HIP Monthly Round Up {May 2017}

I am a firm believer in looking at a lot of different viewpoints. If we only reinforce our own views, how can we grow? If you search only for knowledge with which you agree, you become too focused and disconnect from other people.

There are so many awesome bloggers and people sharing their lives and ideas around the world. I try to curate the articles and posts others write that would pertain to the target reader here.

Parents, high income earners and those that fall in both category will benefit from the other articles listed in a feature I call the HIP Monthly Round Up. I try to find content that is relevant to raising our kids, helping our kids with finance and helping their parents make responsible financial decisions.

If you didn’t get a chance head over to White Coat Investor and check out my guest post from yesterday. Dr. Dahle was kind enough to let me guest post. Thanks, Jim!

 

The Dogies

Taylor, the Grounded Engineer has a more laid back approach to the famous or infamous, depending on your perspective, Dave Ramsey Baby Steps. He shows us his own baby steps in Dave Ramsey’s Baby Steps Versus My Five Step Plan: Take Control of your Finances. You can check out my recommendations in Baby Steps for High Income Parents.


 

Chelsea over at MamaFishSaves.com put together the ultimate chart to help you decide on the best 529 plan for your situation. Your in-state plan might not be the best one to use. Check it out at Choosing the Best 529 Plan.


 

This next one is a sweet infographic over at DividendDaze.com. Do you want to be super rich? If you mimic these 11 Frugal Habits of the Super Rich, you’ll be well on your way. I think it’s cool that although these folks are worth millions or billions, they paid attention to the details and didn’t let the multitude of little costs get out of hand.


 

The Financial Panther is going Back in Debt Again!  Hooray!

Not really, but when you get married, your spouse’s debt becomes your debt. But he has a plan. He already paid off $87,000 in debt and he and his wife are ready to do it again with her student loans. This is a great example of some young, educated high income earners setting out to tackle a financial obstacle.


 

Kathryn at Making Your Money Matter is teaching all of us How to Teach Kids to Track Their Expenses. If we follow her advice, our kids will be well equipped to conquer their financial problems as they reach adulthood.


 

The Big Law Investor is thinking outside the box. He might just Fund a 529 Plan Before Having Kids. We always say to save early and often. Why not save for college before having your children? There are risks, but he lays them all out for you.


 

The Mad Money Monster is telling us to not be normal. Check out what normally is in How to Stop Being Broke with a High Salary. We’ve all read the stories of the multimillionaire basketball player ending up in bankruptcy despite making tens of millions of dollars. They should have read this post.


 

If you are like me, I’m always on the lookout for a good investment. I just don’t seem to find too many of them outside my HIP Portfolio. The Wall Street Physician gives some excellent words of advice in A 15% Yield Does Not Equal A 15% Return. Yields may be a wolf in sheep’s clothing.


 

Finally, the Charles Schwab website is giving us parents some good advice about Teaching Young Adult Children About Money. Schwab is backing up their quality brokerage services with some quality financial advice. They want us to pay the financial knowledge forward and make sure our kids are equipped to handle high incomes and wealth after they leave the nest as young adults.

 


A HIP Case Presentation. What Would You Do?

I recently had a friend come to me and ask for financial advice regarding a home purchase. He is a high income parent, has one daughter out of college, another in college and a son finishing the 3rd grade.

He and his wife have wanted to buy a new home for the last 8 years I’ve known him. This would be his ultimate dream home.

By my standards, his current home is pretty nice and more than accommodates his family, but his heart is set on a new home.  Here is his dilemma.

I think this might make my friend happy. Hearst Castle, San Simeon, CA

He doesn’t have enough money to pay cash for this new home until he sells his current home. For high-cost homes in our market, the buyer pool is small. This makes his home more unpredictable in how quickly it will sell. He has a neighbor a few homes down that has not sold his house after being on the market for over a year. I know there are lots of reasons for this and it doesn’t necessarily mean he would have a hard time selling, but it’s not a good omen none the less.

He is deciding whether he should sell stock to get the cash to buy the home and incur a capital gains tax or should he take out a mortgage and pay it off as soon as he sells his current home. Both tactics have advantages and disadvantages.

Option 1: Sell Stock

He will incur a 23.8% tax on the profits for his stock sale. If he did this strategy I advised him to sell the stock with the lowest appreciable gains, that way he would capture the least amount of profit and pay the least tax. The advantage is the expense is a one-time event and is known. There are no additional expenses in the future, but he is paying the maximum capital gains tax because his income is so high. He might have the opportunity to minimize his taxes in the future if he is in a lower tax bracket after retirement.

Another view of Hearst Castle

With our current political climate, there is a decent probability that capital gains taxes could decrease as well, but we are too early in the current administration to be able to factor this in. He wants to purchase the home quickly.

Option 2: Take Out a Mortage

This tactic is more complex. A mortgage will have closing costs and interest. The interest is amortized and the first few months of the mortgage have the highest amount of interest paid. He doesn’t know how long it will take to sell his home, so every month that goes by is another interest payment and higher cost on the mortgage.

Option 3: Delay Buying

I could advise him not to buy a house until he sells the current one. That might require renting some storage space or an apartment for a month or two. 

This has costs as well but is the least risky. If he could wait on the home purchase until he sells his current home then he will be able to control costs even more. 

The risk with this is his current dream home is sold before he can sell his own home and he loses his opportunity. He has already invested several years of his life in his search and it is very rare for a home to meet his standards. He also wants a specific part of town and homes in this area that meets his criteria don’t come along very often.

 Comment Below

Okay, go down and leave a comment and tell me what you would advise him to do? Could he do something else? You’re allowed to think outside the box on this one. You don’t have to choose one of my suggestions. 

The Reveal

Now that you’ve left a comment with your suggestion, I’ll give you the scoop on what he did. 

He actually didn’t take any of my advice. Rather, he did something other high wage earners with investments and savings sometimes have the power to do. He worked out his own deal because he has a long-standing relationship with a private bank here in town. He is a pretty conservative investor and has a good sum saved in CDs. These are older, so the rates are better than you can get today.  

It took some convincing and some negotiating, but he worked out a deal with the bank manager to get a personal loan with his CD money as collateral. I don’t know all the numbers for his situation and this might not be the best deal monetarily, but he is most comfortable with this option. I assume he is paying at least what he’s making on the CDs, maybe more. Essentially he is suspending his earnings on his CDs or maybe paying a little more until he pays back the loan. 

Now that is thinking outside the box, but another aspect of our wealth we should always consider. Our relationships and network could possibly be the greatest asset we own. Don’t ever forget or discount that. It’s hard to quantify but could ultimately save you time, trouble and money in the long run. Don’t ever forget to cultivate your relationships and make them a priority in your family and business.

Have a wonderful week.

 

Tom @ HIP

Tom
Tom is a doctor and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

4 Responses to “HIP Monthly Round Up {May 2017}

  • I would go Home Equity Loan on his current residence up to whatever a bank will give you 80 or 85% assuming he owns it outright. Then cash or stock sales for the difference. The closing costs for a HE Loan are usually between 0 – $500 a lot less than traditional closing costs.

    • That’s a good plan too. Depending on the closing costs and the difference in interest rates, the HE Loan could be a better deal. Just looking up the rates at my local credit union, there was a 0.5% difference between HE Loans (4.5%) and a primary residence mortgage (4%). On a $500,000 loan, that is about 150 a month difference in interest. If it took him a year to sell his house, the mortgage could end up better even with higher closing costs. It all depends how quick he sells the old house.

      Tom @ HIP

  • Thanks for the mention! I agree you need to research both sides of something in order to make an informed educated decision on what is best for your situation. Networking is huge in today’s culture. Everyone has heard the saying “it’s not what you know, its who you know.” You can use networking in anything from getting a new job to getting advice about something that you don’t have as much knowledge or experience in. Especially with the community of bloggers ever expanding, there are some great articles and people out there to relate to.

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