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Even though people receive a tax deduction for...
Posted on 2010-Mar-2 at 12:28
Even though people receive a tax deduction for interest on mortgage payments, they pay for all their other expenses with after-tax dollarsEven after they pay off their mortgageMy wife's parents were shocked when the property taxes on their home went to $1,000 a monthThis was after they had retired, so the increase put a strain on their retirement budget, and they felt forced to move
4 Houses do not always go up in value In 1997, I still have friends who owe a million dollars for a home that will today sell for only $700,000The greatest losses of all are those from missed opportunities If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column, the classic middle class cash flow patternIf a young couple would put more money into their asset column early on, their later years would get easier, especially as they prepared to send their children to collegeTheir assets would have grown and would be available to help cover expensesAll too often, a house only serves as a vehicle for incurring a chanel 5 ladies handbag au home-equity loan to pay for mounting expensesIn summary, the end result in making a decision to own a house that is too expensive in lieu of starting an investment portfolio early on impacts an individual in at least the following three ways:
1Loss of time, during which other assets could have grown in valueLoss of additional capital, which could have been invested instead of paying for high-maintenance expenses related directly to the homeToo often, people count their house, savings and retirement plan as all they have in their asset columnBecause they have no money to invest, they simply do not investThis costs them investment experience Most never become what the investment world calls a "sophisticated investor And the best investments are usually first sold to "sophisticated investors," who then turn around and sell them to the people playing it safeI am not saying don't buy a houseI am saying, understand the difference between an asset and a liabilityWhen I want a bigger house, I first buy assets that will generate the cash flow to pay for the house
My educated dad's personal financial statement best women rolex watches demonstrates the life of someone in the rat race His expenses seem to always keep up with his income, never allowing him to invest in assetsAs a result, his liabilities, such as his mortgage and credit card debts are larger than his assets The following picture is worth a thousand words:
Educated Dad's Financial Statement
Income=Expense
Asset < Liability
My rich dad's personal financial statement, on the other hand, reflects the results of a life dedicated to investing and minimizing liabilities:
Rich Dad's Financial Statement
Income > Expense
Asset > Liability
A review of my rich dad's financial statement is why the rich get richerThe asset column generates more than enough income to cover expenses, with the balance reinvested into the asset columnThe asset column continues to grow and, therefore, the income it produces grows with it
The result being: The rich get richer!
Why the Rich Get Richer
Income -> Assets -> More Income
Expenses are low, Liabilities are low
The middle class finds itself in a constant state of financial struggleTheir primary- income is through wages, and as omega speedmaster day date their wages increase, so do their taxesTheir expenses tend to increase in equal increments as their wages increase; hence the phrase "the rat race They treat their home as their primary asset, instead on investing in income-producing assets
Why the Middle Class Struggle
Income goes up, Expenses go up
Assets do not increase, Liabilities do increase
This pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a larger home or spend more is the foundation of today's debt-ridden societyThis process of increased spending throws families into greater debt and into more financial uncertainty, even though they may be advancing in their jobs and receiving pay raises on a regular basisThis is high risk living caused by weak financial education
The massive loss of jobs in the 1990s-the downsizing of businesses-has brought to light how shaky the middle class really is financially Suddenly, company pension plans are being replaced by 401k plansSocial Security is obviously in trouble and cannot be looked at as a source for retirementPanic has sei in for the middle knock off chanel watches classThe good thing today is that many of these people have recognized these issues and have begun buying mutual fundsThis increase in investing is largely responsible for the huge rally we have seen in the stock marketToday, there are more and more mutual funds being created to answer the demand by the middle class
Mutual funds are popular because they represent safetyAverage mutual fund buyers are too busy working to pay taxes and mortgages, save for their children's college and pay off credit cards They do not have time to study to learn how to invest, so they rely on the expertise of the manager of a mutual fundAlso, because the mutual fund includes many different types of investments, they feel their money is safer because ii is "diversified
This group of educated middle class subscribes to the "diversify" dogma put out by mutual fund brokers and financial planners
The real tragedy is that the lack of early financial education is what creates the risk faced by average middle class peopleThe reason they have to play it safe is because their financial positions are tenuous at best Their balance sheets are not gucci knockoffs bala
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