Accountant Debunks: The Most Controversial Topics in Personal Finance

You ever been to a barbecue when someone drops a money take that's so spicy that you're not sure if it's the ribs or just the reckless advice? You know, you have to own a home or credit cards. Yeah. If you enjoy financial ruin. Sound familiar? Here's the thing. Personal finance is personal. And wow, is that controversial. Now, as a CPA, as an advisor, and someone who's done this for 30 plus years, I've seen miracles and I've seen mistakes and more memes than I could care to admit. So I'm here to help you separate the fact from the fiction. That's why I have this show and to help you build a life where your money works for you. A freedom based life. This is building your money machine where we teach you how to master your money, eliminate financial stress so you can live a life of choice. Think of it as financial education with a side of sarcasm and a whole lot of heart. And as I said, I'm mel Abraham and 30 plus years I've been in this game and I've learned the most dangerous advice usually starts with, well, my buddy said, so grab a drink, silence your inner uncle Larry, and let's bust some of those biggest myths in personal finance. All right, let's do this. All right, here we go. Let's start to break these things down. The things that, that you might hear, you hear around the water cooler, at the barbecues, at family gatherings, you know, and that kind of thing, because I know I hear it. People approach me at conferences when I speak or I at a family dinner and things get thrown out like these kinds of myths or lies or hot takes. So the first one I want to talk about is this idea of renting versus owning a home. You know, people, people will say renting is just throwing away money. Only home builders build wealth. Yeah, now I get it. There is, by and large, real estate in our world has been a great creator of wealth. But does that mean that you ought to all own real estate? And I think that this is like the granddaddy of personal finance debates because people act like if you're renting, you're basically torching hundreds of dollars and doing it every month. But here's the truth. Both renting and owning can be smart. It just depends on your situation. I remember having a conversation with someone from my publisher as, as we were getting ready to publish the book. And he said, I don't know that I'm ever going to be a homeowner. And I said, why is that? He said, well, it's too expensive and interest rates are high, so I don't know that I can afford it. And I said, okay. I said, but let me ask you something. Why do you want a home? And he literally looked at me, says, well, no, it's the American dream. And I said, I go, you're right, it is the American dream. So they say. The question though, is it your dream? And he looked at me and he says, I never really thought about that. See, the reality is that we're here to live our dream. We're here to live our life based on our vision, the things that we want and, and not necessarily some dream that's been created as the American dream or any other dream. And so I caution people to look at this and say, if I'm going to buy a home, is it something I truly want to do and why do I want to do it? Your financial choices, your financial decisions should be in alignment and congruent with the vision you have for your life and move you closer to it. Not because someone else did it, not because your parents, your grandparents, your siblings, or the media or social media or anyone else told you to do it. This is exactly why you need to create a plan, a dynamic plan, a vision for your life with a plan to make it a reality and then live to that. Okay, but let's go back to this question of buying versus renting. Let's just look at it, because I am all for homeownership when it makes sense, but with the tendency is to believe that homeownership is kind of the path to wealth and financial freedom. And I don't know that it is in every case. And one of the challenges is I don't think that people look at the total cost of ownership. See, when we add up the total cost of ownership, it's not just buying the home that matters. It's the property taxes, it's the insurance, it's the repairs, it's the HOA fees, it's the opportunity cost that you lose by putting money down on a home that you might be able to invest. It's not just the mortgage versus rent, which is kind of that, the, the mistake or the thing that people will, will make. They'll start to look at it and say, I'm just looking at the, the cost of the home. But the true cost of the home has a lot of other elements in it. The other thing to realize is that a home purchase decision is a long term decision because the ability to buy and sell a home has a lot of friction to it. In other words, it's got commissions, selling costs. You have to put it on the market for a period of time, you have to dress it up or all those things. So if we're going to make a decision to buy a home, then we want to be willing to be there for, I want to say minimum five years, but more likely seven years or more. Otherwise it's not going to pencil out or make sense. Okay, now here's the other side of it, is that if you turned around and said, I, I don't know that I want to live here, I don't know that I'm here long term and I'm only here for maybe a couple years, buying a home and then getting out, you may not be able to make it back, especially if, if home values taper off or damper or, or even decline. So what you can do is, if you start to look at it that way, is I want you to do the analysis that says takes into consideration all the costs of homeownership compared to the cost of renting. If you choose to do that. And that differential, here's the only way to get ahead. The differential between rent and the total cost of home needs to be invested. And now all of a sudden, you're taking the down payment, the differential on a monthly basis, you're investing it to build something for you. And when you do that analysis, you can also then compare it and say, if I held the home for 10 years, 20 years, and it appreciated after all the costs and everything, what do I end? Which, at what point do I end up better off? Now I am making this just a financial decision. The home that my wife and I live in is a beautiful home, horrible financial investment. Financial? Why? Because it costs us every month. Property taxes, hoa, you know, insurance, all of those things. Upkeep. We're by the water, so the saltwater eats it up. But this purchase wasn't bought as a financial asset. It was bought as a lifestyle asset, incorporated in a plan. So we knew going in that was the case. Now, if we turn around and rent it now we've turned it into a financial asset. But studies over time will show, have shown that, that when you look at it, you will start to look at the possibility that renting can win in certain locations, certain situations, depending on interest rates and, and, or even break even. So, so I've seen clients who have rented and invested, the down payment and the difference, and they actually end up wealthier down the road. But I've also seen clients, and I am Living proof of that. Where I bought homes. Now I've bought homes. In the prior homes that I bought, we convert, converted them to rentals, okay? But I, I bought homes because I needed a place to live anyways and over time still built wealth. Okay? So some folks will treat that home like a shrine. But remember, if you're on some 30 year mortgage, the bank is the high priest of the shrine. You're just a loyal follower with a lawnmower. So here's the thing. If you're going to do this or you want to look at it, there is no hard and fast rule. Run the numbers, don't let your family, don't let fomo, don't let you know the American dream drive your biggest purchase of your life. Now, if you crave flexibility or you think you might need to move, renting might be the wealthier and the better play. If you buy though, plan on being there long enough to beat the transaction costs, the marketing costs, the friction around it, usually seven plus years. If you do rent, invest the difference, don't just go spend it. That will change it for you. All right? And to make it easier for you, I actually have a tool that makes it easier for that does the analysis for you. It's my home buy tool. If you go to melabraham.com homebuy you can get access to it for free. Put the information, check it out, let me know what you think. All right, that leads me to number two. Ah, it's another hot take. Debt or credit? Is it doom or delight or is it just a tool? Here's the thing, the hot take is that there are people out there that says cut up all your credit cards. All debt is bad. They are the devil. Okay? It's Satan on plastic. So here's the thing, then they turn around and you'll hear another person say that, well, debt is how the rich get richer. Leverage, baby, just leverage it all. Here's the reality, it's both. Debt is literally like fire. You can cook and create with it or you can burn the house down. Credit cards, they're not the evil unless you treat them like it's free money, okay? It's not the challenge, it's the use of it, it's the behaviors around it. Now, I don't believe in caring or financing lifestyle purchases. So when I mean lifestyle purchases, clothing, technology, vacations, those kinds of things, Major purchases, home, car, if you if done right, we're going to, we're going to finance it. So I look at debt in two different two different categories. There's destructive debt and there's constructive debt. Destructive debt is the debt to finance consumables, it's to finance lifestyle. Okay? If the benefits of what you bought are shorter than the payment plan in which you bought it on, it's a consumable, it's a problem. Okay? So we don't finance beyond that. And so I look at destructive debt and say this we're supposed to avoid. I don't want credit card balances, I don't want any of it. Okay? Strategic or, or productive debt is debt that you can use to build cash flow, to build net worth that's going to have a return on investment. So that could be financing a piece of equipment that you're going to use in a business that's going to increase productivity or profitability. That could be putting Facebook ads or ad costs on a credit card, but paying it off at the end of the month, but knowing that those ads are going to convert at greater than one to one, meaning that you're making money on could be a mortgage on a piece of rental real estate that is going to pay rents and pay for the mortgage. Now that doesn't mean that you can't get in trouble with. It just means that it's productive debt, it's increasing cash flow or wealth over time. If we do it wrong, if we over leverage, if we take on too much, if we buy the wrong the wrong way, so we over encumber ourselves and we have a problem, everything can fall apart. Even if it's productive debt, it can burn you, it can burn the house down. If one of the greatest proponents of no debt, no debt, no debt is Dave Ramsey and it's because he did that. He over encumbered himself, he had no liquidity, he didn't have the wealth priority ladder to keep him safe and he didn't have rules to make it happen and he ended up bankrupt. He ended up bankrupt. So here's the thing, when you look at this, it's about understanding how to use the debt, but also the cost of the debt. As much as compounding is one of the gifts of investing over time, if we finance it, the compounding works against us. $5,000 at a 20% APR, just paying the minimum rate you're going to be paying for years, you're going to spend double for that big screen TV that you bought without ever getting ahead. So when you look at it from that perspective now, you understand where do people go wrong? They use debt for stuff that drops in value. They use Debt for stuff that dissipates. Vacations, gadgets, avocado toast subscriptions, things like that. They treat credit limits and a spending target. Spoiler alert. It's not, it's not credit cards. I've heard a good friend of mine says credit cards are like chainsaws. Fun to use, but you don't want to lose a limb. Okay? So nobody wants to be featured on America's Funniest Financial Disasters. And that's what can happen. So here's the golden rule. Never carry a credit card balance. Set payments up to autopay in full every single time. Use your credit cards. If you're going to finance anything beyond the paying the balance off, it needs to be for something that is productive, not destructive. Use debt for only appreciating assets, income producing assets to make it happen. And always have a payback plan. Hope isn't a strategy. Have a strategic plan that's going to do it. And if you can't trust yourself, put the cards away. If you really can't trust yourself, freeze them in the freezer, stick them in a, in a can of water and freeze them so you can't get to them. All right, that leads me to the third one. This is another hot take also where you look at lease versus buy of a car. Okay? Leasing means lower payments. You're smart. That's the hot take. But why buy a car that just appreciates? So why not just rent it? So let's cut through this because this is an ongoing debate. Leasing is forever renting now. Full transparency. I used to lease cars, okay, I don't anymore now. I used to turn my cars every two years, okay, I don't anymore. It's a depreciating asset. I used to use my cars because I wanted to look good. So I was always getting the newest, the newest, the newest, okay, which, which meant that I was in this perpetual lease situation and if I overdrove the car too many miles, I was rolling the negative into the next lease. Leasing can be a forever game that you can't get out of. You get the new shiny wheels, but after three years, it's just a pile of gas receipts. No different than any other car. Okay, Buying though, I get that it's a depreciating asset. But buying and holding the car long term is about freedom. Okay? Whether you pay it off, you can finance a car. But I don't finance it more than 36, 42 months. I won't go beyond three, three and a half years. This, this idea of financing cars over seven years is ludicrous, okay? It's crazy. And the only thing they're doing is they're playing the payment game on you. So they'll just extend it out like a home mortgage. And now your car payments are low, but you just lost, you know, a ton of value as soon as you drove it off the lot. So you're immediately negative and you'll never be positive on it because of how long that, that, that, that payment plan is. Pay it off in three years. And, and whatever that payment is that you're making on the car, you better be putting at least that away in investments, otherwise the car's too expensive. Okay, In a, in my case, we buy a car and we keep it for at least seven years. Now we don't drive a ton, okay, but, but I have an expensive car, a nice car, but we, we keep it for seven, seven, seven years at least. And then we roll into another car so we get the use out of it. But I'm not paying, leasing and renting and all of that stuff and do it that way. Now leasing can look cheaper on a monthly basis because they play, they can play games with a number, but over a 2010 year period, a 7, 10 year period, you're always paying. There's no equity, there's no asset, there's nothing there. There's just bills. And you're, you're going from one bill to the next to, but getting a reliable car, paying it off in three, three and a half years and then keeping it for seven to 10 years, you got at least five years of pocketing car payments of no car payments and putting that money away for you to build your money machine. Okay? Leasing is really like being on a financial treadmill. The lots of motion, but you're not getting anywhere. And so the challenge is this. They're going to, the kind of thing to, to look at is, is that the reason we get a car is to get us from point A to point B in a safe way. Now, I get it, we want nice cars, we want nice things. But that doesn't mean that we jeopardize our, jeopardize our financial future by doing it. Now, I can hear right now, but Mel, you're a cpa. Isn't leasing making more sense for a business? And the answer to that question is possibly yes, possibly yes. But each fact and circumstance is different. You have to take a look at it. And even if I can get a tax deduction, a better tax deduction for the leased vehicle, that doesn't Take away from the fact that I'm in a leasing treadmill of vehicles that I'm never going to get out of, that it's difficult to get out of. So here's the action steps here. Leasing, I think, is forever if we're not careful. Buying and owning is for freedom. If I'm going to buy, I'm probably going to buy. I'm either going to buy new or used, but I'm going to drive it long term, seven years or more. I'm going to invest in the years that I don't have payments. And if it's for business, I'm going to take an the time to look at it and say, does it make sense to do a lease or a purchase? But if I'm keeping cars for a long period of time, it almost always will make sense to buy it instead. All right, leads me to the next one, and that is this. Ah, I don't need a financial advisor. All financial advisors are just salespeople. Okay? And you sit back and go, yeah, with everything. I know I can do it myself and I'll always do better. So those are the two hot takes. But here's, here's the scoop. Okay? Not all advisors are out, out there for your wallet. But not everyone needs an advisor either. See, especially in today's world where we can build simple portfolios. I walk through this in, in my book. I walk through it in my money machine blueprint and the master plan. When we work with our clients to create a simple portfolio that is built on 1, 2, 3, 4 or maybe 5 funds. And allowing that diversification, that simplicity to carry, do you need an advisor to do that? Not, not at the beginning, you certainly don't. But at some point you'll have critical mass and an advisor can come into the game and, and help you with decisions. Now it's the other decisions aside from the investing that actually bring their value. So I have an advisor team. They're a great team and they help me with the decisions. Not just the investing. We talk about the investing. I know what the investing is and I make the decisions on what we invest in and how we invest. But there's a lot of other nuances as you get critical mass and you have certain complexities in your life that we need to think about. Okay? Cash flow planning and retirement planning, Social Security, Medicare, avoiding Medicare, surcharges, all the different things and how they integrate and coexist, that's where they earn their keep. Okay? And if you can stick to a plan beginning at beginning and Follow that portfolio and put it on autopilot. Yeah, DIY is great. Low fees, low, low cost, full control. But if you also have a problem with controlling your emotions when the market goes down, or controlling the greed when the market goes up, having an advisor that can kind of tamper you, dampen your emotions, kind of set you straight, talk you off the ledge is huge. Okay, so they, they function more than, hey, what, what fund do I want to buy? And in fact, there was a study called the Dalbar Study that the average investor, okay, if you look at the investments, if you look at the returns on investments, an advisor portfolio on average in this study made about 9 to 10%. The do it yourself investor during that same time period made about half that, 5%. Why? Because emotions got involved. They made panic selling, they made greedy buying. They did things that were emotionally based and didn't follow the plan. Okay, Good advisors will make it through. Listen, a spreadsheet isn't going to stop you from panic selling in a crash. I get it because I did it. Sometimes you need a coach. Sometimes you need advisors. Sometimes you need a friend that takes the sell button away from you. Hey, y'. All, I just want to let you know that my book Building youg Money Machine is out. And it debuted at number four and number 24 on the USA Today bestseller list. Number four in business, number 24 of all books, all titles, all genres. It was big time. So if you have not got your copy of Building your Money Machine, then the first question is why not? The second question is when? And the third thing is go to YourMoneyMachinebook.com, grab your copy, then give me the information from your, your book so I can make sure that I give you some special gifts or bonuses and wealth resources to accelerate your path to financial freedom. Let's get to the show. So here's some action steps for you. DIY can make sense, especially at the beginning, but you have to get gain knowledge and financial literacy. You have to be disciplined and you have to kind of enjoy managing money. Now at the beginning, you may not enjoy it, but you will as you start to get acclimated to it and doing that. If you're going to look at an advisor, consider a fee only advisor, a fiduciary only because they have to act in your best interest. There is no bias. There are no commissions, there's no transaction costs. I do not want to go to insurance salesperson or broker because they're driven by the transaction. I need them to be driven by the dream. Okay? And always, always ask, how do you get paid? Follow the money, follow the bias. All right, that leads me to number five. This has to do with the fire movement. Here's the hot take here. Fire is the only way to freedom. Save 70% and retire by age 35. Or it could be fires for the rich, tech bros and people who hate brunch. That's the way you could look at it. But here's the thing. I love the idea of fire. FIRE stands for financial independence. Retire early. Now I have re termed it and I did an episode on this that is financial independence rich in experiences. See, I don't believe that deprivation is the path to a rich life. Now discipline is okay, investing is, frugality can be. But extreme frugality can turn you into a coupon clipping hermit. And then they talk about. And most of the fire movement is based on this 4% rule. Basically saying just sock away as much as you can as quickly as you can and then have enough where you can take 4% out each year and live that frugal life. So if you can build a life on 40,000 and you can put a million dollars away, 4% is 40,000 a year. You're good. And that's kind of the life they want to build. I don't want that life. I don't want that kind of life. I want that rich life, the one that, that I want, the vision that I have. And here's the challenge with this. When, when this 4% rule was created based on the Trinity study, it was built for a 30 year retirement, not a 50 year retirement. Because a lot of things can happen in those additional two decades. And when you start to look at, at things through those eyes, you need to modify, you need to realize that if you've got two more decades on this rule of 4%, we need to rethink whether this is enough for us to make it happen. Fire is great if the dream is to retire at 40 and spend your golden years optimizing and doing things. But it's not, I don't think that it's meant to create this austere light of frugality where it's extreme and then you continue to live that extreme life the rest of your life. Now if we can get to a point where we build the money machine to give us the life that we dream of and that could be, you know, low cost life, that's fine. But it needs to be your life. It's like you can't stay on an extreme diet all your life. Because most of wealth creation is behavioral. And so we need to create behaviors that are sustainable for the long term. Okay, so here's the action steps. Use the best of fire, okay? The frugality, the understanding, the discipline, all that thing. Save, invest more, but don't starve your present self. Make sure that there's certain things that bring visceral joy to you that are built in there. Build the plan that gives that to you. Build the plan that is for your life and your values, not what some person in the fire movement's telling you or not some spreadsheet. If we want to retire well before 65 or a 30 year retirement, a longer retirement than 30 years, then we might need to adjust the withdrawal rates from 4% to make that happen. All right, that leads me to number six. And number six is real estate. Okay? Real. Should I invest in real estate versus stocks, you know, which is the real wealth builder. Now here's the hot take. Real estate is always the safest, Beth. And stocks there for suckers. I don't know. I think you can see it both ways. Both real estate and stocks can build real wealth, but both come with risk. Very different risk real estate. The reason we can build wealth faster with real estate is because we can leverage it. Like I can take $100,000 investment and put $20,000 down and use 80,000 of other people's money, but I control the full hundred thousand. That's where the, that's where it packs a big punch, is that we can leverage it, but that's the same thing that can go against us when the real estate doesn't perform or declines. Think 2008 and I can't rent it or I can't pay the bills. And now the value declines. I no longer have equity, I no longer can support it, and now I lose the real estate. No, no investment is a guaranteed return. They're different. Now I love real estate and I love it because it's one of the only investments that has four characteristics to is an asset that is a hard asset that allows you to create cash flow. That's one, two, it will build equity buildup. By what I mean by that is if I have a loan against it and someone is renting it, that rent payment is paying the loan and the equity is building up even if the value of the property doesn't go up. Three, it has the possibility of appreciation, the value itself can go up. Okay, now it's not guaranteed, but historically, over the long term, real estate has appreciated. And four, it can give you A tax shield. Okay? It's the only investment really out there that has those kinds of aspects, those four aspects. Because if I look at stocks, I might get cash flows, I'll get appreciation. There's no leveraging it, there's no equity buildup. So you'll get only a handful of characteristics. But here's the other challenge. Real estate has more friction, more costs to go into it. I talk about real estate in my book, but I push it up the wealth priority ladder because I don't want people to start there. Because it's harder to get diversification in real estate at the very beginning. If all I have is $20,000 to invest, I can go get one property for a hundred thousand dollars leverage the other 80. And I have a single property, I have one asset. And if that asset wasn't bought right or doesn't operate right, it can destroy me. Here's an example. Had some friends that bought a building, they wanted to have some work done on the building. And when they brought the contractor to look at the roof to do the work, he looked at, he says, you've got asbestos up there. He says, he said, oh my God, what do we do? He says, we have to get rid of, we've got to remediate the asbestos. That means get rid of all your tenants. That was a building. So he had to relocate all the tenants, spend $150,000 to get rid of the asbestos, then do the work that he wanted and then have to get the, the building rented again. All along still having to pay the, the monthly payments to the, to the bank, the real estate taxes, the insurance, the utilities, the upkeep and not having any cash flow. If that was the first real estate investment that was made, you could lose it all if you don't have the liquidity to carry it. So it's the reason that I push it up the ladder because I want you to have a critical mass of investments. Because if I had the same 20,000, I could put it into three different index funds or ETFs, which has me invested across different sectors and different, different capitalizations of profiles or sizes. And I'm invested across thousands of companies and it's easier to get in and out of. It's more liquid than real estate. So there's a lot of reasons for it. We just got to be smart about it and know exactly how to deploy it, how to put it into your world. And I also think that investing in Real Estate vs Stocks is a lifestyle choice. For instance, I don't own a Ton of real estate. Part of it is because I don't want to be a landlord. Now, do I have a real estate plate? Yes. In my portfolio I have syndications and other things. But I am not the direct landlord where I'm Getting the call 11:00 clock at night going, hey, guess what? Toilet's clogged. I don't want that, okay? But there's people that love that. So we need to think it through and make it, make it work that way. Because millionaires typically actually own a combination of both. Okay, so here's the question. You know, when you think about it, if your rental property calls you more than your mother, and maybe stocks are more your soulmate, the thing to look at. So what are your action steps here before I close this out? One is to diversify. Look at ways where you can have elements of both. Because during different times, stocks will do better than real estate, real estate will do better than stocks, their cycles and their longer term assets. Number two, invest for growth, not just comfort. Not just comfort. And number three, don't fall for anyone who says this is the only way to get rich. Because there's plenty of ways to get rich. We just gotta understand what fits your vision, what fits your lifestyle, and what fits your path. All right, listen, there are a lot of personal finance controversies, but most of them aren't about the math, okay? They're about the emotion, they're about the identity, they're about the half truths that are passed around like they're bad leftovers, okay? But you, you got the facts now, you get the numbers. And you have a CPA and an advisor and a money mentor in your corner. So if you heard a heart hot take here that kind of smacked you right in the wallet, let me know. Drop it in the comments. I would love to hear any other hot takes so we can try and debunk them in a future episode, in a future video. Because remember this, personal finance is personal, but good decisions are universal. Let's go out there and make it. Let's build your money machine. Let's build your life by choice, not by chance. All right? I hope you found this of value and I hope that this will help you on your path to financial freedom. Because I truly believe that financial freedom, it's your birthright. And I'm on a crusade to light that path for a million families. And I want one of them to be you. All right? Till I get a chance to see you on the road, make sure that you've subscribed or share it, leave me a comment. Say hello. If you've got questions, ping me. I'd love to bring them on one of my shows. All right. Until then, always, always strive a little like you see next one. Thank you for listening to the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there. And that's it for this episode of Building your money Machine where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.