Wednesday, July 25, 2012

Millionaire by Thirty - Book Review

Last week, I decided to take advantage of my local library and wanted to see if there were any financial schemes to mass riches that I haven't thought about already. Well, I found the perfect candidate in the "Millionaire by Thirty" book written by Douglas, Emron, and Aaron Andrew. I was enticed by the cover, the title, and especially the subtitle which said "The Quickest Path to Early Financial Independence". I was up for some good reading, or maybe a quick laugh, so I dived right in.

The book starts out nice enough, a couple short stories from the authors' own personal lives, but then lists three types of people:

1.) People who make things happen
2.) People who watch things happen
3.) People who wonder what happened

Well, let me tell you, I wanted to be the one that made things happen.  Needless to say, I started getting engaged.

Further reading through a few chapters on proper budgeting, and getting your financial house in order were basic enough, but I kind of already new all this stuff, and wanted to get to the point.  Finally, we reached the crux of their wealth generating tactics; home equity and arbitrage.  Basically, what they want you to do is purchase a home as early as possible with as little down payment as you can manage.  Next, work it out so that you will have the lowest initial monthly mortgage payments as possible.  They even suggest you get a differed interest or interest only mortgage so that you can take the money you would have spent on it and sock it away towards a higher interest bearing investment.  Every so often (maybe 1 or 2 years), take out a home equity loan on the appreciated value of your property, and use the money to invest in your higher interest investment.  Does any of this sound familiar?  It should, because what they are suggesting you should do is become your own bank and commit arbitrage (however, it's legal in this sense).

In case you didn't know, banks make money by taking your deposits in your checking or low interest savings accounts, and using that money to loan out at higher rates.  The margin between what they are paying you and what they are receiving from clients is the revenue that runs the whole organization.  What the authors are suggesting you do is the same thing; borrow at lower interest rates and invest in higher interest rates thereby reaping the margin in profit.

Finally, they suggest that you take the money ready for investing and put it into MFTA or Maximum Funded, Tax Advantaged Life Insurance.  Basically, this is a whole or universal life insurance policy that you can fund for a few years and then borrow from.  What's nice about this is that from beginning to end, this investment is tax advantaged meaning you don't get taxed on the money going in, accumulating, or coming out.  The problem with this investment is that there could be a bunch of fees if you're not careful.

This all leads me to my big problem with this whole concept: home prices took a huge dive back in 2008-2009.
The graph on the left shows the Case-Shiller home price index.  You can see that dotted line is the indexed value of American home prices.  Notice also that catastrophic drop in value in 2008 to 2009.  If you had invested the way these authors suggested to do it back in 2007 or 2008, you would now be in a situation in which all your homes would be loaned out more than their values, and now your mortgage payments are due.  Unfortunately, you cannot access your money for a couple more years, because you put it all in this life insurance policy that's only generating about 4% short your screwed!

OK, I can see where the authors came from when writing this book, in fact they did make huge amounts of money throughout the process, but those were in times where house prices did rise 7% per year, and investment rates were pretty good.  I only imagine how they weathered this whole ordeal.

I did learn a few things from this book that are helpful.  First, I learned a bunch on the tax savings you get from having a mortgage, plus all the other tax savings from the right kind of investments.  Secondly, I learned more about the concepts to maximizing my returns via home equity loans (which are hovering around 2.5% now).  It was a fun read, but I'm just glad to understand a scheme when I see one.

Wonderful Moment of the Day:  Realizing a crock of $%&# when I see it.

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