Your house is not an asset

It is crucial to end up with this non-sense idea that your house (primary residence) is an asset, probably the only one you will ever own and therefore all your savings shall go into that one asset. Work, ask for a mortgage, pay your house and then retire.

 

 

If a house is taking money out of your pocket (insurance, taxes, miscellaneous, etc.) then it is not an asset. Not only you are actually spending money but also you have to consider the opportunity costs of having our money invested into that house, which you wrongly perceive as an investment, whereas you could have invested the same amount of money in another house or investment that could actually yield at least 5%. In a hypothetical example of a 100k house with an average of 2000 per year on expenses, you are actually spending, per year, 7000 = 2000 + 5 000 (5% of 100k). You have to consider the money you actually spend plus the opportunity cost of not using the 100k in another more profitable investment. Here I have assumed that the other profitable investment would yield an average annual return of 5%, which is very conservative if we consider real estate investment.

In addition, there are also two (hidden) costs which I consider very relevant when you buy the house you live in:

1 – You loose flexibility. Either you assume it or not, it is more difficult to move into another city or country if you know you bought the house you are “supposed” to be living in, not only because you are emotionally attached to it and you probably end up more expensive things for your house, in particular furniture, but also because it is really not that simple to rent a house, get a property manager, etc. from one day to another.

2 – You end up of not making the most rational decisions when you invest in a house with the purpose of living in it. You take into account variables that are important to you and not to the market, like being near your family. Or you are willing to accept living in a area which is not as recognized by the market, like the fact that it is near a highway or a factory, because you prefer to pay a bit less. However, those decisions can make this house a very difficult one to sell or rent to a third party and therefore would not yield any cash flow, in case you decide to rent/sell. In sum, it is a very bad investment.

According to Frank Gallinelli there are 2 rules of real estate investing that we should follow: do not hold any sentimental attachment to any of the properties you invest in and if you think it will be difficult to sell/rent, then it is not worth buying.

 

Another sentence I loved in his book What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures which highly reflects my approach on real estate investing is the following:

You are not buying a properly, you are exchanging a fixed price for an income stream.

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I create my own luck

Most of the people like to believe that external factors such as luck or being in the right place at the right time play a major role in other’s people successes. I believe those people, in general, are just lazy and it is just easier for them to continue being lazy and believing there is nothing you can do to improve your life than actually making efforts and having a plan.

You live next to your family and enjoy a perfect work-life balance. If I had that, I would also have kids right away. Have you ever thought that maybe the person though a lot before having kids and actually shaped his/her career based on where the grandparents live? That this decision actually required effort and it was not just a matter of luck but most likely the result of a well-thought plan?

You are so lucky, you have a high salary. If I had that salary I would also save more than 50% of my salary. This one actually applies to me. I have worked hard to be successful in the tests and interviews that have put me in this high paying salary. Not only I was rejected many times before and after going to interviews, but also I have spent weeks preparing for every interview, studying more than for an exam. Also, I have carefully planned, together with my husband, the places to live that could be more beneficial both in terms of salary, costs of living, safety, etc. and we have both focused our search in those countries. Plan + hard work + focus = success. Also, not many people would be willing to sell their car, like I did, to think thoroughly before spending your money, and rather focus on generating passive income consistently.

I believe some people just choose to be negative and unlucky. I strongly suggest reading this article from Richard Wiseman where he performed an experiment in two groups of people – lucky and unlucky – and where he shows that “lucky” people are not only more efficient in embracing new opportunities but also they pay more attention to the details that may help them thrive. Therefore, what is generally so-called luck is the result of personality factors, such as optimism, openness to new situations and less anxiety combined with the ability to notice and trust the unexpected. It is not an external factor that cannot be controlled by us.

All of us are lucky to some extent, we just need to work hard, take some risks and embrace the opportunities that come across our paths. Try to learn from the experiences of the lucky people that you meet instead of just assuming that they did nothing to achieve success. I am pretty sure that if you start changing your mindset and your behaviour you will also get lucky in the near future!

Financial Statement – December

Our savings in December.

Euros November December Gain
Mine 36,500 38,800 2,300
M 24,600 28,200 3,600
M Pension 27,000 30,000 3,000
My Pension 23,350 24,750 1,400
House guarantee 4,000 4,000 0
House paid 55,000 55,000 0
Total 170,450 180,750 10,300
Cash 61,100 67,000 5,900

Overall, I am satisfied. We managed to save, in terms of cash, 60% of our salary and our total equity has increased quite significantly, not only due to my pension fund, which is paid by my employee every month, but also because we have finally checked how M’s pension is worth and we have realized it has grown in value quite significantly.

According to Mr Money Mustache we would need around 12.5 years working until we reach financial independence. However, we need to bear in mind that: 1-we have already started this journey almost 2 years ago, and 2-if you plan to move to a low cost living country in the future the number of years you need to work actually decreases.

I am also very excited by the fact that, from this month onward, M’s salary will increase 15% and my salary will probably increase by 2% (still pending the final confirmation). Even though some extra expenses are expected, as we are having our first baby soon, they will certainly be lower than the salary increases.

Happy new 2017 and wish you all a quick and fun path towards financial independence!

 

You are your biggest asset

When you have no assets that can generate passive income, think of yourself as your biggest asset. Generate the maximum possible income, have low expenses, with the minimum amount of time spent working.

Think of your time spent at work as an investment, i.e., try to get the most out of your work, not only in terms of cash-flow but also in terms of what you learn from it. I have realised that since I have assumed I will not work many more years and, therefore, I see my work as temporary, I take most advantage of it, I enrol in all kinds of interesting trainings, I put myself in challenging situations because I feel I can learn from them and I am not afraid of failure anymore, because I know I will also learn something from failure. I am also more confident to say what I think in meetings and more prone to apply to higher level positions. So, I guess I am better at work and this is due to the fact that I have decided I do not want to work forever and take it as a temporary situation. Ironic, right?

You are your biggest asset! At least until you have no other assets you can live from, think of yourself as an investment: you have to yield the maximum return to your shareholder, which is yourself!

Financial Statement – November

Here is the result of our savings in November.

Euros October November Gain
Mine 34,250 36,500 2,250
M 23,200 24,600 1,400
M Pension 27,000 27000 0
My Pension 21,950 23,350 1,400
House guarantee 4,000 4,000 0
House paid 55,000 55000 0
Total 165,400 170,450 5,050
Cash 57,450 61,100 3,650

I am not totally satisfied with the result as I believe we can save way more every month. We had some extra expenses this month due to the fact that we have bought some additional furniture, Christmas gifts and maternity clothes but, on the other hand, we did not travel so no money spent on that. I would expect, every month, to save, in terms of cash, 5000 Euros.

Next month will be better 🙂

Financial Statement – October

I am currently just updating you with my savings as I have to admit I do not account properly my expenses every month (I should!)

Euros
Mine 34,250
M 23,200
M Pension 27,000
My Pension 21,950
House guarantee 4,000
House paid 55,000
Total 165,400
Cash 57,450

I am very conservative in what concerns the house guarantee that I expect to get back when we move out of the new house. We have actually paid 5200 Euros but I will assume we will only get 4000 Euros back. Additionally, in M pension, since we are not sure how the pension fund is performing, I will assume a growth rate of 0%. Better to be conservative and then have positive surprises, I believe.

Despite being an unusual month in terms of expenses, as we have just moved into a new bigger house, I am happy to say that our equity increased by 4765 Euros.

Our cash has decreased due to the fact that we have paid 55000 Euros in our first real estate investment. The rest of the payment (45 000 + taxes + furniture) will be paid once the apartment is totally built, which should be in December/January. I am very excited about my first investment and looking forward for my first passive income generator to start working!

The real cost of owning a car

Owning a car is more expensive than what it seems. Even a cheap car can turns out to be a very expensive deal. Additionally, cars require not only expected expenses (cost of the car, taxes and insurance) but they can also mean non-expected significant expenses. In particular for new cars, the money that you loose on devaluation is very significant.

Check my calculator (The real cost of owning a car) with 2 examples and feel free to play with it. The values on the excel sheet are in Euros and they should be considered as pretty representative examples of the European reality. In the calculator I assume that the car will be sold after 5 years at a certain price that can be defined.

A new car with a price of 26k will cost, on average, 500 Euros per month and even a cheap used car with a price of 5k will cost more than 300 Euros per month. Are you sure you can’t find other options to travel around? I understand not everyone can walk to work or go by bike (luckily I can go by bike) but first analyse all public transportation options. Public transportation monthly tickets normally pay off, in particular in Europe, which is the reality I am most familiar with. In Frankfurt, the monthly pass is 85 Euros per month, but, if you pay annually, you get 2 months for free, which means that you are actually paying only 71 Euros per month. These discounts are quite common in other cities as well. What can you do?

  • Be aware of the costs associated with owning your car. Yes, even a cheap car is expensive!
  • Analyse public transportation options and discounts associated with it.
  • Move closer to work. If you live together with your partner, try to move at least close to either your work or his/hers to avoid paying 2 monthly tickets. Another reason for renting instead of buying: flexibility in dealing with other costs.
  • Check other options for when you really need a car, i.e., going somewhere without public transportation or if you want to travel for the weekend. You should be able to find cheap rental places. When we need a car for a few hours (hardly ever, only for very specific reasons like going to Ikea), there is an app that allows us to pick up some cars that are parked in the city for 3 Euros per hour + 0.26 per km. When we need a car for the weekend, we check only the cheapest car available and we book it, normally at around 30 Euros per day.

Another reason for renting a car when you need one instead of buying is that also you can take into account the costs associated with the car in the travelling you are going to make. When you own a car and you travel for one weekend, it may seem you are travelling for free, except the cost of gas, but actually you are not. When I rent, I know I have to spend additional 60 Euros, which I take into account in the total cost of travelling. I have no unexpected costs now which allow me to predict much easily how much I can spend and save.

Do you agree with this approach or think it is absolutely impossible to live without a car?