Multiple Streams Income

“If you always spend as much money as you make, you will never make any money.” – Jay Staudt

Normally I’d be hesitant to quote myself if it weren’t for the fact that this is something I have probably said to my girlfriend far more often than she would have liked to hear it. We were going over a new budget this week to figure out if she could afford to change to a more expensive living situation. After everything was taken into account, we arrived at a figure that would have essentially balanced her budget every month.

While she thinks that balance means affordability, I do not see eye to eye with this line of reasoning. The reason for that is because the typical budget does not take into account the “unknowns” that befall us in everyday life. The bank fees, the traffic tickets, the birthday gifts, the late-night ice cream runs to 7-11, the flu medicines, that super-cute pair of shoes, the flat tire, the overage minutes, and the one-time, spur-of-the-moment purchase add up to a whole lot of extra money going out the door. These are the kinds of things we don’t think about. If my life always went perfectly, I’d have a lot of extra $5 and $10 bills in my wallet.

We are in the midst of a full-on savings crisis right now. The savings rate in the United States is abysmal. You may not agree with me, but I believe that much of the housing crisis has been caused by the fact that when so many people lose their jobs, they have absolutely no nest egg to fall back on. Many people are living with ridiculous amounts of high-interest credit card debt because they don’t have the self-discipline to live within their means.

Just imagine if everyone in this country had between three and six months’ worth of expenses saved.

Instead of immediately falling behind on their mortgage payments, a family who loses its main source of income is able to pinch pennies and be fine for half a year. But as a nation (and in fact, as a global community) we have collectively thrown our hands up and cried “woe is me, for an unexpected error has occurred!” Rather than realizing our fiscal irresponsibility, we blame the government for letting the economy fail. The government takes pity and says, even though we haven’t been responsible, that we can adjust our house payments and take handouts to make things right.

That is why I always budget for the worst-case scenario. If my cell phone bill is usually $82/mo, my budget says it’s $90. If I’m spending all my money on things that will vanish as soon as I stop being able to pay for them, then in reality, I have no money. All of my funds are just going toward things that allow me to keep up a certain quality of life, and not toward things that will extend that quality, like a savings account, investments, or the paying down of mortgages and other debt.

With the amount I have saved and invested right at this very second (not including my 401k) I could quit my job tomorrow and live comfortably for 7.4 months. That’s after I pay off my revolving monthly credit card that I use to buy gasoline and groceries. But don’t worry, I don’t sleep any better at night… or maybe I do. Are you ready for the End of the World?

Ask anyone the following question, and you’ll get a pretty narrow set of responses: “Would you rather have more money, or less money?” The skeptic will rebut your question with, “That depends – how much money is ‘more’, exactly?” For the most part, I think most people will automatically answer “more,” and in fact the conventional wisdom in financial planning is that “more money is always better.” But is it really that cut-and-dried?

I was reading up on the topic of using one’s 401k to pay down their mortgage early, and was very surprised at what I found. The majority of posts and articles referencing this topic appear to recommend that you should not only leave your 401k alone; you should also prolong your mortgage for as long as possible.

This line of reasoning is flawed, in my opinion, because it forces you to plan based on three uncertain assumptions – that your 401k will earn an average annual return of 6-8%; that the mortgage income tax deduction will stay in effect perpetually; and that the dollar will remain stable and retain its value. I’ll address why each of these assumptions can be dangerous below.

The fact that many financial planners actually advise you to stay in debt should be quite alarming – but to many of us, it isn’t. Our cultural desensitization to debt is the very reason the economy has spiraled into crisis several times, even during the years since we’ve instituted so-called “fail-safes” in the banking industry. In order to get back on the right footing, we need to stop taking for granted the fact that we spend so much money that isn’t ours. That paradigm shift has to start on a personal level in order for it to make a difference in your financial life.

Your 401k Is An Investment

All models of 401k growth that I have ever seen indicate that over time, your gains will average out just like the stock market has. Never mind that the 401k hasn’t even been around that long – IRS code 401(k) was enacted in 1978 and became law in 1980. It took well into the late 80′s before the majority of companies offered 401k plans at all. So the performance of your retirement account over the 40-or-so years of your working life is estimated largely based on less than three decades of actual statistical data. And anyone who’s had a 401k account through the first part of the twenty-first century knows that it’s not all upward arrows. Had the 401k been enacted earlier and seen more prevalence during the recession of the late 70′s and early 80′s, I doubt the historical data would induce much more confidence.

I think 401k’s are a great way to save. But to say that you shouldn’t withdraw from your retirement to pay off your house is to assume the best possible outcome of a fallible investment vehicle. Paying off your mortgage, on the other hand, grants you a guaranteed return. You know for a fact that every dollar you save in interest is a dollar that goes straight into your pocket.

Tax Deductions Are Not Written In Stone

As long as America’s deficit keeps growing, lawmakers will always be looking for ways to cut corners. You are not entitled to your mortgage interest deductions, nor is there a guarantee that if you decide not to pay down your mortgage faster they’ll remain as they have for the next thirty years. Attempts have been made to cap the deduction in the past, and recently it came under review again. Don’t count on it being there forever, but instead take it as a gift and you’ll be in a better state of mind to make decisions as to where your money goes.

The Dollar Is Being Exploited

If you already own a home, you have paid a set price for a specific amount of land and a specific building. You will never have to worry about the rooms suddenly shrinking. Once you own it free and clear, you will probably never have to worry about a government employee coming in and deciding they’re taking your couch and coffee table to their office, either. Metaphorically speaking, your physical residence will never be demolished by the dollar. Its value in dollars may change, yes, but its value in terms of your lifestyle is at far less risk. Real property has that name for a reason. You can’t sleep on a bank account. You can’t wrap a thirteen-digit number around your shoulders to keep warm.

Future gains in your 401k and other savings and investment accounts, by contrast, are under the constant pressures of fluctuating currency values. The government can cause inflation (“quantitative easing,” as it’s currently being disguised) because they feel that heavy manipulation is preferable to a more hands-off approach. Realize that you have the ability to make choices that say, despite the downward spiral of our economy and the government’s longstanding ‘I-want-it-now’ monetary policy, you want to behave more responsibly.

The Value Of Certainty

My long-term strategy for retirement doesn’t center around me working late into my 50′s and 60′s and then living solely off of my 401k and government programs for the elderly (medicare and social security are fundamentally flawed, and I wouldn’t depend on them any more than I would depend on the government to protect the value of the dollar). I’m working toward a level of real property ownership that provides multiple streams income based on the current market at all times. That’s why, despite the additional tax I may incur, as soon as my 401k balance exceeds my remaining mortgage balance, I will objectively consider liquidating it in a strategic manner so as to eliminate my mortgage.

I don’t consider the possibility that my retirement account could continue to grow to be a deterrant; it could just as easily do so until a few years before I retire and then fall victim to the next financial crisis. No, I’d rather take more control (and yes, maybe less money) sooner, than leave my future in the hands of a crippled system run by greedy, irresponsible people. So is more money (or rather, the possibility of it) really always better? Not always. As far as I’m concerned, the peace of mind is what pays the greater dividends.

You’ve likely heard the old euphemism “there’s no magic bullet.” It’s used to illustrate the fact that shortcuts to success are few and far between. That phrase isn’t entirely true when it comes to money, though – winning the lottery or being the beneficiary of a deceased relative’s fortune sound like two magic bullets to me. But regardless of how likely or unlikely it is that some windfall financial event will happen to you, one thing remains true: it is possible to mishandle any amount of money. From the alcoholic homeless man down the street to the federal government, people are managing sums of money across the board with great incompetence. Professional athletes and lottery winners alike have won or earned millions upon millions of dollars and frittered it all away, only to file bankruptcy as a result of their perceived financial invincibility.

There is a popular and widely-known system from a modern financial guru that teaches people how to radically turn their debts around. There’s a lot of great advice in this system – or so I’ve heard; the problem is, it’s very expensive. I believe that especially for someone trying to get out of debt, buying something they can get for free is a waste. That’s part of the reason I created this website in the first place – it’s my forum to share everything I’ve learned about money and personal finance in my (relatively short) lifetime, and to have it all written down both for my personal recollection and to help anyone else that might get something out of it. Every word on this site is free, and not in the “buy this now and get that free” sense, but in the completely-everything-you-read-or-see, no-strings-attached sense. I don’t sell or ‘give away’ e-books, I don’t have a members-only section of the site, I don’t pitch sales for pyramid schemes, and I don’t give privileged information to only a select few. But I digress.

In the absence of a magic bullet like the ones mentioned above to solve all your debt problems, all that exists is self-control. The financial system I mentioned above is filled with common sense rules and advice that anybody with some discipline can follow and put to good use. I’m going to lay it all out here, in this post, for free. But first, there are two things I need you to understand before we go any further. Be warned – I’m going to be hard on you. This is the plain truth, after all:

1. You are in debt because you cannot control yourself.
2. The only way to get out of debt is to learn how.

Plenty of hard luck stories exist, and I understand that sometimes the unexpected happens. Huge medical bills, home repairs, automobile maintenance, etc. can all be a big kick in the pocketbook. But part of my stance, and I would argue this vehemently, is that part of financial responsibility means being prepared for the unexpected. If at any given time you don’t have at least two months’ income sitting in a savings or easily accessible investment account somewhere, you are not prepared. You aren’t ready to be reading this and you should stop now.

Too many people have become uneasy at the thought of having extra money. They feel like saving or investing it is a waste because it’s just sitting there – it might not earn enough interest, or else there is the possibility of investment losses, so therefore it’s better to spend that money instead, many would say. Others start earning some bucks and get caught up in “before they hatch” syndrome – a common problem, as I have fallen victim to in the past, where we think “on this date, I’ll get this much money from this source, and after that I’ll be getting some money from that source,” etc. Looking into the future for your income sources is wise, but counting on them to come through and spending it before it’s in your hot little hands is very, very unwise. Repairs and medical bills might not be such a big deal if more of us had the wisdom and foresight to plan ahead and save.

So if you have some money put away, you’re probably in better shape than most of your peers. The next step in escaping debt is to spend less than you earn. Blah blah, I know – you’ve heard it all before. But can you actually do it? Do you have the ability to put that surplus $500 or $1,000 away instead of buying an extra piece of furniture or a new TV? The inherently obvious truth is that spending more than you have now, just because you’re counting on having it later, is just plain ignorant.

The third and final step in getting out of debt is to line up all your debts from smallest to largest. It’s that simple – don’t pay any more than you have to on any of your debts except for the smallest, which you should be paying as much as possible. When that’s paid off, lump all that extra money into paying off the next largest debt, and so forth. If you don’t discipline yourself, it’s likely that you’ll be in debt (or in and out of it) for the rest of your life. Pay everything off and then save, so that the next time you’re tempted to go into debt, you won’t have to.

Read lots more on multiple streams income – stop letting your money control you!