REAL MONEY vs. INCOME – with Housing Example

Our income is not our measure of ‘Money’.

The money that remains after bills are paid, taxes are settled, and all expenses are accounted for… that’s our “money”.

This means our income tells us very little about where we are financially.

The material things around us, our living situation might reflect qualities about our income, but the proportion of our income already spoken-for by our living situation is the real determining factor in our situation of wealth.

We must ask ourselves, what happens if the income stops? The amount of money saved relative to the length of time our lifestyle can be extended without income are the only two factors we can use to assess wealth…

Wealth is initially about preservation of oneself against the wailing blows of mother nature and surviving the various tyrannies of Big Commerce upon our lives.  Our sense of security usually extends beyond ourselves as well, as we often feel the need to secure not only our own necessities of life, but those of our children, and spouses as well.  We can treat money like a common good, but with the greater accumulation of wealth, it becomes about other things. Initially, and through many levels of growth, wealth is just about survival.

Here’s a story that doesn’t exactly lighten the mood, but it will serve to enlighten:

A family with a nice dual income has a house, a couple cars, a future plan, great vacations, a good time overall.  They eat out a couple times a week, hit the town, and enjoy life.  Unfortunately, the man loses his job in a field that’s shrinking, so money becomes tight: the family has no choice but to move to another house.  The mortgage they had been paying was only 10 years old, so for the most part, they were paying almost all bank interest.  When they bought the house, they paid closing costs of course, and they paid taxes all along.  When they sold the house the market was a bit depressed, so they sold their home for $10,000 less than they paid.  They also had to pay closing costs again for selling the house.  After a lot of searching, the family found a smaller house a little further away from the prime real estate spot in town.  They bought the house, paid steep closing costs yet again, and entered a new mortgage that will have them paying mostly interest for many, many years again.

         This family was already stretched thin, with a good income, they were saving enough cash to stave off a few problems, but they attained zero financial levity to overcome major life changes. This simple transition of trading houses cost them a true mountain of cash.  They lost $10,000 to depreciation of house value.  They lost almost $90,000 more, because the mortgage payments for those 10 years were still mostly bank interest (only $40,000 of principle was paid for).  The compiling bill from multiple “closing costs” from the real-estate transactions combined to a cost of almost $12,000.  Basically this family lost $112,000 in cash upfront!!!

The opportunity cost for that money is astronomical, especially since $112,000 could have bought a house by itself with no mortgage and no interest payments.

However, the opportunity cost is actually far greater: consider that the $112,000 lost could have paid cash for the second house, but instead, a new mortgage will open with another $150,000 going to the bank in interest.  We’re looking at at least $250,000 of loss at this point…

Avoiding this outcome seems important, because a story like this differentiates the MASSIVE GAP between real money (wealth) and income.

Should we only live on expenditure patterns
that can survive in Worst-Case-Scenarios?
The answer frequently appears to depend on who you ask.

The people who watch the leading edge of their personal finances survive most situations when the financial crap hits the fan.

Most people don’t even consider “selling one house to buy a new house” a devastating situation!  For most people, awareness of the real costs of things never dials in. Money is frequently treated like an artifact, and the time spent earning money becomes “just the past”.  We only have so many sturdy working years, and money saved is actually about your own personal future living expenses, a point that will be reiterated until death! Viva La Saga!

We really need to understand the gap
between living expense and income
to establish truly sustainable spending habits,
and allow us to arrange a lifestyle
that works in many conditions.

If a person makes $50,000 per year, they probably keep $42,000 after all taxes.

This translates to $3,500 per month.

The most financially-transcendent person would try to life on half ($1,750) and save the other half.

Here’s why:

Saving $1,750 x 12 months = $21,000 per year
in 15 years, with basic 6% investment you would have $511,477.41

With that amount of money, you could officially retire because $511,477 could pay you $30,688 per year, forever, without lifting a finger.  That translates to receiving $1,841,317 of lifetime payout from your own savings/investment account, because you lived very responsibly for a mere 15 years.
15 years responsibility = 60 years of comfort!!

Compare that to the story of the family from the story above, who over 15 years is actually losing $250,000 at first glance.  That number is actually FAR WORSE if we use the same logic we just used to paint that 15 years jaunt into retirement…

By dividing the family’s loss of $250,000 by 30 years, we reach $8,333 per year that could have been saved instead of taking that loss.  If the family instead saved $8,333 every year and put it into a 6% Compound Interest scenario, in 30 years they would have: $698,319

It gets worse… if that money was then used to pay them 6% yearly for 30 years thereafter, that would amount to yearly payments to themselves of $41,900:  After 30 years that amount would equal $1,256,974.  Add that to the initial lump of $698,319, and the grand total lost from simply trading houses = $1,955,293

Almost TWO MILLION DOLLARS lost from simply trading houses.

This is the knowledge of future financial preservation and income multiplication: Ignoring it always leads to peril.

SAGA can save your friends! Feel free to like and share!

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