As we start to explore the “Millionaire Next Door” along with its comments on frugality, this topic came back to me.  This describes just how expenses can also compound to cruel one’s efforts at gaining wealth.   Start back at the first post and test your guesses against the reality of compounding growth – less compounding expenses !!!!  It shocked me when I went through it.

Of course, in that example we used a simple “doubling every year” of income to show its compounding benefits – but also look at how a defined percentage of expenses plays havoc with those compounding income figures.  Shows that frugality is every bit as important as is growing your income.

Steve, perhaps you could provide a simple Excel example where differing values can be tested?   And of course, even as we take a simple doubling of income, it might be that we can more than double it each year, with (say) a 20% uplift offsetting many expenses to prevent the decimation of the growing wealth.

I’m sure there are many other new thoughts that can be derived from this example – greater minds than my own will no doubt add much more value around this fascinating subject.  With the Millionaire Next Door being studied, I’d like to see what added value might appear right here !!!   Please…. ;)

Go for it !!!

Benny

A recent foray into Steve’s book “Millionaire” led me to a brilliant discovery.  I’d written “Gold!” in the margin of the book (it’s on page170) right by the lesson in the last two paragraphs.  Steve had said, ask for a discount if you can leave a 50% deposit when purchasing.  The beauty of such a large deposit is that finance is pretty much assured at any bank, thus giving the contract a much more solid grounding.  So,ask the vendor or RE agent “If I left a 50% deposit, what discount could I get on the purchase price?” and he went on to explain that doing so would be a much better ROI than having a heap of lazy cash in a term deposit at 3%.  Steve then showed how well a 10% discount plays out (see below).

You might be thinking “Why would a vendor willingly provide a further discount on a sale?”  The answer lies in what their situation is.  Steve suggested “They might have already had two failed contracts, they NEED to quit this property, and they want assurance that this one won’t fail.”  By providing a 50% deposit, you’re showing a healthy ability to go ahead from the finance side of things – any lender would bend over backward to finance you if you’ve already covered 50% of the value in cash.  The simpler finance (no LMI, and an LVR at 40% or less) should speed things up immensely.  This allows quicker settlement times.  Maybe the vendor would relish a 30 day contract, and will discount the price even more to make that happen instead of waiting on a 60 or 90 day settlement.

As an example, I then expanded on Steve’s thoughts by considering the purchase of a property for $400k. Assume a 10% discount if we put down 50% deposit on contract. So, we put in $200k cash on a $360k purchase – and it immediately returns $40k (the discount) on that $200k – that’s a 20% return on paper. Nice !!

But wait, what if we refinance later on:-
We take out an 80% loan on a $360k value – $72k is the 20% deposit, so $288k comes back to us as cash – this repays our original $200k, giving us $88k profit, and our tenant then pays for the new mortgage via the rent they pay us.

So, didn’t we just make a 44% return on our $200k in a matter of months?  Isn’t that GOLD?  Thanks Steve – an awesome thought that became a catalyst for more thoughts.

But wait – there’s more….

OK, what if you can only get 5% discount?  It is still way better than 3% in a Term Deposit, but there is so much more too.  Like, the above example didn’t entertain the idea that:-

1.  We bought the place to renovate then rent, so the VALUE jumps way above the $360k we’ve paid.

2.  We were expecting $400/week rent, but were able to get $500/week after renos.

Doing it again then, we buy a place for $400k, but then we get 5% discount for a 50% deposit – so paying $380k with a $200k deposit.  We also spend $60k to renovate, lifting its value and renting for more.  The fact that we bought a discount gives us a $20k profit on our initial $200k (or 10% return on paper). The renovation also adds $100k value to a $400k house, so now valued at $500k.  (Our spend of $60k generated $100k more in equity on paper).

So a few months later, with the house now renovated, we refinance at 80% LVR with a lender.  This gives us back $400k to reimburse our initial $260k spent.  So, $140k profit on a $260k spend is over 50% return – perhaps in just 3 or 4 months.  Is that better than 3%?   Are there other costs in there?  Sure, but there’s quite a bit of cream too, right?

What if we did 2 or 3 of these per year?    ;)   Good hunting.

Benny

Another thing that tends to be overlooked/ignored by reporting media is the relevance of the Covid death rates.  Aussie’s death rate is WAY low compared to other nations – thus we should be able to get back to business sooner.

Instead, let’s look at a nation who is currently seeing a really high death rate – the USA.  From what I’ve learned, their death rate is like 3% of all those who get Covid – quite high compared to most.  Their current total deaths from Covid are said to be 85,000 in about 3 months.  On the other hand, their yearly death rate in 2018 (latest “numbers” available) was 2.8 million people, or about 240,000 per month.  Covid is less than 30,000 a month on average.  OK, that’s an extra 12% – or IS IT?  Do we even know it is “extra”?  Couldn’t it be that these were folk who were likely to pass away anyway due to other health issues, or age?

Did the 30,000/month die OF Covid, or WITH Covid?   Is anyone looking at that?  Should our economies continue to be shut down over what could be “just another flu” in reality?   What about Aussie’s case?

The deaths from Covid in Aussie are still below 100 in total (say 30 per month).  The Australian death rate per year (also 2018 for consistency) is seen to be 165,000 or 13,750 per month.

Say wha’ ?   We have stalled our economy for 30 deaths (extra?  Who says?) on a total of 13,750 ????

Back to work folks.  State Govts – are you listening?

Benny

Well, with a little more time having passed, in Qld the State Govt has begun re-introducing some activities that had been locked down.  i.e. We are now allowed to visit a beach or a park, can take a trip up to 50Km from home (rather than just “stay home” as has been the message).  Re the Rest Home that we like to visit, they are now allowing family members to visit their loved ones in the home (they had previously been locked out – how stupid!).

Schools are starting to “allow” students to come back for face-to-face education once more.  Is sanity returning?  Hope so.  But let me share with you something I heard on radio this morning:-

A microbiologist with some 40 years experience was saying “We shouldn’t have wrapped everyone in cottonwool and hid them in their homes.  Humankind does its best by sharing viruses and bacterii among ourselves and we should be returning to this way of life.”  He asserts that  “the longer we stay in our homes and, when venturing out to buy goods, we meet only sanitised surfaces and we don’t shake hands or touch things, our personal immunity becomes weaker.   We should be out in the Sun, and should still be shaking hands, having normal interactions with others, and just living.”

Now, I think I know the reasoning behind the Fed Govt’s initial “lockdown” – the fear was that this virus was moving so quickly that it would overwhelm our hospital services, including beds, medical supplies, and even staffing numbers.  So, fair enough, the decision to lockdown was made with all good intentions initially.  And yes, this virus has indeed moved quickly.  So, top marks for the initial “lockdown” – closed borders, limiting travel and human interactions as much as possible.

The closing down of so many businesses – well, the jury is still out on that one.  Comes back to my previous comment (went something like “For every one death we have had from covid, 10,000 workers have lost their job”).  Since Govt now knows that parameter, I would think the re-opening of businesses should be put on the fast track now.  Yes, I know it has risk attached, but there is risk in not re-opening them too.  Mental health is a big subject that hasn’t been widely considered in all this – but, as gregarious animals, us being out of touch with others is not such a good thing.  It may be somewhat OK for those with families perhaps – but some just don’t have family nearby, or at all.

Time to re-open restaurants, etc? Is it time to chance our arm once more, risk getting crook, and going out to rebuild our personal immunity systems?  I say Yes – how about you?

Benny