I have spent several posts discussing ways that you can improve your financial life. We talked about refinancing debt and making debt payments more frequently to get out of debt sooner. I have discussed using gift cards as a method to help reduce gasoline costs and control spending. I have written about automatic payments and paying yourself first to help stop the paycheck to paycheck living. And – using a series of savings accounts to help budget for one-time or once-a-year expenses. I am sure that you can come up with a few more ideas of ways to save money.
We talk about “keeping up with the Jones” without realizing the “Jones” may be deeply in debt. They have refinanced their mortgage and, additionally, may have one or more home equity loans. They are driving newer leased cars which puts them in a perpetual car payment. The latest vacation and last year’s holiday spending are still current balances on the credit cards along with the weekly shopping trips. Mortgage, home equity, car, and personal loans are not unusual in addition to balances on credit cards.
Meanwhile, maybe your next-door neighbor is the millionaire that you do not know. They are driving a 5- or even 10-year-old car with no existing car loan. They have a modest house and do their own maintenance and repairs. That neighbor has paid their mortgage down consistently and is out of debt or getting close. Each month their credit card is paid in full, and they do not pay outrageous interest amounts.
They have been maxing out their contributions to their 401(k) for years in addition to funding their IRAs. Maybe they are purchasing stock outside of retirement accounts by investing small amounts each month. These individuals save regularly for vacations and large purchases.
We often hear now about how social media is creating envy in some and stimulating depression in others. It appears like everyone else is having a great time on vacation, eating out at the latest trendy restaurant, and have children that are “perfect.” Money often has the same type of deception.
When we are with others, we talk about all the fun we had on vacation but not the debt we still have. We talk about all the bells and whistles of our new vehicle, but not the fact that we had to lease it because we could not afford the high loan payment. We discuss the upgrade we did to our house – the new deck, remodeled kitchen but do not mention we borrowed against the house and now are started a 30-year mortgage again.
We often talk about the stock purchased that did exceptionally well, but we hide the one that did not do well. This often gives the impression that we are the only one that is not making “a killing” in the stock market. In reality, slow and steady is what happens with most. Adding regular contributions into a well-diversified portfolio with an appropriate risk tolerance is what works.
That millionaire next door will tell you minimizing debt is what allows him to be comfortable. He is often paying extra on any debt to get loans paid off sooner. These are the individuals that shop around to make sure they have the lowest interest rates possible. If they are refinancing debt, they manage it to shorten the term, avoid taking cash out, and often continue to pay the same amount to allow for a faster payoff. Frequently, they are putting down a sizeable down payment to lower the amount of debt. Most keep cars long after the loan is paid off to give time to save for the following vehicle.
Those managing their money will often tell you having money in the bank to cover emergencies, and savings for expenses significantly reduces their stress level. Think about how much less stress you would have if your refrigerator broke down and you knew you had the funds to purchase a new one.
Yes, you can often get the new refrigerator with 6 or 12-months free financing. In doing so, you are now committing future income to pay a past debt. This potentially will leave you short of funds to manage future needs. Every time you take out a loan, you commit future income to pay for a prior need, and there is less income available for current needs.
Sometimes debt is good. If you are taking out student loans to improve future earnings power, that often makes sense. If you are incurring debt for a reasonably priced car that you can afford to enable you to work and earn your paycheck, that is a good use of debt.
Taking out your initial mortgage debt to purchase a house is often the only way individuals can afford a home. Does this make sense? It depends! We are seeing for more individuals that it does not make sense. It can make sense if you anticipate staying in the location long enough to recoup the closing costs for purchasing and selling. It can make sense if you are in a place where property prices have steadily risen (not the potential bubble we are in right now).
Just because the mortgage payment is less than the rent payment is not a good reason. You must consider all the other costs of homeownership – especially the unpredictability of home repair needs. Will you be able to manage those? If you can barely manage the payments, utilities, and taxes, you may want to wait to purchase. If you do not have the funds to afford the 20% down payment that avoids PMI, it may not be a good idea to purchase now.
Money for many holds a lot of shame. Some do not understand the terminology. They are unsure how to calculate the true cost of borrowing money. Individuals constantly fight against the urges of spending beyond their means to “keep up with the Jones.” Individuals do not want to admit they should not go out to dinner or drinks with friends because they cannot really afford to go. Individuals want to make sure they keep up the appearance that everyone else seems to be able to afford.
How can you help combat all this? Be open and be honest with what your current situation is. If you cannot really afford something, then go without. Learn to live on less than your paycheck and make sure you are saving 15-20% for future needs – retirement, large purchases, emergencies, dreams, and goals. Be willing to ask questions if you do not understand something. Seek help when you need it. Read books and magazines, listen to podcasts and watch videos if you need to learn about something – make sure you are using a reliable source since there is lots of misinformation out there. Talk with that neighbor if it seems appropriate.
And – certainly, reach out to us at Planning with Purpose if we can help. I am available to work with you to create a realistic spending plan, answer a quick question, help you review loan options, and set up a system to meet a future financial goal, whatever you need.