alternative finance Archives - Page 3 of 3

Nominal Income vs. Real Income

submitted by jwithrow.

Most of us understand that inflation is a given in our world today… But not too many of us think about how inflation affects our income.

We tend to think of our income in nominal terms rather than in real terms because that’s what we can see. We can see the numbers. After all, nominal income is our income defined only by its dollar amount.

While this just seems like common sense, it’s not the real story. You can expose the flaw of nominal income when you compare it over periods of time.

Think about this. What if our income goes from $48,000 last year to $50,000 this year? That’s a 4% raise. Not too bad, right?

Well, let’s look at our income in real terms. Real income is income defined by its purchasing power. It is nominal income adjusted for inflation.

What if inflation rises to 4% this year?

Well, the means our $50,000 salary this year will have basically the same purchasing power as our $48,000 salary last year. In other words, we didn’t get ahead. Our raise wasn’t actually raise. That’s because our income did not go up in real terms… even though our paychecks were bigger.

That’s why it’s so important to see income in terms of purchasing power… Not in terms of nominal dollars.

The real story is that the American middle class has been stuck on a giant hamster wheel for decades now. Their paychecks keep getting bigger… But their purchasing power is destroyed by inflation. They are stuck.

This is why the Austrian School of Economics views inflation as an insidious tax. If nominal income kept pace with inflation then it would not be so bad. But wages have struggled to keep up with inflation since the early 70s.

Now, wages have done a decent job of keeping up with the Consumer Price Index (CPI). But this index has been adjusted several times to ignore food and fuel price increases. They fudge the numbers to make the CPI look better.

By the way, Social Security promises cost of living increases tied to the CPI… Retirees are getting a raw deal there.

This concept also exposes the retirement folly pushed by the financial services industry.

Have you seen those commercials about your “magic number”? They say you need a certain amount of dollars saved up for retirement to live securely off the income.

But if you think in terms of real income and purchasing power… It is impossible to pinpoint a magic number. Inflation will constantly eat into it. That’s why their magic number is just a carrot on a string.

So, the only way to truly take control of your own financial destiny is to think in real terms… And to recognize the nominal view of money for the illusion that it is.

P.S. Our Finance for Freedom course series pulls back the curtain on how money and finance really work. And it covers expert financial strategies to increase income, build wealth, and shatter the glass ceiling forever. Learn more at newly revamped https://financeforfreedomcourse.com/.

Real Estate for the Long Haul

submitted by jwithrow.

Did you know that the average real estate mortgage is in existence for less than seven years?

Wall Street does and that is why they are willing to purchase and package thirty year fixed rate mortgages into securities for retail. Which is why banks are willing to originate thirty year fixed rate mortgages to sell to Fannie Mae and Freddie Mac to then sell to Wall Street to package into securities to then sell to their “muppet” clients (ask Goldman Sachs).

This is also why mortgage contracts are front-loaded with interest. You see, fixing an interest rate for thirty years (or fifteen) would be a losing position for the bank if it had to keep the mortgage on its books for the contractual length of time. Fortunately, most people are not terribly disciplined so they either refinance or sell their home within seven years of purchase.

Let’s examine this process from a financial point of view. The bank collects a myriad of origination fees when real estate is purchased and it collects an un-proportional amount of interest in the early years of the mortgage contract. Then, within seven years, the homeowner either refinances or sells the home. When the homeowner re-finances, the bank collects a myriad of origination fees once again. When the homeowner sells the home, the bank also collects a myriad of origination fees again.

Now we don’t mean to vilify bank fees, We are simply pointing out that this revolving process results in a constant drain of private capital. Each time origination fees are paid that is a little bit of capital being drawn into the banking system that could have been used by the individual to build wealth instead. Once in the banking system, exponential debt will be pyramided on top of that small amount of capital.

The point is this:

We have been buying the same real estate over and over again for decades and we have been giving up small chunks of capital each and every time the same houses have been purchased.

Wouldn’t it make a lot more sense if we just bought our homes, paid off the mortgage, and then kept them within our control? Imagine the possibilities! Of course this wouldn’t make sense in every case, but the idea is worth considering…

Shopping for a Mortgage

submitted by jwithrow.

A stable housing situation is a vital part of a self-sufficient financial plan. While home-ownership is not something that should be rushed into, we would suggest that it is advantageous to purchase a home and begin to pay down the principal balance once you are settled into a community and intend to stick around for an extended period of time. Owning a home will involve repair expenses that could be avoided by renting, but the opportunity to one day be free of a monthly housing payment is probably worth the cost of periodic home repairs.

In order to purchase a home, most of us need to obtain mortgage financing. There are a number of different mortgage types available for consumers, but a fixed rate conventional loan is by far the best option for someone who is buying a home with the intent to occupy it for the foreseeable future. As such, this article will be geared towards someone who intends to buy a home for the long haul. While the ‘long haul’ time frame is dependent upon the perspective of the home buyer, please see our thoughts on the matter here.

Unlike the other options, a conventional mortgage will allow you the choice to either escrow your homeowners insurance and property taxes as part of the monthly payment or to pay your homeowners insurance and property taxes separately. A conventional loan will also allow you to avoid private mortgage insurance (PMI) if you are able to pay 20% down up front. PMI is simply insurance that covers the lender in case the borrower defaults and it is paid by the borrower as part of the monthly payment. When obtaining a mortgage, avoiding PMI should be a top priority as it is nothing more than wasted money from the borrower’s perspective.

If at all possible, you should plan to pay 20% down when purchasing a home to avoid PMI and lock in the best terms. Some lenders will allow borrowers to also pay 10% down up front in exchange for a reduced PMI payment. If you are unable to pay 20% down initially but feel like you have the opportunity to get a great deal on a home purchase then most lenders will release the PMI requirement once you have paid the mortgage down to 80% loan-to-value (LTV) – be sure to ask about this up front. The loan-to-value ratio is simply how much you owe on your mortgage as a percentage of the home’s appraised value.

When shopping for a mortgage it can be difficult to directly compare mortgage quotes from different lenders as each lender structures closing costs differently. One lender may offer a slightly better rate but charge higher closing costs up front while another may offer a higher rate in exchange for lower closing costs. You can also choose to pay more up front to reduce the rate or vice versa when originating a mortgage. It is advisable to have a conservative idea as to how quickly you intend to pay the mortgage off before shopping for one. This way you can analyze how much you will be paying in interest and fees over the life of the loan so that you can determine which option would make the most financial sense for you.

When shopping around for a mortgage, we would recommend contacting several different lenders and asking them for an initial quote listing the interest rate and estimated closing costs. Advise them that you are shopping for a mortgage and that you will get back to them if their offer is the best. The interest rate will change every day so you will need to get the quotes on the same day that you intend to lock in an offer. Do not feel like you need to rush into a commitment, however, as you can always ask a lender to send you another quote at a later date if you are not ready to move forward initially.

Once you have several quotes in front of you, calculate the amount of interest paid over the period of time in which you intend to have the mortgage for each offer. Next, add the total interest paid to the estimated closing costs for each quote to determine the total cost of financing over the life of the loan. Whichever lender comes out with the lowest cost of financing is probably your best deal but keep in mind that each lender may estimate title insurance and attorney fees differently and that these costs will depend on the title company or attorney used for closing. It may even make sense to exclude the title insurance costs and attorney fees from your analysis if you intend to use your own title insurance company or attorney rather than the lender’s.

Mainstream mortgage advice suggests that you should lock in the lowest monthly payment possible over a thirty year period but this is not always the best way to go. Mainstream advice assumes that you will only make minimum payments and that you have no interest in paying the loan off early. We would suggest that it should absolutely be your intention to pay the mortgage off early as the idea is to minimize the amount of interest paid over the life of the loan. If you are confident that your income is stable then it may make more sense to go with a fifteen year mortgage in order to secure a better rate in exchange for a higher monthly payment. Also, be sure to play around with amortization calculators online to see how much interest you can save by paying extra on the mortgage each month.

Once you are a homeowner, be careful not to get caught up in the temptation to use your house like a piggy bank as was common during the housing bubble of the 2000’s. People love to talk about building equity in their home but this is a false premise. The term equity refers to the difference between what you owe on the mortgage and what the appraised value of the home is. Mainstream finance suggests that this equity is an asset. We suggest that it is an illusion (ever heard of anyone getting their ‘equity’ after the mortgage has been paid off?). Only the market can determine what the true value of your home is. If you do not have a buyer lined up to buy your home then you do not know exactly what your home is worth. A lender would be quick to issue a home equity loan based on the illusion of equity but this would only serve to increase the amount of interest you are paying each month.

Rather than thinking in terms of building equity, we think that it is far more wise to focus on paying off the mortgage as quickly as possible without sacrificing other opportunities. Just imagine the extra cash flow that would be available to you if you no longer had to make a mortgage payment.

Eliminating your monthly housing expense will greatly increase your resiliency and self-sufficiency and that should be your ultimate goal when shopping for a mortgage in our humble opinion.

Steps to Self-Sufficiency

submitted by jwithrow.

This list is certainly not comprehensive but it is our hope that it serves as food for thought.

1. Become money-conscious

Before you can begin to create self-sufficiency and build wealth, you must become money-conscious. Wealth does not come to those who are careless or lazy and it does not come overnight with a stroke of luck. You must begin to recognize that nearly everything that you do has an impact on your self-sufficiency and accumulation of wealth. You must begin to recognize the rules of the universe as it relates to money. And you must begin to take action immediately. Begin to track your expenses tirelessly and eliminate unnecessary spending where possible. This does not require you to become “cheap” but it does require frugality. Once you become money-conscious you will identify ways to reduce your expenses and you will free up additional income to use towards the attainment of self-sufficiency.

2. Consider contributing to a 401(k) if your employer matches your contribution

After assessing your income and expenses and getting your financial house in order, consider contributing to a 401(k) up to the employer match percentage each month. It is important to review the vesting requirements (time of employment required before you can cash out the matching contributions) and determine whether or not you will be at this company for that length of time before deciding to contribute to the plan. The employer match will serve to multiply your deferred savings and your 401(k) contribution will reduce your taxable income. We would not recommend contributing any more than the employer match rate as 401(k) plans are very limited and the rest of your income would better serve you elsewhere. Be aware of the fact that you will have to pay a 10% penalty to the IRS if you cash out the 401(k) prior to retirement but the tax shelter provided will serve to offset some of this penalty. With that said, we would suggest that a 401(k) plan is not a very strong part of a retirement plan and that the funds accumulated would probably better serve you as capital to be deployed once you have developed a more specific investment plan. The 401(k) will allow you to automatically put aside a very small amount of income for use once you are farther along on your road to financial freedom. This vehicle may not be suitable for everyone, but it may be useful if you are still working on creating a sound investment or business plan.

3. Develop a plan to eliminate all consumer debt

You must eliminate all consumer debt before you can effectively begin to build wealth and your first target should be credit card debt. The interest rate on your credit card, in all likelihood, will far outweigh any return on investment that you could consistently generate with your money. So develop a plan to pay all credit card debt off as soon as possible. The most effective way to do this is to determine exactly what dollar amount you can afford to pay towards your credit card debt with each paycheck, and to pay that amount immediately as soon as your paycheck is received. Do not leave yourself short on other bills but make sure that you are paying a sizeable chunk of debt down each month at the same time. If you have multiple credit cards then you should pay the card with the highest interest rate off first. Once all credit card debt is eliminated, move on to the next highest interest rate obligation that you have. The one exception to paying down the highest interest rate debt first is if you have a smaller obligation that could be paid off very quickly in order to free up additional cash flow that could then be directed towards the higher interest debt. While eliminating consumer debt may seem like a long and slow process, be patient and persistent. Imagine a world in which you have no consumer debt to pay and imagine how much extra money you will have at your disposal once you are free of consumer debt.

4. Develop a plan to eliminate or reduce mortgage debt

This step could possibly be interchanged with the next steps depending on your situation but the idea is to either eliminate or reduce your monthly mortgage debt significantly now that you have additional free cash flow from eliminating consumer debt. While the many possibilities cannot be described in this article due to the variety and complexity of mortgage types, we do discuss mortgages in more detail here. Broadly speaking, assess your mortgage and determine if an action can be taken to enhance your financial situation (reducing the LTV, refinancing, etc).

5. Build a six month cash reserve

If you have not already built a cash reserve then now is the time to do so (if you have dependents then you may want to consider making this step two). A cash reserve should be extremely liquid so that you have access to the money in a timely manner in case of emergency. A standard checking account would serve this purpose. Interest bearing savings or money market accounts are acceptable choices although you can rest assured that the interest paid on these accounts will be negligible. Cash under the pillow is another option. Gold or silver bullion could be a wise choice but you will probably want to have direct and immediate access to some cash. While six months is a good benchmark, you could consider building a one year cash reserve as well. Just make sure that you are prepared to sustain yourself and meet obligations in case of an emergency.

6. Set up an IBC whole life insurance policy

If you are unfamiliar with the IBC (Infinite Banking Concept) strategy then this step will require some research before you are comfortable with the idea. Now, do not be put off by seeing this recommendation for ‘life insurance’ – learning about an IBC policy will completely shatter your preconceived notions about what life insurance can do. The reason you have not heard about this type of policy before is because Wall Street would go out of business very quickly if the masses learned and implemented this financial strategy. An IBC policy is about building an ever-growing pool of capital in a way that is advantageous in both the tax and liability realms. The IBC strategy is not about death benefits and it is not about rates of return – these are just bonuses.

When structured properly, IBC policies allow you to funnel income into the policy rather than a bank account. Unlike your bank account, your life insurance cash value is secure from creditors, bail-ins, and bank runs. The cash value also generates a small rate of return without sacrificing liquidity – you can access your cash value tax free at any time for any reason. The implementation of this strategy does require a long-term commitment because it will take on average 8-10 years before an IBC policy ‘breaks even’ internally (cash value equals premium outlay).

Please feel free to email us if you would like more information on this concept.

7. Build diversified income streams in fields that interest you

At this point you have done your due diligence and are in a financial position that will allow you to work on pursuing income in ways that are enjoyable to you. If you are already engaged in work that is satisfying and meaningful to you then this step may not be relevant to you. But if you are like most of us who simply tolerate or maybe despise our job then now is the time to make changes. And even if you are content in your current profession it may be wise to build side businesses as economic conditions are tentative at best at this juncture in time.

Start by deciding what it is that you would like to do with your time and then develop a plan to generate income from your chosen field. While this is an embarrassingly simplistic statement, it is entirely possible to generate income from any good or service for which there is a market. Build a big business. Build several small businesses. Buy rental properties. Become a freelancer in your areas of expertise. Whatever your plan is, the important thing is to engage in work that is enjoyable and meaningful to you – income is useless if it comes with the sacrifice of happiness.

8. Convert income into real assets

Once you have developed a source or sources of stable income then it is time to convert this income into real assets. The most widely accepted choices would be gold and silver bullion, real estate, and/or farm land but you are not limited to these. Real assets could also be things that increase your household’s self sustainability such as alternative energy sources or a family garden. You could also choose more speculative items such as art work or a wine collection but these assets would be much less liquid and thus much more risky (well, the wine would be liquid but in a different kind of way). If you venture into the realm of these speculative investments then make sure that you have a portfolio consisting of the more widely accepted assets as well.

Conclusion:

Note that we wittingly omitted any mention of investing in paper equities (stocks, mutual funds, exchange-traded funds, bonds). The first reason for this is that the financial services industry has sold this type of investment as the only one suitable for retirement which is a lie. There may be a place for this type of investment within your portfolio but it will require much diligence and should serve only as one asset class amongst several within your portfolio. Holding a mixture of stocks across different industries is said by the experts to be the key to diversifying your portfolio. We would suggest that holding a mixture of stocks, real estate, gold and silver bullion, etc. would be the key to a diversified portfolio and that holding only paper equities would be terribly risky. So if you do choose to include equity investments in your portfolio please make sure that you do your research and that you also diversify amongst other, more tangible asset classes as well.

Think of real assets as a ‘backing’ to the cash value of your IBC whole life insurance policy that we discussed in step 6. By building a significant pool of capital (IBC policy) and solidifying it with real assets you are doing exactly what the elite central banks do – except without resorting to fraud. The central banks, Wall Street, and the power elite in general have done a wonderful job of convincing the masses that the key to success is to accumulate exclusively stocks and bonds. And this is true. But what they did not disclose to the masses is that such a strategy is key to the success of the central banks, Wall Street, and the power elite, not the masses themselves.

We hope that this brief article serves as a guide towards maximizing your personal liberty, resiliency, and self-sufficiency.

Always remember that happiness, fulfillment, and calmness of mind and spirit are the most precious of commodities and be mindful not to lose sight of these ideals on the road to building wealth and obtaining self-sufficiency. Also, never be afraid to follow your heart and stand on your principles; this life is but a journey in search of experience and wisdom, and that journey is best undertaken to the beat of one’s own drum.