Anybody ever read the book "Rich Dad, Poor Dad" which was a best-seller a few years ago? I read this book and it really opened my eyes about money. Most people in this country, and I mean 99.99 percent of us, don't really understand money. The author of this book is no "brain surgeon" and doesn't pretend to be, but he is smarter than most simply because he was able to absorb a few basic lessons over the course of his lifetime. The author favors real estate because of favorable tax treatment, but really doesn't advocate any particular class of assets. Just buy assets regularly, and keep buying them, and buy them some more.
Without going into excruciating detail, the author teaches us that what he learned was that you have a few distinct "jobs" in life. As a young person you should pursue an education, then as an "adult" you have two distinct jobs. Your first job is your "profession" which is being an engineer, attorney, truck driver, or whatever profession you choose. Your profession pays your bills and gives you access to money. Your second, and more important job, is to build wealth. This means that instead of buying liabilities, like bigger and bigger houses, new cars, boats, etc (all things that I like) you should buy assets. Simply put, assets earn money for you and liabilities take money from you. This lesson is so simple but it is lost in the American system, whose economy is built on spending. The author shows us how to put money to work for us, instead of working for money, by buying assets. So if you invest in, say, a mutual fund, or whatever, then you are sending a dollar out to work for you. And the more dollars you send out to work for you, the better. The goal, of course, is to send enough dollars off to work that they return enough money to you that you become wealthy*. In other words, you become able to live off the yield from your investments. The secret of money is that there is no secret. When you send that dollar off to work, it doesn't need a day off or a vacation or get sick. It will work for you essentially 24-7 with a relatively modest amount of attention. Very few of us will make it our whole lives without illness or some interruption in our working lives. So buying assets affords the possibility of better weathering a serious illness, or simply surviving retirement without becoming part of the dependent class, with the ultimate goal of becoming independently wealthy.
My definition of *wealthy is when you don't work for money, your money works for you. So an attorney might be affluent while an auto mechanic might become wealthy, because the auto mechanic bought assets while living below his means, and eventually became able to support himself solely based on his assets, while the attorney pursed the home mortgage interest deduction, "lifestyle", and larger and larger toys, but didn't buy enough assets to ultimately become financially independent. The financial classes might be described as poor (dependent class), working class, middle class, affluent, and wealthy (also known as rich). So what is the best way out of the poor class? A job. And what is the best way out of the working class? Education and a better job. How do you get out of the middle class and become affluent? More education and a better job. We can see that at every step of the way the clear answer is education and gainful employment. It is possible to skip a class with enough education and gainful employment. So how does one become wealthy? This is where I think the american education system fails, by omission. The system deliberately DOESN'T teach us how money really works, so I don't think education will really help in this instance. Learning how money works is really up to the individual. If we learned how money really works in college, we would leave college not being so willing to become part of the system. I remember very distinctly in high school, as a group we asked our AP English teacher why the public education system didn't seem to teach us anything practical. She just shrugged. She was bright and dedicated, and it wasn't her fault, she didn't set the curriculum. But she was required to teach the curriculum that was set. It is not in the system's favor for the system to teach us how the system really works, so the system teaches us to be employees, not entrepreneurs. I believe that to become wealthy one must diligently follow the path laid out in "Rich Dad, Poor Dad"; buy assets. Buy them regularly. Then buy them some more. Then keep buying them. This seems like simple advice, but apparently it is lost on most of us. We buy larger and larger houses on the notion that we are buying assets. We buy more and better toys because we are conditioned to be consumers. We dig a larger and larger hole.
And who likes the home mortgage interest deduction even more than we do? The banking industry! If we like it, they downright stone cold love it. The system is designed to "reward" us with a tax reduction based on how much interest we send the bank. So, say, for every thousand dollars we send the bank in interest (My definition of interest is money I will never see again) we get a tax rebate of $300. Already this seems like a scam to me. But Americans pursue it with fervor! The public reasons that, if they got back $300 for every $1000 in interest, they would get back $600 for every $2000 they spend. Woo-hoo! So they set out desperately to trade up in houses to get that $600, without much thought to the $2000. Which I totally don't get. I think the public would be much better off by staying in the smaller house, paying the extra taxes, then using the remaining $700 monthly to invest in assets. I agree that it is better to own a house than to rent, but I don't think a house that is twice as big is twice as good. I actually think it's twice as bad. It's just bigger, with more rooms to fill with furniture and electronics (more consumption), larger heating bills, and higher property taxes. I would actually like to see the home mortgage interest deduction abolished, because I think it distorts the value of housing. And I am a conservative*. But I am seriously in the minority in thinking it should be abolished. What would happen to home values if it were abolished? Well, I think they would decline by roughly the value of the deduction itself. Which I think would be a good thing, because property taxes should decline accordingly, and a more rational approach to home ownership would be restored. But be assured that there are millions of Americans who are leveraged to the max, and do not want to lose the home mortgage interest deduction, because their budget is already stretched so thin based on receiving that tax rebate that they can't afford to give it up. Then throw in a few HELOCs and pretty soon they have spent the house anyway.
We Americans pursue the home mortage interest deduction like the donkey chasing the carrot. We are the donkey; we can't step back and see the big picture, because we are chained to the cart. If we could see the whole picture, we would stop pulling the "cart" (the american financial system). Which wouldn't be good for the cart (system), but a lot better for the donkey (us).
In the future, your property taxes will be as much as your mortgage is now. Ask any elderly person what their mortgage was in the 1960's, and what their monthly property taxes are now. In most places the property taxes now outstrip what the mortgage used to be. So you will never really get that house paid off. You will pay either the bank or the government your whole life.
*Conservative - Not the only reason, but one reason I am a conservative is because I am a taxPAYER. If I were part of the dependent class, I would be a tax USER, and might be a liberal. I work Monday, Tuesday, and part of Wednesday for the benefit of the Federal and State Governments, respectively. Between me and two other taxpayers, we will also be the sole form of support this week for one person on social security, to include medical care as well as actual cash. I spend the balance of Wednesday working toward securing my own retirement, in order to not become a tax USER at some future time. I work Thursday and part of Friday to pay my bills in order to keep a roof over my head, once again in order not to become a tax USER. The rest of Friday, if any Friday is left, I earn money to buy a few luxuries, say a vacation somewhere nice once a year. And if I am successful, I get to pay MORE taxes, and at a higher rate, based on the "progressive" tax code that the liberals are so proud of. The liberal system punishes success (higher taxes) and rewards failure (free stuff!), so if you are a liberal and are proud of all that free stuff that is being provided for your dependent classes, you might be onto something. Maybe I should convert. Being a conservative is hard and a lot of work, plus you get called a lot of names, like greedy and insensitive, and worse. It would be a lot easier and cheaper to just throw in the towel and be part of the dependent class. Ironically, the appeal of the liberal system is based on the success of conservatives. If we threw in the towel the liberal system would fail because there would be no one to actually pay for all the free stuff the liberals love so much. We would stop pulling the cart. Also, I am not a fan of free health care, ironically, because I don't think I can afford it. It would only be free to the dependent class, us people with jobs would see a brand new deduction in our paycheck, a deduction which would have to be pretty large. Where else is the money gonna come from? Someone once suggested to me that if we eliminated government waste, we could afford universal health care. I don't really disagree with this in theory. But if that would actually work in practice, why not eliminate the waste first, then come up with a new entitlement program after you succeed in eliminating the waste? Since this will never happen, we can see that this really wouldn't work in practice, therefore I am guarding my paycheck. And just try getting a congressman to give up pork. One man's pork is another man's job. Every taxpayer dollar has a constituency, but does the country really need a "bridge to nowhere"? I don't really blame the senator from Alaska for bringing home the bacon, but I do blame the rest of the senators for going along with it. If this isn't government waste, what is? The appropriations system is woefully broken. No repair in sight though.
