What were you doing in 10th Grade? The last thing on my mind was purchasing a home and my retirement. I was much more interested in rebellion, snowmobiling, boating, did I mention rebellion. Amidst all of the curriculum approved by the State of Wisconsin, the “What is the Magna Carta? What was Sherman’s March? What is the boiling point of alcohol? was a lesson in Math on Cumulative Interest. Looking back, I wish there was a gold star next to the lesson’s that can reshape generations, your grandkid’s, kids lives. Maybe even have a special area in the High School referred to as the “HIGHLY APPLICABLE WING”. We can’t look backwards though can we…as I was moving from one Honor’s Study Hall to the next sticking pencils in the ceiling praying for it to be over, I missed it. The lesson of all lessons. Cumulative/Compound Interest.
Here I am 14 years later and actually had to Google what year that lesson was covered because it was SO long ago. Now nearly a decade into the real estate business and working to blend a great life while creating a great legacy, I stumbled across the lesson again. Where? Well, believe it or not, in church. My wife invited me to something called Financial Peace University by Dave Ramsey and WOW what an eye opener especially for my industry. After the 8th lesson at FPU, I was reviewing some real estate statistics and what I found put me back in my chair. The following is the scenario I cooked up:
A 200k Loan at 3.4% is truly after 30 years going to cost you: $319,306.49
Now let’s say interest rates will rise to 4.4% by years end the difference in monthly payment is: $114.56 (Savings if you BUY NOW)
Now let’s say you buy the home today instead of years end, even assuming no appreciation of the home, you save that $114.56, but instead of spending that on Twizzlers, Movies and Over-sized Popcorn, you invest it.
You open an IRA and invest in Growth Stock Mutual Funds earning a steady 11%, you start out with a $1,000 deposit and then deposit the $114.56 into the IRA monthly….after 30 years you have an IRA worth: $347,993.88
So let me sum this up for you…the money you save if you bought today vs. waiting for interest rates to rise to 4.4% could essentially earn you a rebate in the entire Principal and Interest on your home after 30 years. This is a game changer…had a REALTOR paired with a Financial Planner explained this to me at a basic enough level that I could understand it at 20 years old I would have learned this lesson in APY instead of the lesson I learned in APR from Credit Card Companies. I bought my first home when I was 20…assuming the same scenario, my IRA would have $38,000 in it, I would be 18 years from owning it free & clear and having 100% of my P & I coming back to me through compound interest.
Am I the only one that didn’t look at this? I feel like the last one to the party on this one. What do you think? Are you floored or bored? Shoot some comments my way!
In My Head 