Finance 101 Archives - Lazy Man and Money

Wealth at Any Income: Assets vs. Liabilities

March 6, 2017 by Lazy Man 8 Comments

Last week, I introduced you to a new (very short) series on how to be very wealthy at any income. That article focused on making compound interest work for you rather than against you.

It makes a huge difference. Over 50 years, earning a conservative 5% interest means you’d turn one dollar to $11.50. So you could turn 90,000 into over a million dollars. Conversely, you could be paying 10% interest (or more) on a credit card. If you can make one dollar grow to more than $11 in 50 years, how much do you think the credit card companies can make at twice (or more) the same interest rate? I started to do this calculation and the numbers got so ugly that I didn’t trust my math. (It was essentially that you have to make $117 to pay off each dollar of debt you created… and it was 10 times worse when paying 15% interest.)

Of course few people plan ahead 50 years. That’s not really the point.

The idea was that you can turn a dollar into more than $11 or turn more than a hundred dollars into a single dollar. If I gave you a million dollars today, would you rather have more than $11 million or less than $10,000?

Ahh, but compound interest was (literally) so last week.

Let’s turn our attention to something new: assets and liabilities.

Before I go any further, I have to give some credit to where it is due. This concept was brought to my attention by reading Rich Dad, Poor Dad by Robert Kiyosaki. While the book inspired me, the only useful I learned was this explained in pages 69-70 (of my copy, your edition may differ.) Other than this, I think Kiyosaki is selling a bunch of misinformation. Does it count as “giving credit” if I (and many others) believe the person is a fraud?

The concept was that people who are rich buy assets that appreciate in value. People who are poor spend their money on liabilities.

Let’s take an example of two people: Asset Man and Liability Man. (If you thought I was going to in a “fatherly” direction there, you were very close to being right).

Liability Man spends $60,000 to buy a luxury SUV. He enjoys it for four years and decides he wants another new car because he just loves that smell. We don’t need to get into that new purchase. Let’s just focus that his luxury SUV is now worth only $30,000.

Asset Man decides to buy a Subaru Forester for around $25,000. It has the same new car smell. He uses another $35,000 to put a down payment on a $150,000 investment property. The tenant pays the mortgage and the property goes up in value over time (real estate is an appreciating asset). The property appreciates an average of 4% a year for 15 years and becomes worth $270,000. The mortgage is down to around $70,000.

Liability Man turned his $60,000 into $30,000. Asset Man turned turned his $60,000 into $200,000. That $200,000 comes from the $270,000 value of the property minus the $70,000 mortgage. Yes, that’s 15 years away, but wouldn’t you want $200,000 in 15 years? (Who would say no to that?) Also, the Forester he bought is worth around $12,500 after the same 4 years as Liability Man.

These numbers are estimated, but hopefully you can see what’s happening. Asset Man is building wealth. Liability Man may be enjoying life, but he’s not building wealth. In 15 years Asset Man might decide to sell that investment property and use that $200,000 to buy a luxury SUV AND 3 more investment properties. Those properties might provide enough cash flow to fund his entire retirement.

That’s not bad for a single buying decision over four years. Imagine if the decision was to buy a used Forester at $10,000 and the remaining $50,000 was invested? Imagine what you could do if you lived a lifestyle that was focused on spending money on appreciating assets.

This scenario is very similar to the compound interest point that I made above. Your money can grow or it can shrink. It’s up to you to make the choices that are right for you. My general focus is on acquiring assets that appreciate because financial freedom is important to me.*

Unfortunately, appreciating assets can be very boring. I don’t know too many people that think, “I’d love to be a landlord and get calls about pipes bursting at 3AM!” (You can get a property manager – don’t let this scare you away.) Only a nut like me thinks, “Oh, a few more shares of IBM will make so happy!” (Okay, I’m not even nutty enough for that.) It’s difficult, but the idea is to focus on the big picture.

Spending money on liabilities that depreciate is a necessary fact of life. You notice that I didn’t suggest that people should just not buy cars. That’s possible for some, but not for others.

It’s a balance. If you can tip the scales towards buying assets, I think you’ll find yourself fairly wealthy in a decade or two.

* That doesn’t mean we can’t splurge every now again. In fact, we bought a luxury SUV.

Make Mine a Double (Rules of 69/70/72)

February 21, 2017 by Lazy Man 4 Comments

Before we get started, can someone tell me what constitutes a holiday? My calendar reads that yesterday was President’s Day. My son’s school was closed on Friday (and yesterday). However, trash pick-up was on its normal schedule, to the surprise of 90% of my street. Later, I saw mail trucks driving down my dead-end street, but not dropping off mail at each house (maybe one of those Sunday Amazon deliveries.)

Enough with life keeping me on my toes, let’s get to the money.

You may have noticed that lately I’ve been writing about my net worth more than usual.

I’d like to tell you that it was part of a normal writing schedule. Honestly, it’s because the stock market has been going for nearly a decade now and my local real estate market is finally joining in.

During times like these, I try to remember two things:

Don’t fall into the mental trap that markets will go up forever at this pace. They can’t and they won’t.
I don’t control the markets. I’m a leaf on the wind. Watch how I soar. I can only go where the wind takes me.

With those caveats in place, let’s use my net worth over the last several years as an introduction to the Rule of 69, 70, and 72. (Regular readers are probably familiar with this rule, but I’d like to define it for beginners and have one place in the blog where I can refer to it whenever necessary.)

The Rule of 69, 70 and 72

While it is one rule, it comes across in many different forms. It’s helpful to understand that they are the same thing.

Rule of 70

You may have come across the “Rule of 70”, which says you can take 70 and divide by the expected interest rate to find out how many years it will take your investment to double.

Example: I am investing $100,000. I expect the investment will return 7%. I can expect that the money will double to $200,000 in "70 divided by 7 years..." or simply 10 years.

Rule of 72

This is the same as the Rule of 70, but 72 works better with numbers like 6, 8, and 9 which are often used as hypothetical investment growth percentages.

Example: I am again investing $100,000. I expect the investment will return 8%. I can expect that the money will double to $200,000 in "72 divided by 8 years..." or simply 9 years.

Rule of 69

It’s really hard to divide 69. It’s only two factors are 23 and 3. You aren’t likely going to be working with a 23% interest rate. The 3% interest rate is pretty well covered by the rule of 72. (No one is going to complain about the difference between an estimate of a 23 or 24 years, right?

So why the Rule of 69? It’s technically the most accurate. It is derived from the natural logarithm of 2 or ~.693.

And while the Rule of 69 can’t help us with quick estimations like 70 and 72, I like to include it because it shows that those numbers aren’t magical. (Also, you can see that 72 is a little less accurate, but it’s still very good.)

Putting the Rule of 69/70/72 to use

I was looking through my net worth chart at the end of the year and I noticed that it grew, on average, around 18% each year over the last 4 years.

Because I’m a crazy math nerd, those 18 and 4 numbers hit me over the head. Those are Rule of 72 numbers. My net worth had doubled. (No wonder I’m obsessed with Net Worth, right?)

Well, it didn’t exactly double. The numbers weren’t consistently 18% and it was the Rule of 72 (vs. 69). Still they were close enough.

This brings me back to the leaf on the wind point above. It would be great if one could simply say, “Hey I’ll order up a doubling of my net worth every 4 years. Thanks!”

It don’t work that way.

Doubling your net worth depends a lot on your net worth. When I saved $10,000 at age 23 it had a huge impact on my net worth (perhaps doubling it alone). Today, at age 40, my net worth is driving more by the markets. Don’t get me wrong, it’s still nice to save $10,000, but it isn’t going to double my net worth.

The higher the net worth, the more difficult it is to double… if you are relying only on savings.

On the flip side, investment gains can be huge. If a billionaire make 10% in the stock market in a year, it’s $100 million dollars. If you were to earn a salary of a million dollars a year (not a bad salary, right?!?!) it would take you a hundred years to do what that billionaire did in one.

It works the same way at the lower net worths… you don’t have to a billionaire. I just used that as an extreme example.

Conclusion

I realized that I just jumped in to talk about net worth in this article. The best software for tracking it is Personal Capital. Personal Capital is completely free. It can help you track all your financial accounts: banks, brokerages, loans, credit cards, etc.

When it comes to your net worth, I always say that you can’t get to your destination if you don’t know where you are to start. Personal Capital is a great tool for knowing where to start.

Where do you want to be 4 years from now?

Financial Fixit Friday

October 14, 2011 by Lazy Man 4 Comments

Rather than ready an article from me today, I’d like you to focus on fixing one thing in your financial life. It could be moving that old 401K to an IRA. It could be switching to that cheap cell phone plan as I did yesterday.

My only suggestion is to do something that you’ve been putting off. Have you rebalanced that retirement account lately? Have you reviewed how much you are paying for car insurance or cable?

I’ve got a few items specific to my business to take care of and today is the day that I at least get one of them done. Join me and we’ll get it done together.

Finance 101: Good Debt vs. Bad Debt

February 8, 2018 by Lazy Man 20 Comments

I’m amazed by the number of people who seem to be against debt. Debt has become has a problem in America, but I think too many people clump the good with the bad. To the people that don’t like debt, would you take a million dollar loan at 1% interest? I would. I’d immediately put it in a few interest baring accounts that are FDIC insured (I say a few because FDIC insurance doesn’t cover a whole million). At today’s rates, which are historically pretty low, you can make a guaranteed 3% on that money. That means the debt naysayers would be missing out on 2% of a million dollars, $20,000 a year. I’m pretty Lazy, but for $20,000 I can manage to set up some bank accounts.

Good Debt

When you can make more money than you are paying, that’s an example of good debt. Some people call it leverage. Here are some other examples of good debt:

Student Loans – The idea here is that you choose to into a little debt now, so that you can make a lot more money through the rest of your life. That extra income, in theory, should be enough to pay back all that debt and then some. Just remember that if you initially got a bad rate you can refinance student loans and save a lot on interest.
Mortgage – This is an area of wide debate – it might even matter where you live. If you had a mortgage in the early 1990’s there’s a good chance that the debt allowed you to own a home that appreciated in value a whole lot. If you bought in some markets in the last couple of years, there’s a good chance you’ve seen no appreciation and if you sold today would have been worse off than if you rented. In many cases, a mortgage is tax deductable and that’s very nice benefit as well.
Work Necessities – Many people don’t consider a car loan good debt. However, if you need a car to get to your work, I argue that it’s good debt. For it to quality as good debt, you’d have to treat it as purely transportation between two points, not a status symbol. When an expense is necessary to protect your income stream, it may very fit into the good debt category

Bad Debt

Bad debt is debt that doesn’t have an obvious way helping your finances. There’s a lot of debt that falls into the category of bad debt, which is often where bad debt gets its name. Do you use a credit card to buy CDs and don’t pay it off every month? That’s a prime example of bad debt. Many companies will charge you interest of 20% or more. It’s not long until you are paying twice as much for that CD as you should. This does not benefit your finances?

If you go into debt to afford a vacation, that’s bad debt as well. You might feel more refreshed and ready to earn more money, but you need to get your finances in the positives first.

Three Debt Questions to Ask Yourself

I like to ask myself the following questions before considering taking on any kind of debt:
1. Am I going to pay interest on this purchase? With my credit card purchases, I pay them back, so the answer is usually no.
2. Does this purchase preserve or grow my current earning potential? If yes, then it has potential to be good debt. I say potential because it’s not worth going a million in debt to earn a couple of extra thousand dollars a year. It’s also not worth protecting a $20,000 a year job.
3. Am I buying this because I feel “I deserve it?” This is often a danger sign.

It’s not always easy and straight-forward, but understanding the difference can be important.