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With every expense you are indirectly borrowing

Discussion in 'Property Finance' started by Terry_w, 11th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I would just like to point out that every time someone uses cash to buy something then they are indirectly borrowing to buy that item (unless they have no loans at all). This means that every purchase they make will incur interest for years to come.


    Example

    Borat has a $100,000 home loan with $20,000 in his offset account. He takes the $20k and buys a car (or sheep). The interest on the home loan jumps up and he is paying an extra $1000 per year (approx at 5%) in interest for that car - and it isn’t even deductible.


    So every time you want to make a major purchase just consider this. A new car goes down in value as soon as you drive it and it will cost you a fortune in other costs, plus it will cost you dearly in interest over 20 years or so.


    Think like Buffet - If you use that $20,000 to invest now, in 10 years it could be worth $40,000 and be producing $2,000 per year in income whereas the car could be worth $7,000 and costing you $1,000 per year in interest still.


    You can also use this as a dieting tool - every beer you buy will cost you for years to come! I am still paying interest on some cheesecake that I had 3 years ago.
     
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  2. Tony Fleming

    Tony Fleming Well-Known Member Business Member

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    Hahaha Borat "Great success"
     
  3. Plutus

    Plutus Well-Known Member

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    Isn't thinking like Buffett more like gaming the US taxation system by:
    • Ignore income (no dividends), focus on yield
    • If income is needed, borrow it against the asset (asset at the full, pre-tax value of the asset), because a loan isn't taxable income
    • Never sell, worst case do an internal restructure between entities, thus avoiding ever paying tax (capital gains.)
    • Never, ever pay tax if you can avoid it. Hello $62,000,000,000 in deferred taxes.
    Also a few other things to point out on the topic of Buffett, the rags to riches story is marketing spin, his family were already incredibly wealthy, he simply carried on the family tradition of not appearing to partake in conspicuous consumption (and his kids still manage to do the same even if behind the scenes they are living in multi million dollar penthouses & travelling via private jet... The buffett's know how to do branding.) & applied a modern take to wealth acquisition exploiting the conditions available to him. I'm sure if the US made major changes to their tax system, he'd find a way or his advisors would assist in finding a way to still do very, very well.

    Think like Buffett.

    1. Inherit fortune & power.
    2. Don't f*** it up
    3. Game the system as much as possible. Don't break the rules, just find as many exploits as you can.

    Most of us can't do 1 (hello long lost incredibly wealthy relative!) but hopefully we can pull of 2 & 3 which comes back to your points, delayed gratification, I think its fair to say that for most people wealth doesn't happen overnight, it takes years of education to build up the necessary skills to develop cash flow and to know how to identify opportunities, then time in the market or even more skill to turn those opportunities into $$.
     
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  4. neK

    neK Well-Known Member

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    I'd say 99% of people can't do number 2 properly. We all f up some way or another. It's how we learn from it :)
     
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  5. Azazel

    Azazel Well-Known Member

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    This analogy explains it well to people whose brains might work a little differently, hehe.
     
  6. WattleIdo

    WattleIdo renovating Premium Member

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    If we're going to learn from our mistakes and be self-made and delay gratification, we need to add another 50 young years to our lives...
    i.e. in order to become wealthy
     
  7. D.T.

    D.T. Adelaide Property Manager Business Member

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    Yep. This is why I disagree with people who say they make a property c.f. positive by using a bigger deposit.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Only a fool learns from their own mistakes, A wise person learns from the mistakes of others.
     
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  9. WattleIdo

    WattleIdo renovating Premium Member

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    Jeepers that's not even backhand. Is there any possibility that I've misunderstood you? It seems to me that you're saying you've never made mistakes? um how do you go with all your clients who've made mistakes?
    CrrrrAAzee
     
    Last edited: 11th Aug, 2015
  10. Hanison

    Hanison Well-Known Member

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    Isn't the saying here.

    Show me a man that's perfect and I'll show you a liar.
     
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  11. WattleIdo

    WattleIdo renovating Premium Member

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    Before you can learn from a mistske, you have to be big enough to admit you've made one.
     
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  12. Darlinghurst Boy

    Darlinghurst Boy Well-Known Member

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    I sort of understand Terry.
    Your saying rather than use cash to buy things you should borrow and get CG.
    But how would he get a car?
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am not saying that. Just say that every expense takes you further into 'debt' however expenses are unavoidable and should be minimised where possible, especially early on to get you where you want to go quicker.
     
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  14. Redwing

    Redwing Well-Known Member

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    Buffets Tax..never sell and lock in your earnings

    Warren Buffett is fond of saying his tax rate is lower than his secretary’s. He does not publicize his tax returns, but for the tax year 2010, he paid $6.9 million on taxable income of $39.8 million, according to partial disclosures he made in 2011.

    What is astounding about those numbers is not the 17.3% tax rate, but that Buffett’s $39.8 million of taxable income is only about 0.05% of his reported net worth ($71 billion according to Forbes, which put him third on its list of the 400 wealthiest people in the world for 2015).

    Proportionately, that’s like someone with an ever-expanding net worth, currently $10 million, reporting taxable income of only $5,000 and paying a federal tax bill of only $900.

    So, how does he do it? Buffett’s principal holding is an economic interest of about 20% of Berkshire Hathaway, the huge conglomerate he has been building since the 1960s. It has a market value of about $350 billion. Berkshire hasn’t paid any cash dividends since 1967. Rather, the company accumulates its prodigious after-tax income ($19.9 billion in 2014) and cash flow ($32 billion in 2014) to get bigger by buying companies, lots of companies. Among its large recent acquisitions were Lubrizol, Burlington Northern Santa Fe, and a shared acquisition of H.J. Heinz.

    The Berkshire Model is to buy companies rich in cash flow with histories of paying dividends, then cancel those dividends and retain the cash flow going forward for future acquisitions.