The Work, Travel and Everyday Life Newsletter
from Randy Lewis
Are you one of those people?
Some people reading this can earn tens of thousands of dollars by implementing the strategy I have used all my life. You will have to ask yourself, “Am I one of those people?”
Your financial world is in three buckets.
Did you know that all of your financial assets are really in just three buckets? That’s right. Today I’m going to tell you that there’s a very good chance that you might not have the right amount of your assets in the right buckets.
What I’m going to share with you could literally increase your net worth by thousands of dollars. This won’t work for everyone. Some people are too young and some people are too old to use the strategy. Some people don’t have enough money and some people have too much money to use this strategy.
Then there is another group. This is the group that could use the strategy but they won’t understand it after I explain it. Or they might be too stubborn to use it after I explain it. Finally, they could be too scared to use it after I explain it. Don’t be that person.
Of the hundreds of people who are reading this a distinct minority can and will adopt this strategy. What is the reward? More assets! More freedom! More options! What do I get out of all of this? For those one or two or 10 people who actually implement this financial advice, I’ll simply get a big smile on my face for helping someone up the ladder.
I wanted to share a couple of thoughts about taking financial advice or any advice for that matter. Beware of the person who benefits monetarily from the advice they provide. Secondly, I take golf lessons from a pro because that person can play golf better than I can. Try to get advice from people doing better than you in whatever subject you are seeking advice!
I’m doing just fine thank you.
Some people are going to say, “Hold on Randy. I am doing just fine financially. I don’t need to make any changes. I have all of the money I need.”
Oh really? I get that response a lot. I have a simple lie detector question that proves or disproves the statement that someone really believes they have all the money they need and don’t need to do anything differently. Ready to take the lie detector question?
Let me ask you this question. Did you get a stimulus check from the government because of the coronavirus pandemic? Did you cash it? If you did get that check and you did cash it I guess you could always use a little bit more money right?
Before we go any further please understand I don’t think anyone is telling a lie when they tell me they are doing just fine. However, maybe some folks are simply fooling themselves into thinking there is nothing they can do to improve their financial lives.
I had one lady ask me how I could be talking about money when we have all of these pressing problems impacting us pretty much on a day-to-day basis? My response was simple. I told her that every day I have literally hundreds of thoughts on all kinds of topics that cross my mind. There can be crazy things going on all around us and I’ll still be able to give a little mental power to all of the topics that interest me.
Are you ready?
So…are you ready? I’ll try to make this as technically understandable as I possibly can. But remember, I’m talking about giving you an idea that can provide thousands of dollars to you over the next few years. If the entire idea was too simple then everybody would do it.
OK, we’re doing this.
I told you that all of your assets are really in three buckets. This is how it works with the buckets!
In bucket #1 you have all of your IRA type funds. This is money that you’re going to have to pay ordinary income tax rates on when you someday try to get at the money.
In this bucket, you have all of your assets that if you were to sell them they will create no taxable event or if they did generate any tax it would be on a long-term capital gains basis at a lower tax rate. Examples could be Roth IRAs, personal savings and investments where taxes have already been paid.
In your third and final bucket, you have your assets that are tied up in your home’s equity or maybe your rental property equity.
You might have some other assets that I didn’t mention above. You’ll have to decide whether or not those assets are resting in buckets number one, number two or number three.
Now I’m going to make an assumption about how much money you have in each one of your buckets. Since I don’t know your particular financial situation you will have to decide how much money you have in your own buckets. For the purpose of this explanation, I am going to use numbers where some folks are going to say I WISH I had that much money in my buckets. Other folks are going to say I don’t know how I could live if I ONLY had that much money.
Don’t worry either way. After I paid for a lot of golf lessons I’ve played a lot of golf. I learned there was always somebody I could beat on the golf course and somebody who could beat me. I didn’t concern myself with that. I just wanted to improve my game!
For the purpose of this example, I’m going to assume that each of you has $100,000 in each one of your buckets. Right off the bat is having the same amount of money in each of your buckets a good thing? No, I don’t think so.
Another assumption that I’m going to make is the return that you can get on your investments is 8.1% annually. I know what some of you might be thinking. You might be saying to yourself “Getting a return of 8.1% is definitely, “pie in the sky” thinking, Randy. You are really shaking my confidence in your financial analysis if you think I’m going to assume I can get 8.1% on all of my assets.”
Hold on! This is why I picked 8.1% as a long-term return on your funds. In just two weeks I will have been retired for 18 years. When I retired I invested my retirement assets in a group of broadly diversified low-cost stock and bond mutual funds with Vanguard. For this nearly 18-year investment timeframe my annualized ROI is 8.1%. If you want to see how I did that you can click on this link and it will give you all the details.
However, this is part of the beauty of what I am explaining to you today. You don’t have to use 8.1% as your expected future rate of return. You can pick any rate of return that you feel comfortable with. If you think over the next 10 or 15 years you’ll earn 3% on a broadly diversified stock and bond investment mix to go with 3%. If you think 5% or 7% or whatever number is right for you then use that number.
The water will get choppy from here.
In the next several paragraphs I am going to tell you some things about finance that some folks might think is absolute heresy. These people might even want to throw the computer across the room or slam their phone into the floor because this will go against every financial grain in their body. With this in mind I’m going to ask you to take a deep breath, possibly a swig of whiskey, and just tell yourself, “At least listen to what Randy has to say and stay calm“.
I am going to tell you that you should not have your home 100% paid for. You should have a mortgage as large as you can possibly afford. OK, if you need it take another swig from the whiskey bottle. I can wait. If you are a fair-minded person you’ll hear me through.
I’m going to use my example of having 100,000 in each of my three buckets and earning a rate of return of 8.1%. In bucket #1 (my taxable IRA bucket) if I have $100,000 invested at 8.1% at the end of one year I’ll have 108,000 at the end of two years 116,000 and on and on and on.
In bucket #2 if I have $100,000 invested at 8.1% at the end of one year I’ll have 108,000 at the end of two years I have 116,000 and on and on and on.
Now we come to look inside bucket #3. Per our example, we know that we have $100,000 in bucket #3 which holds our home equity.
I’ll take a moment to define home equity. Home equity is determined by taking the value of your home and subtracting whatever mortgages you might have against your home. Let’s say your home is worth $300,000 and you have a $200,000 mortgage. Then your home equity is $100,000.
It is a 100% true and factual statement that the amount of home equity that you have or the amount of a home mortgage that you have has absolutely ZERO to do with the value of your home. Everyone agrees with that statement correct?
The value of your home will go up, down or sideways independently of how much home equity you have. This means that your existing home equity is actually earning you a 0% annualized rate of return.
By way of the above example, if your home increases in value from $300,000 to $400,000, and you have a $200,000 home mortgage your home-equity will increase from $100,000-$200,000.
However, the $100,000 home equity that you started with didn’t “earn” an additional $100,000. That $100,000 came from the real estate market. Your house would have gone up in value from $300,000 to $400,000 regardless of whether you had zero home equity (big mortgage) or $300,000 in home-equity (no mortgage) to begin with.
It is true that in most situations you can’t buy a home without putting a down payment against the purchase price. However, because home-equity doesn’t earn anything at all you want to put as little of a down payment into your property as you possibly can and finance the rest. I know for some of you a third shot of whiskey may be necessary at this point in time.
Of course, whatever mortgage you do get on a property you need to have 100% capability of servicing it on a monthly basis for the entire term of the mortgage. As with every example as regards borrowing you should never get a loan where you can’t afford to make the payments. We’re clear on this right?
This is not a one-trick pony.
This theory about financing as much of your home value as you can also apply to automobiles too. I’m going to give you a real-life personal example that I initiated in December 2019 only six months ago. I’m hoping that when you see how I have been successful with these ideas you will come to believe you can be just as successful or more.
Before I give you the details I’m going to tell you that I will try to share an Excel spreadsheet that you can use to input your own numbers. I’m not sure I can attach it in this format. If I can’t and you want to use it send me a private email and I’ll send it to you.
Please note that when you see this spreadsheet it is already set up for MY car buying experience. However, you can customize the spreadsheet to fit your own situation. Just change the inputs (they are all in bold red font) with your personal information. This will work for both car and home loans. This is a financial spreadsheet.
A few months ago I bought a 2020 Tesla Model X automobile. I financed my car purchase with a $100,000 car loan. Yep, this means the car cost more than $100,000. The first car I ever bought was a 1964 Ford Falcon for $700! For my Tesla purchase a local credit union financed the loan at 1.99% over a 72-month or six-year loan term. Let’s just call that loan a 2% loan.
In my world, I’m planning to earn 8.1% on the funds that I invest. I don’t have to make that return but because I have earned that return for nearly 18 years I might as well use that number. I don’t have to earn 8.1% in order to be a happy camper but I will be a happier camper if I do get that return.
Thank you EECU!
Rather than take money out of my buckets #1 or #2 I wanted the bank to pay for my car. They did just that. The Educational Employees Credit Union up in Fresno sent a check for 100 grand over to Tesla. Tesla cashed the check! I guess Tesla needed the money just like everyone who cashed a stimulus check.
I don’t want to pay the credit union back any faster than I have to. I want my funds in buckets #1 and #2 to keep cranking out 8.1% returns on the $100,000 I didn’t pay Tesla for as long as they can. I did sign a document telling the credit union I would give them $1,475 a month every month for six years.
While I’m running around in a pretty nice automobile my money is earning 8.1%. The credit union is only charging me 2%. Every month I try to scrounge up $1,475 to keep current on my car loan. The $100,000 I didn’t give Tesla is being decreased by the amount of my car payment every month for six years.
So, exactly how much money would I have in my investment account if I started with $100,000 and earned 8.1% and gave the credit union $1,475 a month for six years? I thought you might ask that question. That being the case the Excel spreadsheet will help you out with the answer.
Just in case you don’t work with Excel spreadsheets or are impatient or both this is what the spreadsheet would tell you.
If I earn 8.1% on the funds ($100,000) I am investing that I didn’t give to Tesla I will still have $26,145 in my investment account in six years. What if I had paid Tesla $100,000 out of my own funds on day one of the entire proposition? At the end of six years, I would have zero dollars in my investment account. See the difference? It’s a big friggin’ difference!
Of course, this assumes the buyer already has $100,000 and could pay cash for the new car if they wanted. Not everyone has $100,000 for this purpose. I told you these strategies would not work for everyone. However, if you don’t have 100 grand you might want to keep reading so that one day when you have read and understood and more importantly implemented these ideas, you WILL have $100,000 when you need it.
I know that some of you are still pretty skeptical that you could earn 8.1% on your funds even though I’ve done it for a full 18-year timeframe. For those folks who think they are going to earn just a little bit less I can tell you what your account would be worth at the end of six years with lower investment returns. The table below lists the amount of money you would have in your investment account in my new car buying example based upon different rates of return.
7% – $20,498
6% – $15,5 71
5% – $11,349
4% – $7,271
3% – 3,495
2% – breakeven
O.K., I don’t expect everyone to run out and get a $100,000 car loan. Maybe you won’t earn 8.1% on your stock and bond investments. However, you just need to understand the main point here. It is this.
If you can earn an investment rate of return that is greater than what the interest rate on a loan is you would never want to pay off a loan early. If I can earn 8.1% why would I take money out of an account doing that and give it to someone so I could save a 2% interest rate on my loan? I wouldn’t.
I used the above example regarding a car loan because I thought it was pretty simple. However, the same line of thinking applies to home loans.
I did it. You can too.
Just this week we signed on the dotted line for a 10-year “interest-only” loan with an interest rate of 2.75%. We have owned about 10 homes in our lives. We have had probably 25 mortgages on all of those homes. With all of that experience, I have never gotten a home loan rate as low as 2.75%.
I told you that I want to have as little home equity in my home as I possibly can. I want to have as big of a mortgage as I possibly can afford.
You may want to down your fifth shot of whiskey to understand and agree with my next point. Some folks who haven’t been drinking the whiskey during this reading might be stuck on this point. It goes something like this. “If I had a mortgage and I couldn’t pay the mortgage on a monthly basis I might lose my home”. If you are thinking that you are totally misunderstanding the point I am making. Of course, I wouldn’t recommend you run out and get a home mortgage with a loan so strong that you couldn’t pay it.
When I say get a mortgage loan as large as the bank will give you it goes without saying that I expect you to be able to pay the mortgage every month. The bank is with me on this idea as well. They are going to go out of their way not to give you a mortgage that they don’t think you can pay for.
The next thing I’m going to tell you is to run away from a principal and interest mortgage as fast as you can. This is called a “fully amortized” loan. It means that if you keep paying and paying at the end of the loan term you will have the loan paid off. Bad idea!
You need to get an interest-only mortgage. I’ll bet there are very few people reading this that have ever had an interest-only mortgage. I’ve had interest-only mortgage now for years.
In the example that we’ve been using above you have a home worth $300,000. If you can I want you to get a $250,000 mortgage. However, I want you to get the right kind of $250,000 loan. The monthly payment on a 15-year fixed rate fully amortized (paying principal and interest) loan with a 3% interest rate would be $1,726 per month. Don’t get this kind of loan!
If you are now thinking, “Randy, you must be smoking something. Where and how am I going to get a 3% mortgage?” Folks, if I can do it you can do it. I have not earned a single dime of work income in 18 years. I just got a jumbo loan for 2.75%. I did it during the COVID-19 pandemic. You will never get much done if you think you can’t.
Take a swig.
The numbers above are for a 15-year fixed rate principal and interest fully amortized loan. At the end of the 15 years, your mortgage balance would be fully paid off. Having the mortgage fully paid off is a good idea right? WRONG! The last thing you want to do is pay off your mortgage. Paying off your mortgage isn’t even the last thing you want to do. You never want to pay off your mortgage. After you die the mortgage can be paid off when your heirs sell your home. Your heirs will need to sell your home when you die regardless of whether you have a mortgage or not.
Remember the car loan example? Now with the home loan example, you are earning 8.1% on your assets and you’re borrowing money via your home loan at 3%. You do not want to take any money out of a bucket that is earning 8.1% so you can avoid incurring a 3% loan charge. Understood?
So if you went out and purchased a $300,000 home you would have a decision to make. Option #1. I pay $300,000 in cash and have no mortgage. Option #2 I pay $50,000 as a down payment and invest the $250,000 I have remaining. I hope that you were on board with going with the second option!
If you get an interest-only loan on a mortgage amount of 250,000 at an interest rate of 3% your monthly payments are going to be $625 a month. Remember the monthly payment on that same $250,000 loan is $1,726/month with a principal and interest loan.
In my experience, the maximum loan term you can get on an interest-only loan is 10 years. There are shorter terms. You will want to get the very longest interest-only term that you can.
How much would your $250,000 earn that you didn’t use to purchase your $300,000 home after 10 years if you invested it at 8.1% and made a monthly payment interest only of 3% or $625 a month? The answer to this question is pretty key to why you will want to do what I am recommending. Take another shot of whiskey please you’re going to be smiling after you read the next paragraph.
It’s smile time.
Here’s what happens if you take your $250,000 (that you didn’t use to pay for your house) and invested in at 8.1%. Remember you would be making a monthly payment of $625 for ten years. At the end of your 10-year interest-only loan your account would be worth $445,468. You would have almost $200,000 more money in your account if you followed my strategy than if you paid cash for your home and had no mortgage whatsoever.
Again this strategy assumes you already have $250,000 sitting in bucket #1 or bucket #2. I realize not everyone is in that position. Keep earning and keep investing and someday you will be. For those that do have this kind of money don’t use it to lower a 3% loan payment. Use that money to earn investment rates of return.
It all comes down to being able to invest your money over the long term, not two months or six months, at a rate that is higher than the cost of your borrowing. Yes, the stock and bond market has been known to go down for a year or two but very rarely, almost never, has it gone down and stayed down for a period of 10 years.
Now I know at this point people have all kinds of questions and concerns. I’m sure when I finish with this I’ll get several messages from folks who can tell me exactly what those concerns are.
In the above example, when you get a $250,000 mortgage at the end of 10 years you’re going to have $200,000 more than if you had paid for the house in cash. What would you do with nearly $200,000?
You can spend the $200,000 on yourself. You could give a little bit more to charity now rather than much later on when you leave this world. You could give some of that extra money to your family now rather than 10, 20 or 30 years down the road when you pass away. Remember, you can’t spend the money or give it away AND earn investment returns. I’ve got some good ideas but they are not capable of letting you have your cake and eat it too.
What I’m talking about here is creating a way to get at your home equity now. As I told you much earlier your home equity doesn’t earn any rate of return whatsoever. Your down payment, which should be a small as possible, does get you into the house but you don’t need to put any more money into the house than the most minimum down payment you can get away with.
It doesn’t matter how much money you have in each of the three buckets that I have described. With everything else being equal do you want your funds to grow as much as they possibly can? Who wouldn’t want that? Do you want to have the chance to enjoy some of those funds (that are tied up in home equity) now? Would you like to give some of those home equity funds to your favorite charity or family members now or ten or twenty years from now?
What about this situation?
Now let’s talk about another situation which quite a few people reading this might encounter. You already own a home. It either has a mortgage on it or it doesn’t. How are you going to get at your own home equity? The banks don’t make it easy for a “cash-out” refinancing.
In our example, you have a $300,000 home. If you have a mortgage you were going to want to refinance that mortgage at an interest rate that is lower than what you currently have. You are also going to want to get a mortgage as large as you possibly can.
If I can get a loan rate on a jumbo mortgage of 2.75% you can get a loan rate on a smaller mortgage at 3% or so. Of course, everything I’m talking about here assumes a stellar credit rating. If you don’t have a stellar credit rating you need to get one and that might take some time. It pays to pay your bills on time.
Are you an oldster? Don’t miss this opportunity.
Here’s another really good idea. This is for my more experienced readers. Some folks call these people “oldsters or geezers or seniors”. These “oldsters,” if you will, retired from the rat race because they didn’t need to work for money ever again. Good for them! They don’t have any income but they likely have some decent savings.
Some might think that without any income they couldn’t qualify for a home loan. Wrong!! Absolutely wrong!! People who are retired, and older, and who have no income but who have savings can get a home loan based upon having their assets annuitized. What the heck did he say?
Here’s how that works. I’ll just pull some numbers out of the air. Let’s say someone has no work income but one million dollars in the bank. They are 70 years old and they would like to get a $250,000 loan. The bank will look at your age, your assets and decide if they think based upon those numbers you could handle a $250,000 monthly loan payment. The older you are the better the numbers work in your favor. Very few people know much about this kind of home loan qualification. Some would think this couldn’t be done. I have experience by doing exactly what I am describing in this example. I did it this week!
Let’s try to summarize just a bit here. Your money is in three buckets. If you’re still working you use the income from your job to pay your living expenses. Anything left over goes into one of your three buckets. If you are working and you have a principal and interest loan you are already moving some of your work income, via principal reduction, into the home equity bucket. That’s not necessarily a good idea.
Do you own your own bowling shoes?
Maybe you’ll win the lottery or someone will leave you quite a bit of money from their estate. You do know that winning the lottery is just about as easy whether you buy a ticket or not right? Here’s something that maybe you didn’t know. In order to win the lottery, you have to own your own bowling shoes. I don’t make this stuff up.
Let’s say that you don’t win the lottery or inherit very much money. Whatever money you do earn needs to first cover your expenses. Anything leftover, and you better make sure some of your income is left over, needs to go to work for you so that when you get to be at retirement age you can live comfortably.
I know that when I say the very last thing a financially responsible person should do is pay off their mortgage the hair on the back of some folks stands straight up. Sorry. I’m not trying to make you uncomfortable. Sometimes doing things the right way feels uncomfortable at first. Remember, for the third or fourth time, I am not talking about getting a mortgage or any loan you cannot afford.
I’m assuming that a person is going to invest their funds responsibly in fully diversified low-cost asset allocations. I’m not talking about going to Vegas and putting your entire financial savings on red. There’s a lot that goes into doing this the right way. With a return of 8.1% over 18 years I think I’ve done it pretty well. That’s why you might want to take a close look at my “Financial Plan of a Lifetime” linked above.
I guess the bottom bottom line is don’t try to pay off people who charge you 3% when someone else will give you 8% in your investment account. Like I said you don’t have to use 8.1% as your rate of return. You can use another rate of return that you feel more comfortable with. As long as your investment ROI is greater than the cost of your loan you’ll be increasing your funds and not making them stagnate.
I also told you that some people will be too young and haven’t had a chance to accumulate the assets required to make these ideas worthwhile. Others may be older and the benefits of time may not be available to them. Others may not have enough money to implement these strategies. Still others may be independently wealthy and if they are I would ask why have you read this far?
Don’t be in this group.
And then there is one more group. They are just about the toughest to convince. They already think they’re doing, “OK”. Maybe they don’t think of themselves as financial wizards. Maybe, dare I say it, they are just lazy when it comes to money management. Maybe in this example, they bought a $300,000 house and paid cash for it and now that $300,000 is tied up and their home equity and is not earning a dime.
If they had put $50,000 down on their $300,000 home and invested the remaining $250,000 they would have nearly $450,000 in 10 years AFTER making monthly payments. At the end of those 10 years they could take their $450,000 and after paying taxes on the investment income have enough to pay off their entire loan, which they wouldn’t want to do of course. Oh yeah, they good pay off the $250,000 loan AND have money left over.
I practice what I preach.
I’ll close by saying this. I practice every one of the strategies that I am recommending to you. We have refinanced over and over. During a period of five years, I have been able to take out nearly THREE YEARS OF EXPENSES from my home equity. I’m talking about EVERY expense we have including mortgage payments, real estate taxes, car payments, vacations….everything. I took that money from home equity that wasn’t earning me a dime and paid for nearly three years of expenses.
Because I am retired I do not work for money. If I had not taken money from home equity I would have had to take three years of expenses from my IRA which has quietly been cranking out those 8.1% returns. If I hadn’t done the things I am recommending you do my net worth would be hundreds of thousands less.
So that’s pretty much it. I can’t wait to answer questions and hear your comments. I always appreciate a healthy dialogue on any of the subjects that I share.
I don’t know which of the people out of the folks who receive my newsletter will benefit from this. I know there will be some. When I hear about their success I’ll be smiling all the way home.
San Clemente, California
P.S. I couldn’t link my Excel file to this message. If you would like me to email it to you….just ask.