Wednesday, September 26, 2012

My Big 3

As an aficionado of learning I am generally not one to pass up a free opportunity to attend a workshop/seminar relating to personal finance. I feel that if I can learn one new thing that the event was worth my time. I also use it as an opportunity to compare and contrast my personal finance practices against the industry standards, which just about every time only reinforces that what I am doing will enable me to continue to grow my nest egg and to avoid standard practices like the plague.

In a recent workshop the presenter named three of the biggest expenses that we incur during our lifetimes that “most people” need credit for and a rare few pay cash for: Cars, kids’ College and Real Estate. I’d like to expand on each of the three.

Cars

Nothing drops in value quite like a car. A car is not an appreciating asset and is best described as a long term cost. So why on Earth do people finance new cars that, according to Consumer Reports, lose 70% of their value in the first four years of ownership? I have not owned a car for 9 years and rely on public transportation to get around. But when I do buy a car I will only buy used vehicles that are at least 10 years old and I will pay cash for the whole deal. No payments, no lease contract, no 0% APR while the car is losing 70% of its value, just peace of mind. And yes, whether the car is new or used it will eventually break down and need routine maintenance, so I will counter that by adding car maintenance/repair line items to my monthly budget. And when the time comes to buy another car, I’ll simply use a sinking fund to replace the cost of the vehicle that died. Car payments will not be a part of my life.

Kids’ College

I elaborated on this topic before on my kids’ college savings plan. But I’ll reiterate with a reader’s digest version. I currently do not have children but have began saving for their college expenses. I plan to use an ESA and will max out the current $2,000 contribution limit every year from the kids’ age from 0 to 18. Since I can’t open an ESA because I have no children, I have started to set money aside every month to get ahead start on what will be cash contributions to the ESA. We plan to cut costs by having our kids attend community college and transfer as many credits as they can to a state college.

For those with little to no time left before college starts there’s a solution I have called work. In my current state of Illinois minimum wage is $8.25 an hour. If your child works 30 hours a week that will equate to $12,870 a year. The estimated annual cost for attending a local community college in my area, with the kid living with their parents is $6,112.  In earning an Associate’s degree the kid would earn $25,740 over two years and pay $12,224 in tuition, netting $13,516. By the way as of 2012 the federal tax rate on this income earner is 15% so you’re working college student could cover tuition and taxes all by his or her self!

Now if the kid plans to earn a B.A. I would advise going to an in state public college. In my corner of the world, in tuition and fees that comes out to about $14,000 a year if the kid goes full-time. I recommend the kid goes to class part-time, work full-time and cash flow their own way to a B.A. degree. At the end of it your kid will graduate debt free along with years of working experience. College debt is not a way of life.

Real Estate

Here it is, the big enchilada. My wife and I plan to pay cash for our first home. To accomplish this we plan to move to a small market area (i.e. Nashville, Charleston, etc.) and buy a distressed property at a fraction of the appraised value. Yes it will likely need some TLC but without a rent or mortgage payment this task should be more than feasible J! Plus by buying at the bottom of the market range we expect to get great appreciation over the long term.

Consequently I believe that the mortgage interest deduction is one of the biggest scams that exists in our country. For example, if my wife and I paid $10,000 in interest on a home mortgage we would be able to deduct $10,000 from our gross income. We are currently in the 25% tax bracket. If the same home were paid for with no mortgage than instead of sending $10,000 in interest to a bank we would be taxed on that 10k at 25%. Between the two I would prefer to pay $2,500 to the government than $10,000 to a bank.

In summarization I will not use debt for the big 3 purchases in life: real estate, cars and college.

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