Jamie, a portfolio manager in Seattle, has done very well for herself. In fact, she has accumulated $1 million in liquid assets at the young age of 38!
Jamie lives near the city in a small apartment, but has recently entertained the idea of buying a large home with some acreage. After all, she’s got a million bucks to spend!
After 2 weeks of browsing with her trusted realtor, she stumbles upon the perfect house and instantly falls in love. The price tag: $999,999. It’s like it was meant to be.
Now comes the ultimate dilemma. Should she:
A) Take all her money out of her savings and pay for the home with cash, or
B) Take out $400,000 for a down-payment, and invest the remaining $600,000 into the market?
What advice would you give to Jamie?
If you’re an avid readers, you might say, “Pay for it with cash! Pay for it with cash!” Choose option A!
If you’re a financial advisor, you’d probably push for option B because you would still have a nice nest egg for emergencies, much of your money would still be working for you in the stock market, and you’d be able to deduct your home interest payments from your taxable earnings. It sounds sophisticated, but quite honestly, I’m not convinced with either option.
Don’t Forget About Option C
I received a free book in the mail the other week. It was written by a somewhat unknown author, and he was obviously hoping that I’d give it glowing reviews on my website (which of course would have sent his sales through the roof ;)). Let’s just say it didn’t pass my sniff test. In fact, for his protection, I’m not even going to tell you what the title of the book was. Basically though, the book was written around the above example.
The author was a financial advisor, and he gave the exact advice of the advisor above: take some cash out for a down-payment and put the rest into investments. It all seems logical…until you realize that there’s a third door… I’m calling it option C.
In Jamie’s world, there were only two options, (A) to buy the house with cash or (B) to simply put down a hefty down-payment. In the real world of the financially wise, there’s a fairly obvious third option: buy a much cheaper house!
Before Jamie even started looking at houses, she already had it in her mind that she was going to spend her entire savings on it. What if she just changed her mindset? What if she searched for a nice $250,000 house instead? She could buy it with cash and still invest the remaining $750,000. With this method, she’d end up even farther ahead than option A or B!
It’s Okay to Second-Guess Your Advisor
Your financial advisor is probably pretty smart, but that doesn’t mean he has much common sense. He’ll probably tell you to keep a bunch of debt, to invest heavily in the already-inflated stock market, and to (of course) pay him a commission for his infinite wisdom.
Rarely will he come up with the idea that you should live well within your means and invest simply in index funds and real estate (which is likely your best option), because these options aren’t “sophisticated” AND they won’t earn HIM any money!
When you’re thinking about option A or option B, don’t forget to think about that potential option C!
What is YOUR option C?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.