Wealth is Life's Equalizer

Posted: Aug 04, 2013 12:00 AM

A friend of mine had a phrase that he said to me early in my years that stuck with me for decades: "Whether you are rich or poor, it's nice to have money". I have to say my friend had it right.  Wealth certainly is a main ingredient of a life well spent, but how do you get wealth?  Less than one percent of the world can earn their way to wealth; the rest of the population must do the following.  In order to create wealth you must spend less than you earn, then invest the difference.  There are actually 3 ways to increase your wealth; first, you can increase your income, secondly reduce your expenses or third increase the rate of return on your investments. 

Investing to some people can be scary.  The stock market’s ups and downs can be overwhelming and investing in Real Estate for rental purposes is out of your comfort zone, as well.  The challenge is in order to become wealthy you must invest.  Fortunately, you already have an underutilized investment vehicle, your home. 

Today I am going to talk about the third option, increasing your rate of return.  One of the substantial investments available to all of us is an investment in your own home.

I know that your home is your castle, and it is sacrosanct.  Nevertheless it is still an excellent vehicle to invest in as you will have the ability to watch it, nurture it and make sure that it stays in the best of shape.  Best of all you will not have to expend any additional energy, unlike the stock market or rental properties as it is your home.  

The hidden secret that most people don’t realize about their home is there is a guaranteed rate of return when you pay it off.  So for those of you who need to start investing to generate wealth and are not prepared to invest in more real estate or the stock market, you can invest in your own home.  Investing in your home has a guaranteed rate of return and almost zero risk.  

The easiest way to make this happen is to invest in a 15 year loan which will replace your 30 year loan. Let’s say the loan size is $350,000, and your payment on the 30 year fixed will be $1773 for principal and interest.  A 15 year loan would be 3.5% and have a payment of $2502 for principal and interest.  Your investment is the difference in the payment between the 30 year and the 15 year which in this case would be $729 /month.  Your profit will be what would have been remaining on the 30 year loan at the end of 15 years which is $231,818. What really is left is zero because through your 30 year payment and the investment payment you were able to pay the house off in 15 years

The total of your investment in your house would be $131,220 and using the remaining balance your profit would be $231,818, but that is not the whole story!

Now that you paid off the house and made about $100,000 net you haven't any payments.  If you wanted you could make the 30 year payment, $1773, or the 15 year payment ($2502) for the next 15 years to equal the 30 year payments.  You would either gather $450,360 from the 15 year payment or accumulate $319,410 without interest on the other figure.  Compare these figures to owning a house free and clear after 30 years of payments, to owning a house free and clear after paying it off over 15 years and investing the difference for an additional 15 years; the latter gives you a real jackpot! 

The return is 56.6% over the life of the investment:  $131,220 investment/ $231,220 return.  The annualized return is 3.77%.

DO NOT FORGET the borrower will have the full 30 year payment for his use after 15 years, which is truly an amazing return.

Don't you think it is time for you to seek your pot of gold?