Creating Your Own Mutual Fund

In the previous lesson we focused on credit cards. We looked at how they work and differ from other more conventional loans such as a car loan. We talked about how they can easily get out of hand and mire you down in debt. More importantly we talked about how to use the mechanics of a credit card to gain control of your credit card debt. But you may ask yourself; why even bother dealing with a potential problem such as a credit card? Credit cards like all other types of debt when used and controlled properly can be of a great assistance in your finances. In this lesson we will go over ways debt can be your friend when used wisely.

So, we took the plunge and decided to roll the die with a thirty year bond. We bought our first house. We offered the asking price if the seller took care of several issues that made it move in ready for us. It costs us $250,000. We had a down payment and closing cost of $37,500. Our insurance is $70 a month and $50 taxes. Our mortgage payment is just under $1,100. It is a beautiful colonial with solid wood floors and a wonderful front and back yard. It has an attached two car garage with storage in the loft and a recently paved drive.

I’m not going to lie. It wasn’t easy and took some trial and error which taught us a lot of valuable lessons not only about managing money but about ourselves as well. See, we didn’t want to go in this as most people do. We wanted to make sure we had a strong financial base on which to stand while making this purchase. Let’s go over the various things we did to make this a less scary move and easier in the long run.

We had always known that we had wanted to own a house. We had an idea of the types of houses we wanted. We just didn’t know for sure when and exactly where we wanted to make the leap. So, we had time and we decided to make the most of it. We kept an eye on the market and got an idea of prices in different areas and for different types of houses. We found a few books on buying homes and the overall costs of home ownership. We also perused various realtor sites and various home owner periodicals. We gathered as much information as we could and planned accordingly.

First, we set up a budget and through some trial and error we worked out one with which we could try to make the most of our money. We set a goal of how much to save each month. After some rough runs we tweaked, reevaluated, and restructured our budget to one which captured all the information broken down they way we desired and one with which we were able to work comfortably. We made sure to include our credit card payments as discussed in the previous lesson. We looked at the credit limits of each and set our payment at 4% of these limits. For example: if our credit limit was $2,000 then our minimum payment would be $80 unless the balance was less than this. If we owed nothing on our cards this was money which was added to our savings and investments. We did make the commitment to use our credit cards only when needed. By this I mean that we used it to run interference for the budget when surprise expenses came up or a large purchase was needed such as a new appliance or major car repair. During the trial and error period we came up with reasonable amounts for each part of the budget based on our spending habits and rounded up to give some breathing room. From the information and lessons learned we were able to set a highly viable goal for saving each month.

The point of our credit cards and other lines of credit were to ensure we were able to maintain our budget. If we had a $400 car repair we would charge it. Sure, we probably had enough money to just pay the bill but it would have taken from different accounts and definitely our savings goals. This could cause problems with our other expenses and undue stress. If we decided to stay on goal we would have to play catch up and continue to cut and move around money from accounts to make up this short fall. Since we based our credit card payments on the maximum credit limit and had decided to use our credit cards for necessities which weren’t covered by the budget we could easily afford the $400 charge and make the $80 payment as budgeted allowing us to maintain our budget and reach our goals.

I should mention that in the idea of setting up our savings we decided to create a safety net in the form of saving up the maximum credit limits of our credit cards and other lines of credit. I have a card with a $2,000 limit and so does my wife. So, the first part of our savings goal was to not only build up a savings which would cover not only six months of living expenses but also $4,000 to back up our credit cards. Now, this may seem like a lot of money and it is, but it has not been sitting idle.

As mentioned there was a lot of trial and error to iron out what was working for us. In this process we did try various investments. This included government savings bonds and mutual funds as well as five year certificates of deposits. These all not only gave us a fairly safe place to keep our safety net but also added to our annual income which helped to increase our monthly savings. We did have a goal for each month that was based on our actual earned monthly income. Thing to keep in mind is that investments don’t always pay out a monthly income. Certificate of Deposit just kept all the interests it earned within the deposit to be paid out when matured as do the Savings Bonds. Mutual funds and individual stocks did periodically pay out a dividend or other distributions. This was just added to our savings for the month or an occasional mental health trip to alleviate the stresses of day to day life.

As I learned to invest and created my own mutual fund I would put ever more money into it. As I diversified and increased the amount of shares for the various investments in the mutual fund I started noticing we were getting ever more distributions which would just go into our savings and more investments. It became like a snowball and they just increased as I added more shares and other companies to our mutual and overall financial mix. We even started earning enough in these various distributions that we could use that to pay ever more of our monthly expenses. We actually had enough coming in to make our monthly credit payments. So, in essence when we charge something on our credit card our investments will reimburse us for the credit card payments or in short, our investments were paying for what we bought on credit and an ever increasing part of our living expenses. This all added up to having not only a down payment for our dream house but also the closing costs and through the use of using credit and managing it well a decent credit score.

Another thing to keep in mind is that we did not use our entire savings for the house. We still have quite a bit invested. This continues to earn us income. Our mortgage payment just pretty much took the place of our rent payments. But our rental payment was $850 and our mortgage payment is about $1,100 a month. It isn’t this amount. It is about a $30 less but for simplicity we plan on paying $1,100 a month. I should also mention that by paying $30 more a month may not seem like much but over the years it does add up and is applied directly to the principle. This means there is a $250 increase in our living expense. This won’t really shake up our budget that much but it along with utility costs and other housing costs does mean we need to revise our budget. This means there will be another period of trial and error and we not only still have our safety net but we have some flexibility to learn and grow as we do revise the budget.

Some of our expenses will increase slightly while others decrease slightly. Some will no longer be relevant while others will be added to our budget. There will be some which will increase or decrease a lot and there will be some items in our budget which will remain the same. We need to gather information and revise the budget to meet our current needs and of course this will include a savings/investment goal. As the years tick along we will probably earn enough to cover all our costs.

Here comes a question. If we have the investment to pay off our house and other obligations why not just do it? The answer to this is what actually separates the wealthy from the struggling. Let’s say I invest and earn enough to have the $250,000 to buy the house. I then buy the house and it is mine but my worth is still just $250,000. Now if I take the mortgage and continue to grow my investments at the same time the distributions from the investments will not only help me to pay for the house but at the end of the mortgage I not only have my original $250,000 but I have the value I have added to it plus the value it has grown over the years and now the house at its current value. Yes, you could say that I could have accomplished the same thing just buying the house outright and building up investments again and you wouldn’t be wrong. But with the mortgage I had my investments as a safety net as well as an additional income to help me pay for the house. Imagine buying a house outright with your investments and a month later a tragedy occurs such as a powerful storm, fire, flood, etc. You are at zero. But when it really comes down to it you must do what is comfortable for you. Personally, I like having the income from my investments help me to pay for the various aspects of homeownership.

Another way of looking at it a friend of mine came into an inheritance at the age of eighteen. Instead of buying one house he bought five rental properties in a college community. The rent paid for the houses and their expenses and helped him to buy his own house. Now he owns several rental properties plus a house of his own which are all being paid for through the rent he earns. He is now in his late forties and retired comfortably from his income he had generated. He could have just bought his dream house but more than likely without investing as he did he would still have to work. Through the use of mortgage and credit he had managed to transform a one time disbursement into a lifetime income which is actually through his management still growing.

With proper planning and using good habits you can actually amass more wealth through the use of credit. But you need to develop the discipline and maintain certain limits for it to work for you. For instance if you have ever bought a house you probably have been told to keep your spending under control from the time of submitting your application through the day you actually get the keys to the house. This is because lenders like to see that you are able to pay your loan. They do look at your credit report to get an idea of what to expect from you. They also look at your current monthly payments. This includes payments for car loans and credit cards along with the proposed mortgage payment which includes the insurance and tax payments. They take all these payments and divide it by your monthly income and this gives a percentage. For example: Let’s say our monthly gross income is $5,000 and we have two credit card payments of $80 each and a car payment of $225 and our proposed mortgage payment is $1076. We will add these together and it gives us a monthly debt payment of $1.461. When you divide this figure by our gross monthly income of $5,000 we have a percentage of 29.22%. This is less than 33% or a third of our monthly income. From looking at several sources I have found that most lenders like your total monthly debt payments to be less than 36% of your gross monthly income. Personally, I think that keeping your debt payments to less than a third or 33% is a good guideline. Thing is even though 36% is the standard by which a lot of lenders may go by the reality is the closer your monthly debt payments approach this percent the less confident the lender is. Having financial resources as a safety net and income generator will help to increase the lender’s confidence but only if you have your debt payments under control so do your best to keep it under a third of your gross monthly income.

Well this concludes my lessons. I hope they help you to find your path to your financial goals. Remember when it comes to financial possibilities they are only limited to what you know and as you proceed in using the strategy in this book don’t hesitate to learn all you can about finances and the market. You can use investing for that dream house, retirement, putting the kids through college, or just to enjoy yourself. I hope the lessons I have presented will help you reach your goals and I wish you the best of luck. Thank You.