Sunday, February 19, 2006

Leverage Edition: $3.01 - Do what you CAN afford

Financial leverage continued ....

50 year old couple, limited savings, poor retirement prospects, so did equity take-out of $200,000 from their house, additional loan payments of $1,199 monthly, intend to invest in dividend paying "Widow and Orphans" stocks, which have a small negative cash-flow for a few years, but is expected to become cash-flow positive in the sixth year and by their 70th birthday, is anticipated to be providing around $28,728 annually in positive cash flow.

Of course, your home might not be worth the same as those folks, or maybe you couldn't afford that amount of initial negative cash flow (averaging about $2,000 annually for the first five years [without considering the tax benefit of the deductibility of the mortgage interest]) - so you might be able to only afford a $50,000 equity take-out. In that instance, everything would simply be divided by four, but otherwise the example would remain the same.

On the other hand, you also might be starting out younger, and that allows much more time for everything to build up by retirement age.

Later we'll look at the specific companies I used in this current example.

JW


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