Working with a financial advisor can be beneficial for many reasons. Here at PAX Financial Group, we get questions of all kinds, from “What should I be investing in?” to “How do I create a budget and take control of my daily expenses?”
Because planning for financial freedom later in life is something we promote and encourage for everyone, we thought we should take a look at some areas where money is commonly a concern: Real estate and car payments.
Everyone needs a place to live, many people use second homes as investments and most people require a vehicle to get around. So here are some simple guidelines to follow.
He Wants Out of Real Estate!
I have a client worth about $5 million. That’s a pretty impressive net worth based on his age. Remember, net worth is defined as assets minus liabilities. This client doesn’t have any liabilities, so his assets alone are worth $5 million. Most of the assets are in real estate.
Now, he wants to simplify life. He’s getting close to the magic age of 65 and he wants less complexity and less liability.
So, what does he want to do? He wants to sell all of his commercial and residential investments. He doesn’t want to fix roofs anymore or negotiate contracts.
I understand, but I don’t think it’s wise to make such a robust change. Some real estate has a very attractive yield. Yield is defined as net rental income (after property taxes, insurance and repairs) divided by the fair market value of the property. Some of his yield is 7 percent; some is 8 percent. That’s much more than today’s certificates of depression.
So, What Do We Do?
When it comes to questions about real estate, we draw a circle on a piece of paper and make a pie chart. The question is, “How much (in percentage terms) do we want our client’s net worth to be in real estate?” Then, we decide how much we need to sell to hit this goal. We identify the lowest yielding properties and come up with a plan of liquidation. Lastly, we’d help our client find a property manager to help with negotiating contracts and fixing the roofs of the remaining properties.
It’s difficult to develop a simple plan because of the emotion tied to a person’s investments. It sometimes takes someone else to help unravel the complexity of money and business. I’m glad I can help.
How Much Real Estate Should be a Part of Your Net Worth?
Investors want a one-size-fits-all answer to this question. And honestly, so would we. But the reality is, each client’s situation is different. This example is not indicative of all client experiences and should not be interpreted as a guarantee of future performance or success. This material is for informational purposes only. If you have specific concerns about your situation, make sure to talk with a real estate professional in regards to specific advice, and contact PAX Financial Group for help.
I Bought it Because it’s Safe
Now let’s discuss car payments.
Car payments can be a real struggle for some families, especially these days. Kelley Blue Book reports that the average new car transaction price reached $33,340.
If someone finances $33,340 over five years, they will suck $600 per month from their take-home pay.
If a family decides to buy a couple of $33,000 SUVs, then $1,200 is debited from the bank account on the 15th of every month.
How can a family possibly save for college, retirement, vacation or giving to those who are in need when $1,200 is yanked from the family household cash flow?
Then, life happens.
One of the breadwinners gets laid off and now groceries are a real issue for the family.
This happens all the time. I see it and it pains me to watch families go through it.
Our family experienced the car crisis as well and we learned our lesson. We were car-payment broke and struggling to pay bills. We sold one of the cars and became a one-car family, paying the vehicle off aggressively. The one-car strategy lasted for 12 months and was one of the most mature financial decisions we made, despite the comments from friends and the inconveniences.
Car buying is getting more expensive with all the features, technology and gadgets added each year. Sometimes I miss my 1984 GMC pickup – I could find all the parts under the hood and tinker with the engine to make the clicking sound stop. Today, I’d have to have an advanced degree in computer science to uncover and work on my vehicle. New cars are complex.
Here’s What You Need to Remember
If you have a car payment that is more than 15 percent of your take-home pay, you are paying too much. If you have car payments beyond four years, you are paying too much.
The end result for every family should be to not have a car payment, buy a reasonable vehicle and stop getting sucked into the car-buying trap.
The one thing standing between you and financial freedom may be parked in your garage.
Is your car paid off?
Talk to us to see how PAX Financial Group can help.