Happy New Year to all of those who've stopped by the Insurance Pro Blog on the first day of 2014! We're busy making plans for the new year as you read this on our never ending quest to bring our community greater value this year than we have in the past.
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Now, on with today's episode:
It seems that really bad financial advice is never in short supply. So, a few weeks back Brandon and I began to have a conversation surrounding this very topic (imagine that?) and we began to ponder–what is the root of all this bad advice?
Do people learn this stuff in school, do they concoct these theories all on their own or do they learn it from friends, teachers, or their uncle Bob?
I can tell you that we definitely tend to lean toward the latter. We've encountered way too many otherwise very intelligent people who conceive irrational justifications for their poor financial decision making. The sort of mistakes that a pencil, notepad, and a basic calculator could easily prove flawed in just a few minutes.
Is Your House Your Most Valuable Asset
Homeowners insurance companies would tell you absolutely!
But we'd beg to differ a bit on that one.
One of the most common misinformed financial decisions that I've heard over and over and over since becoming a young adult (at least that's when I first recall hearing it) is that you should buy a house as soon as possible because it will be your greatest asset.
Now, I certainly took the bait on this one–hook, line and sinker. No doubt about it. As a matter of fact, I owned my first three houses before I was 30. Of course when I say “owned” I mean that I had a mortgage and was paying a mortgage bank for all three.
Reality: Your house is not an asset, at least not in the wealth building sense. I know saying this is akin to being a puppy killer or someone who thinks kittens are demon spawn.
But hang with me for a moment while I explain.
Let's say you purchase your house for $500,000 and you take out a mortgage for 50% of the purchase price. That's now $250,000 you owe somebody for your house. Yes, you do have $250,000 in equity–if the value of your house at purchase was truly $500,000.
Now, I'm not going to get into a lengthy discussion about fair market values and real estate appraisals. Just to say that at best they are an opinion based upon compiled data in your given locale. In the end your house is only “worth” what someone is willing to pay you for it at the time that you wish to sell.
Your house is where you live, it's shelter from the elements and for some a great place to build memories. All things that I value deeply.
However, it's not an asset that's going to help you accumulate real wealth. It doesn't produce an income for you, and even if you realize a gain when you sell it, you still have to buy another place or rent. In other words, where you live, will always COST you money.
And even after you've paid off the mortgage, you will always pay property taxes. Great investment right? It always costs you to own and in most places property taxes are not some paltry sum. Most people never account for these expenses when they calculate the return on owning their house. Typically people also fail to account for money spent on improvements, maintenance, utilities, insurance, and mortgage interest paid.
When you account for all those things, this asset doesn't look so much like an asset anymore.
Another example of bad common financial wisdom…
But the Government's Paying Me to Buy This Car
No they're not. If you want a new car, have the money, go buy it and own it. Your every day car is always an expense, there's no financial justification for buying a new car.
You want a new car, you don't need a new car. Receiving a tax deduction/credit for spending money doesn't automatically make it a good idea. And you always need to make sure you read, comprehend and plan for the fine print as you can see in this story.
We're not totally against conspicuous consumption (we're known to participate as well) just make sure that you're being honest with yourself. The only person that's truly impacted by making these decisions is you.