A paid off home is the new retirement. This is a point that I have been making to my mom for some time. She doesn’t listen to me but that doesn’t make the point less valid. My mom doesn’t listen to me because she knows me as the baby she raised, not the lawyer with an eventual MBA who has been exposed to levels of wealth, strategic financial planning and contentment that most will never see. You don’t though, so you should get these bars.
Much of the habits that people in America practice aren’t good practice. They are instead what we have been sold by people who make a profit when we buy into what they are selling. An example of this is the 401k and the home mortgage. For so long the middle class has been sold the idea of investing long term for retirement via a 401k and a 30 year mortgage. This blog will discuss the reasons why that doesn’t work and why there is a better way. That way is to first buy a home the is the right sized not just the size you qualify for and then pay off the home, after that is done, circle back to investing and 401k at a higher level.
Slow Lane Wealth
Investing in a 401k in hopes that you will be rich at 65 equates to what is called slow lane wealth. In the game of life there are wealth formulas that different classes of people operate under. The middle class aka the slow lane use their paycheck and time to create wealth. At the end they might be wealthy but they will no doubt be old. That is a big gamble to make because at 65 there is no guarantee you WILL be wealthy. You punted years of life you wont get back for something that is not guaranteed. Scary stuff.
Another problem with this method is that by investing in the 401k you become a profit center for those that manage money and those that leverage the money you invest. By giving them your money you effectively help them create real wealth while you create slow “wealth”. These banks and funds use your money and acquire real asstets while they pay you a portion of what is made. They took your money, used it and gave you back the scraps, shame shame shame bu thats the game.
Investing long term is not a bad strategy, what makes it bad is using 401k as the primary source of wealth while you consume the rest of your paycheck day to day with the slow drip of mortgage interest bleeding the rest of your wealth away.
But the right size house
Just because you can qualify for a certain home doesn’t mean you should buy the home. Same with cars, furniture and any other debt you apply for. The more debt you take out the more interest you pay and the more money they make off you. The problem is that you need to look to buy a home that is big enough but not that will take so much out of you that the only way you can invest is the small percentage of your paycheck. Again, please read the blog about not living paycheck to paycheck and find a home that is 30% or less of net monthly income. Most lenders will qualify you for 50% debt to income, but that is a HUGE 20% in income over the long term. That 20% should instead be used to pay DOWN the mortgage on the right sized property not spent keeping up with the mortgage that you have. But the right sized, the right sized is 30% not whatever they qualify you for.
The math doesn’t add up
For the life of me I cannot understand why a family that earns 100k in income will spend 30 years paying off a 400k home. Yes there are expenses and life and fun and vacations but if you used all your salary you could pay off that home in four years and live like no one else. If you really wanted it you could pay that home off in ten years, maybe 7 if you are hungry. Do you know what you could do if you paid off your home in seven years instead of 30? That is $2,000 that is not going directly to you not to the bottom line of the banks income statement while it hop skips and jumps over your principal. In addition you free up time so you can take the trip when you want to not when someone says you can. That is true freedom not faux freedom, for the gram.
You could start living your best life NOW (well seven years from now) not when you are old and tired. You might not be able to stunt on your neighbors who just bought that Benz, but at 65 that Benz rider will be asking you for a reverse mortgage on their home because they consumed all their discretionary income for the floss while you used it to avoid being someones source of wealth.
It’s not about being debt free just to say you are debt free. The goal is debt freedom so you can start your business, work less hours, work IF you want.. etc etc. Get your biggest expenses out of the way and then you can live how you want to live, you can also retire your wife.
Easier to pay off debt you can see than chase returns that may or may not happen
The point is that it is easier to pay off debt that you can see at a rate that you can see than it is to bank on the stock market turning in your favor and raining manna from above. Pay off your home, aka your biggest expense and your required living expenses plummet. Most people don’t even realize that the first 15 years of your mortgage are all or mostly interest payments. People don’t even make a dent in the principal until 15 years after they have lived somewhere. SMH. Another thing people don’t realize is that they end up paying twice what the house is worth. If you finance a 300k home, you end up paying about 600k after interest taxes, insurance, maintenance etc. Then they brag because the home went from 300k to 500k, that is still a net loss dog. I am pro home ownership but I am also pro beating the bank at their game. You do that by pushign down the principal balance and not just making the minimum payment.
Banks don’t lend because they like you, they lend because it makes good business sense. You have to learn that by stretching out that loan the full 30 years instead of chunking it out, you are getting taken advantage of. Every interest payment is profit for the bank and a loss for you. Just like paying off cc debt is better than investing, so is paying off your home.
Debt free is the new retirement
After you pay off your main expenses you will realize that you don’t need much to live on. The problem is that banks, mortgage companies, mutual fund companies and even the government make money off your debt so they dress it up and make it look good for you. This is similar to smoking ads that made it look cool or sexy to smoke. There is nothing sexy about paying 15 years worth of interest or financing an over priced car for 7 years. You know what is sexy? Driving a paid off car to your paid off home while everyone else is stuck being a slave to debt.
Dump your debt, pay off your home and car and the whole world opens up to you. Debt free no payments, paid off home is the new retirement. Don’t believe me? This is exactly what Telah Holcomb did as she explains on the Millionaire Podcast Episode 37 (which can be found here: https://soundcloud.com/charles-l-oglesby-iii/todd-capital-millionaire-podcast-episode-37-retired-at-30) Reverse the trend and win.
Be great, invest well,