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5 Financial Homilies To Reconsider


wealthymatters.comFinancial advice always needs to be nuanced.What is good for one person in a certain situation many not be so good for another in a different situation. Unfortunately people are always looking for simple advice and rules of thumb.If we over-generalize on generally sane financial advice we can come to a sorry pass.

Here are some common homilies that need some reconsideration:

1. A house is always a good investment:A house is a tangible investment that you could potentially live in.You could rent it out and make some money.Maybe it will help you save tax.Maybe you could invest in one to save for retirement.Generally saving for a house to live in is good in that it gets a family to start saving.But at the time of buying a house it’s important to remember that you are buying a house and not a home.So do not go sentimental and over pay.Buying a house requires a deal of legwork and hard-headed thinking.Overpay and you will have to worry about the fluctuation in market prices.Try to buy an encumbrance-free house at a discount.It adds a greater measure of safety to your investment.Buy when the markets are down to safeguard yourself.Next how you pay for the house makes a big difference.Try to put down a large payment to save on the total interest you will pay.Shop around for a good loan if you need one.Read the fine print.Check if there is a penalty on prepayment.Lower rates matter.Also check if the interest is calculated on a declining balance.Check for hidden costs starting from the processing fee,the lawyer’s fee and structural engineer’s fee and insurance.When you consider the EMI you want to pay, don’t be too optimistic.Pay increments and bonuses might not come on time.Remember that over longer periods something is bound to go wrong.It’s the way of life.Also if you pay too much of your income into house payments you will not have any money left over to diversify into other assets and derisk your investments. Read more of this post

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Learn Wealth Building From The Millionaire Next Door


wealthymatters.comDo you want to be a millionaire? Then perhaps you should start by studying the habits of millionaires….. And this book is just the right place to start.

If you check lists of the best financial books of all time,  you’re bound to find several that include The Millionaire Next Door: Surprising Secrets of America’s Wealthy. Written in 1996 by professors William Danko and Thomas Stanley, its main premise is that people who look rich may not  be wealthy; they overspend — often on symbols of wealth — but actually have modest portfolios and, sometimes, big debts. On the other hand, many actual millionaires tend to live in middle-income neighbourhoods, drive economical cars, wear inexpensive watches, and buy suits off the rack.

Following are some of the gems of wisdom found in the book that the authors Danko and Stanley have gleaned from their thousands of surveys of millionaires.

#1: Income Does Not Equal Wealth
Yes, higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is invested. On average, millionaires invest nearly 20% of their income.

Danko and Stanley even offer a “simple rule of thumb” formula for determining whether you have a net worth that is commensurate with your income:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be.

Those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley. Those in the bottom quartile are under accumulators of wealth (UAWs).This formula also helps in sorting out the millionaires/millionaires-to-be(PAWs) and the millionaire-lookalikes(UAWs).Here is a calculator to do this calculation easily:https://wealthymatters.com/2011/01/17/am-i-wealthy-calculator/

#2: Work That Budget Read more of this post

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