10 Things Millionaire Won't Tell You

http://finance.yahoo.com/banking-budgeting/article/105626/10-Things-Millionaires-Won't-Tell-You

Discuss

 

excellent insight.

can't wait to be a millionaire.

 

Maybe it's just been a while since I have read it but the "Millionaire Next Door" study seemed to say that many millionaires were not heavily leveraged. I think it also depended on if the millionaire was a first-generation millionaire or a second-generation when it came to debt (second-generations were often heavily leveraged and they constantly commented that it took the first-generation to earn it and by the 3rd or 4th generation, the wealth was typically gone).

This made me laugh:

"People who are serious about building wealth always want to have a mortgage," says Jim Bell, president of Bell Investment Advisors. His home is probably worth $1.5 million, he adds, but he owes $900,000 on it. "I'm in no hurry to pay it off," he says. "It's one of the few tax deductions I get."

Dude is a Millionaire (though the story doesn't explicity say he is one) and he can't do simple math.

 

I suppose if your interest rate on your home is low enough and your tax rate is high enough then you might find that you could earn more interest by investing your money than you could save by paying off your mortgage.

Wolfpac your point is valid though. Paying interest on a mortgage just to get a tax break is not helping you build wealth. You are never going to get as much of a tax break as it costs you to pay it.

 

Exactly! If he has a 900K mortgage at 6% and a 200K income, he is going to send $54K to the bank to keep from sending $13,500 to the government.

Even investing it, if you were really sophisticated and took into account taxes and risk (the inherent difference in risk of having a 900K debt versus not having a 900K debt), the 12% invested he might get starts to really look like 6%. Most people just go "ooohhhh, 12 is bigger than 6, I must invest". Also, most don't take into account the amount of money they are losing by paying interest to avoid taxes (in the example above, that guy was losing over 40K a year doing this so he would have to make that up annually in the stock market to keep investing). Honestly, the real ROR you need to get in the market to justify keeping a mortgage around is probably north of 25%. Turn it around on most people and ask them if they would take a mortgage on their paid for house to invest in the stock market and almost everyone would say no. They measured risk when you state it that way.

 

I would not do it either and I do not agree with the guy. There is a possibility for it to work though. I think the risk thing is the real heart of it. It is not worth the risk in my opinion.

 

The other variable out there is that there are certain income points that make the laws go crazy. At some income point, you can't really write off your charitable giving anymore (which seems crazy). So, for high income people, it may make more sense than say someone like me or you.

 

Good points, but not so simple. The context of this quote came after the article mentioned that only a small portion of wealth was tied up in home equity. Although the article wasn't clear about it ( as it was not clear about alot of things - i thought it sucked ), that $900k in debt was not spent on helicopters, cocaine, and prostitutes. It was invested in other assets - businesses, other income yielding properties ( which can provide further deductions in the form of depreciation ), etc. They're not necessarily invested in mutual funds or some other consumer investment product. I would never do that - unless that was my sole occupation. For the same reason, I stay away from real estate investments.

The millionaire next door and the lesbian on CNBC are big advocates of paying off a mortgage. Alot of other people are not - and they both provide good arguments. I can see it both ways, but I know one thing - home equity put to no use costs ALOT of money. It has been a huge untapped resource to build wealth. The housing boom distorted that - and it became a huge resource for rampant spending on consumer products. Not the point.

I went to get a credit line for one of my businesses about 6 months ago. If I had used my signature as collateral, I could get some cash, at a decent rate. If I used my house - I could get a shitload of cash at less than prime rate. I lobbed the house on there. The investment in improving the business processes of that venture is yielding a FAR greater return than the interest charges on that cash. If in 5 years I calculate how much I made as a result of freeing up the cash lost in poor business processes, using that cash for improved customer services, sales, and marketing, and then compare my increased profits with the cost of that cash - it would be laughable, and so easy someone would likely make it illegal.

Unless you're in lockdown mode, to me, keeping your home paid off is not going to help much. Or if you're not self employed. If you're an employee, it would seem access to that kind of debt could only get you into trouble.

All that said, economies like this one make me fantasize about lockdown mode.

 

lockdown mode? what's that?

 

Hunker down and weather the storm. No capital investments, etc. No need for the equity b/c not going to risk it.