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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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You Can Avoid the Mistakes that Brought this Business Down

quote There’s a great post by Roger Ehrenberg on his Information Arbitrage site. Roger was an investor, board member and leader in Monitor110, a company that planned to become the internet version of Bloomberg. The team had impressive credentials, but ultimately the business didn’t make it.

Roger spells out the reasons why. We admire him for sharing these lessons because most of us don’t like to talk about our failures. These are mistakes that any of us could make, so he provides a great opportunity to learn from others. But even more than that, it’s the way he wrote about it that impressed us – he doesn’t cast blame; he just discusses the lessons he learned in the hopes that we may benefit. And we did!

That’s why we highly recommend that you read the whole post. We’ll hit his highlights here.
 

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7 mistakes that led to the demise of this business

#1 – No single leader
Monitor110 had two leaders – a technology person who was one of the founders and Roger, who was a business person. Roger said this structure just didn’t work.

This reminded us of the number of times we’ve seen two people start a business. It’s pretty common to split everything 50/50. But it’s a recipe for disaster. In almost all cases, there has to be someone who has the final say for a business to succeed.

#2 – The technology-side drove the business
This made us think of the number of entrepreneurs who start a business in their craft. They’re technically oriented. They love their product or service, but they ignore what the customer wants and needs.

#3 – Too much PR too early
Roger’s company was featured on the cover of the Financial Times. You wouldn’t think that would be a problem, would you? But Roger says this raised the bar with everyone – customers, themselves, and financiers … which led to the next problem.

#4 – Too much money
Too much PR. Which led to too much money. Sounds like a company that’s been blessed. But Roger says the blessing turned into a curse.

  • Because of the great PR, expectations went up significantly.
  • Within the financial community, so money flowed in
  • With their customers
  • And most importantly – with the people of Monitor110.

With all these high expectations, they didn’t push a product to market because it needed to be just right. And that didn’t matter because they had a cushion of cash.

#5 – Not enough customer feedback

By now, you see how all of these mistakes were interrelated. Because of the great publicity, they were afraid to show the customers what they had. They didn’t want to disappoint them and be disappointed. But it wasn’t a problem at the time because they had plenty of money. One mistake was feeding another which was feeding yet another.

#6 – Slow to adapt to the market
On a post not long ago, we talked about a military concept called OODA loops. OODA is an acronym for Observe, Orient, Decide, Act. The idea behind the concept is that by getting into the loop, you gain information. Then, by adapting to what you’ve learned, you gain a competitive advantage.

#7 – Disagreements about strategy
This stemmed from the technology side and the business side not being able to come to terms. It’s also an outflow of Mistake #1 – without a single leader, it’s hard to have a clear vision.

Just get started!

All of this made us think of the saying, “You don’t have to get it perfect; you just have to get it going. That’s one of the things that we did with Bigg Success. We talked to a lot of people who had all kinds of great ideas. Some diametrically opposed to each other! We could have easily just got caught in the quagmire.

Ultimately, we just launched. It wasn’t perfect – we knew that. We’ve learned a lot. There are things we would do differently if we had it all to do over again. But by launching, we were able to learn from the most important people of all – our community. We learned from you.

We’re happy to let you know that you’ll be seeing some bigg additions in the near future. So keep checking in and let us know what you think! We’re listening!

 

 

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The Secret to Action

Sharon Ayn joined us on the show today. She is the author of five books, including the newly released Create Your Own Reality: The Ancient Wisdom. Sharon has made many appearances on radio and television, including the nationally syndicated radio show, Minding Your Business, and an appearance on The Oprah Winfrey Show.

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marylynnWhat inspired you to write your latest book?

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sharynI work with entrepreneurs and people who have been downsized, and I’ve found one thing that’s consistent. People know they could do better, work less, and make more money, but without someone stimulating their imagination, it’s very difficult to go through a change. So the book is designed to help people realize that, no matter what’s going on in their life, if they take one step or enroll one person at a time, they can change anything that isn’t the way they wanted it.

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georgeWhen we talked before our interview, you said that this book goes beyond where The Secret took us.

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sharynExactly. I love the fact that The Secret brought consciousness to so many people about staying positive, but the one thing people missed is being in action. You have to be in action. It's not enough just to think about it. You have to take a proactive role in your life.

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marylynnWhat do you think keeps people from taking action … what is it that holds people back?

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sharynSome people truly believe that they’re not entitled. Some people think it’s too much work to get what they want. Other people are too overwhelmed by what’s first, so they just stay at what they’re doing even if it’s not what they want.

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marylynnFor someone who feels that, what would be the one thing you would tell them to work on right now?

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sharynMake a list of all the things you want to change, but put it in the positive. I work with clients who want a better job. I get them to describe what it’s like to work at the company, what their tasks are, what the people are like that they work with. And then backtrack – how do we get to that point? So for anything that you want to change, what is the first step you can take to be in control? Because I think a lot of this is people feeling that they are out of control of their own lives.

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georgeThat is awesome … there’s a lot of practical advice that people can use right away in this book.

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sharynIt’s simple knowledge that most people don’t apply to their own life, even though they might be aware of it.

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marylynn Oprah calls it the “aha” moment. What do you call it?

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sharynIt’s the dawning of the day when, like in City Slickers, you get your “do over”. So don’t think, my life is just surrounded by quagmire, all my friends are always complaining and leaning on me, my relationship isn’t working … we’re fighting all the time, I hate my job, and all these things. Instead, think about every day being brand new. Every day, we get to reinvest ourselves.

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Sharon’s book comes with bonuses

You get an incredible $4,661 in bonuses when you buy Sharon’s wonderful book, including great material from:

  • Annie Jennings, who helps people who want to be authors or speakers, and get interviewed on the radio.
  • Dave Sheffield, who works with corporations, helping people take the first step to change what’s happening in their career.
  • Jim Bouchard, a good friend of ours, who helps people tap into their personal power. Jim’s material alone makes it a great deal to us!

Find Sharyn's book at createyours2.com

 

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I Need Money! Should I Cash Out My Retirement Plan?

frustrationThe financial news seems to be all gloom and doom these days. The reports are that we’re not in a recession, but times are tough for a lot of people.

No matter how tight things get, we still have bills to pay. People are responding to this very intelligently. They’re turning to public transportation, eating out less, seeking cheaper forms of entertainment, and cutting back on unneeded items.

But what do you do if that isn’t enough?

Tapping your retirement plan …

It’s tempting to pull money out of your retirement plan, like a 401(k), especially if you change jobs. In fact, about 40 percent of job changers in their twenties and thirties have done just that, according to a recent report by the Financial Industry Regulatory Authority (FINRA).

… could cost you $130,000 …

If you’re under 59½, it’s usually not a good idea to cash out your retirement plan. Let’s look at the example that FINRA used:

You’re 30-years old with $20,000 in your 401(k). If you earn just 6% on that money until you retire at 62, you’ll have nearly $130,000 in your account, without making any additional contributions.

… and then some!

Of course, you can start over. But you lose the power of money compounding on top of money on top of more money, all accumulating tax free until you take it out. So it’s like taking at least two steps backward.

But that’s not all. Here are 4 other steps back:

  • You’ll have to pay income taxes out of this money, since it was invested pre-tax.
  • There’s also a 10 percent penalty for early withdrawal (unless you’re over 59½)
  • Your employer is required to withhold 20 percent toward income taxes.
  • If you owe money, your creditors can’t touch your 401(k) unless you cash it out.

By the time you get a check, that $20,000 will probably be more like $14,000 net of everything. So cashing out of your retirement plan is a short-term solution with long-term consequences. 

 

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How Dual Income Couples are Bucking Traditional Roles

man_womanThe Council on Contemporary Families published a summary of previous studies, looking at data over 30 to 40 years. Here are some highlights:

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1. Men’s share of household duties doubled as a percent of the total over last 40 years, from 15 percent to 30 percent of the total. The number of hours women spend on these same duties has declined over that period.

2. The younger the couple, the higher the share of household duties performed by the man.

3. Time spent caring for children tripled for men and doubled for women over the same period. Couples are placing much more emphasis on spending time with their kids than they did 30 years ago.

4. The longer a woman works outside the home, the greater the percentage of household responsibilities assumed by the man of the house.

5. Men are working less and spending more time on family duties. Women are trending in the opposite direction.

6. When the woman of the house works more hours, earns more money, or has more education than the man, the man’s share of family duties increases.

7. About one of out three couples now has a woman who earns more than the man.

They pointed out that there had been an expectation of immediate change when women started working. That didn’t happen to the disappointment of many! However, over the span of a few decades, things have changed quite a bit and they predict this trend is here to stay!

The bigg payoff

Couples are redefining what it means to be the man or the woman, the father or the mother, in a relationship. This summary shows that the divorce rate is lower when couples divide up the duties more equally. In fact, it’s even lower than with the traditional relationship where one person is the breadwinner and the other person runs the house.

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georgeMary-Lynn and I both grew up in a traditional family that stayed together. But we’re pretty non-traditional.

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marylynnYeah, I remember that my mom was always in the kitchen. I determined long ago that wasn’t for me! She kept telling me “you’re going to have to learn how to cook, what are you going to do when you are out on your own?” I told her I would just meet a guy who knew how to cook and marry him. And that guy is George! And let me just add…he’s an AWESOME cook!!!
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Roles are getting redefined so don’t listen to what other people say. If it works for you, your spouse, and your family … it works!

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This week, our newsletter subscribers received a great article about how to get more flexibility at work so you can have more time at home. You can get it, too, click this link to subscribe to the Bigg Success Weekly.

Until next time, here’s to your bigg success!

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