Bernie and Pam Britten: life and work

Bernie and Pam Britten

The family has $40,000 in savings by the next year out of their gross income of $100,000 by the beginning of the next year. Now they are reconsidering to finish renting an apartment and purchase a small condominium for $100,000. The required down payment of $10,000 which means they will have left approximately $30,000 in case if they choose to purchase the condominium and will be able to allocate the remaining sum of their saved $40,000 into different investment opportunities. It is advised to purchase housing if the income is enough due to growth of market values of housing at higher rates than the expected growth of nominal and real wages. The remaining sum is advised to be allocated into the investment with the highest yields and lowest risk rates. The rental payments also increase by the inflation rate and thus this must be considered when deciding whether to rent or to purchase housing.

The condominium they will purchase will increase in value by 5% annually and their annual income is expected to be $100,000, the real value growth rate is approximately 1.94% due to inflation. If the family allocates the money and receives income, it must pay taxes and the current tax bracket for this family is 28%. The pre-tax yield is calculated by dividing tax free yield by (1- Tax Rate), or divided by 0.72. Thus, the yield of 5% on value growth is equal to 6.9% pre-tax yield equivalent. The municipal bonds, high-yield corporate stocks are all taxable and their pre-taxable yields of 5% and 8% are equivalent to after tax yields of 3.6% and 5.76% accordingly. The calculation of the after tax yield is derived from the formula and is as follows: After Tax Yiled = Pre-Tax Yield * (1- Marginal Tax Rate) and thus the after tax yield is different for people with different income rates and thus variable marginal tax rates.