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During the first half of the twentieth century, Wall Street believed that companies existed primarily to pay dividends to shareholders. However, over the past 50 years, society has witnessed the acceptance of the more sophisticated notion that the profits not paid out as dividends and, instead, are reinvested in the business also increase shareholder wealth by expanding the company’s operations through organic growth and acquisitions or strengthening the shareholder’s position through debt reduction or share repurchase programs.

Berkshire Hathaway Chairman and CEO, Warren Buffett, created a metric for the average investor known as look-through earnings to account for both the money paid out to investors and the money retained by the business.

The theory behind his look-through earnings concept is that all corporate profits benefit shareholders whether they are paid out as cash dividends or plowed back into the company. Successful investing, according to Buffett, is purchasing the most look-through earnings at the lowest cost and allowing the portfolio to appreciate over time.

Calculating Look-Through Earnings

Normally, a company reports basic and diluted earnings per share (for example, if we take step back in time, The Washington Post reported diluted earnings per share of $25.12 for the fiscal year ended 2003.) Sometimes, a portion of the profit is paid out to shareholders in the form of a cash dividend (e.g., The Washington Post paid a $7.00 cash dividend to shareholders, again, in 2003.)

Stated another way, of the $25.12 diluted earnings per share profit earned by the company, $7.00 was sent to each shareholder in the form of a dividend check they could take to their bank and the remaining $18.12 was reinvested in The Washington Post’s core businesses which included newspapers, educational services, and cable stations. Ignoring stock price fluctuation, an investor that owned 100 shares of The Washington Post common stock would have received $700 cash dividends at the end of one year (100 shares x $7 per share dividend).

Logically, however, the $1,812 that “belonged” to the shareholder and was reinvested in The Washington Post’s business had very real economic value and couldn’t be ignored, despite the fact that he never actually received the money directly. In theory, the reinvested profit would have resulted in a higher stock price over time.

As previously mentioned, Buffett’s look-through earnings metric attempts to fully account for all of the profits that belong to an investor – both those retained and those paid out as dividends. Look-through earnings can be calculated by taking an investor’s pro-rated share of a company’s profits and deducting the taxes that would be due if all profits were received as cash dividends.

Scenario: John Smith’s Portfolio

To illustrate this point: assume John Smith, an average investor, has a portfolio consisting of two securities – the common stock of retailing giant Wal-Mart and that of soft drink juggernaut Coca-Cola. Both of these companies pay a portion of their earnings out as dividends, but if John was to only regard the cash dividends received as income, he would ignore most of the money that was accruing to his benefit.

To truly see how his investments are performing, John needs to calculate his look-through earnings. In effect, he is answering the question, “How much after-tax cash would I have today if the companies I owned paid out 100% of the reported profit?”

Stock Position 1: Wal-Mart

In 2004, Wal-Mart reported diluted earnings per share of $2.03. John’s dividends are taxed at 15% and he owns 5,000 shares of Wal-Mart. His look-through earnings, therefore, are as follows: $2.03 diluted earnings x 5,000 shares = $10,150 pre-tax * [1 – 0.15 tax rate] = $8,627.50.

Stock Position 2: Coca-Cola

In 2004, Coca-Cola reported diluted earnings per share of $1.00. John owns 12,000 shares of the company’s common stock. His look through earnings can be calculated as follows: $1.00 diluted earnings x 12,000 shares = $12,000 pre-tax [1-0.15 tax rate] = $10,200.

John’s Look-Through Earnings

By tabulating the total look-through earnings generated by his stock holdings, we discover that John has look-through earnings of $18,827.50 after-tax ($8,627.50 + $10,200). It would be a mistake for him to only pay attention to the $6,630* that was received as cash dividends on an after-tax basis. Common sense tells us that the other $12,197.50 that had been plowed back into the two companies was accruing to his benefit certainly had value.

Buy and Sell Decisions

When should John sell his Coca-Cola or Wal-Mart positions? If he is convinced that another investment opportunity will allow him to purchase substantially more look-through earnings and that company enjoys the same sort of stability in earnings due to regulation or competitive position, he may be justified in selling his shares and moving into the other company (note that in the case of Wal-Mart and Coca-Cola, however, it is unlikely one is going to find a corporation with comparable competitive advantages and economics.)

Benjamin Graham, father of value investing and author of Security Analysis and The Intelligent Investor, recommended the investor insist on at least 20% to 30% additional earnings to justify selling one position and moving into another.

Furthermore, John needs to evaluate his investment performance by the operating results of the business, not the stock quote. If his look-through earnings are steadily growing and management maintains a shareholder-friendly orientation, the stock price is only a concern in that it will allow him to purchase additional shares at an attractive price; these fluctuations are merely the lunacy of Mr. Market.

The $18,827.50 in look-through earnings John calculated is every bit as real to his wealth as if he owned a car wash, apartment building or pharmacy. By investing from a business perspective, John is better able to make intelligent, rather than emotional, decisions. As long as the competitive position of either company has not changed, John should view significant drops in the price of Wal-Mart and Coca-Cola’s common stock as an opportunity to acquire additional look-through earnings at a bargain price.

Corporate Investments

Many corporations invest in other businesses. Under Generally Accepted Accounting Principles (GAAP), the earnings of these investment holdings are reported in one of three ways: the cost method, the equity method or the consolidated method. The cost method is applied to holdings that represent under twenty percent voting control—it only accounts for dividends received by the investing corporation.

This shortcoming is what caused Buffett to expound on the undistributed earnings in his shareholder letters. Berkshire, both then and now, had substantial investments in companies such as Coca-Cola, The Washington Post, Gillette, and American Express. These companies pay out only a small portion of their overall earnings in the form of dividends and, as a result, Berkshire was accruing far more wealth to owners than was evident in the financial statements.

**Calculation of cash-dividends on an after-tax basis:Wal-Mart: $.36 per share cash dividends * 5,000 shares = $1,800 * [1 – .15 tax rate] = $1,530 after-taxesCoke: $.50 per share cash dividends * 12,000 shares = $6,000 * [1 – .15 tax rate] = $5,100 after-taxes———————————————–$6,630 total after-tax cash dividends received

When managing your stock market trades, many techniques and tools exist to help you make a profit or reduce a loss. For example, the different types of buy and sell orders available to traders essentially offer a toolkit that lets you choose the right tool for the right job.

You can use these different trade types to control when and for how much you want to buy or sell a given stock. Many traders find the limit order to be one of the most important and useful tools in their arsenal.

What’s a Limit Order?

A limit order gets it name because using it effectively sets a limit on the price you are willing to pay or the price at which you are willing to sell a given stock. You tell the market that you’ll sell or buy, but only at the price set in your limit order.

Unlike the market order, which executes your buy or sell transaction immediately regardless of price, the limit order may or may not go to the top of the list for execution by your stockbroker. If the price on your limit order is the best ask or bid price, it will go to the top and may be filled very quickly.

If not, it will get in line with the other trade orders that are priced away from the market. As other orders get filled, your order may work its way to the top. On the other hand, orders priced closer to the current market may come in and push your order down on the list.

Although they do have some flaws, some consider limit orders a trader’s best friend, because they provide a certain discipline to buying and selling by fixing a price the trader can live with. Your order will only be filled at the price you set, or better.

Placing a Trade

A limit order, whether given to a stockbroker or entered into your advanced trading platform, has the same five components:

• Buy or sell transaction type
• Number of shares
• Security
• Order type
• Price

For example, if you wanted to buy 100 shares of a stock with the ticker XYZ, and the maximum you wanted to pay per share was $33.45, using a limit buy order, you would express it as follows:

Buy 100 shares XYZ limit 33.45

This order tells the market that you will buy 100 shares of XYZ, but under no circumstances will you pay more than $33.45 per share for the stock.

An important point to remember about limit orders is they are not absolute orders. Your limit order to buy XYZ at $33.45 per share won’t be filled above that price, but it can be filled below that price. If the stock’s price falls below your set limit before the order’s filled, you could benefit and pay less than $33.45 per share.

The transaction works the same way for a limit sell order. If you enter a limit sell order for $33.45, it won’t be filled for less than that price; in other words, your stock won’t be sold for any less than $33.45 per share. If the stock rises above that price before your order is filled, you could benefit by receiving more than your limit price for the shares.

Benefits of Experience

It takes some experience to know where to set limit orders. If you set limit buy orders too low they may never be filled, which does you no good. The same holds true for limit sell orders. With some experience, you’ll find the spot that gets you a good price while making sure your order actually gets filled.

An Example

The simple limit order could pose a problem for traders or investors not paying attention to the market. For example, you could enter a sell limit order on a stock that currently sits a few dollars per share over the market price and a buy limit order with a price set at a few dollars per share under the market.

This way you will make a profit if the stock rises and add to your holdings if the stock price drops.

While not a creatively inspired trading strategy, it’s one that seems to have your bases covered. You might choose to take off for a long weekend, only to return Monday to find your sell limit order has been filled.

You feel happy with your small profit until you notice that the company is a merger target, and the stock has jumped $15 per share.

Unfortunately, your limit sell order got you out of the stock with only a $2 per share profit, leaving the additional $13 per share on the table. You can imagine the reverse of this scenario if the stock dropped like a rock and your buy limit order filled as the stock was in a free fall.

Limit orders make excellent tools, but they are certainly not foolproof. In a highly volatile market, limit orders like the example above may be tricky, causing you to lose out on additional profits or shares because orders execute too soon.

If you want to buy or sell a stock, set a limit on your order that is outside daily price fluctuations and live with the outcome. Either way, you have some control over the price you pay or receive.

If you are bullish on a particular company’s stock, you can structure your investment with LEAPS so that a rise of, say, 50 percent could translate into a 300-percent gain for you. Of course, this strategy comes with risks, with the odds very much stacked against you. Used foolishly, it can wipe out your entire portfolio in a matter of days. Used wisely, however, it can be a powerful tool that allows you to leverage your investment returns without borrowing money on margin.

Defining a LEAPS Strategy

The strategy consists of acquiring long-term stock options known as LEAPS, which stands for “Long-Term Equity Anticipation Securities”. Put simply, a LEAP is any type of stock option with an expiration period longer than one year. It allows you to utilize a smaller degree of capital instead of purchasing stock, and earn outsized returns if you have bet right on the direction of the shares.

An Example Strategy

It’s easier to understand how to use LEAPS by way of an example. For now, use shares of General Electric given the enormous size of the company and the fact that virtually everyone in the world knows of the firm.

Say that shares of GE are trading at $14.50, and that you have $20,500 to invest. You are convinced that General Electric will be substantially higher within a year or two and want to put your money into the stock. You could simply buy the stock outright, receiving roughly 1,414 shares of common stock.

You could leverage yourself 2-1 by borrowing on margin, bringing your total investment to $41,000 and 2,818 shares of stock with an offsetting debt of $20,500. However, if the stock crashes, you could get a margin call and be forced to sell at a loss if you can’t come up with funds from another source to deposit in your account. You will also have to pay interest, perhaps as much as 9 percent depending upon your broker, for the privilege of borrowing the money.

Perhaps you don’t like this level of exposure. Given your conviction, you might consider utilizing LEAPS instead of the common stock. You look to the pricing tables published by the Chicago Board Options Exchange (CBOE) and see that you can purchase a call option expiring the third weekend in January of 2011, nearly 20 months and 3 weeks away, with a strike price of $17.50.

Put simply, that means that you have the right to buy the stock at $17.50 per share any time between the purchase date and the expiration date. For this right, you must pay a fee, or premium, of $2.06 per share. The call options are sold in contracts of 100 shares each.

You decide to take your $20,500 and purchase 100 contracts. Remember that each contract covers 100 shares, so you now have exposure to 10,000 shares of General Electric stock using your LEAPS. For this, you have to pay $2.06 x 10,000 shares = $20,600. You rounded up to the nearest available figure to your investment goal. However, the stock currently trades at $14.50 per share. You have the right to buy it at $17.50 per share and you paid $2.06 per share for this right. Thus, your breakeven point is $19.56 per share.

That is, if General Electric stock trades between $17.51 and $19.56 per share when the option expires nearly two years from now, you will suffer some loss of capital. If GE stock is trading below your $17.50 call strike price, you will have a 100- percent loss of capital. Hence, the position only makes sense if you believe that General Electric will be worth substantially more than the current market price, perhaps $25 or $30, before your options expire.

Say you are correct and the stock rises to $25. You could call your broker and close out your position. If you chose to exercise your options, you would force someone to sell you the stock for $17.50 and immediately turn around and sell the shares you bought, getting $25 for each share on the New York Stock Exchange. You pocket the $7.50 difference and back out the $2.06 you paid for the option.

The Outcome

Your net profit on the transaction was $5.44 per share on an investment of only $2.06 per share. You turned a 72.4 percent rise in stock price into a 264 percent gain by using LEAPS instead of stock. Your risk was certainly increased, but you were compensated for it given the potential for outsized returns. Your gain works out to $54,400 on your $20,600 investment compared to the $14,850 you would have earned.

Had you chosen the margin option you would have earned $29,700 but you would have avoided the potential for wipeout risk because anything above your purchase price of $14.50 would have been gain. You would have received cash dividends during your holding period, but you would be forced to pay interest on the margin you borrowed from your broker. It would also be possible that if the market tanked, you could find yourself subject to a margin call as we warned earlier.

The Temptations and Dangers of Using LEAPS

The biggest temptation when utilizing LEAPS is to turn an otherwise good investment opportunity into a high-risk gamble by selecting options that have unfavorable pricing or would take a near miracle to hit strike. You may also be tempted to take on more time risk by choosing less expensive, shorter-duration options that are no longer considered LEAPS. The temptation gains fuel from the few, extraordinarily rare instances where a speculator has made an absolute mint.

Using LEAPS doesn’t make sense for most investors. They should only be used with great caution and by those who enjoy strategic trading, have plenty of excess cash to spare, can afford to lose every penny they put into the market, and have a complete portfolio that won’t miss a beat by the losses generated in such an aggressive strategy.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Land contracts are useful instruments for sellers who are selling a home and contemplating carrying the financing for a buyer. It gives sellers a built-in income and generally a better interest rate than rates offered on money market accounts or certificates of deposit. However, a prudent seller should take steps to protect equity and ensure the buyer can fulfill the terms of the land contract.

Difference Between a Land Contract and a Mortgage

Land contracts are security agreements between a seller, known as a Vendor, and a buyer, known as a Vendee. The Vendor carries the financing for the Vendee, which may or may not contain an underlying loan. A main difference between a land contract and a mortgage is the buyer does not receive a deed or clear title to the property until the land contract is paid off.

Some states have laws that treat a land contract similar to a trust deed, and those land contracts provide for a trustee, giving a trustee “power of sale” to initiate foreclosure proceedings in the event the Vendee defaults on the contract. Other states give buyers a longer period of redemption, similar to those under a mortgage. For these reasons, it is important to reduce the chances of default by pre-qualifying the Vendee.

Protecting the Seller

If you have an underlying loan, given a choice between a straight contract or a wrap-around contract, offer the wrap-around land contract. It will give you an override on the existing interest rate of the first mortgage. Ask for legal advice about an alienation clause. The lender could call your loan due and payable if the lender discovers you have sold the home through a land contract.

• Obtain a Credit Report on the Buyer. If the buyer has filed a bankruptcy, made late payments to other creditors or, worse, no credit, those derogatory records are a red flag.
• Demand a Title Insurance Policy. Title searches of the public records will also show liens or judgments filed against a buyer. The title company will likely ask for satisfaction of those encumbrances before it will insure the land contract on a title policy. Ask to see a copy of the preliminary title report (or commitment for title insurance) to determine if a search reveals anything about the buyer.
• Ask for a Hefty Down Payment. Buyers are less likely to walk away from a land contract or stop paying on the installment sale contract if the buyer has made a big down payment. The more money invested upfront; the less likely a buyer will risk losing it.
• Carry the Financing Short-Term. You might amortize the payments for 30 years but ask for a balloon payment after five or ten years. It will let the buyer refinance or sell the property to pay you early. Check to see if this type of financing complies with your state laws. Balloon payments could be prohibited.
• Verify the Buyer’s Employment. Make sure the buyer is employed and has been employed for at least two years, preferably longer. Ask if the buyer is employed by the company or is contract labor and whether the employment term could be slated for termination any time soon.
• Ask for Personal References. Check out the buyer’s references, including past landlords. Ask about payment history on previous rentals, not just the current rental because sometimes landlords will say anything to get the tenant out of the property. Go back to the landlord before the existing landlord and inquire.
• Insist the Buyer Obtain a Homeowner Insurance Policy. You don’t want to be responsible for the home after the land contract has been signed and notarized. Make sure the buyer names you as an additional insured and get a copy of the homeowner’s insurance policy.
• Set Up a Disbursement Account. Many banks and financial institutions offer a service that will collect the payments from the buyer and send them to you or deposit them into your bank account. It prevents the buyer from knowing your home address, and the arrangement frees you to travel.
• Collect the Taxes From the Vendee. Ask the Vendee to pay the taxes to your disbursement company. The company can then make the tax payments to your property assessor and you can be assured the taxes will be paid on time.
• Include a Late Payment Charge in the Land Contract. If you are paying an underlying loan payment, you will want to receive your payments in a timely manner to avoid your own late charges. Charge the buyer a reasonable fee for payments received late to entice the buyer to pay on time.
• Ensure Continued Maintenance and Care. Consider including an acceleration clause in the contract, which will allow you to make the Vendee refinance the property if the condition of the property becomes a risk to your financial investment.
• Prevent the Vendee From Assigning the Contract. After you’ve done your homework to approve this buyer, you don’t want to give the buyer the right to assign the contract to an unknown entity.
• Talk to a Lawyer. It’s worth it to spend a few hundred dollars to obtain legal advice before entering into a land contract. Besides, a lawyer is likely to think of something have missed in this bullet-point list.

At the time of writing, Elizabeth Weintraub, Cal BRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

It’s no secret that budgeting is the foundation to getting out of debt. One of the hardest parts about traditional budgeting is staying on budget, which requires you to track of how much you’ve been spending in each category. It can get time-consuming. For some people, the envelope budgeting system makes it easier to stay on track without all the cumbersome record keeping.

Envelope Budgeting With Cash

Here’s how it works. Create your paper budget, planning the amount of money you’re going to spend in each category for a particular period whether it’s monthly or bi-weekly. Pay your regular monthly bills as normal, by writing a check or paying online. For variable expenses – groceries, gas, entertainment, etc. – you’ll use your envelope budget. You’ll need one envelope for each budget category. Write the name of the category on the front of the envelope and place the allotted amount of cash in the envelope. For example, you may have $200 in the envelope marked groceries. When you make purchases, use the cash in the envelope for that category. Once the envelope is empty, you can’t buy anything else in that category unless you “borrow” money from another category.

Envelope Budgeting via Debit Card

One of the drawbacks of envelope budgeting is that it requires cash. If you receive your wages electronically, this may mean a trip to the bank to withdraw cash for your envelopes. You can fake the envelope budgeting system even if you prefer to use your debit card, but it requires a little (easy) math and some record keeping.

On each envelope, write the category and the amount of money you’ve allowed to that category. Say, the same $200 for groceries. Then, whenever you make a purchase, subtract the amount of the purchase from the budgeted amount. If you bought $45 in groceries you’d write $200-$45=$155. Do this each time you make a purchase in a category until it gets to $0. You can still “borrow” from other categories, too. Just make a subtraction on the category you’re borrowing from, e.g. Entertainment $100-$25=$75 and an addition to the category that’s borrowing the money, e.g. Groceries = $0+$25=$25.

We’re using the term “borrow” loosely because you don’t necessarily have to pay the money back to the other category. It just means you have less money to spend in the category that’s lent money.

Smartphone Apps for Envelope Budgeting

If using envelopes seems old-fashioned or like too much work, you can download an app like GoodBudget or Mvelopes, both which are available for iOS and Android devices. The benefit of the app is that you can check your balances anywhere on-the-go without having to shuffle through physical envelopes.

GoodBudget doesn’t sync to your bank account, which means you have to manually enter your transactions. This is actually a benefit for anyone who’s leery of allowing apps to connect to their bank accounts. Mvelopes offers more functionality and does sync with bank accounts (depending on the institution).

Both have free versions that offer a limited number of envelopes and subscription versions that increase the number of envelopes and other features you can access. For example, Mvelopes offers a debt elimination plan with their $10/month Premier account.

How Envelope Budgeting Helps With Debt

So how exactly does envelope budgeting help you pay off debt? The whole idea of envelope budgeting, or budgeting in general, is to get your spending on track, reduce your expenses, and to ideally have some money leftover at the end of each month to put towards your debt (or other financial goals once you’ve paid off your debt). If you’re not meticulously tracking your spending, you can easily overspend, particularly with your debit card because you don’t really have an idea of the impact of your spending. Envelope budgeting keeps everything separated and gives you a visual cue about your financial standing. You can easily tell when you need to curb your spending to stay on track with your budget.

At the end of the month, combine all the cash that’s left in the envelopes and put it towards a debt – your lowest balance debt, highest interest rate debt, or another debt you’ve selected for pay off. If you’re using cash-based envelope budgeting, you’ll have to either deposit it into your account and write a check or purchase a money order because you can’t pay credit card bills with cash. If you used your debit card instead of the cash system, then add up the balances left on each envelope, confirm this amount in your checking account, and write a check for the amount to one of your creditors.

The days of easy credit and 100 percent financing might be behind us, but down payment assistance (DPA) programs are alive and well. They survived the credit meltdown, and they still provide a valuable service for stimulating local housing markets.

From down payment assistance grants to interest-free second mortgages and other special mortgage programs, would-be homebuyers have a number of options You can buy a home without depleting all your assets, or maybe you just don’t have those assets in the first place. Buyers can earn as much as 120 percent to 140 percent of their area’s median income and still qualify for some programs.

What Types of Assistance Are Available?

Down payment assistance comes in many forms, but the most common sources are:

• Community grants
• State housing agencies
• Local housing agencies
• Lender-specific community reinvestment act programs
• Fannie Mae (Federal National Mortgage Association; FNMA)
• Freddie Mac (Federal Home Loan Mortgage Corporation; FHLMC)
• Federal Housing Administration
• VA loans
• USDA loans

There are more, but these represent the vast majority of available programs and are a great place to start your search. Some lenders, including TD and Fannie Mae’s HomeReady program, have their own in-house programs, and they might pay your closing costs as well as your down payment.

Assistance Grants vs. Assistance Loans

The major difference between grants and loans is that grants generally don’t have to be repaid unless you sell or leave the property within a certain period of time, usually about three years.

Loans must be paid back, of course, but they’re often interest-free and you won’t necessarily be adding another payment to your monthly budget. You might not have to repay the loan until your first mortgage is paid off or you sell your home or otherwise relocate. And any interest that is charged is often nominal.

How Do You Qualify?

Program guidelines can vary from product to product, but some are pretty standard. In most cases, you must:

• Be a first-time homebuyer, which generally means you haven’t owned a home in the last three years. You might also qualify for some programs if you’ve been divorced or displaced for another reason.
• Occupy the property as your primary residence. Nonoccupant co-borrowers are typically not allowed.
• Complete homebuyer education counseling and obtain a certificate of completion through an eligible homebuyer counseling organization.
• Meet the requirements of the lender and the mortgage insurer/guarantor.
• Income must fall within the program’s limits.
• Your desired home’s price must fall within the program’s limits.

This list is not all-inclusive, and all these restrictions will not be applicable to every down payment assistance program. But you might encounter a lot of them, so be aware and be prepared to satisfy these conditions if necessary.

You can be approved for assistance automatically simply because your lender participates in a program for which you meet the guidelines. Otherwise, don’t expect lenders to inform you of these loan and grant options; they often result in less income for lenders on the loans they make. Don’t be afraid to ask about these DPA programs; they are in place for people who need them.

How Can You Take a Homebuyer Education Class?

Homebuyer education is critical to any homeowner’s success and happiness. Although such courses are not required for all down payment assistance programs, being prepared is always a good step.

You can often take a course online through a number of accredited education providers. You can also attend classes in person at Homebuyer Education through NeighborWorks America or any housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD).

Where Can You Find Available Programs?

Start your search for down payment assistance with your state’s housing agency. State housing departments offer the bulk of the DPA programs. Your local housing agency—county or city—is also a useful resource. Community grant programs can often provide the best deals for low- to moderate-income homebuyers.

HUD also has some quality information on down payment assistance programs that work with U.S. Federal Housing Administration (FHA) mortgage loans. In fact, HUD’s website can be another good place to begin your search; there you’ll find lists of grants made available in each state.

The Nehemiah Community Foundation has compiled one of the most comprehensive down payment assistance program databases in the country to help reduce your barriers to homeownership.​ The database includes first-time homebuyer and general assistance programs.

Ultimately, however, your mortgage lender will have the final say. Not all lenders offer or accept all programs, so check with a loan officer to make sure your lender can help you with the down payment assistance program you’re hoping to pursue.

One approach to successful long-term investing is to hold shares for a considerable length of time (typically 10 years or more), reinvest the dividends, and periodically add to your ownership stake as money becomes available to you. A primary advantage of this philosophy arises due to the way the taxation system is set up in the United States, which creates an inherent edge that accrues to the passive strategy as the years go by and compounding works its magic. This advantage becomes especially noticeable when you are unable to utilize tax shelters such as a Roth IRA, Traditional IRA, or 401(k) plan. Here is a hypothetical scenario, to illustrate the numbers in stark detail so you realize that harnessing this advantage can be a very powerful way to accumulate additional wealth over your career.

Thinking of Deferred Taxes on a Low-Cost Basis Investment as an Interest-Free Loan

Imagine that fifteen years ago, you bought 10,000 shares of AutoZone for $26.00 each for a total cost basis of $260,000. You stuck the stock certificates in a vault and haven’t looked at them since. You check the newspaper and find that the shares closed Friday at $439.66. Your 10,000 shares now have a market value of $4,396,600. There have been no dividends paid during the holding period.

You are now sitting on $4,396,600, of which $260,000 represents your original investment and $4,136,600 represents unrealized capital gains. If you lived in the Kansas City area and were to sell your shares, you would owe a 15% tax to the Federal Government and a 6% tax to the State of Missouri, totaling 21%. Thus, of your $4,136,600 in unrealized gains, $868,686 represents taxes that you will have to pay the moment you liquidate your ownership stake in the specialty retailer.

Famed investor Warren Buffett has pointed out that the true long-term holder should think of this $868,686 as an interest-free loan from the Federal and state governments. Unlike ordinary debt, you get the benefit of more assets working for you but you have no monthly payments, you are charged no interest expense, and you get to decide when the bill comes due. As long as you continue to hold your shares, you are essentially getting $868,686 in free money working for you that will disappear if you decide to change seats and swap your stock in AutoZone for another company.

If AutoZone grows at an average of 10 percent every year for the next decade, this means that in the first year alone, you would collect nearly an extra $87,000 in market wealth that you otherwise couldn’t have earned simply because $868,686 is still invested for your benefit. The longer this goes on, you get this self-reinforcing cycle of wealth creation that puts the buy and hold investor at a considerable advantage to the day trader, provided the underlying securities are of blue chip quality.

Deferred Taxes Can Make It More Advantageous to Hold an Overvalued Asset Than to Swap It for an Undervalued Asset

This is one of the major reasons you don’t see wealthy people or successful portfolio managers selling positions just to shift into a stock that might be a little bit of a better deal.

Say you owned $1,000,000 worth of PepsiCo built up over decades. Your cost basis is $100,000. That means $900,000 represents an unrealized capital gain. In your case, $189,000 in deferred taxes would be carried as an offsetting liability on your balance sheet. Your PepsiCo shares are trading at 20x earnings, or a 5 percent earnings yield. That means your cut of Pepsi’s profit each year is $50,000.

Now imagine Coca-Cola trades at only 17x earnings with the same projected growth rate and dividend payout. That is an earnings yield of 5.88 percent, which is 17.6 percent more than PepsiCo is offering in relative terms, 0.88 percent more in absolute terms. If your entire $1,000,000 were invested in Coke, your share of the net profits would be $58,800. An extra $8,800 in underlying earnings is not insignificant.

As you know by now, it’s not that simple. Let’s run the math to see what would happen if you made the switch. You sell your PepsiCo shares and see $1,000,000 in cash in your brokerage account. You immediately trigger a $189,000 Federal and state tax bill, leaving you with $811,000. You put this $811,000 to work in Coca-Cola shares at a 5.88% earnings yield, meaning your share of the earnings is $47,687 per year. As odd as it sounds, you lost $2,313 in net earnings, or 4.6 percent of what you had been indirectly generating each year, despite buying an asset with a higher look-through yield.

How could such a thing happen? The loss of capital when you triggered the deferred capital gains tax meant that less money was employed for you. In this scenario, it was enough of a hit that it exceeded the benefit of the higher earnings yield on the cheaper stock. Hence the moral of the story: Once you are established and somewhat wealthy, having built your portfolio with diligence and care for a while, flitting between company to company in a taxable account can be a costly undertaking that handicaps your after-tax results. In rare cases, it can actually make you end up poorer than you otherwise could have been despite causing your pre-tax stated returns to be higher. This is why experienced wealth managers focus on the metric that counts: The amount of risk-adjusted surplus generated each year, net of taxes and inflation, produced by your investments.

In the end, deferred taxes represent a form of leverage that has few, if any, of the drawbacks of leverage. It is a force you should at least consider harnessing if you can adapt your long-term strategy to benefit from its effects.