Toyota Millionaires vs. Mercedes Millionaires

By: Roshawn Watson

In 1996, Dr. Thomas Stanley shocked the advertisers and the general public alike when his research found that the most common car driven by millionaires were Fords. After all, what would someone with a net worth north of a million (or three) want to do with a non-prestige brand like Ford? Such frugal revelations characterized his New York Times bestseller Millionaire Next Door. In his latest book, Stop Acting Rich, Stanley revisits the car buying habits of millionaires and comes up with two new distinct profiles: the Toyota Millionaire and the Mercedes Millionaire. They differ substantially based on income and net worth, and I found some of his results surprising. The critical question is which one do you want to be?

The Toyota Millionaire
Toyota is popular among millionaires. Indeed, Toyota was the number-one make selected among millionaires surveyed (market share of 10.9 percent). You may ask yourself: why Toyota? According to marketing consultant, Gorden Wangers, Toyota is...

"...the ultimate vanilla automobile...it has a silly name. The styling is invisible. It does not give you bragging rights at the valet, to put it mildly."

While Toyota has had some recent well-publicized mechanical troubles, overall Toyota has a long history of making high-quality vehicles at reasonable prices. This translates into a powerful brand known for its value. This is why they are so popular. Stanley supported Toyota's popularity by comparing the number of dealerships. For example, there are roughly three times as many Chevrolet dealerships as there are Toyota dealerships in the US, so many must purposefully drive past several Chevrolet dealerships to purchase a Toyota. In fact, the next most common vehicle acquired by millionaires is the Toyota Motor Corporation's Lexus (typically the entry-levels models).

All this points to a simple fact, if you breakdown the most recently acquired cars by millionaires, you will find that most of them are not luxury vehicles (those with a sticker price of $42,000 or more). Most luxury car purchasers are aspirational, people lacking a high net worth but want to perceived as wealthy and enjoy the "nice things." Personally, unless I know that a person is wealthy, I instinctively think the opposite. When I see someone driving luxury cars, I typically feel bad for them because all I see are payments (not status). I instantly believe them to be the Phony Rich leasing these vehicles (94% of millionaires do not lease) hoping that someone is impressed.

The Mercedes Millionaire
However, the research also show that's not a wholly-accurate generalization. Although most people who drive Mercedes are not millionaires, Stanley's research also shows that millionaires driving Mercedes are actually quite rich. Stanley argues that a very specific type of millionaire purchases these cars (The Mercedes Millionaire): those driven by a nearly uncontrollable desire to succeed. Of all multimillionaires surveyed, Mercedes Millionaires are near the top of "the elitist scale in activities and social characteristics." They often pay top dollar for many things such as clothes, watches, entertainment, etc. For example, more than three times as many Mercedes Millionaires wear Rolex watches compared to Toyota Millionaires.

Importantly , this group has higher income and wealth than other millionaires. For example, 24% more Mercedes Millionaires make in excess of $200,000 compared to Toyota Millionaires. Additionally, Mercedes Millionaires are also prodigious accumulators of wealth (their net worth is at least 2 times what one would expected based on Stanley's wealth formula). Typically, they became successful first and then began living high-consumption lifestyles. In essence, buying the Mercedes hardly puts a dent in their financial statements even though many of these vehicles were undoubtedly luxury. Note, three out of four Mercedes sold in 2007 were luxury (sticker price $42,000 or more).

Which Do You Want Be?
My personal opinion is you can't go wrong in either case: both are very proficient in transforming their income into wealth. Technically, the Toyota Millionaires appear to be somewhat more productive; however, both types of millionaires far outpace most people. The Toyota Millionaires also prove that even if your income is lower, you can still generate phenomenal wealth over the long term. We all have different motivators. If you can use a particular car and lifestyle to motivate you to become more economically productive, more power to you. The most important thing about the Mercedes Millionaires is that their lifestyle didn't elevate until after they could easily afford it. My bias is that if you have been fiscally responsible, why persecute yourself for liking nice things. That's part of why we save anyway. That said, you must think carefully about which one you want to emulate (or be) because the answer is affecting your balance sheets whether we acknowledge it or not!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Posts
The Phony Rich

Creating Phenomenal Wealth Over Time

Why Do We Save Anyway?

Forget Looking Rich... Be Rich!

7 Surprising Facts About Millionaires

Author Note: Lexus has 10.8% of the market; likely not statistically different from Toyota

Scarier Than Halloween Round Up and Uncommon Money News

By: Roshawn Watson

Do you want to know what scares me? It's certainly not ghosts or goblins. Most likely you are already familiar with it. It's called the Rat Race.

The Rat Race refers to a pattern of behavior where we work for a living but barely make any progress financially. It's actually a misnomer because even rats have more sense than to stay in this ridiculous model. There's nothing wrong with having a job, but depending on a job for your financial provision is a precarious position to be in.Unfortunately, many have been forced to acknowledge the harsh realities of their financial vulnerability.

Job security is but an illusion in most cases, and pay checks are addictive.

Don't lose sight of financial independence in favor of a shopping excursion to Neiman Marcus or even Best Buy. I was reading The Grouch's account (link below in Personal Finance at Biz of Life) of getting fired after many years of faithful service to his company. It's tragic and can happen to good, experienced, and educated people. I mention it because it is very important to be honest with ourselves. Don't cling to safety that isn't there. If the recent financial crisis has taught us anything, it is that there is no time like the present to do an autopsy on our finances to identify areas of weakness and ways for improvement.

Thought Questions: What Financial Demon Are You "Scared" Of?

Now, it's time to do the weekly Uncommon Money News and Yakezie Round Up.

Uncommon Money News and Yakezie Round Up

In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!

To my readers: I am so honored by your support. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you: you are vital! Thank you sincerely.

Personal Finance (Yakezie and other PF bloggers)
My Experience With Unemployment at Biz Of Life - I said it before if you are an employee, "your only job security is your ability to get another job." Read this all too familiar account (video included in post too).

Tax Avoidance Double Irish And Dutch Sandwiches at Everyday Tips and Thoughts - Kris discusses a business practice that allows Google to save billions. Also, here is a related link.

Saying Yes To Home Ownership at Beating The Index - Mich discusses his reasons for owning a own and refutes one commentator's counterarguments.

The Economic Crisis Is The Best Thing That Happened To Us at Hope To Prosper - This interesting guest post challenges the conventional wisdom of passive index investing.

Roth Contributions versus Roth Investments Gains at Money Reasons - Can you remove your Roth contributions with a penalty? Money Reasons wants to clear up some notable misconceptions about Roth IRAs.

Business News
Wall Street Journal Catches Facebook Giving Your Info To Advertisers*

AIG Raises $17.8 Billion in Record Hong Kong Offering Putting Bailed-Out Insurer On Course to Repay its US Assistance

Economy
October Autosales Poised To Be Best of 2010

Netflix Separation Anxiety Attack at Retire By 40 - To sell or not to sell (Oh the Joys of Stock Investing)!

Entertainment Money News
Final Numbers Suggest Elin Received $110 Million Divorce Settlement From Tiger Woods

Paranormal Activity Has The Best Horror Movie Opening Ever!

Offbeat Money News
Whatever Can Be On Your Mind at Aloysa's Kitchen Sink - Find out whether Aloysa and her future husband lost their jobs after they violated their company's ridiculous policy.

Achieving What You Set Out to Do in 2010 at Move to Portugal - Laura reminds us that "there is still time to achieve it done...whatever ever it is"

The Importance of Opportunity Costs at Invest It Wisely - Missing opportunities can be costly. Kevin explains why.

Building Your Financial Fortress at Simple Financial Lifestyle - Bsimple explains how to protect yourself financially.

Carnivals

• Carnival of Personal Finance at Cash Money Life- Keys to Moving Beyond Past Failures
• Festival of Frugality at Frugal Upstate - Why Do We Save Anyway?
• Festival of Frugality at Budgeting In The Fun Stuff - Will Mortgage Rates Really Drop to 0%?
• Carnival of Financial Planning at Simple Trading System- Economists Blame ME for the Slow Recovery and Why Is Debt Really Decreasing?'

Round ups that linked to posts from this site

• Kevin at Invest it Wisely - Weekend Reading- Fall Edition
• Aloysa at Aloysa's Kitchen Sink - Alyosa's Reading Picks 2
• Laura at Move To Portugal - Link Love Update
• Kris at Everyday Tips and Thoughts - Take a Break and Read Some Great Posts
• Money Reasons - Visiting Family: The Brief Edition
• Bsimple at Simple Financial Lifestyle - Big Yakezie Thank You Edition
• Retire by 40 - PF Blogosphere Investigation
  

Keys to Moving Beyond Past Failures

By: Roshawn Watson

Do you believe in second chances?

I sure do. It's always nice to hit the ball out of the park on the first try, but sometimes a second swing is required. All too often, we become so demoralized from initial failure that we give up while on the cusp of breakthroughs. Successful implementation of one idea can completely revolutionize your fortune. Do not allow past failures to rob you of tomorrow's victory.

Leaving the Past in the Past
I know we're tough, but sometimes the past not only affects us, it controls us. It's is no coincidence that psychologists often focus on the underlying past events influencing present behavior. About five years ago, I was discussing investing with a friend. She told me that her father used to be a diligent investor; however, he presently keeps his money in savings accounts. I asked her why (he wasn't that old), and she said it was because he lost money once. Now, her dad can obviously do what he wants to do, and I'm sure the recent (2008 through March 2009) stock market dip only confirmed his suspicions. However, it is quite depressing to be a saver right now. As a saver, he is likely ignoring (or at least mentally suppressing) the fact that inflation and taxes are eroding any return he is getting. Instead of developing an investing strategy that accounted for his lower risk tolerance, he decided to leave the market altogether because of a bad experience. He is successfully failing to fail. To this day, that bad experience defines him and restricts his ability to grow his wealth.

Personally, I think the challenge is keeping the past in its context. It's not a matter of denying what happened but rather the lens with which we view our past shortcomings that often determines their impact on us. I remember opening my first C.D. account several years ago. I went to a financial workshop at a business school. After it was over, I decided to tell the facilitator what I was doing. To be honest, I was a little proud of myself and thought she would be too. She was proud of me...until I told her the interest rate that I was receiving, a whopping 1.2%. Her expression was classic. She gave me a conciliatory "Well, at least you are trying..." This had the undertone of "but you will certainly have to do better." She was right, and I am glad that I used that experience to become a better steward of my resources instead of allowing it to turn me off from saving and investing.

Success Not As It Seems
We often don't realize what's involved in someone's success equation. If you listen to the details of someone's journey, you might be quite surprised. Earlier this week, I shared how Dave Ramsey was an overleveraged multi-millionaire who went bankrupt in the eighties but has rebuilt his fortune. Despite his popularity, many are unfamiliar with his struggle. He didn't allow his failure to stop him from becoming much more successful than before the setback.

I was recently listening to Peter J. Daniels, an internationally known speaker, philanthropist, and businessman. Some have estimated his fortune as near a billion. Many would be surprised to know that he started as a sickly, illiterate bricklayer. Through the years, he has also had challenges in his businesses as well, yet he rose above them. The point is that your past failures (or achievements) are not necessarily a predictor of the future. For example, if you look through his life, you will find that your qualifications and potential for success are greater than his were when he started his businesses. This supports my belief that if you learn how to do one thing well and can persevere, you have a genuine potential for extraordinary success.

Remember, Babe Ruth is both the home run king and strikeout king.

Learning From Failures

Some people love learning from their experiences. I'm not one of them. I often find this method too painful and slow. However, that doesn't mean that I don't look for value (lessons) from mistakes. "Listen to the pain, it's often trying to tell you something" my mentor used to remind me. It still is very hard to walk through recent mistakes impartially (without getting upset). If you invest everything into a goal, not reaching it affects you. You have to allow yourself time to grieve. The death of a dream is very painful. Let me share with you a revelation that completely changed my outlook on failures a few years ago. It caused me to realize that very few failures are tragic. Additionally, it helped me separate a failing project or task from being a failure. The quote is:

"Men don't drown by being underwater, they drown by staying underwater."

In other words, you have to get back up from failure. One of the best ways to accomplish this is by not repeatedly making the same mistake. Thus, you must acquire the wisdom from the misstep. The old saying goes "insanity is doing the same thing repeatedly but expecting a different result." Don't allow pride, arrogance, confidence, or pain to cause you to dismiss the lessons you should be learning from your mistakes. I believe it was partly his willingness to own and learn from his mistakes that caused Donald Trump to go from being worth a negative $100 million to an estimated $2.4 billion. Unfortunately, too many of us successfully fail to fail instead of playing until we win.

Dealing With Criticism
Regardless of whether it's building a business, investing in paper or real estate portfolios, or obtaining a Ph.D, there will be challenges. Critics may deride you, laugh at you, and wish you ill-will, especially if you fail at something. Don't allow their snide remarks to change your perception about yourself or your abilities. It is easier to throw stones from the sidelines than to achieve something significant. I'm convinced that part of their hostility towards you results from their resenting the fact that you have the guts to achieve what they couldn't or wouldn't. Let them tell you the 10 reasons why they think you suck, and know that their opinions cannot hinder your ultimate success. Your struggle is the proof that you have not been conquered. Laugh all the way to the bank my friend. A monument was never built to a critic anyway. Tell every dream-killing troll in your life that they provide limited value at best and are a waste of space at worst. (I kid, it is best to leave the negativity to them)

Adopt your winning posture because it's time for battle again. Your present victory isn't dependent on past events, luck, genius or what critics say. Possibilities for you are determined by your capacity to believe. Don't be a prisoner of your circumstances; create the life you want today!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Posts
Through the Looking Glass

Second Chance Round Up with Uncommon Money News

Second Chance Round Up with Uncommon Money News

By: Roshawn Watson

Andrew Fashion had a phenomenal ride. Before his 22nd birthday, he had made $2.5 million, a handsome sum exceeding what some families make in a lifetime. It's especially impressive given his young age. Unfortunately, the money evaporated, and now he is in debt and starting all over. Here's his story (link under Business).

He started his first business while in the sixth grade (he and a friend turned mechanical pencils into rocket launchers). Later, he launched a couple websites helping people customize their Myspace pages, which netted him a couple of million. Unfortunately, he enjoyed his money a little bit too much: several fancy cars, expensive home repairs, riotous living, etc. Unfortunately, he loss his money and is now in debt. He is using his experience as a cautionary tale to inspire people to make wiser decisions, which is laudable. Additionally, he is starting new online endeavors and his writing a memoir entitled Young and Stupid. With his youth and talents, the possibilities are endless.

Speaking of second chances, I saw another article (link in Business) that completely made me cheer. The article has a picture of none other than Dave Ramsey's $5 million mansion (no mortgage). At over 13,000 square feet plus another 1500 square feet garage, this home seems quite impressive. If you are unfamiliar with Dave's story, here is a brief overview. He was worth about $4 million by his late 20's but was overleveraged. The Tax Reform Act of 1986 caused most of his loans to be due, and because he didn't have adequate liquidity (cash on hand), he was bankrupted. He loss all his material possessions and almost loss his marriage. The process was so devastating that he swore off using debt again and began teaching biblical finance. Anyway, it's nice to fast-forward 24 years and see some of the fruits of his labor, especially since his business is built upon helping others.

Thought Questions: Why do (or don't) you believe in second chances?

Now, it's time to do the weekly Uncommon Money News and Yakezie Round Up.

Uncommon Money News and Yakezie Round Up

In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!

To my readers: I am so honored by your support. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you: you are vital! Thank you sincerely.

Personal Finance (Yakezie and other PF bloggers)

My 90% Dip in The Value of One of My Stock at Money Reasons - MR discusses investing strategy. This fun post brings up some important investing topics including volatility and risk tolerance.

Judging a Generation of Home buyers Based On TV Shows Like Househunters at Everyday Tips and Thoughts - Kris discusses the impact popular HGTV shows such as Househunters and Property Virgins have on our perception of home buyers and their expectations.

5 Reasons To Have An Emergency Fund at Invest It Wisely - Kevin shares a nice guest post on the merits of having an emergency fund.

How Much to Pay For Graduate School at Grumpy Rumblings of the Untenured - Nicole and Maggie share their insights into the costs of school, judging subsequent job potential based on a degree funding, and graduate school, topics that some treat as mutually exclusive.

Firefighters Let House Burn and Pets Die Over $75 at KNS Financial - Khaleef places us square in the the debate of whether certain important services should be available to people who choose not to pay for them.

The Problem With Elitism at Biz of Life - I found the video shared in this post extremely insightful regardless of whether you agree with the host.

Business News
Top 400 Charities Lose Billions in Donation

How to Earn and Blow $2.5 Million Before Your 22nd Birthday

Dave Ramsey's House: Living Like No One Else

Economy


Entertainment Money News

Dane Cook's Half Brother Jailed for Embezzling Millions from Actor

Screech -- 3rd Foreclosure is the Charm

Kate Moss's Cocaine Scandal Doubled Her Salary

Octomom Delivers Miracle Payment, Saves Home

Carnivals I Participated in

• Carnival of Personal Finance at Dough Roller - Good Old Middle Class or Wealthy - You Decide Redux
• Carnival of Financial Planning at The Skilled Investor- Economists Blame ME for the Slow Recovery and Why Is Debt Really Decreasing?'
• Yakezie Carnival at The Narrow Bridge - The Problem with Being Budget Minded is Other People
  
• Carnival of Wealth at Personal Dividends - 7 Surprising Facts About Millionaires

Round ups that linked to posts from this site

• Kevin at Invest it Wisely - Weekend Reading- Fall Foliage Edition
• Mich at Beating the Index - World Stocks From One High To Another
• Kris at Everyday Tips and Thoughts - Time to Read Some Great Posts
• Money Reasons - MR Cache: Water Spot Edition
• Maximizing Money - Join the Best Personal Finance Sites at Yakezie
• Khaleef at KNS Financial - Tipping Edition Round Up
  

Honorable Mentions

• Andrew at Money Crashers - launched Top Personal Finance Blogs ranking algorithm
• Barb at Barbara Friedberg Personal Finance -wrote a free 20 Minute Guide to Investing

Good Old Middle Class or Wealthy - You Decide Redux

By: Roshawn Watson

Taxes are rising! Taxes are rising, or are they? I guess we still don't officially know what exactly is going to happen yet. However, that doesn't stop the bickering and fighting over the proposed tax increases. During what appears to be a very slow recovery, many would characterize the present  state of the economy as fragile. Thus, a change in tax policy could potentially have very big implications: help plug deficits or send the economy over the edge.

Good Old Middle Class or Wealthy?
A little over a year ago, I wrote an article (Good Old Middle Class or Wealthy, You Decide). It discusses just how difficult it  is to distinguish the middle class from the wealthy. Many families who earn in excess to $250,000 do not feel wealthy and consequently don't want to be subject to a 3% tax rate increase on income above $250,000 proposed in the Obama budget. They argue that although their income may be in the top 2-3% of Americans, they are not rich. Here are some examples:

James Duran, an owner of a human resource company Silicon Valley, and his wife make $400,000 annually and bemoans how he's "barely getting by."  Additionally, Mrs. Ellen Parnell, a surgeon's wife, claims her family's "needs are met, but we don't have a load of cash to cover wants... the reality is Obama may call me wealthy, but I thought we were just good old middle class" despite their $260,000 annual income.

She cites the $60,000 decline in the value of their house, the fact that Dr. Parnell works 7 days a week, and that he drives a 10 year old Infiniti as her justifications. Additionally, she says taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut their gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.


Parnells Have Gained Allies Over The Past Year
The Parnells are not alone though. Todd Henderson, the now infamous University of Chicago senior law professor, said that Obama's tax hikes on "the rich" might force his family to sell their house. According to Henderson's blog post,  his family's tax payment is "nearly $100,000" (including state taxes), so using a reverse tax calculator that puts the Hendersons income at about $400,000 a year.You may ask why would a family making approximately $140,000 more than the Parnells also have trouble with a 3% tax increase. After all, that's over $11,000 per month more than what the Parnells earn. Well in his post, which has subsequently been taken down amid the controversy, he wrote "(a) quick look at our family budget, which I will happily share with the White House, will show (President Obama) that, like many Americans, we are just getting by despite seeming to be rich. We aren't." .

Flawed Argument
The problem with the Parnells and Hendersons' argument is they are essentially saying "we have no room in our budget, so our inability to afford a tax increase means we are not rich." They ignore the fact that sloppy financial management  can make you broke even if you earn millions a year, such as Screech and Toni Braxton.

For example, it makes no sense why the Parnells would have a car payment or a second mortgage with $21,000 monthly income. Perhaps, the debt represents their unwillingness to live on that income. They clearly have no aversion to debt despite their less than indulgent lifestyle.Thus, even with an income five times above the median household income in the US, they struggle. It's their  lack of personal responsibility with regards to their finances, not their opposition to the tax hike, that's particularly troublesome.

Economic Basis (or Lack Thereof) For Tax Abatement

Then, there are also the more prominent allies who dispute the economic merit of raising taxes, such as famed economist and personality Ben Stein. You know Ben Stein "the guy who got rich because when he talks, it sounds so boring it's actually funny (Bill Maher)." Here's Ben's take:

 I am a fairly upper income taxpayer. Not anything even remotely close to sports stars or movie stars or financial big boys. But I am above the level Mr. Obama says makes me rich. So, in the midst of a severe recession, I am to have my taxes raised dramatically.... I worked for almost every dollar I have... I pay my income taxes, and after them and the commissions I pay my agent, I am left with about 35 cents for every dollar I earn...I am not quite sure what my sin is.

Moreover, he argues "(t)here is no known economic theory under which raising my taxes in the midst of a severe recession will help the economy recover. It isn't part of any well known monetarist or Keynesian theory. So if it does no good to raise our taxes, I assume we are being punished."

Art Laffer also weighed in saying that removal of the Bush tax incentives would precipitate an economic collapse in 2011. In Will the Economy Collapse in 2011, I discuss his famous Laffer curve (he theorizes that there is a "sweet" spot  for taxes which we are presently in), and increasing taxation will only serve to hurt the economic recovery and result in lower government revenues. At the core of his theory is the concept that money moves where it is best treated. The wealthy control the volume, location, and the timing of their income. Thus, many will choose to avoid these tax cuts via minimizing earned income, changing residency (low or no state taxes), and finding loopholes, etc. As support, he cites how states that have "millionaire taxes," such as New Jersey, are more apt to have struggling economies. Additionally, he points to the dramatic surge in economic activity that occurred when Reagan gave tax relief. Notwithstanding, the accuracy of some of his predictions, his theory is quite interesting. To read more, click here:

Concluding Thoughts


First, without complete financial records, it is impossible to accurately judge the Parnells, Durans, and Henderson's financial positions, so who knows whether they are wealthy. However, I am certainly inclined to believe them when they say they are not rich. Additionally, I highly doubt if taxes were 20% lower that they would consider themselves rich then either. In other words, the taxman  isn't the only reason they are just getting by. It is particularly hard to have empathy for families who complain that they can barely make it on $400,000 per year, especially during a time when one middle-aged man in four can't find a full-time job.Too many people build sizable fortunes on less. Too many people thrive on less. If you are barely making it on $400,000, you are probably pretty crappy at money management (or have  extremely unreasonable expenses). Being inept at your finances or living above your means is your prerogative, but complaining about a 3% tax increase on the basis that you can't afford it on $400K embarrasses your cause and only you brings ill-will. I am certainly not against anyone's success; in fact, I applaud it. However, if the best the Parnells, Durans, and the Hendersons can do is to tell us how they are struggling like everyone else, then they may consider struggling a little more quietly (free speech or not).


With respect Ben Stein and Art Laffer, they have some interesting points. For example, regardless of how rich you are, there's a big problem when you only get to keep 35 cents on every dollar you earn mostly because of taxes, especially when 47% don't pay any taxes. That, at the very least, is demotivating. It was demotivating when taxes were 91% under Eisenhower and 70% under Nixon. I certainly hope the government is not increasing taxes to punish high-income earners because somehow anyone who earns a lot must have done something evil to get to that level. While that sounds silly, it's not like the pro and con arguments for class warfare have been exactly logical lately. Anyway, I am curious how increase taxes will solve what trillions of dollars in fake money couldn't. Just like like the aforementioned families could likely cut the fat, what would happen if we collectively tried to cut the fat on a national level, an interesting thought indeed?

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Posts
Good Old Middle Class or Wealthy, You Decide

Will the Economy Collapse In 2011?

We Don't Export Enough!

Today's post come from Mr Credit Card from Ask Mr. Credit Card  where he writes about news in the credit industry, reviews specific cards, and identity theft protection services.


Recently, the United States and western nations have gone through a lot of soul-searching about what went wrong with the economy. All paths point to overleverage as the blame. For example, the sub-prime mortgage debacle would not have been so dire if our economy had not been in so much debt. Consider that one of the primary reasons for the halt in economic growth was that so many companies use debt as their working capital for daily operations! Consumers are leveraged too with mortgages, car loans, balances on their credit cards, and student loans. Unfortunately, we are confronted with a far bigger problem today, which is that the US economy has a negative cash flow. We run a persistent trade deficit. In other words, we import more than we export. It's like we are spending more than we are making. This has been going on forever. How can this be?

Well, the simple answer answer is that the US Dollar is the currency of international trade. This happened after the World War 2 when the United States became the world's superpower. The US Dollar is used in international trade. Since international trade is conducted in our currency, countries who have trade surpluses with us (those that export more than they import) have excess savings. These savings are in the US Dollar. They need to reinvest these dollars somewhere, and their preferred investment choice are the US Treasury bills and bonds, which are deemed the safest investments. Consequently, we are able to continually import more than we export thereby allowing us to keep running budget deficits!

However, the recent financial crisis has exposed a flaw to the way the U.S. economy has developed over the last few decades. We are now facing a "jobless slow recovery". Why?

We Do Not Export Enough

The answer is really simple. We have stopped being an exporting nation. Our economy for the past couple of decades has been based on consumption fueled by our increased indebtedness. Since we run an inflationary policy (2% inflation thereabouts is tolerated), our cost structure continually goes up. It goes up slowly and is not noticeable at first. However, over the years, it results in higher wages. Consequently, we are hit with a double whammy. Our exporters have shifted our jobs overseas because of cheaper labor cost, and the bulk of our economy is based on consumption by consumers. We now consume products made overseas that used to be made by us. Together with cheap leverage, our economy became "service-based." We became a nation of real estate brokers, attorneys, restaurant owners, financial engineers. Even in our export industries, we hire "Ph.Ds" to invent more swanky Nike shoes (high tech!) and we hire MBAs to market and sell them. These are "phantom" innovations in my opinion.

Now that credit has dried up, we face real difficulties in recovering because we cannot keep consuming anymore without dealing with our economic problems. Becoming a manufacturing nation again doesn't appear to be a viable option now that jobs have been shifted overseas. One reason is it is hard to be competitive with rock bottom prices available for labor in other markets.

Passive Income Syndrome

Additionally, we have become a nation that simply wants to earn "passive income". We do not want to get our hands dirty anymore. We try network marketing, making money with blogs and online, and all kinds of other "stuff". We search for all kinds of "business opportunities" to free ourselves from our "jobs". We subscribe to franchise magazines or small business magazines and look for opportunities and ideas. However, the problem is that these do not help solve our national problem, which is we do not export enough!

Pick up any small business opportunity magazine and I bet you cannot find a single idea about inventing products and selling overseas. All you see is "franchise opportunities" and other "US based ideas".

Are you in a "Service-based Job"?


I think a more important implication is that if you are in a "service-based job" that depends on the domestic economy, you are likely (on average) to see slow growth (if any) in your industry for the next few years. That is because the whole economy is deleveraging and demand would be tepid at best.

Beyond Passive Income and Getting Rich


And if you are thinking about going into business yourself, perhaps you should ask yourself if your product or idea will have worldwide demand: In other words, can this product be exported? If you could, you are likely to do better than most domestic businesses that focus exclusively on the U.S. consumer. You will also be helping the nation. If you are thinking about changing careers, perhaps you should consider moving to an industry that sells their products overseas as well.

I do realize that many of you who read personal finance blogs love the concept of passive income, being your own boss, and being a freelancer. However, if you are seriously thinking about switching careers, I suggest returning to the basics and asking if you can start a business that sells a product overseas (potentially). Our economy is in dire need of such businesses and these are businesses that are likely to be more successful rather than service-based industries that just services local or domestic businesses.

So here is a question for you readers:

Does Your Company Export?
If you are an entrepreneur, is their demand for your products abroad?

Related Post
Deleverage Your Life

Big Controversy, Alexa, Round Up, and More!!!

By: Roshawn Watson


Disclaimer: I am deliberately treading carefully with this post because of the sensitive nature of the topic. By even mentioning something so controversial, I risk upsetting some and enraging others. I seriously considered not discussing it to avoid such polarization; however, I believe that it would be quite unfortunate to allow political correctness to preclude having meaningful discourse about an issue that affects us all. All I ask is that you keep an open mind. 


This weekend, I became aware of a recent article written by Penelope Trunk, founder of the Brazen Careerist (and two other start ups), which has a very unpopular premise. She argues that Women Don't Run Start Ups Because They Rather Have Children. She likens being an entrepreneur to having a mental disorder and says " I am officially not crazy enough to spend another year missing out on being with my kids." Brazen Careerist is now going to be moved and run by a new CEO. She can reclaim her life now, as she will no longer oversee operations nor be the primary company visionary.

Upon reading, I sent out a few email queries and tweets to several female professors, bloggers, and other professionals. Their responses ranged from calling Penelope's opinion "sexist"  and grossly "generalized" to saying that they typically "agree with most of what she is saying." However, most of the responses had an overtly negative tone. When I asked one person why she thought Penelope was sexist, I got " most people want to be judged for their own actions not the actions of others of the same sex, race etc." Now, I personally didn't think that Penelope was saying it is okay to judge anyone but rather discussing her own experiences and observations, but that's just my take (and I have been told I am wrong). The shortest reply was "I find it makes me angry...but thanks :-)"

For me, this article hits close to home for two main reasons. First, I know some fiercely intelligent and ambitious women and am quite curious about the motivation behind their career choices. For example, starting your own research program is similar to running your own start up in many ways. There's a high failure rate, you work very brutal hours, and you need an unparalleled drive, passion for, and an ability to sell your ideas. Some of the brightest women I have had the privilege of knowing have decided against going this traditional tenure-tract faculty route citing lifestyle restrictions as a major consideration. Another reason I found the article interesting is because I am an entrepreneur. I blog  to help people (and I enjoy it) but not because of its business model. I do have more profitable endeavors. Thus, her discussion of the entrepreneurial lifestyle peaked my curiosity.

In short, I found her commentary on her experiences and observations to be quite candid and insightful (insider's perspective so to speak). I truly believe such opinions affect us all (whether directly or indirectly). After reading her post, I am left with so many questions that perhaps you will be kind enough to help me with in comments.

Thought Questions:
1) Why do you agree or disagree with the author's opinion?
2) Is it perceivable that there could be at least some validity to what she is saying (despite the generalizations)?
3) Are men and women so different that the overall familial unit may typically be better served in a particular way (noting that there are always exceptions)?

Exciting News!!!! Last Wednesday, I met the Alexa Challenge goal by crossing the 200,000 threshold! I changed to this domain back in early July, so it took 3 months to go from 1.9 million to underneath 200K. I send a heartfelt thanks to all who made this possible with just 1 article and 1 round up per week! Your efforts have truly been remarkable, and I am very grateful!
 
Now, it's time to do the weekly Uncommon Money News and Yakezie Round Up.

Uncommon Money News and Yakezie Round Up

In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!


To my readers: I am so honored by your support. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you: you are vital! Thank you sincerely.

Personal Finance (Yakezie and other PF bloggers)
I'm Sick of hearing It's For The Kids at Free From Broke - Craig discusses how some parents who are financially struggling still manage to lavish every gift on their kids

You Just Won 1 Million, Now What at KNS Financial - Khaleef knows it is fun to dream and begins to tap into ours with this fun post. He thinks his plans are boring, but most would call them sensible and charitable. What about you?

What Do You Need To Get Out of The Rat Race? at Invest It Wisely - Kevin talks about what is financially necessary to never be forced to work another job that you hate. (Of course, if you really hate it, the time to plan your departure is now.) Ponder what financially freedom would feel like for a while, and then check out his detailed and insightful analysis.

Ignored Tip for Building Wealth at Money Reasons - Money Reasons believes this tip is often ignored in our pursuit to build wealth. Have you ever experienced the death of a dream? It's tragic! Learn how winners handle this.


Financial Discoveries In a Consumerist Culture at Saving Money Today - This guest post by Aloysa is quite interesting because it discusses being exposed to American consumerism while being from a country with diametrically opposed values. It's quite enlightening to read her four discoveries!

To Annuity or Not Annuity at Everyday Tips and Thoughts - Kris discusses whether annuities (insurance-investment products that can guarantee you an annual income) have a role in your portfolio.

Business News
How the Phone Companies Are Hurting America: The $320 Billion Broadband Rip-Off

U.S. companies sitting on piles of cash are using them not to hire workers or build factories, but to prop up their share prices

Economy
Warren Buffett: Tax cuts for all, EXCEPT the rich

The International Currency War at Beating The Index - Mich discusses the currency war and how to capitalize from it.


Entertainment Money News
Please Unbreak My Heart - Toni Braxton Bankrupt Again (Could Owe $50 million)

Two and a Half Men Kid Star gets a Whopping $300,000 per episode

The Social Network #1 Again (Box Office) and Personal Finance Lessons from the Social Network

Wealth
There's Rich... and Then There's Super-Rich

Americans Are Horribly Misinformed About Who Has Money



Carnivals I Participated in

• Carnival of Personal Finance at Canadian Finance Blog - The Problem with Being Budget Minded is Other People
• Carnival of Financial Planning at Consumer Boomer - Economists Blame ME for the Slow Recovery and Why Is Debt Really Decreasing?
• Festival of Frugality at Fiscal Fizzle -  Do Competent Kids Need an Inheritace?

Round ups that linked to posts from this site

• Khaleef at KNS Financial-Education Edition Round Up
• Kevin at Invest It Wisely - Weekend Reading: The Changing Seasons Edition
• Laura at Move To Portugal - Financial Freedom Edition
• Money Reasons - MR Cache: Winning Across The Board
• Mich at Beating The Index - Thanksgiving Edition
• Kay Lynn at Bucksome Boomer - Week in Review and check out (Please cancel my account)
  

The Problem with Being Budget Minded is Other People

By: Roshawn Watson

Budgets are powerful tools. If followed, they force us to realistically evaluate our income and outgo to develop a rationale spending plan in line with our household or business goals. However, one of the biggest challenges to operating on a budget, past the initial dread budgeting in the first place, is that other people don't. Thus, if you follow a budget, "they" (family, friends, society at large) will call you a zealot, fanatic, and extremely frugal. I'm convinced though that the problem isn't you my friend, it's them!

Our Societies and Our Need For Approval
We live in an overtly critical society. Go to nearly any entertainment or political news website, and the discord represented in the comments is phenomenally depressing. Everyone is so anxious to share their dissent about this or that regardless of how banal it is. At least on the internet though, you often don't really know who the critics are. It's an entirely different dynamic when the critics reside within your real life inner circle.


I was reading a story recently where a lady saw a beautiful piece of furniture that she would have loved to own except for the fact that it was out of her budget at the time. Her mom said "that's fine. Use your emergency fund to purchase it." When the daughter refused, her mother called her a miser. Her mom's thinking was so warped that she misconstrued being fiscally responsible with miserly behavior. Personally, I think the real difference between this daughter and mother is quite profound. The mother can't think beyond instant gratification. Obtaining what she wants right now is her priority. In contrast, the daughter is thinking about her risk tolerance and financial future. The mom's inability or refusal to think ahead is commonplace among the poverty-minded. In creating phenomenal wealth over time, we discuss using the opposite mindset to build wealth long-term. The long-term implications of consistent fiscal conservatism to your balance sheet is remarkable. Being budget-conscious doesn't make you any more miserly, than being a spendthrift makes you a giver.

Interestingly, there is another important issue at play. By the daughter's refusing to embrace her mother's advice for handling her finances, she is expressing a quiet dissent towards reckless spending (her mom's path). Since people don't like to be reminded that money needs to be managed well, this criticism was ill-received.The mom didn't like the challenge and lashed out with a passive-aggressive statement, which is really thinly veiled manipulation through hostility.This story highlights the often dysfunctional relationships we have with our family and friends with regard to money. Fortunately, the daughter had the wherewithal to set a clear boundary for her condescending and unsupportive mother. However, all too often we give into the pressure, blow our budgets all in the name of maintaining approval.

Let's Challenge Them
Well, I say forget their approval if it is contingent on "fitting in" financially. Relationships with friends and family members should not be based on whether or not I do what you want but rather determined by your love for each other. If they are so lame that they can't stand you being responsible with your money, then it may be time to limit their exposure to your life in most financial matters. Two men cannot walk together unless they agree, and this explains why your income typically will reflect that of your 5 closest friends. The old adage is true: birds of a feather do indeed flock together and go to the same destination!

Your goals are vitally important because they will decide the direction of your life. Some people will be a hindrance to nearly everything you try to accomplish financially.Whether intentionally or subconsciously, they will take you down with them if you let them. Often, they will be dismissive of your wisdom while simultaneously asking for your financial help. While they certainly do have a right to not listen to you, they also need to respect your rights to keep them out of your wallet. However, instead of supporting your decision to not go out and have fun or help them, they will typically demonized you for not enabling their irresponsibility with your subsidies or for being too tight.

Such parasites, leaches, people generally don't like me too much anymore. If they hang around me for too long, I'm gonna hold them accountable for their misbehavior (if they give me an adequate opening). I wouldn't do this out of malice or spite, in fact it's just the opposite. For example, I supervised someone at a company where I made nearly 7 times more than the person I was supervising, yet he was the one driving the Benz and couldn't afford to get it fixed when it subsequently broke down. Rather than risk losing his social standing by purchasing a car that he could afford, he was broke and sometimes had to take the bus when his car wouldn't start.The thought processes that people use to justify spending all that they have goes beyond my comprehension.We obviously had very different goals. I really wanted to say something to help when I first noticed the Benz but never got a chance. This is essentially watching a disaster waiting to happen but being told to be quiet (don't warn them). I have learned not to stuff food down the mouths of the non-hungry, but it doesn't change my compassion for them just my approach. If they are comfortable enough to air or discuss their ignorance, then I can be comfortable enough to tell them no (if applicable) or tell that they are making a mistake.

Stick To Your Plan, You Are Smarter
Additionally, I often think people misunderstand my motive for endorsing conscientious consumption. Frugality for frugality sake doesn't interest me. Even more undesirable to me is frugality for the sake of living a high-consumption lifestyle (i.e. after you become debt-free, the money that was sent to Chase Auto now gets spent in its entirety on going more fancy vacations prior to building any real wealth). Here's a thought, why go through the trouble of becoming debt-free only to blow tens of thousands of dollars a year on crap you don't need without building any substantial wealth. Those aren't reasons that would motivate me to live frugally. However, budgeting for the purpose of making my dreams happen is a different matter entirely. For instance, instead of spending money on a depreciating Benz, I would rather own additional dividend-paying investments. This isn't an attack against owning nice things either, but their purchase should fit within your budget, values, and overall goals. I'm convinced by my own experience and those of countless others that if you operate frugally long enough, earn a reasonable income and control your expenses, you build wealth. This is the path towards having some serious financial game!  As I have said before, according to the 400 richest Americans (Forbes 400), 75% believe "the best way to build wealth is to become and stay debt-free." That's a plan that I can live with: sacrificing to win.

Thus, before you give in to the pressure, thinking that something is wrong with you, realize that debt and consumerism have so infected most people that fiscal responsibility seems downright radical. It appears radical if you say "I'm going to go to school without student loans," "I am going to buy a car without payments," "I'm not going to eat out at restaurants four days a week," or "I am going to live without worshiping at the altar the the great FICO." In fact, there is an outright hostility when you suggest anything other than the aforementioned status quo.

Don't yield into intimidation or manipulation. Refuse to allow others to set your household budgetary agenda. Normal is broke, so following their financial advice can be deleterious. If your family and friends or others are bullying you to discount your budget, consider this your call to action to develop enough of a backbone to tell them NO! Tell them you will not be manipulated into spending more just because they are out of control and won't feel validated until you join them (okay maybe leave off that last part, but you get the point). You set your family priorities. You diligently pursue your goals. You reap the rewards!

The only thing wrong with us is our refusal to embrace this stance sooner!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Posts
Is Extreme Frugality For You
What's Your Financial Mindset
Creating Phenomenal Wealth Over Time

Hiding Money Round Up and Uncommon Money News

By: Roshawn Watson

Last week, I came across a very interesting post from J. Money of Budgets are Sexy entitled Hide Your Money From Yourself (link below). The premise is 1)to create distance between yourself and access to your money thereby decreasing the likelihood of spending it and 2)to fund this "distant" account automatically, so that it grows effortlessly.

This strategy is simple enough to employ by opening an online savings account, and it has personally served me well.  I initially opened online accounts because they provided superior interest rates compared to brick-and-mortar banks. However, after using them for a while, I found that they also protected me from me!

These accounts force you to be disciplined, which is vitally necessary if you are not a natural saver and investor. Here is why. If your household makes the median income of $50,000 per year for 30 years (age 35-65), your household will gross approximately $1.5 million. Given this fact, it is particularly disturbing to work your entire lifetime and have little to nothing to show for it. A reality is that many of the elderly cannot write a $5,000 check. Lack of financial discipline (poor money management skills) is also one of the five primary reasons I believe that causes lottery winners to go broke.  While people love quoting the profound advice from George Classen's book The Richest Man in Babylon, "Pay Yourself First," I wonder how many actually practice it continuously. The problem with paying yourself last is that for some people, there is little to nothing left unless you make your goals a priority. Additionally, restricting your access to your money also helps you avoid (or at least delay) "dipping into savings."

In short, if you can use some more discipline with your finances, consider implementing this strategy.

Thought Question: Do You Hide Money From Yourself?

Now, it's time to do the weekly Uncommon Money News and Yakezie Round Up.

Uncommon Money News and Yakezie Round Up

In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!


To my readers: I am so honored by your support. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you: you are vital! Thank you sincerely.

Personal Finance (Yakezie and other PF bloggers)
The End of Free Markets: A Great Reason to Buy Stocks at Balance Junkie - 2 cents argues that now is a great time to buy stock. She gives her rationale, but do you believe her?

How to Allocate a Second Income  at Everyday Tips and Thoughts  - Kris ponders what to do with an unexpected second income. The comments are pretty interesting too: you can see the disparity in risk aversion clearly by the answers.

Do We Incur Debt Through Our Childhood? at Squirrelers - Squirrelers discusses whether we incur an ethical and financial debt to our parents. I commented on the cultural dynamic of such a provocative question.

The Curse Of The Accidental Millionaire at Money Reasons - He recalls the tragic story of his friend who was very income affluent but never converted that income into wealth: very sad indeed.

Super Freakonomics at Joe Taxpayer - Joe reviews this insanely popular book.

Hide Your Money From Yourself at Budgets Are Sexy- I hide money from myself with online savings accounts, and so do most of J Money's readers. If you want to read an example of just how powerful and extreme this strategy can be, this is a good and quick read.


Business
College Kids Who Made Millions

Southwest to Buy Air Tran for $1.4 Billion

Investing and Economy
Is Global Debt a Ticking Bomb

The Great Tax Debate: Ben Stein versus Linda McGibney at Biz of Life - He gives a very interesting proposition to all of the wealthy billionaires supporting increased taxes.

Entertainment Money News

Which Celebs get paid get bucks to tweet


The Social Network Takes #1...Here's the weekend box office breakdown

Offbeat Money News
Toxic Friends - Non-Reciprocal Takers at Invest It Wisely -  Some people will always be takers.

My Guest Posts

• Thanks to Jason White (Frugal Dad) for publishing my article: Radical Thoughts About Our Culture of Debt
• Thanks to Nickel (Five Cent Nickel) for publishing my article: Winning The Lottery Won't Fix Your Finances

Carnivals I Participated in

• Carnival of Financial Planning at The Skilled Investor- Why Is Debt Really Decreasing? and Economists Blame ME for the Slow Recovery
•  Your Financial Independence Carnival at Ditch The Boss -Is Extreme Frugality For You?
• Yakezie Carnival at Personal Finance By The Book -  Why Do We Save Anyway?  
• Carnival of Personal Finance at US News  and World Report -  Will Mortgage Rates Really Drop to 0 percent?
• Festival of Frugality at Before You Invest - When is Paying Down Your Mortgage a Bad Idea?  

Round ups that linked to posts from this site 

• Kevin at Invest it Wisely-Weekend Round Up - Six Month Anniversary Edition
• Kris at Everyday Tips and Thoughts - Round Up - Time To Do some Reading
• Adrian at 7 Million 7 Years - Millionaires Aren't Rich
• Mich at Beating The Index -  Weekend Edition: China's Economy Soars

Will Mortgage Rates Really Drop to 0%?

By: Roshawn Watson

Purchasing a home is one of the biggest financial decisions most people make. The amount you spend on your home often will impact your retirement, ability to pay for the education of your children, your ability to build wealth, and your overall financial solvency.With historically low mortgage interest rates and several depressed markets, this is  prime opportunity to buy (or refinance) if you have an adequate financial foundation. In an effort to get more buyers off the fence, mortgage lenders have pondered the implications of aggressively cutting rates even further. What impact would no-interest mortgages have on buying decisions?

Could You Use an Extra Quarter Million?
The prospect of zero percent mortgage rates really got me thinking: just how much does one spend on a 30-year mortgage (assuming no prepayment)? After all, mortgage rates are so freakishly low; surely it's not that big of a deal. Let's say that you purchased your home about 5 years ago at 6.5% APR. By the time the  mortgage is paid off in 30 years, you would have paid for the mortgage nearly 2.25 times. Simply multiple your monthly payment times 360 to test out the theory. More importantly, this means that 56% of the total amount you pay is interest. Of course, this interest goes to the mortgage lender as profit. Over the lifetime of the loan, that means you are being charged 125% interest.

This point is easier to appreciate using real numbers, the 2005 median home price in the United States was $240,900. If the mortgages were $193,000 (assuming a 20% downpayment) at 6.5% APR, then Americans would end up paying $438,840 (not including downpayment) over 30 years. This also means that we would pay nearly a quarter million dollars interest alone! Since most people could you use an extra quarter million, the interest issue is very relevant to most homeowners (as most have mortgages). Note, if the rate decreased from 6.5% to 4.5%, one would save a noteworthy $85,000 over 30 years (in this example)!

If mortgage rates plunged to zero

Perhaps you may be wondering, why a lender would consider giving up so much profit by cutting rates? As long as deflation is a prominent concern, mortgage rates will continue to decline.

At least, that was the opinion of loan officer Dan Green according to Market Watch. What I found most interesting was the article's discussion of the feasibility of mortgage rates plunging to zero. Of course, using 0% interest or near zero rates to spur buying behavior is not a new practice. For example, new car buyers expect to pay little to no interest (if they have great credit) as an incentive for financing the vehicles.  Likewise for homes, zero percent financing could spur demand to barely containable levels, prompting hiring in the mortgage industry to meet capacity and increased consumer spending due to substantial reduction in monthly payments. However, mortgage industry experts are dubious as to how this economic model could work, since "to fund a 0% mortgage, an investor would get a negative return."  One pragmatic solution would be to implement tremendous fees to borrowers, which would compensate for costs to originate, deliver, and the cost of default, etc.

Unfortunately, the general consensus is that 0% interest is very unlikely, but that doesn't preclude rates going even lower than the present levels despite record-breaking low rates for 30-year loans. This is primarily because this recession has been very atypical (huge understatement I know). Thus, the predictive value of historical precedent regarding interest rates is not as strong. We experienced a 0.7 point decline in fixed mortgage rates between June 2009-2010, which was the largest over the last six recessions. This means that although declines in rates are common during the 12 months following a recession, the recent decreases in mortgage rates have been distinctively more steep.

Regardless of the Rate, You Must Watch Your Ratios

Often missing in the discussion of mortgage debt is the ratio of your mortgage to your annual income. Thomas Stanley and Chris Farrell both advocate not going over two times your annual income for a 30-year fixed mortgage, and I am inclined to agree. In his book Your Money Ratios: 8 Simple Tools for Financial Security, Chris argues using the following chart as a guideline for your mortgage to income ratio (MIR).

• 25 years old -- MIR: 2.0
• 30 years old -- MIR: 2.0
• 35 years old -- MIR: 1.9
• 40 years old -- MIR: 1.8
• 45 years old -- MIR: 1.7
• 50 years old -- MIR: 1.5
• 55 years old -- MIR: 1.2
• 60 years old -- MIR: 0.7
• 65 years old -- MIR: 0.0

Another conservative strategy is to make sure that your mortgage payment is no more than 25% of your net (take home) salary. In either case, the goal is to make certain that your mortgage is in line with your wages and to enhance the probability of you paying it off. In some more expensive areas, this may mean delaying the purchase of a home until a large enough downpayment can be saved to reduce the total mortgage to a more reasonable size.

As stated earlier, the mortgage has a significant impact on one's finances. Consider research by Thomas Stanley that showed that those with investible assets of at least $1 million or more were over 2 times more likely to live in a home valued at $300,000 or less compared to those who earned $200,000 or more (but assets less than $1 million). In contrast, people with investments of $1 million or more were only 0.65 times as likely to live in a home valued at $1,000,000 or more (compared to those with annual income of $200,000 or more). The implications are clear. This data suggests it is easier to become (and stay) a millionaire if you live and consume like those who live in modest homes than in expensive homes.

Additionally, the size of a home is a better predictor of one's mortgage than one's wealth.

It is particularly grieving to watch my well-educated, high income friends move into upper-middle class neighborhoods even if some of them can barely afford it. Stanley's data indicates: conspicuous consumption (including status homes) is a better predictor of credit rather than wealth. Please forget looking rich...be rich! I know school districts are a frequent concern for parents. School districts are important but so is not eating Alpo in retirement. Just be pragmatic and show restraint.

Build Your Wealth Not Their Wealth
There's been much discussion about how we are more frugal now. However, there is rather interesting data suggesting otherwise.Although the lending standards are more stringent today than a few years ago, the lender's assessment of your financials is only a beginning consideration. Remember, if your end goal is to become financially independent, not having a mortgage would be tremendously advantageous. It is so much easier to save and invest without consumer debt, so imagine what you could do without a mortgage.Being mindful of your money ratios  is very prudent. Low interest rates don't mean much if your home is 55% of your income.

In summary, there is little doubt that 0% mortgage rates would be sweet even if some reasonable fees were levied up front. Although such rates seem unlikely, this is still a great buying (refi) opportunity for those on solid financial footing because the rates are so low. Just remember:

"Every penny of interest you pay is money you have to earn...money that should be contributing to your wealth...but instead you are donating it to the wealth-building of your creditors" (John M. Cummuta).


Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Posts
Why Those Dropping Gas Prices Might Not Be Such A Good Thing

Forget Looking Rich... Be Rich!

Why Is Debt Really Decreasing