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- The Scent of a Mortgage is Cash Flow
"Cash rules everything around me. C.R.E.A.M.
get the money— dollar dollar bill, yo.”
Weekly Spotlight: To Borrow or Pay Cash: It Depends
Ultimately, we all live lives of cash flow, and when we can’t cash flow something, we can pull cash flow forward in the form of borrowing to pay for it now. When you borrow to buy a sweater, it has a negative wealth impact as sweaters depreciate, while borrowing for a house has yet to decrease wealth if the house is held for a long enough period.
This model (above) was something I created to help explain to consumers (and ultimately financial advisors) this dynamic of cash flow, borrowing, and wealth creation. Let’s walk it through…
The blue is the current month—the cash flow of your life. The lower dark areas represent the money you don’t have now and can’t afford to lose (like wrecking your car without car insurance or getting sick and not being able to earn an income), which would drain the money you earn now. This blue area is your cash flow, and as it comes in monthly for most of us, you can spend it on insurance to protect things and your daily living, but a goal is to live big but not beyond your means. To have the blue zone stay positive to support the wealth pyramid.
If you spend exactly how much you have each month, you are netting out $0. If you spend more than you make, you have to borrow money (like credit cards) to make up that difference in monthly spending. If you have more money than you need, you can invest that money to spend later or even leave money for your kids in the future. That’s the upper area of the triangle where money earns money and supports you.
So what is the outline of the house for? The house rarely fits into the cash flow capability of most of us to just buy a house. We pay rent or a mortgage in the blue zone. You pay cash for rent or cash for a mortgage payment. If you want a house, most likely you will have to borrow to do that, but that borrowing tends to support your ability to spend later (house equity) and leave wealth to your family (housing, equity, etc.). The house becomes the largest aspect of wealth for 80% of US Citizens, so the decision to borrow and buy can be a life-changing one.
This scratches the surface, but models can be helpful tools to tell a story to your client or share with a realtor or a financial advisor how you think and approach what you do differently.
a BORROW SMART CONCEPT
Liability Management
Here is another model to consider. These are all the areas of impact that a financial advisor might have working with a client, but by changing asset management to liability management you realize there are strategies to impact a client in all these areas.
One example is college funding. The #1 source for college funding outside student loans is house equity. Buying a house could be an important planning strategy for future college funding, as a young couple might have 20 years of equity growth to tap if needed for college funding.
When you can map key areas of wealth to strategies, your confidence soars. There are strategies that are borrowing related that support every single area of traditional wealth creation.
LIABILITIES
What’s Happening?
the biggest risk to housing is joblessness. ... low rates are great, but you still have to make the house payments, and consumers are flying close to the sun with cash flow in many respects...
you can see that risk is reflected in higher-interest debt service for consumers
the higher rates mean less tapping of equity in the house
mortgage debt is largely decreasing since 2021
rate expectations continue to move lower - great for housing
REAL ESTATE
What’s Happening?
real big jump in positive sentiment
real continued jump in house equity
and rent is going down which puts some drag on real estate but good for consumers saving to buy a house
“At the critical juncture in all human relationships, there is only one question:
What would love do now?”
ASSETS
What’s Happening?
returns cycle by annual seasons
optimism is good but ours has too big a gap
savings continue which is good for future home buying
companies are in the worst shape ever as higher interest is hurting their ability to grow
“Bespoke (courtesy of Liz Ann Sonders) since 1993 if you only owned the etf SPY the day after a down day you would have been up 785%! If you only owned it the day after an up day, up just 16.7% over those thirty years.”
ON BEING HUMAN
What’s Worth Sharing?
"An unknown but certainly significant proportion of the population has almost completely given up on learning. These people seldom, if ever engage in deliberate learning and see themselves as neither competent at it nor likely to enjoy it. The social and personal cost is enormous.
Although negative self-images can be overcome, in the life of an individual they are extremely robust and powerfully self-reinforcing. Deficiency becomes identity: "I can't learn French, I don't have an ear for languages;" "I could never be a businessman, I don't have a head for figures;"...
If people believe firmly enough that they cannot do math, they will usually succeed in preventing themselves from doing whatever they recognize as math. The consequences of such self-sabotage is personal failure, and each failure reinforces the original belief. And such beliefs may be most insidious when held not only by individuals, but by our entire culture."
DOPAMEMES
And Other Inspirations…
Anyway, good morning.
— Rudy Havenstein, Senior Markets Commentator. (@RudyHavenstein)
6:46 PM • Dec 7, 2023
A classic Christmas movie - for geeks who saw both versions in their childhood…
And maybe the happiest song ever: Vince Guardi Trio
AIdeas
Future Hacks…
A favorite AI tool for you to explore Google is coming on strong:
https://bard.google.com/chat is something you should work into your rotation.
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