making things happen. There’s no trick here that I’m using.

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marylynn
So now going back to that first night, you really got lucky twice.

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george
And not getting lucky the way you want to get lucky in college either!

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adam_shepardThat’s how I could have spent my $25! There was a lady who told me where I needed to go; she could see that I was a stranger to town. So she told me to go to the homeless shelter. As I was waiting at the bus stop, I had a confrontation … well, a near confrontation. I thought he wanted money, but he didn’t. There was just this miscommunication. I narrowly defeated the book being just twelve pages long by getting on the bus and heading down to the shelter!

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Moving Out

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george
So tell us, how did you start working your way out of the shelter?

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adam_shepardThe shelter was great because I had a place to sleep and hard boiled eggs in the morning. So I was able to save my money instead of having these expenses. So that was the whole idea – to put money away – as opposed to spending it on other things like beer, cigarettes and lottery tickets. I wanted to save my money. For the first two weeks, I did little day labor jobs – anything I could get my hands on to get money today for things I needed right away – pants, shirts, shampoo, and I’m a total pretty boy so I needed conditioner. But then the idea was for me to get a permanent job where I had money coming in and I could control the money going out.

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marylynnYou say that the shelter was great. I know from reading your book that there were some things that weren’t so great. You make it sound really easy – you were living for free, you could go and get a job – but some people don’t leave the homeless shelter. What do you think is the reason for that?

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adam_shepardI know that when I do interviews it sounds like this was just a walk in the park. When you read the book, you see that it was much more challenging than that. I think the difference between one guy, who’s able to make it out, and another guy is so complex. There are all kinds of dynamics – mental illness, addictions – that plays into this. But if you put a healthy guy next to another healthy guy, the one who has the better attitude, that strong work ethic, and who wants to get out, he can get out. I think that’s what is so great about my experience in the shelter. I made it out; I did it. But there were guys right along side me that had these plans – to get out of there in 30, 60, or 90 days. They had that attitude and focus to get out.

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georgeI know your major wasn’t sociology but this was an amazing sociological experiment. You did this from “scratch beginnings” as you say. To me, your story illustrates so well how any of us can get to that next level in life. It’s the same thing. One person will make it; another person won’t. It comes down to attitude, focus, setting realistic goals and a number of complex things as you said.

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adam_shepardAbsolutely. I think that’s why I’m so passionate about this story now. Whether I’m speaking to a college, a corporation, or a homeless shelter, it’s the same! It doesn’t matter if you have $25 or $25,000. It doesn’t matter what kind of educational background you have. There’s somebody out there just like you that’s fighting and clawing for the top. That’s why it’s always a hustle. The American Dream and the American spirit exist at every socio-economic level. That’s where I think the value in Scratch Beginnings is. You can read it and it relates to your life no matter where you are. It’s always a hustle!

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Learn more about Adam and purchase his book at scratchbeginnings.com. Next time, we’ll continue talking with Adam and find out how one shelter resident helped him turn things around. Until then, here’s to your bigg success!

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Starting from Scratch – Part 2

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Are You Throwing Money Away by Owning Your Home?

toss_moneyWe all know that the three essentials for living are food, clothing, and shelter. We definitely rent our food. Do we rent or own our clothing? Hmmm.

Part of the American dream is to own your own home. And there are good reasons to do so. For instance, a Federal Reserve study[pdf] shows that the average family that owns a home has a net worth of nearly $625,000 while families who rent have a net worth of just a little over $54,000.

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Homeowners on the move

We’ve seen an interesting statistic bantered about, but we haven’t been able to pin down a reliable source. If this statistic is true, American homeowners move once every five years or so, on average.

So we thought we’d consider what that does to the buy vs. rent equation. We’ll use some averages and national statistics to create an example. However, what really matters is your own situation and your local real estate market. Only you, working with your financial advisors, can determine what’s in your best interest.

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marylynn When I was younger, one of my bosses in radio told me that I was just throwing away money by renting. I remember thinking that it made sense. I’d reached an age where maybe I should consider buying. So I did. As often happens in the radio business, less than a year later, I lost my gig. So I had to sell my house to move to a different market. I lost a lot of money by buying. If only I had had a crystal ball!

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Putting buy vs. rent to the test

We created a fictional purchase to see if we would be better off renting or owning a house for five years. We assumed that:

  • We put 20% down (approximately $63,000).
  • We financed the rest with a 30-year mortgage
  • The interest rate would be 6.50%, slightly above the current rate.
  • Our house would appreciate 4% per year, slightly below the recent average.
  • Property taxes would cost us 1% of the value of the home.
  • Insurance would run 0.50% of the value of the home. (Renters and homeowners have to insure the contents. We have the added burden of insuring the building.)
  • Repairs & maintenance would consume 1.50% of the value of the home.

Over the first five years, 83% of our total mortgage payments would go for interest. In other words, for the most part, we’ve traded renting property for renting money. If the interest rate is higher, the portion that would go to interest would also be higher. Of course, the reverse is also true.

During this period, we would pay $2,171 per month as “rental costs” for our home. We call them rental costs because they have no value once they’re paid. They only allow us to keep owning. So if we could rent a similar property for less than this, we would be better off renting instead of buying.

Of course, if we had made a down payment of less than $63,000, our cost would go up because we would be paying even more interest.

Where’s the break-even?

We also looked at how it would take before we would break-even. After all, it costs money to sell a house. We would have to pay commissions to our realtor, closing costs, and the like. We assumed these costs would total 8% of the selling price.

Given our assumptions, we looked at what would happen if we sold after one year. Our house would now be worth $326,560. From that, we would pay $26,125 in selling costs. After a year, our mortgage balance would be $248,392.

So we would be able to take out $52,043 in cash. But remember, we invested $63,000. So we lose about $11,000 if we sell after one year.

But that’s not the whole story …

We haven’t yet considered the opportunity cost of tying up that $63,000 in a house. Because if we didn’t invest it in this house, we could have invested in something else. We assumed we could have earned 6% by investing in some portfolio of financial assets.

That would have returned nearly $3,800. So by buying this house and selling it in a year, we would put ourselves in the hole nearly $15,000.

Even after 2 years, we’d still be about $3,500 behind, given our assumptions. Of course, one of those assumptions is that real estate prices are rising. It’s almost certain they will in the long run, but will they rise in the next year or two? They may not in some markets.

What’s the bottom-line?

We concluded that if we didn’t plan to own a house for at least two years, we’d rather rent. We also saw that the longer our holding period, the better we would do. For instance, in the last five years of the mortgage, only 15% of the mortgage payment would go to interest. It seems like buy-and-hold is rewarded in real estate investing.

How to get around it …

We have two friends who have been able to get around the short-term ownership problem. One of them is in the military, so he moves frequently. He only buys a house that he knows would make a good rental property. If he gets transferred, he hires a local property manager and rents it out. Until he decides where he wants to retire, he plans to hold a number of his houses.

Another friend doubled-down on this strategy. He moved quite frequently as he climbed the corporate ladder. Not only does he own houses in a number of cities, he bought additional rental properties, so he has a diversified portfolio across a number of cities. Now he’s retired living off the rents!

So you can get around the disadvantages of short-term ownership by having an alternative exit strategy!

Next time, we’ll discuss how a toy that you probably played with as a kid can help you manage your time. Until then, here’s to your bigg success!

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