Investing 102

[Vegas69]

I don't know if it's been covered but I thought I'd post it either way.

Taking stock in your personal finances is key to investing. Where is the money going? I've had a spreadsheet with hard costs for quite some time but recently I broke it down and spend every penny before it comes through the door. The hardest part is the discretionary spending. Look at your bank statements over the last 6 months and it will make you sick. Allocate a specific monthly budget for misc. and blow money AFTER your hard cost including future expenditures like car maintenance, car replacement, home maintenance, etc.. I'm able to track my approximate monthly net worth gain from savings, retirement contributions, and principal reductions. This is a great way to keep yourself accountable and really dissect your finances. It's also a great way to lay out a path to financial freedom. You'll now know how much discretionary income you have left over. I'm increasing my retirement contributions and mortgage principal reductions with some of the excess. I'm commission so I use the average over a 6 month or 12 month period for my income. I've also combined Kelli and I's numbers so it's a WE deal.

Bottom line, a major key to investing is additional money to allocate to that avenue. Until you get a real grasp on your expenditures, you aren't maximizing your investments. I don't care if you have three nickels to rub together or if you are filthy rich. It's just as important.

[Code510]

Originally Posted by Vegas69

I don't know if it's been covered but I thought I'd post it either way.

Taking stock in your personal finances is key to investing. Where is the money going? I've had a spreadsheet with hard costs for quite some time but recently I broke it down and spend every penny before it comes through the door. The hardest part is the discretionary spending. Look at your bank statements over the last 6 months and it will make you sick. Allocate a specific monthly budget for misc. and blow money AFTER your hard cost including future expenditures like car maintenance, car replacement, home maintenance, etc.. I'm able to track my approximate monthly net worth gain from savings, retirement contributions, and principal reductions. This is a great way to keep yourself accountable and really dissect your finances. It's also a great way to lay out a path to financial freedom. You'll now know how much discretionary income you have left over. I'm increasing my retirement contributions and mortgage principal reductions with some of the excess. I'm commission so I use the average over a 6 month or 12 month period for my income. I've also combined Kelli and I's numbers so it's a WE deal.

Bottom line, a major key to investing is additional money to allocate to that avenue. Until you get a real grasp on your expenditures, you aren't maximizing your investments. I don't care if you have three nickels to rub together or if you are filthy rich. It's just as important.

Todd,

I always enjoy reading your posts, either here or in the Health threads. Always inspirational.



This year my life somewhat settled down for me. I have always been really good with money and finances and never in debt. Between school, a period between school and finding a job, getting married, moving, buying a house and a few other expenses, I had acquired more debt than I ever thought I would have. Again, I've always been smart financially, so my goal was always to pay off all my debt. This year things finally settled down for me and I was able to start knocking things off. I took the Dave Ramsey Total Money Makeover approach and knocked them off a list, smallest to largest. I'm over halfway through and it feels amazing. Luckily my wife is on the exact same track as myself. Every single day she goes over the finances, looks at where money is coming in and where its going out. This sucks for my car habit, but I don't complain. Its nice to see my debt going down and my play money going up. My goal is to be 100% debt free, my house and everything. I know that's a few years off, but I still don't see any reason I can't make that happen over the next 15 years instead of 30.

[Tony_SS]

Getting out of debt is very liberating. However, I believe in 'good debt'. For example, You have $25k and need to buy a car. Are you going to use your liquid cash when you can use the bank's money at 1.9%? This is probably the only example of good debt that I can think of. It seems that even your mortgage is not an investment anymore. Property values in our county fell 4% last year! One of the biggest drops ever. And to think there was a day when your own property was a good investment.

[sik68]

Originally Posted by Tony_SS

Getting out of debt is very liberating. However, I believe in 'good debt'. For example, You have $25k and need to buy a car. Are you going to use your liquid cash when you can use the bank's money at 1.9%? This is probably the only example of good debt that I can think of. It seems that even your mortgage is not an investment anymore. Property values in our county fell 4% last year! One of the biggest drops ever. And to think there was a day when your own property was a good investment.

In my eyes, that 1.9% financing cost gets added to the depreciation cost of the car as well. If you finance a car at 1.9% that depreciates at 10%, your $25k needs to make like 11.9% per year just to keep up (this is not official math, just for demonstration). So for a depreciating asset, it may be best pay cash.

[carbuff]

Originally Posted by sik68

In my eyes, that 1.9% financing cost gets added to the depreciation cost of the car as well. If you finance a car at 1.9% that depreciates at 10%, your $25k needs to make like 11.9% per year just to keep up (this is not official math, just for demonstration). So for a depreciating asset, it may be best pay cash.

You're going to have to educate me on this...

If I choose to keep the car forever, then how does the depreciation factor into the investment equation?

But even if I don't, let's say I sell it in 3 years, I don't get any more or less money for the car at that point (all else being equal) whether I financed it or not.

But if I invested the $25k for those 3 years, then I've made money on that, and hopefully more than the 1.9% that the money cost me. If I put all $25k into the car, I have no possibility to make any return on that $25k.

So how does the depreciation factor into how you want to pay for it?

[sik68]

Originally Posted by carbuff

You're going to have to educate me on this...

If I choose to keep the car forever, then how does the depreciation factor into the investment equation?

But even if I don't, let's say I sell it in 3 years, I don't get any more or less money for the car at that point (all else being equal) whether I financed it or not.

Don't mistake me for a pro! I should say that it isn't so much how much it's depreciating, but that it does depreciate is why I (philosophically) hesitate to finance. You're borrowing money that loses value.

And more specifically depreciation rate does matter if/when you decide to sell your car while owing more than it's worth.

Originally Posted by carbuff

But if I invested the $25k for those 3 years, then I've made money on that, and hopefully more than the 1.9% that the money cost me. If I put all $25k into the car, I have no possibility to make any return on that $25k.

So how does the depreciation factor into how you want to pay for it?

I am assuming that you have a monthly income stream besides this $25k. So with the income stream, you can either

1) Finance the car/Invest $25k for 3 years.
$714 per month pays down the loan in 36 months. Total payments = $25,704
Earn 5% per year on $25k. Account Balance = $28,941
Car value = $18225
Balance Sheet: 28941 + 18225 = $47166

2) Cash for the Car/Invest Mo. Payment for 3 years
$714 invested per month at 5%/year for 36 months. Account Balance = $27785
Car value = $18225
Balance Sheet: 27785 + 18225 = $46010

So in this case, yes if you pay down the loan in 3 years, you will come out ahead under option 1). But you can also see that if you play with the rates, duration etc. that you can lose money by financing a car vs paying cash. When rates are low and the time duration is short, the results are no fun and don't explain much. Drag out the loan longer and that's when you feel it in your pocketbook.

[Vegas69]

Originally Posted by Code510

Todd,

I always enjoy reading your posts, either here or in the Health threads. Always inspirational.



This year my life somewhat settled down for me. I have always been really good with money and finances and never in debt. Between school, a period between school and finding a job, getting married, moving, buying a house and a few other expenses, I had acquired more debt than I ever thought I would have. Again, I've always been smart financially, so my goal was always to pay off all my debt. This year things finally settled down for me and I was able to start knocking things off. I took the Dave Ramsey Total Money Makeover approach and knocked them off a list, smallest to largest. I'm over halfway through and it feels amazing. Luckily my wife is on the exact same track as myself. Every single day she goes over the finances, looks at where money is coming in and where its going out. This sucks for my car habit, but I don't complain. Its nice to see my debt going down and my play money going up. My goal is to be 100% debt free, my house and everything. I know that's a few years off, but I still don't see any reason I can't make that happen over the next 15 years instead of 30.

Thanks for the kind words.

I'm one of Dave's ElP's. I like his philosophy on getting debt free and recently read the total money makeover.

Personally, I'll take debt free all day including Sunday. The turtle wins the race.

[GregWeld]

Sorry Steven ---- Even I will finance a car at 1.9% -- or even 2.9%....


The very reason you state -- depreciation -- is the reason why... and the #1 reason is -- it takes way more effort to gather up the 25K ---- than it does to make the payment from monthly cash flow. The 25K should be MAKING you money -- and capital -- so in 4 years you should have 35K.... Where as the 25K car is going down in value -- so in 4 years it's only worth half.

Think of CHEAP car payments as rental... you're just paying for the amount you used along the way.

I just bought a Land Rover for our Idaho dump.... they're relatively expensive... I was trading (getting rid of) my pick up -- 2oK trade in -- and the gal says to me -- you sure you don't want to make payments --- HELL NO! I don't make payments..... But! She says... It's only 1.9% interest rate. I said -- how much down do I need then? She says -- just your pick up....

OKAY -- I wrote a check for ZERO and left with a new car... Payment? $1200 a month. Cash saved? 70+ Grand.... the 70K makes 5%.... and should have a total return of maybe 20%....

Neither of these scenarios changes the depreciation. Either way - the auto depreciates. But if I'm making 5% and paying 1.9%.... then I'm ahead. And I have the cash too!


I could buy 5,800 shares of Annaly Capital Management (NLY) at $12 a share -- and get paid $9,000 a year in dividends. That covers most of my payment -- which by the way is a LOT of principal reduction and not much in actual interest cost! So in 4 years I'd pick up 36K in cash payments -- I would have the Land Rover paid for -- so if it's worth half --- it's worth say 35K..... So I'd have 70 in cash (that I didn't put out of pocket) -- I'd have received 36K in dividends - and I'd still own a truck worth 35K...


If I paid all cash -- I'd have 35K.


Does that make sense??


BY THE WAY ---- I didn't do any of the math in order for it to have any validity.... I was just writing to make a point. The numbers would have to all be worked out. But either way -- the POINT is made.

[Vegas69]

I'll make the argument that 95% of Americans with their financial position and knowledge are better off debt free than borrowing money and investing.

[GregWeld]

Originally Posted by Vegas69

I'll make the argument that 95% of Americans with their financial position and knowledge are better off debt free than borrowing money and investing.

May be.... but then again.... they're not the ones reading this thread. And we're trying to change that. It's like fat people are fat because they don't exercise and eat right....

Normal people don't know how to invest - or how to manage money. Doesn't mean they can't read and educate themselves and try to do better.