Inflation: devastating or full of opportunity. Which do you want?

May 25, 2012

Banks lending again? What does that mean for you and your money? More than you may think.

Did you notice there are some banks that have begun to lift their tight lending requirements? For example, Key Bank here in Denver is now offering 100% financing again. So, what’s the big deal? Before we take a look at what this means, let’s ask a few questions:

  • Have there been any bad times before in the history of the world financially? Of course.
  • During those bad times, even the Great Depression, were there any people who made money? Of course.
  • Was it the people who planned and prepared or people who just let stuff happen to them that were most successful? Obviously those who planned.
  • So which one do you want to be and when do you want to get started?
  • If you could truly put yourself in a position to take advantage of the opportunities you have to earn your family’s financial independence even in bad times, then shouldn’t you be thinking the current economic situation is an opportunity and not a “bad thing”?

Inflation is going to do some real damage to our money if we’re not prepared. Stop and think about this, if you had $1,000,000 and you lost $200,000, you’re down to $800k and that money just stays the same. If we have 7% inflation that $800k is only going to buy $400k of retirement, or $400,000 of goods and services a decade from now.

  • What’s your strategy to make sure that you don’t get hurt by this inflation?
  • More importantly, are there any strategies available that would help you actually take advantage of that inflation to your benefit?

There are strategies that have been implemented for over a century.

Now, let’s get back to the banks…like what Key Bank is doing. The banking system received an unbelievable amount of [printed] money (inflation Step #1) that our government created when TARP was passed. We’ve discussed before but do you remember Step #2 that is required for inflation to take hold? Step #2, the printed money has to be circulated. You starting to put this together?

  • Did the banks circulate those monies initially? No they didn’t, at least not very much of it.
  • Even though they didn’t circulate a lot have we experienced some inflation because of those funds? Absolutely, all you have to do is go buy a gallon of milk today to see it first-hand.

Here’s the bigger problem, banks are beginning to circulate more of that money (i.e. Key Bank offering 100% financing again!). This will have a huge impact over the course of the next decade. Huge!

  • What happens to interest rates when inflation begins to roar? They go up. Remember the early 80’s after the inflationary pressures from the late 70’s?
Historical rates of great opportunity
If you don’t remember what interest rates were at that time then take a look at this graph. Opportunity? You better believe it but only if you were in a position to take advantage of it. What if all your money was in your house (equity)? Look at this graph. In 1982 would you have borrowed money at 16.08% in order to earn 15.12% for one year? Of course not.

There are always those who plan and those who do not. Over the next decade and beyond, you have the opportunity to take advantage of these opportunities but it requires one very important characteristic.

  • You MUST have access to capital, more specifically, guaranteed access to capital no matter the situation with the ability to collateralize those funds and earn a spread in a GUARANTEED and PREDICTABLE environment!
If inflation was raging right now and guaranteed rates, like CDs, were flying high, are you in a position to take advantage of it or are you currently positioned to be hurt by it? It’s a choice, not a matter of chance.
Since I’m on a roll, here’s some more questions for you
I love questions so here are a few more; however, these questions are designed for you to ask other advisors who want to invest your money. Those advisors MUST be able to provide an answer for each one these and we challenge you to ask them because, after all, it’s YOUR money and YOUR future.
  • What are you doing to do to make sure I don’t lose any money? What’s your strategy?
  • If I do lose, what’s your strategy to make back any money lost to get me back ahead of the game? What are your recommendations?
  • What impact are taxes going to have on all of this and could taxes prevent me from having a successful outcome?
  • Do you believe taxes will be higher in the future? If so, please answer the third bullet point again.
  • What strategy is there in place to keep taxes off my back going forward?
  • If you are recommending my money be put in a taxable position then please explain to me the specific reason why (especially if you believe taxes will be higher in the future) and the exit strategy to minimize those taxes in the future.
  • How can I take advantage of the pressures caused by inflation with your strategy?
  • What impact will inflation have on your strategy?
  • What is the impact of fees over time to the performance of your strategy? How can I get rid of or minimize those fees?

I hope it’s obvious by now but we have an answer, and a specific strategy, for each and every one of those questions.

You better be able to address each and every one of those. If not, then you’ll simply be one of many who didn’t plan…again, it’s not a matter of chance but instead a matter of choice.

We’d be happy to show you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Further NONSENSE by Dave Ramsey

December 6, 2010

Taking a brief break on the mortgage posts…30 year vs 15 year to follow very soon.

I’d like to begin with a quote by Dave Ramsey and his Financial Peace book (full reference below) that is so unbelievably wrong it needs to be ripped out.  Actually, Dave has proven perfectly with this quote why he holds NO financial licenses issued by any state because if he did then the governing authorities of those licenses would have to shut him down for major compliance violations.

A Quote From Dave Ramsey


“A Government Gift?”

“Billionaire J. Paul Getty says that one of the keys to building wealth is not to pay taxes on money until you use it.  So you shouldn’t pay taxes on retirement dollars until you use them.  You should always invest long term with pretax dollars.  What if I gave you $2,000 each year and these were the conditions: You can earn all the interest you want on that $2,000 – and keep it – but you have to give the $2,000 for each year back to me when you are seventy years old.  If you were thirty-five years old and we did that for thirty-five years at 12 percent, you would have $863,326.  You do have to give me back $2,000 x 35 years or $70,000, but you still net $793,326.  If you save $6,700 per year in a pretax investment like a 401(k) or SEPP (Simplified Employee Pension Plan), the above scenario would have occurred.  If you bring that $6,700 per year home, it turns into $4,700 by the time Uncle Congress gets his greedy cut, so $2,000 of that money is Uncle Congress’s – which, if we invest pretax, we get to keep for free all those years.  What a deal!

I have heard the ridiculous pitch that it is better to pay your taxes today because tax rates may be higher by the time you get to retirement.  The only people who believe that argument do not understand the power of the present value of dollars or are life insurance salesmen.”

~(Dave Ramsey, Financial Peace Revisited, Penguin Group, page 154-155)

“Financial Idiots” – remember, that’s you


Boy if I could cuss this is where I’d do it.  What a……joke.

If you’ve read any of my previous posts you’ll remember the conversation I had with Dave’s right-hand-man (who I can’t name since he’s a friend).  I addressed this particular page in their book with him, and several other topics of equal concern, and he admitted that this was wrong.  I guess we’ll see if it’s printed correctly  next time around…I highly doubt it.  Remember what that friend said at the end of our conversation concerning Dave’s followers?  No?  Well let me refresh your memory.  He said this, “Kelly, you have to understand that 80% of our clients are financial idiots.

Unfortunately, it appears he’s right in this situation because you’d have to be a financial idiot to believe the above paragraph is accurate.  Honestly, I don’t understand why the SEC doesn’t require this to be corrected because it’s TOTALLY false.

Seriously, Are You That Gullible?


First, do you really believe the government only takes that which you put in?  Are you so gullible to believe that the government will allow you to contribute $2,000, pay no tax on that $2,000, let it grow, and then only pay them back the $2,000 when it’s time to take it out?  Unbelievable.  You see, in reality, the government gets to take as much as it wants of the full account balance.  How?  They, Uncle Sam, get to decide what tax bracket you’ll be in at the time of withdrawal.  The entire balance of $863,326 is at their mercy when it’s time for you to take it out.  You don’t get to decide!  You have no idea how much of your Qualified Plan (401k, SEPP, Traditional IRA, etc) is actually yours until that day comes.

Let’s say you happen to fall into a 30% tax bracket when you’re 70 years old.  Okay, so how much of your 401(k) is the government’s in Dave’s example above?  What’s 30% of $863,326?  It’s $258,997.80!  Not $70,000.  You see, you haven’t paid taxes on any of it yet.  You didn’t pay on the $2,000. You didn’t pay on the growth (tax deferred instead of taxable).  But now you’re withdrawing and the government gets their share.  The very fact that he, Dave Ramsey, claims you only have to pay back what you put in is utter stupidity and complete ignorance of how these financial instruments work but more importantly how the tax code works.

No Dave, There Is No Difference


Second, let’s address the pre-tax and post-tax issue.  Read this one slow: there is no difference mathematically between pre-tax and post-tax dollars when invested.  Dave would yell foul (he said above that “you should always use pre-tax dollars to invest long-term”).  Actually he’d step out of his Christian teachings and call me names like he does all the time on his radio show  – which really surprises me since the Bible tells us to call no one a fool…or an idiot for that matter.  Maybe he has a different Bible than mine.

When I say, and I’ve said it over and over, that Dave can be proven wrong with math not opinion…well, this is another perfect example.  Don’t believe me?  Let’s allow the math to decide for us.  I’ll even use his numbers from above.

If you invested $2,000 for 35 years and earned a 12% actual rate of return (remember, there’s a difference between average and actual rate of return) then your money would grow to $863,326.  If you were in a 30% tax bracket at that time, and took a lump sum,  you would have to pay the government $258,997.80 leaving you a balance of $604,328.20.

Now the “post-tax”:  If you took that same $2,000 but were taxed 30% on it when you brought it home then you’d have $1,400 to invest.  If you invested $1,400 each year for 35 years at an actual rate of return of 12%, guess how much you have at the end?  $604,328.20.  What?  How can that be Dave?  It’s math people.

A No-Calculator-Needed Example


How about a simpler example so you don’t have to pull out your calculator to determine if my math is right or not.  Let’s say that Brother A had $10,000 before tax to invest.  He put it in an investment product that delivered an actual rate of return of 7.2%.  In 10 years his money would double to $20,000 (Rule of 72).  At the end of the 10 years if his taxes were 30% then $6,000 (20,000 x .30) would go to the IRS and he’d have a balance of $14,000.  Congratulations, you followed Dave Ramsey’s advice and you apparently made the wise decision.

Let’s then say that Brother B also had $10,000 to invest but he decided to take the 30% tax hit at the beginning.  He’d have $7,000 left over after paying the IRS $3,000 (10,000 x .30).  Now, if he used the same investment account as Brother A and received a 7.2% actual return over the next 10 years then his account would also double.  What would his balance be at the end?  Pretty easy,  $7,000 x 2 = $14,000.

Pre-tax and Post-tax are the EXACT SAME if the variables are the same (i.e. investment return and taxation).  They are identical.  So what then becomes the primary consideration when choosing these types of accounts?  TAXATION!  It is the number one issue.  Dave, you said above that others who disagree with you “do not understand the power of the present value of dollars.” Uh, right.  Pure stupidity.  It has nothing do with that Mr. Ramsey. It has everything to do with MATH!  My 5th grade son could prove this point.

If you are not educating yourself about the economic and social conditions of our country and the impact they will have on your dollar then you better start.  These issues will be crucial when determining future taxation and it’s the taxation issue that has the biggest impact on your future dollars.  Please, please start reading.  The information exists.

You Never Avoid The Taxes Dave Ramsey


Again, what were the conditions in the above examples?  The conditions simply assumed a 30% tax bracket for both and the same actual rate of return.  Guess which option, pre-tax or post-tax, gets worse in an increasing tax environment?  Come on.  Pre-tax loses.  Dave’s example, and advice, gets worse in an increasing tax environment.  His quote at the end about those who  believe taxes will be higher are giving a “ridiculous pitch”, I wonder if he still feels that way.  I will say his book was published in 2003.  Are any of you really under the impression economically that we are in a decreasing or flattening tax environment?

Outside of all the various conditions that are pointing to higher taxes, what is it that determines your tax bracket anyway?  Your income.  How many of you have incorporated into your financial plan to be at the lowest income bracket once you retire?  I assume none of you.  Yet Dave continues to sound off that you will be in a lower tax bracket which completely counters the economic conditions and your own lifestyle desires.

Now I understand why they refer to you followers as idiots because you’d have to live in a hole to think your taxes aren’t going up.

Anyone Think Taxes Are Going Down?


What if, when this person turns 70, the tax rate goes up to 35%?  Not a huge hit or is it?  Well, 35% going to the government would leave this follower of Dave a balance of $561,161.90.  So he deferred at a 30% tax in order to pay at a 35%…genius planning.  If he simply contributed along the way with his post-tax dollars of $1,400 then he’d still have the $604,328.20…because he already paid his taxes on this money.  That’s a difference of $43,166.30.  Now Dave, that simple decision could buy this retiree a new car.  But if you would rather pay that to the government then go ahead.

Dave’s advice is not only wrong in regards to the rules established by the IRS but also from a mathematical position.

Am I saying that Qualified Plans are foolish?  Not necessarily.  If we were in a decreasing tax environment and you could defer taxes today at a higher rate and pay them later a lower rate then dump money into them (you would still have to understand that the government is in charge of this money along the way even in a decreasing tax environment).  But that’s not the condition nor the situation our country is facing.  We are NOT in a decreasing tax environment and the less money that you have at the control of the government (keep in mind they can change the rules on these accounts with a stroke of a pen) the better.  YOU need to be in control and Qualified Plans like these give you ZERO control of your money.  If you don ‘t believe that then please tell me how you are getting around the rules…millions of people would love to know.

It’s the Postponement of Taxes!


You must remember that Qualified Plans defer two things (we like to say “postpone” since that’s what they do):  they postpone the tax AND postpone the tax calculation.  It’s the second one that’s the killer.  It’s the second one that makes the difference, that determines how much is yours, that determines if it’s a wise decision or not.  Are you educating yourself about the second one or are you only falling for the whole “pre-tax is the best place to be” sales pitch?

Get Out Of My Church Dave


Sorry Dave Ramsey, but I believe it’s fair to say that if this is what you’re teaching then it is in fact you who is the “financial idiot”.  Please stop sending this garbage into my church.  You have deceived so many people out of hard earned investment dollars by putting them at risk with the IRS and the economy.  For every dollar you’ve helped people save in their quest to be debt free you’ve lost again by this type of advice.  Please sir, educate yourself…at the very least, have a financial professional review your book before you publish it so these types of mistakes can be caught.

If you feel my math is wrong or if you believe that Dave is right and you only have to give the government back what you put in then please let me know.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Owning A Home: The Most Misunderstood American Dream #4

November 5, 2010

“A large down-payment will save you more money on your mortgage over time than a small down-payment.”


This one is long…most likely will be the longest in this series but it’s worth it. This topic cannot be “glossed” over if a paradigm shift in your thinking is to occur.  I heard recently,

“Have you probed your paradigm lately?”

Thought that was funny and yet so great of a question. Let’s face it, even the Bible tells us to ensure those who teach the Word are in fact teaching accurately…basically, don’t take anyone’s word for it.  We have to stay diligent in our learning or we can simply become dead in our thinking. Or worse yet, a blind follower of that which is not true. Case in point here with Dave’s mortgage advice.

YOU OR THE BANK


In the previous post, we discussed a basic financial truth: you finance EVERYTHING you buy.  This happens because you either keep your cash and borrow thus paying interest (finance) or you use your cash to purchase (Dave Ramsey’s method) and thereby lose interest you could have earned on that money going forward (lost opportunity costs – aka a finance expense).

So it begs the following two questions:

  1. Which of these two situations will cause the least amount of wealth transfer for you personally?
  2. Which option makes the most money for the bank?

I’ve yet to meet an individual who intentionally desires to transfer large amounts of money away.  Also, I do not know one single person who wishes to make financial decisions that benefit the bank the most.  Unfortunately, very smart and well-minded individuals do this everyday…and the mortgage is just the tip of the iceberg.

So, will a large down-payment save you more money on your mortgage over time than a small down-payment?

Yes or No?

ROCKY ROAD ICE CREAM and INSULIN


If you said “Yes”…you’re wrong. Remember, it’s NOT my opinion but rather it’s the MATH that proves it wrong.  Unfortunately, Dave Ramsey’s advice, compared to that which is mathematically true, is similar to the comparison of Rocky Road Ice Cream and Insulin.

Dave is saying that Rocky Road Ice Cream is the best (Subjective Opinion – you see, I think Mint Chocolate Chip is the best) yet he’s presenting it as an Objective Truth.  His teaching on this (make a large down payment to save you money) is only backed up by his personal attitude and feelings.  It’s like Dave saying that Rocky Road Ice Cream is medicine to help the diabetic.  That’s just false. Insulin is the medicine that helps the diabetic (Objective Truth – doesn’t matter if you like it or not).

When we present our opinion as an objective truth we set ourselves up to be proven wrong…that’s what Dave has done.

Dave can claim all day that the above statement from our quiz is True but it’s not.  He’s giving you ice cream to heal your diabetes (your financial plan).  We give you Insulin.

So, if something you thought to be true turned out not to be, when would you want to know about it?

Right away!

If you believe that a large down-payment saves you money then logic would follow that you feel the best down-payment is paying cash in order to pay no interest on a mortgage.  So, if “cash” is the best down-payment, then let’s take a look.

EQUITY HAS NO RATE-OF-RETURN


First, you have to understand that equity has no rate-of-return.  A down-payment, or paying cash for a home, is like putting money in a tin can and burying it in the back yard.  The day you sell the home you get to dig the can up and blow off the dust.  Since a home appreciates or depreciates the same if it is financed 100% or is free-and-clear, makes the cost of having our money tied up in the house something we should consider.

As a matter of fact, every dollar you pay to equity actually decreases in value each year due to inflation.  If you put $10,000 towards your equity this year that same $10,000 is available to you in the future (assuming of course the bank allowed you access or you sold the home), but, at that future date it has less buying power because of the inflation factor.  Yes your home may have appreciated but it would have appreciated anyway whether you put the extra $10,000 towards equity or not.  Now, most “wise” mortgage Ramsey followers will say “No, what I pay in principle DOES have a return because I’m paying less in interest.”  Not so fast.  Keep reading.

$31,693,128…now that’s a MISTAKE Dave!


Recently, some news came out about Dave Ramsey’s new house. I contacted Peter who heads up the blog I read about Ramsey (and just linked to) and I sent him a quick video on the math for Dave’s very own purchase.  This video is personalized for Peter but go ahead and take a look of Dave’s HUGE mistake.  If you recall earlier, in my first mortgage post…this is where you either start to get a bigger box or you choose to keep following an opinion because it “feels” good.

Banks aren’t in the business to make me “feel good”.  They’re in the business to make money from my money…period!

Let’s recap the video:

Dave has $4.9 million to buy his home. He decides to pay cash.  What Dave must understand is that it costs him the same amount of money to live in the home whether he finances it or not.  How’s that possible? Well, with math…that’s the whole point.  Remember, this is Insulin not Rocky Road Ice Cream.

If he could have invested that $4.9 million at 5% he would have a balance of $21,891,947 after 30 years.  If he financed $4.9 million at 5% he’d have a monthly payment of $26,304.  If that $26,304 is going to the bank and not being invested at 5% then the principle and interest PLUS the lost opportunity costs (not able to invest those payments if they’re going to the mortgage) equal $21,891,947.  They are identical.

Now, you Ramsey followers are told, and very foolishly by the way, that if you put your money in a “good growth mutual fund” you can average 8-12%.

Unfortunately, his position here is even wrong because the average rate-of-return means nothing…only the actual rate-of-return is what you should concern yourself with regarding your money.  Watch this video of us explaining this very thing.

So, if Dave took his own advice, because he certainly claims that over the “long haul” you can in fact average 8-12% so it would only make sense that he could also, then his $4.9 million could have been invested at these rates.  Let’s take the 8% and be nice (keep in mind, you have to take the Expense Ratio and 12b1 fees into this as well so you can typically add another 1 -1.25% on top of this “average”).  If he invested the $4.9 at 8% in 30 years his account would be $53,585,075.

Wait, you mean, if he took a mortgage at 5% it would cost him $21,891,947 (far more that what he even claims because he only takes the principle and interest into consideration we add the lost opportunity costs because let’s face it, he’s making a mortgage payment and that payment can’t be saved anymore) and if he took his own investing advice that $4.9 million could become $53,585,075? Yep.  Ummm…that’s a $31,693,128 difference!   No small change here folks.

If he can’t sell that home in 30 years for $53,585,000 then Dave Ramsey made a minor financial error. But there’s more.

BEGS THE QUESTION DAVE!


A lady on the blog I mentioned above made this comment to me,

“But Kelly you are not taking the risk factor into this.  He could lose everything.” (not an exact quote)

She’s right; however, does Dave ever say that statement concerning his recommendations?  Does he ever say that if you invest in a “good growth mutual fund” that has a track record of at least five years that you could lose everything?  Nope.  As a matter of fact, all of his calculations assume that the 10-12% WILL in fact happen (by the way, feel free to send me any mutual fund that you think would make Dave happy and I’ll break down the ACTUAL rate-of-return for you).

Take me up on that last offer!

Even though he believes that it WILL happen, let’s say that he could in fact lose everything (which he can) and chose to NOT take on the risk to ensure he wasn’t under risk of foreclosure if the “Fit-Hit-The-Shan”.  Let’s break it down.

As a matter of fact, that’s exactly what he recommends (and wisely too):

“You’ve compared a zero risk investment [free and clear home] with a risk investment [investing in mutual funds] , and you don’t do that.”

He’s right but that does beg the question: Dave, can we take a zero risk investment with a zero risk investment? Maybe we’d want to do that if we could.

What would it look like, assuming he decides to go with his own recommendation here and take no risk, if he chose something that has guarantees at a measly 5%?   Remember, this account CANNOT lose so it’s an absolute certainty that the 5% will happen.  Well, we’ve already proved earlier that investing the lump sum at 5% and paying a mortgage at 5% would come out the same.  So what are we missing?

Any guesses?  His tax deduction. You see, this new home of his is a primary residence.  Let’s be nice and say he’s at a 35% tax bracket.  This changes his GROSS rate of 5% to a NET rate of 3.25% after the tax break.  Now, once we consider the mortgage payments at 3.25% that we can’t invest since they’re going to the bank (again, opportunity costs), it’s costing him $12,973,610…no longer the $21 million figure.

His puny, wimpy, guaranteed account earned him $21,891,947 and his mortgage cost him $12,973,610.  A difference of $8,918,337! With how much risk?  COME ON, with how much risk!?

NONE!  It was all guaranteed.

Who had control of the money?  HE DID!

What happens if values plummet?  THE BANK FREAKS OUT NOT DAVE!

What happens if his income stream completely dries up?  HE’S LIQUID!

Dave’s all about emergency funds so what happens in case of emergency?  HE HAS THE MONEY NOT THE BANK!

What happens if he comes across an investment opportunity?  HE HAS LIQUIDITY AS OPPOSED TO EQUITY!

Here’s two bonus questions:

What if the account where he has this money has no penalties to access?

What if this account can be used later tax-free?

Answer me this: do you think that banks have a faulty model of making money?

I mean that seriously.  Do you?  Can you literally “look me in the eye” and say that the way banks make money is ineffective?

Of course you can’t. Yet you then discredit the same model when it’s presented on a personal level.  Maybe not you…but Dave sure does!  You see, in this example Dave did exactly what a bank does:

  1. He borrowed money with a low cost (3.25%). (He’s all about getting a deal)
  2. He used his money in a guaranteed and predictable environment (at 5%) to earn a spread. (Remember, he said no risk)
  3. His mortgage is fixed so it will NEVER go up or cost him more and
  4. His earnings are FIXED because it’s in a guaranteed environment.

No matter what happens he wins. He created a banking environment for himself because both of these two financial tools were guaranteed to happen.

REMEMBER…YOU’RE A FINANCIAL IDIOT!


You see, I just about exploded when Dave’s right-hand man (I won’t use his name or title because he is an old friend of mine from church), told me (after seeing this math for himself) that “80% of our clients Kelly are financial idiots”. Honestly, that pissed me off…in a big way.  I asked him, “Then why are you following his advice?”  He had no answer.

You’re not idiots. You’re just being served Rocky Road Ice Cream for your diabetes.  It’s time for some Insulin.

Next up, the math behind his bogus advice about 15-year mortgages versus 30-year mortgages.  The banks would love for you to choose a 15-year mortgage…that’s the problem!

You don’t want to miss this one.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Owning A Home: The Most Misunderstood American Dream #3

October 22, 2010

We’re very close to jumping into the math but we do need to cover a little bit more so you understand the mortgage issue.  It is a complex issue but ironically the math is simple…and we’re almost there.

The dilemma any homeowner has when choosing a mortgage product is that no matter what type of mortgage the owner selects, major wealth transfers will occur. The solution to reducing these transfers is understanding the opportunities that lie inside the mortgage itself.

What do we mean by “transfer”?  Well, if you get a mortgage, you’ll pay interest to the lender (a transfer of your money), and if you pay cash not only will you lose the money that you paid for the house, but also the ability to earn more money from that money (lost opportunity cost).

People like Ramsey say, “Wait a minute! I’ve got the house.
I didn’t ‘lose the money’
and my
money does earn
because the value increases.”

Not quite.  The value of your home has nothing to do with the mortgage or lack thereof.  Your home appreciates or depreciates either way.  And, as a matter of mathematical fact, you do lose money because equity has NO rate of return – I’ll prove that later.

So you either pay interest or you lose interest; however, you must answer these two questions (and this is what all of our math will be based around):

  1. Which of these two situations will cause the least amount of wealth transfer for you personally?
  2. Which mortgage option makes the most money for the bank?

These two questions are by far the MOST important issue and we’re confident your Realtor, mortgage lender, CPA, financial planner, and certainly Dave Ramsey did not deal with this properly.  We will!

Now that we’ve set the foundation let’s get moving. We’re going to address each one of the True / False statements on the quiz in the previous post.

We call it Financial Caffeine because once you understand the truth, it’ll keep you up at night.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Owning A Home: The Most Misunderstood American Dream #2

October 18, 2010

Now that we’ve stated our purpose , let’s get started.

You’ve seen how many mortgage options a home buyer has these days.  If the banks made the same amount of money on every mortgage loan then truly how many options would we have as borrowers?

ONE.

But we don’t have just one.  There are several to choose from.

That then begs the question, do the banks have our best interests at heart? I believe most of you reading would say no.  More like, HECK NO!

So, if they don’t have our best interests at heart and they offer us so many different options that provide various profit margins for them then maybe, just maybe, we should do a little math.  But how many of you have done so?  More importantly, how many of you have financial professionals who have done so in your life?

If you think it’s only about the amount of interest you pay (i.e. Ramsey) you are hugely mistaken. Check out his own words on his website and read the “Want More Proof?” piece.

Our guess is when you chose your mortgage you simply took the product that:

  1. provided you the lowest rate,
  2. provided the payment structure that satisfied your budget,and 
  3. satisfied your plan to pay the house off early.

If you followed Dave Ramsey’s advice then you took the 15-year mortgage.  Unfortunately, you chose the one mortgage that makes the most money for the bank of all options available to you.  Hey, at least your bank has profited from your choice…heck you might have even scored a toaster.

What if you missed a crucial piece to this plan?  Would you want to know about it? You’re reading this so you’re at least interested or you’re secretly hoping that I make myself look like a fool.  I mean really, can I back up the statement that 15-Year mortgages are a dream to the banker?  Yep, and I will.

We educate on what we call financial transfers.  This is money that you’re losing unknowingly and unnecessarily and the largest transfer of wealth, next to taxes, anyone will ever encounter is the purchasing of a home and the mortgage associated with that transaction.  It is part of the traditional American dream. It’s also the most misunderstood.

As promised, let’s take a quick quiz to see how you’ve understood mortgages so far.  Ready?  Go with your first reaction.

TRUE or FALSE:

  1. A large down payment will save you more money on your mortgage over time than a small down payment.
  2. A 15-year mortgage will save more money over time than a 30-year mortgage.
  3. Making extra principal payments saves you money.
  4. The interest rate is the main factor in determining the cost of a mortgage.
  5. You are more secure having your home paid off than financed 100%.

Imagine if math, not some theory or new “latest and greatest” product, but math proves that each of these statements are actually false.  Would you think it was worth your time to learn just how that’s the case?  It’s certainly worth it from a financial standpoint.

If you’re a Dave Ramsey follower then you certainly answered “True” for each one of the above statements.  Soon you will understand why I have such a hard time with what he teaches and specifically that churches continue to hold his classes.  My fellow Christians need to know the truth.

I will say this though about Ramsey: what he teaches about snowballing debt and creating a savings cushion is right on the money and very much needed in today’s “spend now and pay later” culture.  I just wish he stopped there.  It’s his instruction on mortgages and investments that are incredibly off the mark and unfortunately it’s these two topics where people lose the most money.

Stay with us, we’re about to dig in the heels…remember the Bigger Box?

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Owning A Home: The Most Misunderstood American Dream #1

October 15, 2010

How could a blog about the truth behind mortgages start with a quote from Madonna?  Well, because she’s right.

Better to live one year as a tiger than a hundred as a sheep.
~ Madonna

Why is it seemingly “uncool” to call someone out?  Maybe because most live like sheep.  I’m tired of this attitude…no more.  We’re going to be tigers here and actually hope that the “sheep” decide to come after us.  Let’s be real clear on the intention of this upcoming series of mortgage blogs.

THE PURPOSE

There are three purposes behind this series:

  1. Dig into the math behind your primary mortgage options and which one benefits you or the bank the most.
  2. Teach people the truth about this huge financial transfer, known as the mortgage, in order to challenge the “false teachers” out there today…primarily Dave Ramsey.
  3. To PROVE with good ‘ol 8th grade math that Dave Ramsey is mathematically challenged.  Afterall, one of his very own (and high-up-the-ladder) executives told me personally that “80% of our (Ramsey’s) clients are financial idiots”…that’s a quote folks.  So congratulations, they think you’re financial idiots.

This will be fun but frustrating for those who have actually followed his mortgage advice…don’t forget how they defined 80% of you.

A BIGGER BOX

Like Dave, I’m a Christian. Unlike Dave, I was willing to learn.  Malcolm Forbes said:

“The dumbest people I know are those who know it all.”

When an idea is presented that is “outside the box” of your belief system about what you know to be true, then you have two choices: you can throw it out or get a “bigger box”.

I’ll be asking you to get a bigger box.  Why? Because if what you knew to be true turned out not to be, when would you want to know about it?

Followers of Dave Ramsey will have a choice after math proves him wrong: to keep their box-of-truth the way it is or get a bigger box because they were willing to learn.  Your choice. If you want to remain a “sheep” under his protection fine, we’re looking for tigers.

Get ready for some serious Financial Caffeine. Keep reading, we have a quiz for you next.

I’m Kelly O’Connor and as I dig deeper I’d like to get your comments…I’ll post ‘em all.

kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part 4

October 11, 2010

These two defining moments we have discussed so far – Your money will never be worth more than it is today and This may be the lowest tax bracket you will ever be in – are unique because they will have a direct impact on all the remaining conversations and even our videos (coming soon to YouTube – update: now on YouTube).

They certainly present a very clear challenge to our thought process. When combined together they confront head on some of the traditional thinking that has been branded into all of us.

If your money will never be worth more than it is today, due to inflation, and this may be the lowest tax bracket you will ever be in due to the demographics and government spending (my next set of blog posts – don’t miss these), then why is traditional thinking telling you to take as much of today’s money as you can and throw it as far as you can into the future, where it will have less buying power and be taxed the most?

That is such a strong question. I recommend you read it again.  Once you do, ask yourself, is that the thought-process or type of planning you want to pursue?

When you begin to apply these two Defining Moments to your everyday lives you may begin to process things a little differently. Like this: if you purchase a car which is a depreciating asset anyway, do you want to use as many of today’s dollars that have the most buying power and pay that car off as fast as you can?  Maybe not.

You may also think about the way you are approaching your retirement dollars. In qualified plans, such as IRA’s, 401K’s, one thing is very clear, the government controls the pen which gives them the ability…and the authorization…to change the rules at any point.

So you must then be able to answer this question:

who’s future are you financing, your’s or the government’s?

You must consider that whatever you have left after taxes, what will the buying power be of your money at that time? Understanding this may open your eyes to ideas other than what you’re hearing on TV or read in the financial magazines, and certainly today’s traditional thinking.

That’s what we do…we help you re-consider.  It’s Financial Caffeine.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook