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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

Top Financial Questions Answered

by David Bach

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Posted on Monday, January 14, 2008, 12:00AM

I receive a lot of great questions, not only through this column but through my free monthly coaching call.

January is the most popular time for setting new financial goals, transitioning careers, and making other major life decisions. As a result, I had some really great questions this month that I'd like to share with you.

Conflict Resolution

Q: My financial resolution for 2008 is to end the debt cycle. My husband feels we don't have all that much debt and thinks I'm overreacting. Will I ever finish rich without my husband's help?

A: There's no doubt that getting out of debt is going to be easier if you and your spouse are on the same page. The first thing you should do is read my previous column, which covers the role values play when creating a meaningful plan for your finances.

In it, you'll learn how to identify your top five core values and their related goals. This is an important step in effectively sharing with your partner why it's so important to you to be debt free.

When sharing your goals with your spouse, you'll be more effective if you can really get down to the root issue. Instead of simply saying, "I want to get out of debt," try having a bigger conversation. It might go something like this: "Right now, having debt scares me. It keeps me awake at night because I don't feel safe. If something were to happen to you tomorrow, how would I take care of our family with this much debt?"

When it comes down to it, most couples don't have conflicting values. So having this bigger conversation about safety and security should help your husband see where you're coming from.

A Moving Experience

Q: You often advise that buying a home and living in it is one of the best investments one can make. We just relocated on the first of this year, but our jobs require us to move every three years. Does your advice still apply to us?

A: If you don't own your own home, it's very hard to become wealthy. That's a simple financial fact of life. Your challenge is that because you move so often you don't feel confident enough to buy a home, and therefore you never get the opportunity to build up any equity in a house.

What I recommend for a couple in your situation is to take a year to rent while you get to know your new community. Seek out a great real estate agent and really get to know the local real estate market. Then, when you're able to afford a decent sized down payment, make your purchase. When it comes time to relocate, hold on to your home and rent it out instead of selling it. A condo or townhouse might be a great choice because they're often easier to rent. This is an amazing way to build your real estate portfolio.

If you live in 3 cities over the next 10 years, you could potentially own 3 homes -- living in one while renting two out. It's not easy, but it can be done, and it'll start with your first home purchase.

To make this difficult leap, the real secret is to buy much less than you can afford. If your dream home has three bedrooms, buy one with two bedrooms. Start small and make it manageable.

Finally, I recommend that you visit the bank where you currently have an account and ask about their "first time homebuyer programs." Find out what kind of mortgage you qualify for, how much you'll need for a down payment, and how much you'll need to have saved in a reserve account. If you do this now, you'll have the next year to get your finances in order and look for a great deal.

Good Debt/Bad Debt

Q: I have both credit card debt and student loan debt. Should I work toward paying off my student loans early to get them out of the way? And does it make sense to consolidate several different student loans?

A: Should you pay off your student loans early, or before your credit card debt? My answer is a simple "no."

Think of your student loans as "good debt" and your credit cards as "bad debt." Most borrowers have student loans with very low rates -- 5 to 10 percent, which is cheaper than most credit card rates. Often, government loans are even lower than 5 percent.

Some graduates who come out of school with $50,000 to $100,000 in student loan debt feel that they can't save in a 401(k) plan or buy a home until their debt is paid off. That's simply not true. You're better off to start saving right out of school, make the minimum payments on your student loans, and add extra to your payments on high-interest-rate credit cards.

As far as loan consolidation goes, it comes down to the terms of the loan. Will you truly save money if you consolidate your loans? What often looks good in the short term can be a rip-off in the long term. You need to know the true cost of the loan, what the rate is, how long that rate is good for, and what the penalties are for late payments. Don't be fooled by a low teaser rate that's going to be jacked up in a year or two. Know the facts -- visit the U.S. Department of Education web site for more information about student loan consolidation and whether it makes sense for you.

Home Is Where the Work Is

Q: I'm a 43-year-old working mom with two young children. My goal for the new year is to leave my job so I can stay home with my two young children. In order to afford to do this, I'm looking for a way to find a legitimate work-from-home opportunity. I'd also like to withdraw the $37,000 I currently have saved in my 401(k) and profit sharing plan. Is there any way to avoid paying penalties on that withdrawal?

A: The brutal truth is that if you have to withdraw your 401(k) retirement savings in order to afford to quit your job and stay home, you're simply not financially prepared to make the change.

Unless you borrow the money (which I don't recommend), you won't be able to avoid taxes and penalties. So right off the bat, you're looking at forfeiting over $18,000 (depending on your tax bracket). In almost all situations, my advice is to leave your retirement account untouched.

I've done dozens of financial makeovers for couples, and the No. 1 thing I've seen destroy a family's finances (other than sickness or disability) is going from a double-income household to a single-income one with no adjustment made to the family's standard of living. I've seen families go through their entire savings within 18 months, rack up credit card debt over $25,000, and pay off that debt with a home equity loan only to wind up with more credit card debt -- only with no more equity in their home.

My advice is to increase your savings and actually practice living off half your income before you leave your job. If you really want to be financially prudent, you might consider moving to a less expensive area.

As for working from home, the good news is that today, employers are more open than ever to telecommuting arrangements. So rather than opening yourself up to a potential work-from-home scam, give your employer a business plan outlining the mutual benefits if you were to telecommute or even freelance. Telecommuting or freelancing on a part-time basis may be a great solution for you and your family. It'll allow you to spend more time with your kids while still earning some income.

Any Questions?

If you've got a question of your own that you'd like to see answered in a future column, leave a comment below and I'll pick the best ones.

Here's to getting your year off to a great start!

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54 Comments

Showing comments 6-35 of 54<< PreviousNext >>
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  • Yahoo! Finance User - Friday, January 25, 2008, 1:57AM ET  Report Abuse

    • Overall: 4/5

    Get outta debt!Thats the main thing,the rest will come later.Be patient,and good things will come!

  • Bob & Tracy S - Thursday, January 24, 2008, 8:50PM ET  Report Abuse

    • Overall: 4/5

    I think your advice is right on.

  • Yahoo! Finance User - Friday, January 18, 2008, 12:26PM ET  Report Abuse

    • Overall: 3/5

    I am currently thinking of purchasing a condo as an investment. Technically it is a condotel but not as restrictive as the usual ones. It is located in a resort area and can be lived in year round if you want to. The unit will pay for itself if rented out 50% of the time if the hotel is used to manage it. It is 2BR 2 bath unit. I can easily afford the down payment and still have a years salary in the bank. The problem I have is that my wife thinks this will be too stressful. What do you think of buying this as described in this particular economy. Thank[you

  • Jeff B - Thursday, January 17, 2008, 4:31PM ET  Report Abuse

    • Overall: 1/5

    Why would I want to be an absentee landlord in 3-4 different cities. That part of the article is crap. If most people got a 15 year mortage, they would have the house paid off by the time they are 50. Assuming they don't keep moving up in house every time they have a new kid.

  • Reinhard - Thursday, January 17, 2008, 3:47PM ET  Report Abuse

    • Overall: 1/5

    "If you don't own your own home, it's very hard to become wealthy. That's a simple financial fact of life." That is the biggest honking nonsense I've read in a long time. Many investments outperform real estate in the long run and virtually all but burning your money straight do now. I take that back, burning your money is the better option, at least you retain your credit rating that way.

  • Yahoo! Finance User - Wednesday, January 16, 2008, 11:02PM ET  Report Abuse

    • Overall: 1/5

    What an idiot! He says its very hard to become wealthy without owning a house?!?!?!?!? Hey David, I'm wealthy to the tune of low seven figures in liquid net worth in my late 20s and I have never owned a piece of real estate. How did that happen??? You are truly dumb. First of all in most major metro areas, the places where you can best go out and make a lot of money through work, housing costs can drain you unneccassarily. There is a huge disparity between rental rates and housing prices in the top economic centers of the country. People also tend to forget about factoring in all the associated costs with buying, like taxes, interest, insurance, and maintenance....when you do factor these in, as numerous studies have done, the real return on housing isn't that great at all. Most importantly, your house is not liquid. That is why most net worth statements ask for net worth EXCLUDING primary home. That is the important number. The second biggest cause for bankruptcies in the US is unforseen housing costs related to mortgages. You are locked into an expense for your entire life. When you rent, you always have options of moving around without incurring any material costs. Housing is a good investment for lifestyle reasons for many people, it works out to be ok for financial reasons for many people, it typically never works out to be great for financial reasons for anyone. That is purely hype that the real estate industry has been feeding the public and the media for years. Anyone with a modicum of financial valuation skills knows better.

  • grambo - Wednesday, January 16, 2008, 3:16PM ET  Report Abuse

    • Overall: 3/5

    Hey, Ariannel, While I appreciate your intent, I have contirbuted mightily to my 401k, instead of applying that money to paying down my mortagae. Result? I can now pay mine off twice and then some with my 401k. So .... yes, you should have the funds equivalent, or more, than your mortgage, but applying them to that mortgage is poor use of the earning power of that money. grambo

  • Arianne - Wednesday, January 16, 2008, 2:34PM ET  Report Abuse

    • Overall: 3/5

    What many of you do not realize is that it is important to purchase a home and pay it off so that when you retire at age 55 or 65 or whenever you decide is right, you will no longer have to make mortgage payments on the house. Your income will cease and you will be living off of your retirement savings at this point. By the time anyone retires, they should have their mortgage paid off. This allows financial security in later years for people who are not interested in options such as the reverse mortgage. This also eliminates the need for life insurance after retirement-- all debt SHOULD be paid off at that point. I can't think of a reason why I would want to continue paying $1000-5000 a month in RENT after retirement if I could avoid it. That would really eat up my retirement savings.

  • Yahoo! Finance User - Wednesday, January 16, 2008, 12:00PM ET  Report Abuse

    • Overall: 5/5

    Hello, Mr. Bach, you're the "latte-factor" guy, right? I sometimes get you confused with the "rich dad" guy, but you both generally give useful advice. LOL Here's my question: we have an 80-20 mortgage, with the 20% as an ARM that's set to rest in March of '09. I'd like to switch the entire mortgage over to one fixed rate. Our credit ratings are "excellent" (me)and "very good" (hubby), and we have no other debt aside from the mortgage. We currently have 77K equity in our home, but we are short on ready cash savings, only about $2000 at the moment. We do have over a year before the ARM resets, but I don't want to miss the opportunity to get in on the currently low mortgage rates. Would you advise continuing to save and amass some cash, or just jump in and refi now? P.S. We do have an IRA worth $77K, but we would rather not liquidate any of it if we can help it. Thank you so much!!

  • Renderdog - Wednesday, January 16, 2008, 10:25AM ET  Report Abuse

    • Overall: 1/5

    It's hard to get wealthy without owning a house!? What drivel. In some markets owning a house can break you, and house maintenance is often forgotten in these "calculations."

  • spinaltap58 - Wednesday, January 16, 2008, 9:17AM ET  Report Abuse

    • Overall: 1/5

    Wanna go directly to the poorhouse? Then listen to David Bach, the Spoiled brat who never worked a day in his life thanks to his Rich Grandparents. Look at his past recommendations for investments: Real Estate Reits Down 30% , Equity Mutiual Funds Down 15% and sinking fast, and Bond Interest Down down down. Hes getting Richer by giving bad advice in his" how to go broke in a hurry" Books. He really should be sued by people who had taken his advice then fired .

  • StevenS - Tuesday, January 15, 2008, 7:32PM ET  Report Abuse

    • Overall: 5/5

    There is uncertainty among all levels of financial professionals, with most claiming doomsday and recession, even depression. The concensus seems to be investing in commodities (gold/silver/copper) and let the dollar smoulder out until the rumored Amero is born. What are your thoughts, and how can we all be saved? After all, if the dollar has no value, what is the point in having alot of them?

  • Yahoo! Finance User - Tuesday, January 15, 2008, 6:39PM ET  Report Abuse

    • Overall: 4/5

    For those readers who commented that those who bought real estate in '06 & '07 made a bad purchase, I must remind you that real estate is local and not global. I purchased 4 houses in those two years. One of them I purchased at $119k and it's now valued at $150k. Another I purchased at $90k and it's recent appraised value was $110k. My primary home was purchased at $259k. It appraised recently at $330k (that includes a $30k kitchen remodel). I don't regret purchasing in '06 and '07.

  • JPEG - Tuesday, January 15, 2008, 5:29PM ET  Report Abuse

    • Overall: 1/5

    You mean going from two incomes to one might be a problem? YAHOOOOOO!!! Experts ride again!! I'm investing my money in Krispy Kreme... Carbs will "rise" again!!

  • t r - Tuesday, January 15, 2008, 5:26PM ET  Report Abuse

    • Overall: 4/5

    I think the article touches on some good points. But the people crucifying this author for saying "buying a home leads to wealth" are a lack for a better term dumb. Unless they are living rent free, then in a sense, when they do pay there rent they are flushing money down the toilet. If you were applying that same rent money to your mortgage you are gaining ownership into something which on average is beating inflation. Along with that you are not just throwing away money. Think of it as a large steady chucnk of your portfolio

  • Yahoo! Finance User - Tuesday, January 15, 2008, 5:19PM ET  Report Abuse

    • Overall: 4/5

    A caveat: Be wary of buying a home rather than renting; I agree with other comments that you need to weigh the options carefully particularly in this market. If you've done your homework and know your area's home prices/value, there are good deals to be found. I would recommend looking into residential management companies (they are usually part of larger real estate franchises, Century 21 for example). They usually charge about 10% of the gross rent--plus they also can prescreen renters for you as well as handle the repairs. By having rental properties, you would also be able to qualify for a better home loan down the road with the accumulated equity in your rentals. Find out what your tax advantages would be and compare that with renting cheap until you can settle down.

  • Yahoo! Finance User - Tuesday, January 15, 2008, 4:25PM ET  Report Abuse

    • Overall: 3/5

    If everyone reading these columns seems to already know everything about finances (as it seems through their comments), why do they keep coming back and reading them?

  • Da Big Guy - Tuesday, January 15, 2008, 3:54PM ET  Report Abuse

    • Overall: 2/5

    I find advise in this column somewhat amusing. While basically correct on some information, the troubling part is to be lending advise with so little personal information on the asking party. I believe in basic generic info but you Mr. Bach are soliciting the questions!

  • Ian - Tuesday, January 15, 2008, 3:41PM ET  Report Abuse

    • Overall: 1/5

    Unbelieveable poor advice, I hope no one listens to this column. You suggest buying a home knowing very well that the person is moving in 24 months. Then you suggest to keep the home and rent it after leaving the geographic area. Then to buy another and repeat the process. Once they cant rent a property for an extended period or a tenant wrecks the place the plan they're bankrupt. Automatic Foolishness!!!!!!!!!!!

  • Yahoo! Finance User - Tuesday, January 15, 2008, 3:25PM ET  Report Abuse

    • Overall: 3/5

    Not too bad, two things though: David implies (without explicity saying) that homeownership results in wealth. That is a classic example of the logical fallacy of "correlation proves causation." Homeownership does not result in wealth. Ignoring the current housing market situation, homeowners own a home at the end of a mortgage, and will likely have a large chuck of equity after living there for many years, but renters who save significant amounts of money instead of spending everything also end up wealthy. After all, just because 100% of people who consume water will someday die doesn't mean that drinking water causes death. Also, student loan interest is tax deductible even if you don't itemize. Always pay down student loans after any other debt, it is tax deductible and not secured by any physical assets. By all means pay it off if you don't have any other debt, otherwise just make the regular payments.

  • Yahoo! Finance User - Tuesday, January 15, 2008, 2:21PM ET  Report Abuse

    • Overall: 1/5

    "If you don't own your home, it's very hard to become wealthy" ... I'm sorry, but this is simply not true. One has very little to do with the other. Buying a home is not even in the top ten things you should do to become wealthy. The recent housing boom and subsequent bust notwithstanding, home ownership is, historically, a poor investment choice. It's an expensive, illiquid, uber low-return 'investment' that barely outpaces inflation in most cases. Call it what it is, a forced savings account for those too feeble-minded to live below their means. I'm not anti-homeownership, per se, I just think people should be honest when discussing it as an investment option. Millions of people recently bought houses they couldn't afford, using ARM's and other exotic vehicles. Many of these homes are now in foreclosure. My point is that those who choose consumerism over fiscal responsibility tend pull all of their equity out to buy stuff anyway. This, in turn, leads to record levels of foreclosure and bankruptcy. Home ownership is not the way to get rich. Education, hard work, disciplined saving and investing will get you where you want to go. Buy the house if you know you can afford it and if you know you'll be in it for at least 5-7 years. Otherwise, it generally makes more sense to rent and invest the difference. Unfortunately, not everyone is so disciplined.

  • Matthew - Tuesday, January 15, 2008, 2:04PM ET  Report Abuse

    • Overall: 5/5

    A well written article. In reading some of the comments below. I agree with David's recommendation to buy a house if possible. As a former homeowner, I agree the expenses of fixing your house do make things more expensive, but you will make that money back and more over time that you own. Real estate may be headed down now, but it was inevitable given the lending practices and speculation buying. Over time it will settle out and prices will go back up. I now live in San Francisco and buying to renting will approximately double your payments, but prices are still headed down. I am not sure where the statistic below of only 30% of homeowners can itemize came from. If you are single and your interest, property taxes, and state income taxes are more than $454/month, you qualify to itemize your taxes, and if you are married those totals are $908/month. Even if the cost of renting is 2/3 the cost of buying, you are breaking even with the tax deduction, and you will have a fixed payment in lieu of a rising rent payment.

  • Prof. Giles - Tuesday, January 15, 2008, 1:36PM ET  Report Abuse

    • Overall: 1/5

    Very good points, Sensei. Like so many other Yahoo columns, this one just perpetuates old myths to maintain the status quo.

  • DouglasG - Tuesday, January 15, 2008, 1:28PM ET  Report Abuse

    • Overall: 1/5

    Ask those who bought real estate in 2006 or 2007 if they made a good investment.

  • Al - Tuesday, January 15, 2008, 12:50PM ET  Report Abuse

    • Overall: 1/5

    Home ownership is a casino just like the stock market. It depends on when you buy and which housing market you buy into. Equity gain can come from people sinking their effort and money into improvements as much as it can come from market appreciation. The only thing making home ownership cheaper than it appears is the governments subsidy to the banking sector in the form of making mortgage interest tax deductible. Piling on to the 401k scam is not going to make your pension reappear. Good luck with that. Best case is to capture your employer's matching contribution so you have extra ice cream money in retirement. All of this 60's financial advice is worthless now that neo-capitalism has crucified the American Dream Myth. Wake up America. Your labor is being pillaged.

  • Yahoo! Finance User - Tuesday, January 15, 2008, 12:47PM ET  Report Abuse

    • Overall: 4/5

    Does it make sense to own a stock twice? I mean if you own it as part of a mutual or index fund and then own it again individually? Is there a difference, especially with a stock that has a high dividend yield?

  • Yahoo! Finance User - Tuesday, January 15, 2008, 12:38PM ET  Report Abuse

    • Overall: 1/5

    This article gives very bad advice. Although some of the points may be true under certain conditions--like to invest in your own home rather than rent, it is a gross misrepresentation to say that buying a home is the way to get rich--especially in the current market. And the idea to buy three homes in three cities to rent and built equity is hilarious... As a finance professional I think that this article is garbage.

  • Yahoo! Finance User - Tuesday, January 15, 2008, 12:37PM ET  Report Abuse

    • Overall: 4/5

    Is there a credit card for people who pay off the balance each month that if you are a day or two late getting your payment in will only charge a finance charge for the two days and not 32 days? Is there a credit card that thinks out side of the box?

  • HG in MN - Tuesday, January 15, 2008, 12:03PM ET  Report Abuse

    • Overall: 4/5

    Good advice. But how does this fellow have time to write an advice column AND star in Law & Order SVU? Well, I guess if Fred Thompson could balance L&O, why not this guy.

  • archambault j - Tuesday, January 15, 2008, 11:50AM ET  Report Abuse

    • Overall: 4/5

    The idea of paying off all debts before saving is foolhardy. This just leads to more debt. You pay off 500 dollars in credit card debt in May, but you have 600 dollars in car maintenance and repairs in June? Where does that come from. The best bet is to take your disposable income and break it up into 4 pots. If you have say an extra 500 or 1000 dollars after paying the necessities (utilities as in water, electric heat, 1 phone either home or cell - NOT CABLE, Sirus radio, Blockbuster online, and a second phone line, rent, groceries - not eating out, toiletries), you should form a plan: Possibly... 40% towards debt reduction, 20% saving/investing for retirement, 15% long term savings account, 10% fun money, 5 percent short term savings. THE REASON MOST PEOPLE ARE IN DEBT IS BECAUSE THEY DONT BUDGET AND DONT SAVE. If you NEVER invest and save because you are trying to get out of debt, and you never get out of debt, when will you ever save? I have a girlfriend and she has vehicle debt and that is it! Sounds great. Actually it is awesome. Only problem is she is 26 and has no life savings. I think she might have 200 dollars saved up total. Why, because she takes all of her extra money and puts it into her car payment. What is the point? She cant afford to replace the tires, get maintenance done or anything else.

Showing comments 6-35 of 54<< PreviousNext >>

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