ADVICE: "PROTECT YOUR PRINCIPLE" CONSIDER THIS AFTER THE RV - by Anonymous
To save time and keep this simple I'm going to get straight to the point...
After the RV happens all of us will be afflicted with SWS (Sudden Wealth Syndrome) a common ailment that is a real problem for people who come in to wealth suddenly. There have been plenty of articles written about it, so Google for it to learn more if you want - I won't focus on SWS in my article here.
With a deep respect for SWS, after the RV you and I will be highly tempted to run out and buy lots of "stuff" - please don't do it!!! As the IQD Team Mods are always suggesting, take a few weeks to absorb the fact that you are now wealthy!
So, now you've taken a little time after the RV, and you are now looking around and thinking of what to do with your money - may I suggest you think about this, Invest your money, and try to ONLY SPEND THE INTEREST.
Here is an example: Lets say after the RV you'll have $500,000.00 USD as "free" cash to spend. You are thinking about investing in Real Estate, maybe buying a home to live in or as a rental for rent income.
At first you think, I'll just pay cash for that house, and own it out right! That may not be the best option, lets just for fun say that the house/rental you want to buy is $350,000.00 USD - did you realize that you can use the interest from your $500,000.00 that is invested to purchase this home?
Let me break it down with simple CONSERVATIVE numbers:
Purchase Price = $350,000.00
Down Payment = $ 50,000.00
Loan = $300,000.00
Lets look at your loan: NOTE: you can find free loan / mortgage calculators all over the internet as well as iPhone / Android Phone Apps.
Loan = $300,000.00
Loan's Term = 30 years
Interest Rate = 6.0% - fixed 30 years (today's rate I got was 3.60%, but I'm going very conservative with 6% almost being double today's rate)
Mo. Payment = $2,298.65 NOTE: A payment of $2,600.00/month will reduce the term from 30 years to 20 years - paying just $300 extra a month will save you a lot of money on Interest.
Annual Payment = $27,583.80
NOW, Lets look at investing your $500,000.00 in "free" cash - DISCLAIMER: This is NOT investment advice, consult a professional, every individual has their own situation based on Age, risk tolerance, etc. Again, seek out a professional - not me! :0) There!
Cash = $500,000.00
Interest Rate = 10.0% (Investco has a portfolio which averages over 11% for over 40 years - This company is listed as one of the top 10 Investment companies in the world, there are other great companies to look at to that pay less and pay more, but for this example I'm bench-marking at 10%).
Annual Distribution = $50,000.00 (Gross before - their will be income and capital gains taxes that will be due as well)
Quarterly Distribution = $12,500.00 (Mutual funds normally distribute Quarterly)
Okay, I'm sure by now you are starting to see where I'm going and putting 2 & 2 together!!!
So, lets look at it... You have annual mortgage payments of $27,583.80, and you have annual Interest gains of $50,000.00 - even after taxes you will more than cover your mortgage on the real estate property.
The leftover monies that you don't need to use to pay the mortgage you can leave in your mutual fund to increase the principle. So, lets assume you can leave $10,000.00 of the $50,000.00 gain on the Principle - that will add $200,000.00 to your principle making it $700,000.00 in priciple within just 20 years! But hold on, it gets even better, because of the compounding effect of principle your $200,000 will be actually approximately $630,000.00 + your original $500,000.00 - or $1,130,000.00!!! AND YOU OWN BOTH THE CASH AND THE HOUSE!!!
For the real estate investment, I would also suggest you think about paying a little extra to accelerate that mortgage so you pay it off in 15 or 20 years instead of 30 years - only about an extra $300/month on the payment will drop that term down to 20 years, probably saving you well over $100K in interest.
Oh, and remember, that mortgage interest is tax deductible if it is your primary residence! If it is an income property (commercial) then your CPA can Depreciate the property and that will reduce your tax. Be sure to consult with your TAX, LEGAL and Investment Professional before you make any final decisions!
Buy now - at the end of say 20 years, you will have a paid off home or rental (which is also paying you rental income) and you also have your original $500,000.00 - that friends is how the Wealthy People get richer!!! I know this last line was a bit "repetitive" however, I believe this point is extremely important - you can have BOTH!!!
Regarding Insurance a tip for you to please consider....
For your real estate investment's mortgage you will be required to purchase mortgage insurance and fire insurance to protect the lender, this sucks, but is normal. You may also want to get Home Owners Insurance (there is a version for investment properties also). In most states you also need car insurance to drive, these types of insurance are necessary-evils and cannot be avoided - just try to get the best rates you can!
HOWEVER -- Think long and hard BEFORE you purchase ANY Life Insurance Product (i.e. Whole Life Insurance, Annuity, etc.) - Insurance is generally not a good product for "investment" although they try to dress it up - but you can't "polish a turd" (IMHO). Think about this, if you have $500,000.00 (or more) in Cash and Investments - more than enough to cover any/all expenses for your spouse & family if you should die, then why waste (IMHO) your good money on buying Life Insurance or Annuity products???
Please promise yourself that you will think long and hard about it first, those policies are almost impossible to read and understand, and ANYTHING the Agent "tells" you, INCLUDING if s/he writes it on paper - it null and void and NOT enforceable!!! The only entity that can modify those insurance policies is/are the Corporation/Underwriter - and they will never do it for you! If you are confused - then DON'T sign it, don't do it! :-)
In Conclusion.... The real estate example above does not have to be just for real estate, it can relate to cars, vacations, parties, and other luxury toys! Remember, let your money work for you - keep the principle protected! Keep a portion of the interest on the principle and then spend the rest of the interest - this will let you have both your toys and keep your security of your investment! :-)
One last and very important thing, please be careful of the people you take advice from!!! Don't be afraid to interview many people - think of it like dating (especially from a Lady's perspective....) and please don't be too tight with your money, go ahead and pay for true professionals, not your 2nd cousin's brother-in-law who just joined with an investment company! One tip I can suggest is look for Series 65 Licensed Investment Advisers - they make their money from the fee you pay to them. Then you can take that advise and purchase from whomever you wish. Keep in mind that Series 6, 7 and 63 Licensed Professionals make their fee from the investment they SELL to you! This isn't "bad" I'm just making you aware of the differences.
Thank you for sharing