Paying off your Mortgage

I hope to never pay off my mortgage, much to my wife’s chagrin.

 

That may shock some of you. Especially those of you who are familiar with this phrase:

 

“Debt is dumb, cash is king and the paid-off home mortgage has taken the place of the BMW as the status symbol of choice.”

 

That is from Dave Ramsey, radio host and author of The Total Money Makeover, and it is the battle cry of a growing movement away from debt. Indeed, debt is seen as a key cause of our current Great Stagnation. However, I think we may be moving too quickly to eliminate debt from our lives. Indeed, actions like paying off a mortgage may cause harm to your overall portfolio.

 

That harm comes from the extra money you put toward your mortgage. Deciding to put money toward the principal balance of your mortgage means you are not investing that extra money. Instead, the principal balance of your mortgage decreases. Note that this doesn’t necessarily increase the value of your home. Your home will appreciate or depreciate regardless of the balance of the mortgage.

 

Let me use an example to help illustrate this point. This example has two actors: Tabetha and Liam. Tabetha hates debt and will work her darnedest to pay it off. Liam takes a more wealth-maximizing approach. They are actually neighbors buying the same house for $200,000. Tabetha put 10 percent down and Liam put 5percent down. Tabetha chose a 15-year mortgage, so her payments are slightly higher than Liam’s, but she gets a lower interest rate. Liam chose the 30-year mortgage with a higher interest rate, but a lower monthly payment. The info is in the table below:

 

 

	Tabetha	Liam
Loan balance	$180,000	$190,000
Interest rate	5.5%	6.0%
Months	180	360
Payment	$1,470.75	$1,139.15

 

Tabetha really doesn’t like debt, so she decides to also send an extra $200 per month to help pay off the mortgage. Liam takes the difference between his payment and Tabetha’s and invests it. Liam also sends $200 a month to his investment account which earns about 8 percent annually on average. So how do they look seven years down the road?

 

 

	Tabetha	Liam
Mortgage balance	$93,581.76	$170,314.83
Investment balance	$0.00	$77,074.13

 

 

Tabetha has made great progress in paying down her mortgage. She has more equity in her home compared to Liam. However, Liam’s investments have steadily grown as he invested the difference between Tabetha’s mortgage and his own, plus the extra $200 a month. If we net the investment balance against the mortgage, he owes about $341.05 less than Tabetha.

 

By pushing the scenario further, we can also test strategies for our current Great Stagnation. Assume that both Tabetha and Liam lose their jobs. Liam’s investment account also took a hit and lost about 30percent of its value. The investment account is now worth $53,951.89. Both Liam and Tabetha are having a hard time finding jobs and each has spent their 12-month emergency-fund money. It is now month 13 since the layoff and Tabetha can’t pay the mortgage. She has substantial equity in her home, but no one will lend her money without some proof that she can pay it back. The house she put so much equity into goes into foreclosure.

 

After 13 months, Liam has also emptied his emergency fund, but now he starts to spend the investment account that has decreased in value. Assuming he only uses the investment account to pay the mortgage, he has 47 months worth of mortgage payments—almost four years. This is probably too optimistic, but if we assume that it takes $2,000 a month to run his household, he has enough money for 26 months, more than two years.

 

This example also works for student loans and any other long-term loan where the interest rate is relatively low compared to possible investment returns. This doesn’t work compared to high cost credit cards, payday lending or other high-cost debt.

 

There are three important considerations with the Liam strategy.

 

1. Sleep. You have to be able to sleep at night, knowing that you are not paying off your mortgage as fast as you could be. Instead you are investing in riskier investments that are volatile in the short term, but over longer periods, they generally appreciate. If your personal preferences are such that you are the happiest paying off the mortgage fast, then Liam’s strategy may fail to win you over.

 

2. Peer pressure. In recent history, peer pressure tended to exert influence toward borrowing more, saving less and living well. Your house could be used as a piggy bank to finance purchases, since house values kept rising. This belief was proven false, but I fear that we are falling to the other extreme. The quote at the top is my best example: “the paid off home mortgage has taken the place of the BMW as the status symbol of choice.” We are now fearful of debt and want to expunge it from our lives. Although paying down debt is a much better choice than getting into large sums of debt, it is still suboptimal (see example above).

 

3. Discipline. Liam put the difference between Tabetha’s mortgage payment and his payment—$331.60, plus an extra $200—into his investment account. Additionally, Liam put $10,000 less into his down payment, opting instead to start his investment account with that lump sum. The discipline to put the lump sum and the monthly payments into the investment account was essential to his success.  If the money had been spent on anything else, Liam would be worse off financially compared to Tabetha.

 

My hope with this Financial Tip of the Week was to demonstrate that debt is a tool. It is neither good nor evil. Debt can be used to lengthen an unsustainable lifestyle or enhance wealth creation. The good or evil action depends on the user (like so many things in life!).

 

Notes: Liam and Tabetha are fictitious, and there are many assumptions in this example. Markets generally don’t steadily rise 8 percent a year, they fluctuate. We’ve ignored private mortgage insurance, taxes, inflation, emergency fund amounts, increase in house value, etc. This does not make the example useless, but you cannot apply it to your own life without tweaking all those factors to fit your scenario. A good financial planner dreams of spreadsheets and should be able to model the situation to give you a clear outlook.

 

BONUS CONTENT

 

You’ve read this far, you deserve something special. Some may ask the question: “Sure, Liam looks better, but once Tabetha gets her mortgage paid off, she can invest her whole payment!”

 

Well, let’s break out the spreadsheets.

 

Tabetha pays off her mortgage in the 149th month.  She actually has $201.44 left over that she immediately puts into her investment account. Every month thereafter, she invests the whole $1,670.75 into her investment account. By the time Liam’s mortgage is paid off, 30 years after the homes were bought and about 17.5 years after Tabetha paid off her mortgage, Tabetha has amassed $352,731.08 in her investment account and a paid-off house. At the same time, Liam has a paid-off house and has amassed $901,638.67, almost $1million.

 

The difference between Tabetha and Liam’s account balances is more than half a million dollars. Liam and Tabetha had the same amounts to either invest or pay off debt, as well as the same amount of money to put toward a down payment or invest. They both earned 8percent on their money. Tabetha had a lower interest rate and paid $68,740.35 in interest. Liam had a higher interest rate and paid $220,092.56 in interest. So what caused Liam’s investment balance to be so much higher than Tabetha’s?

 

Time.

 

Liam’s money was working for the full 30years. Tabetha only had 12.5years. Albert Einstein, when asked “what is the most powerful force in the universe?” supposedly replied “compound interest.” Whether the quote is urban legend or true, compound interest combined with time is extremely powerful. Tabetha’s extra payments still couldn’t keep up with Liam’s investment account. Truly, the power of compound interest over time is often described as the snowball effect.

 

More Reading:

 

The second book that spurred me into personal finance was Ric Edelman’s The Truth About Money. Now in its 4th edition, it first introduced me to the concept of never paying off your mortgage. He actually has an entire webpage devoted to this concept.

 

Here is the spreadsheet that outlines the above example.

 

Andrew Zumwalt, M.S.

Director of the MoTax Education Initiative

162 Stanley Hall

University of Missouri

Columbia MO 65211

Google Voice #: 573-234-4268

Fax: 573-884-5768

 

 

Is a College Cap and Gown a Financial Ball and Chain?

This week’s Financial Tip is a re-print of August’s Liber8 Economic Information Newsletter. The article is re-printed here with permission from The Research Library of the Federal Reserve Bank of St. Louis. You can sign up to receive their newsletter here: http://liber8.stlouisfed.org/newsletter/newslettermailinglist.html.

 

“A college education is not a quantitative body of memorized knowledge salted away in a card file. It is a taste for knowledge, a taste for philosophy, if you will, a capacity to explore, to question, to perceive relationships, between fields of knowledge and experience.”

—A. Whitney Griswold, president of Yale University, 1951-63

 

The cost of a four-year college education has risen roughly 150 percent since 1980[i]. For this and other reasons, more and more students must take out student loans to finance their education. Upon graduation, many find they have accrued a sizable debt. Given the significant expense, some question the value of earning a college degree.

 

However, along with the rising cost, the lifetime earnings difference between college and high school graduates has widened. The increased earnings potential of a bachelor’s degree allows a college graduate to recover the cost of college over time and eventually surpass the earnings of those with only a high school diploma.

 

The College Board estimates that for the 2010-11 school year the average cost of a four-year college education is $37,000 per year at a private nonprofit university and $16,000 per year at a public university[ii]. Over the past decade, the real cost of attending a four-year university increased an average of 3.6 percent per year. In contrast, for the same period, real personal income increased an average of only 2.1 percent per year. Consequently, more families turn to student loans for college funding. The College Board estimates that the percentage of students with federal student loans increased from 27 percent in 2004-05 to 35 percent in 2009-10[iii].

While estimates vary, a typical 2009 college graduate accumulated $24,000 in student loan debt, up 6 percent from the previous year[iv].

 

For college to be a good investment, the benefits of a degree (e.g., higher pay) must outweigh the opportunity cost of attending. In this case, the opportunity cost is the sum of tuition and housing costs plus the wages that would have been earned from working directly after graduating from high school[v]. Recent data show that while the cost of college increased, the labor-market value of a bachelor’s degree climbed to an all-time high. In 2008, college graduates earned on average 77 percent more than high school graduates[vi]. Also, from 1998 to 2008 the difference between the median earnings of those with a bachelor’s degree and those with only a high school diploma increased by approximately 23 percent. This increased earnings potential allows college graduates to “catch up” relatively quickly in terms of net lifetime earnings.

 

According to the College Board, recent college graduates who completely financed their education with student loans will earn enough by age 33 to cover the cost of those loans and match the to-date lifetime earnings of those the same age with only a high school diploma[vii]. Thus, the opportunity cost of attending college is recovered over time. A college degree also lowers the probability of unemployment: From 1998 to 2011 the average unemployment rate for those with at least a bachelor’s degree was half that of those with only a high school diploma. Overall, a college degree still remains a wise investment.

 

—By Lowell R. Ricketts, Research Associate

 

You can find additional Liber8 newsletters here:

http://liber8.stlouisfed.org/newsletter/

 

along with Classroom editions, which includes questions for students and an answer key for classroom use, here:

 

http://liber8.stlouisfed.org/newsletter/classroom-edition.php

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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[i] Figures are listed in inflation-adjusted (real) terms. Costs are defined as the sum of published tuition and fees plus room and board charges. Data are from the College Board Advocacy and Policy Center. “Trends in College Pricing 2010.” 2010.

[ii] College Board Advocacy and Policy Center. “Trends in College Pricing 2010.” 2010, p. 15.

[iii] College Board Advocacy and Policy Center. “Trends in Student Aid 2010.” 2010, p. 15.

[iv] The Project on Student Debt. “Student Debt and the Class of 2009.” October 2010, p. 1.

[v] The opportunity cost of money—the accrued return from the next best investment to paying tuition out of pocket—should also be considered.

[vi] Baum, Sandy; Ma, Jennifer and Payea, Kathleen. “Education Pays 2010: The Benefits of Higher Education for Individuals and Society.” College Board Advocacy and Policy Center, p. 16.

[vii] Baum, Sandy; Ma, Jennifer and Payea, Kathleen. “Education Pays 2010: The Benefits of Higher Education for Individuals and Society.”

College Board, p. 13. This estimate takes into account several factors such as years in school, total student loan debt, and time employed.

The actual “breakeven” point will vary depending on an individual’s specific circumstances.

 

Compulsive Buying Disorder

“Compulsive buying disorder is characterized by an obsession with shopping and buying behavior that causes adverse consequences.” It is found in approximately 5.8% of American citizens; of that 80% are female[i].

 

While you may not suffer from a compulsive buying disorder to the point that it has adverse consequences in your life, most of us are guilty of spending money we don’t have for things we don’t really need, whether it is that magazine that catches our eye while checking out or that new movie on the flashing display when you walk in the store.

 

I myself am guilty of it, my personal enemy; Bass Pro. It has such an effect on me that I feel guilty leaving the store with nothing. Let’s get one fact straight – products are placed purposely in stores and packaging and displays are meant to catch your eye. Companies spend millions of dollars each year preying on our inability to say no. So how do we counteract these urges of ours? How do we train ourselves not to pick up that shiny item we all know we must have?  There are many ways to combat this but here are a few strategies that I personally use.

 

·         Making a list ….and sticking to it

·         Leaving your credit cards in the car and only taking in the cash you need

·         Setting a time limit to how long you will stay

·         Taking a friend, preferably one who does not share your enthusiasm

·         Only go when you absolutely need something, not just to browse

Making a list and sticking to it! Making a list before going anywhere is easy and practical. Whether it is a list of things to do that day or a list for the grocery store, it will help you stay on track and be productive. Doing it is one thing but sticking to it is a whole new ball game, because if you can’t do that the list was a waste of your time. A good strategy is to know where you’re going and head straight there because you might need milk, but it’s not going to help if you walk through four isles to get there.

 

Leaving your credit cards in the car and only taking in the cash you need. This personally is my biggest helper. Often I find myself spending more money then I should with the justification of putting it on my credit card. So make it easier on yourself and don’t even bring it in, trust me it will make your life a whole lot easier.

 

Setting a time limit on how long you stay. This may seem a bit rudimentary but I really think it does work. By setting a time limit on how long you stay it helps you from browsing and finding that one item you can’t live without. Make it something practical like 20 minutes in the grocery store. It obviously applies to different situations so just use your best judgment.

 

Taking a friend, preferably one who does not share your enthusiasm. I myself find it a lot easier to stay on track when I’m not alone in the store, they too know what you came there to get and for the most part add a second opinion on any purchases. Don’t take in a friend who enjoys the same thing you do. When I go to Bass Pro with my brother I know it won’t end well because we both love to hunt. However, put me in bass pro with my girlfriend and I’ll bet you my bottom dollar she won’t let me leave with something I don’t absolutely need.

 

Only go when you absolutely need something, not just to browse. Going to a store just to “have a look” is a set up for failure. Only go when you absolutely need something. And even then use the other strategies we discussed before, make a list, only bring in the money you need, and bring a friend who will keep you on track.

Like I said before these are by no means the only strategies to prevent compulsive buying, but they are a good start. Try some of these the next time you go out and see how they work.

 

by Robert Self, Personal Financial Planning student
(with edits by Ryan Law)

 

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[i] http://en.wikipedia.org/wiki/Compulsive_buying_disorder

 

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

A Tax Break on the Table?

There is a lot of talk going on about taxes and budget reductions, as our elected representatives take their stance and lean toward the inevitable compromises.  When you look at Europe and the changing landscape of our world, in the context of our history and our current national debt – to say nothing about our personal debt – there is much to be confused about and no shortage of actions that need to be taken.  The trouble is, of course, the politicians can’t agree with each other on the actions and my personal opinion is that they seem to be more concerned about their personal beliefs and re-election than they are about those of us who sent them to Washington.  Yet, I digress.  I need to write an educational piece for the week….

 

When I was driving back from a meeting in Kansas City, on Wednesday, I heard a report on National Public Radio about the mortgage interest tax deduction.  It is, in some form, on the table to be reduced, if not eliminated, as a means to increase federal revenue.   As the Tip is designed as an educational tool, let’s see if we can use this debate to educate.

 

First, what is a tax deduction?  A tax deduction is an expenditure that is subsidized by the federal government.  A tax deduction reduces the income that is subject to taxation dollar for dollar.  Assuming other tax deductions exceed the standard deduction, $1,000 in additional mortgage interest will cost you the after tax amounts in the following table.  Notice how the cost varies with your marginal tax bracket.  As can be seen, higher income consumers (i.e., higher tax bracket consumers) receive the greatest subsidy from a tax deduction.  From the lowest to the highest, the highest marginal tax bracket households pay $296 less, or a 32.89% lower price, for the same $1,000 of interest paid by both marginal tax bracket households. 

 

Marginal Tax Bracket	Single Income	Married Filing Jointly Income	After-tax cost of additional $1,000 in mortgage interest	Percentage reduction as move to each higher tax bracket
10% Bracket	$0 – $8,425	$0 – $16,850	$900
15% Bracket	$8,426 – $34,200	$16,851 – $68,400	$850	-5.55%
25% Bracket	$34,201 – $82,850	$68,401 – $138,050	$750	-11.76%
28% Bracket	$82,851 – $192,000	$138,051 – $232,950	$720	-4.00%
36% Bracket	$192,001 – $375,700	$232,951 – $375,700	$640	-11.11%
39.6% Bracket	$375,700+	$375,700+	$604	-5.62%

 

Homes are good for the economy and homeownership is generally considered to be a positive for communities.  High income households have higher rates of homeownership, with 89.3% of the top income quintile being homeowners, compared to 32.6% of the lowest income quintile being homeowners.  High income households also purchase larger houses and borrow more money to purchase those homes.  We, as a country, support this by providing the largest subsidy to them to purchase their home.  James Poterba and Todd Sinai report the following (paper available at: http://real.wharton.upenn.edu/~sinai/papers/Poterba-Sinai-2008-ASSA-final.pdf ):

 

Household Income	<$40,000	$40,000-$75,000	$75,000-$125,000	$125,000-$250,000	$250,000+
Average Tax Savings from the mortgage interest deduction	$91	$523	$1,264	$2,703	$5,459

 

Thus, the greatest subsidy is given to the higher income households, both in percentage terms and dollar terms.  So, what is the talk coming out of Washington?  Current law allows homeowners to deduct the interest they pay on homes mortgages of up to $1 million in principal borrowed.  One proposal calls for this to be reduced to $500,000 and for the interest on mortgages to purchase second-homes to be eliminated as a tax deduction.  Professor Wheaton of MIT predicts that what will eventually come out of the Senate Committee is a similar proposal, except the tax deductibility of mortgage interest will be changed to a constant percentage tax credit for all households, regardless of taxable income, perhaps 10%, 12%, or 15% of the interest paid.  (His radio interview is here: http://www.npr.org/2011/07/20/138555793/mit-professor-discusses-mortgage-deduction-reform.)

 

If an indicator of financial success is the house we own, we should consider the question of the effect of the tax deduction.  Does the United States’ tax deductibility of mortgage interest change homeownership rates and average house size, when compared to a country with a different system of taxes?  Fortunately, we have a good example.  We can compare the United States, where mortgage interest is tax deductible, to Canada, where mortgage interest is not directly tax deductible.  I will summarize in a table:

 

Characteristic	Canada	United States
Percentage Homeowners [1]	67%	65%
World rank in house size [2]	#1	#4
%Equity in owned home [3]	70%	45%

Sources:

[1] http://www.nationmaster.com/graph/peo_hom_own-people-home-ownership

[2] http://www.nationmaster.com/graph/peo_siz_of_hou-people-size-of-houses

[3] http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction

 

It appears that homeownership rates are relatively similar between the two countries.  It is a little surprising that the average house size is, in fact, greater in Canada than the United States.  One might conjecture, however, that the lack of mortgage interest deductibility seems to have depressed the percentage loan-to-value ratio in Canada to 30% compared to 55% in the United States.  Stated another way, Americans have more debt in their home than their neighbors to the north.  Perhaps this is due to the upside-down subsidy from the tax deductibility of mortgage interest.

 

There is, of course, much more to this story than what I’ve written.  The main point is that we have choices to make.  This is but one.  Each one of us has deeply held beliefs about policies and some of these beliefs are based on facts, some are based on political philosophy, and some based on emotions.  I am a bit affected by all three, most of the time.   I do encourage you to be informed and make up your own mind.  Let your congressional representatives know how you feel about this topic or others, as is required by a successful democracy. 

 

Other parts of the NPR radio show that spurred my thinking on this topic:

 

National Association for Realtors: http://www.npr.org/2011/07/20/138555795/economist-for-realtors-group-discusses-mortgage-deduction 

From the Associated Press: http://www.npr.org/templates/story/story.php?storyId=137544950

Center for American Progress: http://www.americanprogress.org/issues/2011/01/te_012611.html

Corporation for Enterprise Development: http://scorecard.cfed.org/housing.php?page=homeownership_by_income

 

Financial Recovery and Risk Management

Brenda Procter, M.S., State Specialist & Instructor, Personal Financial Planning, University of Missouri Extension

 

Someone attempting to restore their life and home after a storm will face difficult decisions at a time when stress can cloud their thought process. In many cases, the decisions will involve large investments. Naturally, people want to recover as much as possible through their homeowner’s insurance policy. Where insurance falls short of needs, other types of assistance may be available, especially where the President has declared a disaster area. Claims that aren't covered by insurance or other reimbursements are tax-deductible if they exceed 10 percent of adjusted gross income.  Here are some tips for recovering if it happens to you.

 

Documenting Losses and Claims
 Whether you’re filing for insurance, seeking assistance or claiming a casualty tax deduction, you will need proof of your losses. Before you start cleanup, take pictures. If you can’t take pictures, describe the situation accurately, listing the specific items that have been lost or damaged. Keep damaged materials for proof of loss until your insurance adjuster authorizes their disposal. It’s okay to remove the damaged articles from their original location to prevent further damage to the building, but do not throw them away without insurance company approval.
 

Remember to also document the losses in your landscape and garden. In addition, document the amount of debris you will have to remove, and whether it came from your property or elsewhere. Some homeowner's insurance policies cover debris removal.
 

·         Save all receipts for your temporary lodging and food if your home is not fit to live in. Some policies pay the difference between normal living expenses and the cost of living elsewhere.

·         Save receipts for temporary repairs you made to protect your property from further damage.

·         Save receipts for any materials you bought and for other items you needed to protect your building or its contents from further damage. You may be able to claim these on your homeowner's insurance policy.

·         Keep a copy of all letters and receipts that you send to insurance companies or relief agencies.

·         Keep a record of all phone calls you made to get reimbursements or aid.
 

Filing for Insurance
 These tips are offered to guide you in filing insurance claims for damage to your home and loss of personal property:
 

·         Call your insurance adjuster immediately, and provide a phone number where you can be reached. If phone service is not available, work through disaster assistance workers from the Federal Emergency Management Agency (FEMA) or the Red Cross for assistance in reaching your insurance adjuster.

·         If possible, wait for an adjuster to survey damage. Meanwhile, carefully document losses and begin cleanup and salvage to prevent further damage to your home. Keep damaged materials in an isolated spot as far from the building as possible.

·         Follow up on your insurance call with a letter detailing your problems. Keep a copy of the letter.

·         Leave phone numbers where you can be reached when the adjuster arrives.

·         Ask the adjuster to assess damages. Sign the proof of loss statement. Report additional damage as it is found.

·         Provide any other information the adjuster requests.
 

Be sure to file your insurance claim within the policy's imposed time limits. For homeowner’s policies, it varies. Review the settlement steps outlined in your policy. If you’re dissatisfied with the proposed settlement offer, explain your position in writing.
 

The Missouri Department of Insurance (MDI) can help if you feel you’re being unfairly treated by your insurer. For example, if the company didn't contact you within 48 hours after the claim was reported, or if the company refuses coverage that is specified in your policy.
 

For more information about MDI, call 1-800-726-7390 or review the "Consumers" section on their website at http://www.insurance.mo.gov/. 
 

For information and tips to help you work through the recovery process effectively, as well as information about homeowner’s and flood insurance; credit and other sources of release; contracting for repairs and rebuilding; and federal disaster assistance, read further at: http://missourifamilies.org/features/copingarticles/coping9.htm.

 

Nothing left to lose

Oh, how I love the songs of the sixties! Me and Bobby McGee was written by Kris Kristofferson and Fred Foster and originally recorded by Roger Miller in 1969. The version I remember dancing to and singing with the "windows rolled down" hit the top of the charts in 1971 and was recorded by Janis Joplin, shortly before her death in 1970. It contained the lines:

Freedom's just another word for nothing left to lose
Nothing, I mean nothing honey, if it ain't free

These lines haunt me. I always wonder if the writers were trying to say that we are only free, if we don't have possessions to worry about. Yet, many people want more possessions, money, or whatever. I am not immune to these motivations but I do think about these lines during this time of year, when we celebrate our freedom on Independence Day.

On Independence Day, one of my high school friends posted the following question on Facebook: How do you define freedom?

These were some of the responses:
A fellow classmate, alumnus from Liberty High School: "Liberty"
An older alumnus of LHS, a doctor: "Liberty and Property"
Female:<http://www.facebook.com/lizcarrico2> "The ability/right to jump in the car and travel where one wishes, to speak one's mind and live one's live (sic) without hindrence (sic) from the government. Bearing in mind, of course, the rights of others."
Brother of the questioner: "As (our) forefathers said, "Life, liberty and the pursuit of happiness and I would add a good round of golf!"
Me: "Ability to act to make a difference in one's life or the lives of others."

This got me to thinking about the relationship between money and freedom and the effect they have on our happiness. Fortunately, my Google search led me to an academic article published in May 2011 by two professors from Victoria University of Wellington, published in the Journal of Personality and Social Psychology (Volume 101:1), a publication of the American Psychological Association. Professors Fischer and Boer concluded the following from their study of sixty-three countries spanning nearly forty years of information.
When wealth and individualism are traits used to separately predict anxiety, without controlling for the other trait:

· Greater wealth is, indeed, associated with lower levels of anxiety, until the greatest levels of wealth - where anxiety begins to increase. These increases in anxiety were lesser in the wealthiest societies.

· Greater individualism (i.e., freedom) showed an overall decrease in levels of anxiety, while the highest levels of autonomy were observed to have a slight increase in anxiety.
When wealth and individualism are controlled to see the independent effect of both, while controlling for the other:

· Only greater individualism continued to be significantly associated with reduced anxiety, while the effect of greater wealth seems to be "mediated by individualism".

· Among the poorest countries, there was no "discernible relationship between wealth and trait anxiety". While among the wealthiest countries, increases in average incomes were associated with less anxiety.
So, what is the take-away message? It is clear that freedom is very important to life satisfaction and lowered levels of anxiety - more important than the effect of wealth. It is interesting that they found, for wealthier countries, greater life satisfaction for those with higher incomes. Since greater income is a pretty good proxy for work effort and economic productivity, the result could be taken to mean that those who are working hard to make a difference in their lives are happier, as well as making a larger contribution to the product of the country. Freedom, therefore, is more than just "nothing left to lose". Freedom is the most important ingredient for happiness. Working for financial success just makes it that much better and, if you care, you can even afford a good round of golf!

If you have questions or ideas to share post them on our blog: http://mufinancialtip.blogspot.com/ .

ps: My computer is on the fritz, so I'm writing this from a spare one. I can't seem to find the delay-delivery option. Thus, you will be receiving this shortly, rather than the customary 5:00am! I'd rather my computer not be on the fritz!