How I Will Be Rich

This is the final step in my ongoing theme “The 8 Step Process to Being Rich“.

Living in San Diego, with what my current income is… That’s about what I can afford.

In my post, “Buying Vs Renting: Is Home Ownership Really Worth It“, I described why I’m pretty much better off renting at this time in my life and why it just makes more financial sense. That’s not to say I don’t ever want to buy a home. If anyone’s ever read my very first post one this site, I describe my goals in life. One of my all time goals in life is to make money in Real Estate. I would love to own a few homes, have renters, and make thousands of passive income dollars a month collecting rent. San Diego, however, is one of the top 5 most expensive places to live in the country. With my current salary, I could never afford a mortgage. I’d be living in a place like that picture above. In order to afford a house, I need to keep on course with my investments (Roth IRA and Discretionary), adopt a more frugal lifestyle, make some money off of blogging, sell the junk I don’t need or want anymore and start my own business. If I can stay the path and achieve the goals I’ve set for myself, I can eventually buy a home and start making a whole new set of real estate themed goals.

I don’t own a house but I have done a lot of research. Some people may not value my advice as much as someone who actually owns a house but I’ll throw it out there anyway.

• When finding a mortgage, try to get the shortest term possible. If financially possible, get a 15 year mortgage. You will pay so much less in interest over the lifetime of the mortgage.
• Have all your debts paid off before attempting to get a mortgage. You’ll have much better options available to you if you have a high credit score and will get approved for much more with no debt.
• Pay the money for the proper inspections before the purchase. You don’t want to end up moving in to a money pit.
• It’s better to find the worst house in the best neighborhood than the best house in the worst neighborhood. You’ve heard that the three most important factors in purchasing a home are location, location, location. Well I believe that to be true. I’d rather fix up a home in a nice neighborhood to bring up the value than to have a nice home in a crappy neighborhood where the value may never increase at the same rate.
• Steer clear of no money down mortgages, 40-50 year mortgages, interest only mortgages and adjustable rate mortgages. Right now, the reason there are so many foreclosures is that people have funky mortgages that they can no longer afford due to increasing interest rates. A fixed mortgage offers piece of mind that your mortgage will never increase.
• And finally, don’t buy a home you can’t afford. This sort of goes hand in hand with the last piece of advice. People try to buy homes that are way out of their price range by using these exotic mortgages. Now people are starting to realize that maybe they should have bought a little less house with a little bit more of a sensible mortgage.

Those are my tips and that’s my 8 Step Process to being rich. I hope everyone has enjoyed the little knowledge that I’ve had to share and I hope to re-evaluate my goals and see the progress I’ve made a year from now.

-M

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This site is called “How I Will Be Rich”. I’ve decided that now might be a good time to kind of explain what I hope to accomplish. I may add more to this later but for now, here are 8 steps that I plan on taking. The point of this post is two-fold. For starters, I am setting goals for myself that I plan to achieve over the course of the next few years. Second, I am explaining to others what steps I plan to take so that others may also give my method a shot.I will give you my list of steps that I will take and then I will elaborate on them in future blog posts and continue to post my progress.Here are my steps:

1. Get a job that you don’t hate.
   I’m pretty much at this point right now. There are days that are stressful and I just want punch a wall and go home and cry. (I never do though… At least not the wall punching thing). That’s pretty much to be said with any job though. I’ve never actually known anyone to say that they absolutely love their job and there is never any stress involved but for the most part, you’ve got to be doing something that does not make you miserable. I’m making descent money and for the most part I’m happy. Consider this goal accomplished…
2. Open a Roth IRA and invest the maximum each year.
   I’ve already explained why there is no reason not to have a Roth IRA and then Joe elaborated on the topic. Max this out every year. Invest in index funds that have been proven to be consistent gainers. If you absolutely need to, you are allowed to pull your contributions out and you can even pull some capital gains out if you are using it for a house, school or an emergency. I just recently set up my Roth but I haven’t quite contributed the max yet for this year… I’m well on my way with this one…
3. Open a discretionary investment account.
   You can only put so much money in to a Roth IRA each year. I love investing and I think it’s a good idea to have a discretionary account in which you can add and pull money from as you please. I like to use this account for trading individual stocks. I wrote an article on my investing technique. Some people might say that it’s trying to time the market but, so far, for me, it’s been a great way to tell when to get in to a stock. From then on out, I tend to hold for a while. I personally have a Scottrade account but I think it’s about to go bye bye. I’m currently looking in to setting up an account at Zecco.com because they offer free trades. Scottrade is too slow and it seems to be sort of difficult to pull my money from the brokerage. Besides, how can you beat $0 trades? I’m well under way with this goal as well.
4. Adopt a more frugal lifestyle.
   Some people get frugal and cheap confused. Ramit over at “I Will Teach You to Be Rich” describes cheap people as people who care about the cost of something while frugal people are people who care about the value of something. Buy what you need and shop smart. I am working on this one.
5. Start a blog and take steps to monetize.
   I guess my ultimate goal with the whole blogging thing is to make enough money with it that it covers one of my monthly bills. It would be so nice if I could some day say that my rent payment was covered by my blog. I still think I’m a little off from that goal though. Does anybody know of a place I can rent for $10 a month?
6. De-clutter my life and sell what might be valuable.
   I read a post over at Get Rich Slowly called “The Frugal Collector: 10 Ways to Curb the Habit“. It really made me think about how much I have and how much I can probably get rid of. When I was younger I used to collect comic books. I have hundreds and hundreds. Some are probably worth something too. I’ve decided that one of these weekends, I’m just going to go through all my collections and see if anything is of any value and try to sell whatever I don’t want. I have comic books, dvds, cds, books, computer software and various little gadgets that I probably haven’t touched in years. I can probably make a little bit of money with these and, if I’m lucky, pay down my truck a little. I’m done with hording things. I’m going to stop buying the things that aren’t necessary and started getting rid of the things I don’t need.
7. Start my own business.
   I have so many ideas for different businesses some of them brick and mortar some of them online. I hope to get at least one of them started within the next couple months. This will most likely be the online business because it requires much less start up capital. I just want to have a job where I can set my own schedule and my wages are only determined by what I can do. Then when I’m ready to retire, I can sell all the businesses I’ve created. If you’ve ever read The E-Myth, Michael Gerber explains that when owning a businesses, always have the mindset that you are building it to sell it. Can’t quite say that I’ve accomplished this goal, but I will…
8. Buy a home.
   Finally, I want to own a home. This is not my first goal though. I want to achieve all my other goals first. I want to make sure that when I purchase a home, I can do it comfortably. I know that when my parents bought their first home they had no idea how they were going to pay for it. I want to have a plan and I want all my debts to be paid off. I want to know that my blog or my online business is covering my mortgage payment every month. Mark this goal as still pretty far in the future…

Those are my steps. I’m constantly reading blogs and new books so I may have to add new steps and new good ideas. But as of now, that is my financial goal set. Feel free to comment.

-M

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I have been in the market to by a house for quite some time now. My ultimate goal has been to purchase a home before the age of 25 (I’m 24 now). Lately, after spending time reading all the various financial blogs, I’m starting to rethink my goal. I’ve been reading a lot about the benefits of renting over home ownership. I’ve always been told that when renting, “you’re throwing your money away.” People believe this because every month you’re spending money on rent and you will never get that money back. At least with a home you are building equity. I’ve decided I need to take a closer look at the actual benefits of renting over purchasing a home.

Owning is not what it is cracked up to be. There are many ways that you are actually throwing away your money when you buy a home as well. When purchasing a house, you have closing costs that will never be recouped. Closing costs are things like attorney’s fees, application fees, appraisal fees and all the other various fees that you are required to pay to the people that help make the transaction. Along with your mortgage you will have interest payments, property taxes and home owner’s insurance that will never be recouped. In fact, for about the first 5 years about 80% of your monthly mortgage payment is going to go towards interest. It’s not even until about years 17 or 18 that you are even paying 50% towards the principle of the house. Not to mention you will be paying for whatever maintenance needs to be done on the house.

Housing rates had been appreciating rapidly over the past 10 years or so. The market has taken a dip as of lately but the market is cyclical and it will eventually appreciate again. Housing appreciates at a rate of about 6% per year. You are paying more money for a mortgage payment but at the same time you are building equity. You are putting more money in to a mortgage than a rent payment but it will appreciate and you can pull your money out of it a later date. On the other hand, if you were to rent and save money on that mortgage payment, you can put some of the savings in to an index fund that appreciates annually at about 10% per year.

I found a nifty little calculator over at the New York Times website that shows a graph of buying vs. renting. The first graph shows a $350,000 mortgage vs. a $1,200 a month rent payment. It also figures a 5% rate of return on an investment if I was to rent and invest the difference. You can see that at about year 5 the cost of owning a home becomes less than the cost of renting. The second graph has the same rent and mortgage figures plugged in but figures a 10% rate of return on my investments if I was to rent and invest the difference. This is now a much different story. You can see that over the lifetime of the loan, it never becomes more beneficial to own. It comes close but the effects of compounding interest at 10% over 30 years just adds up to way too much money to make the mortgage worthwhile. This calculator does figure for inflation and a 4% annual increase in rent.

There are a couple of factors that these calculators can not figure in. That is the satisfaction gained from owning your own home and the increased standard of living that comes along with being able to do whatever you want to your house. Another large benefit to homeownership is that you have the ability to fix your payment. You know that every year you will make the same monthly payment. This is a huge benefit. From a strictly financial point of view, I am leaning towards the conclusion that, if you are committed to making the right, responsible investments with the saved money, renting is more sound than owning. I know this is not the popular belief and ownership is the American dream but I do believe renting is not such a bad idea after all.

I love hearing feedback from readers and I know this tends to be a pretty controversial subject. If you have strong feelings on this topic and strongly agree or disagree, please explain. I still have a dream to one day own a home but at this time in my life, I’m just not sure that it makes since.

I’ve found some other interesting articles on the subject. Such as “Renting Vs. Buying: The Realities of Home-Ownership” For an article that agrees with my point of view and “Renting Vs. Buying: Which is Better” For an opposing viewpoint.

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I updated some little things about the site. Hopefully people will like them. I added a “Top Commentators” box over to the right of this page. The idea behind this is that if you comment a lot, your name (and your blog link) will stay in that list. I want to encourage interaction here and get some discussion going. Our goal with the creation of this site was to post our thoughts on things and get feedback, criticisms and ideas on what we have to say. We want to learn from this site as well as teach. Another thing that I did was I added a “Subscribe to Comments” box in the comments section. This way people can comment and watch the discussion from that point on. Once again, this is an effort to encourage more discussion.

Lets get some interaction going right now. Here is my question: For the past year and a half or so I’ve been looking in to purchasing a home. I will be a first time home buyer and I have been doing an immense amount of research. Lately I’ve been reading a lot of arguments discussing the pros and cons of renting vs home ownership. This has really got me thinking about what the best option for me is.

The real estate market is down right now but is it down enough to justify the increased price of a mortgage, maintenance, taxes, etc.? What do you guys think? I want to hear your thoughts on homeownership vs renting.

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