Credit Cards

Americans are notoriously deep in debt—and not just for their home and car. The average adult carries a balance of thousands of dollars on any number of retail and bank credit cards. Personal loans—including home equity, debt consolidation, and student loans—also contribute to this debt load. What is
important about this, is that all of these sources of debt contribute to the draining of a family's budget.

A monthly budget is a snapshot of how a family is doing. If the income is greater than the expenses, the family is doing well financially because they have money left over—which can be saved for future needs. This is called a net surplus. But if the monthly expenses are greater than the monthly income, the family is doing poorly, because it is sinking deeper into debt with every passing month. This is called running a deficit.

If there were one single law of "how to not be a debt slave" it would be: avoid debt at all costs.

Even going into debt for necessary things (house, car) can be done wisely. Choose a house that you can live in for a while, but do not buy as much house as the realtor says you can afford. The realtor is paid a 3 to 6% commission on the house you buy. Take a calculator and see which house will bring a greater
commission: an $80,000 house, a $150,000 house, or a $200,000 house. This should put you on your guard as to what the realtor is going to be pushing for. (Hint: the more expensive house, always.) Tell him how much you are comfortable spending, and he will be forced to oblige you. If you do not intend to go over your head, the realtor cannot force you.

Mortgages — Buying a House

First of all, avoid ARM mortgages at all costs. They lure you in with a teaser rate of 2 or 3%, but that rate resets every so often, usually to something higher than a fixed-rate mortgage would have cost you. Countless families have lost (and will lose) their homes because of shady realtors, lenders, and ARM
mortgages.

Beware a mortgage that sounds too good to be true. Some shady mortgages charge you only 2% interest (so they claim), but instead of your balance going down a little bit every month, it actually increases by many hundreds of dollars! The interest is merely "deferred". Make sure you read the fine print.

So we will restrict our discussion to normal, 30-year fixed-rate mortgages.

It is important to never owe too much on a house at any given time. For every $20,000 you borrow (at an interest rate of 6.5%) you will pay $108 a month in interest. That is hard-earned money taken out of your monthly budget, and given to some rich banker to add to his 300 million dollar fortune. It is money out the window, plain and simple.

An $80,000 house will cost you $432 a month, just in interest. You have to give the bank that big of a "gift" every month—plus the amount you must pay in property tax, and principal (the good part—which is actually taken off your debt balance).

Look at how interest can add up, and cost your family a fortune:
(Assuming a mortgage rate of 6.5%)
Cost of House Interest paid (per month)
$80,000 $432
$100,000 $540
$120,000 $648
$140,000 $756
$160,000 $864
$180,000 $972
$200,000 $1,080
$240,000 $1,296

If your interest rate is higher, then you pay even MORE interest than what is shown above! For instance, a rate of 7.5% would cost $625 per month in interest for the $100K loan.

But it is even worse than that! The owner of a $200,000 house will also pay twice the property taxes (and home insurance) as the owner of a $100,000 house. That, too, is money out the window that you will never see again. You had to work hard for it, and/or your wife may have had to leave your child(ren) at daycare and go back to work to earn that money, but some banker is enjoying it right now.

That humble, $70,000 house looks a lot more livable now...

But some might say, "I will need a bigger house at some point. Might as well go with a bigger house right now." Answer: You do not know that. No one's fertility is guaranteed, and illness/accidents happen. Man writes his plans in pencil, but God has the eraser. But in case nothing bad happens to you, and your 3 or 4 bedroom house becomes too small for your family, you can always move to a bigger house when you need it.

Here is why that works better:
By the time you have 5 or 6 children, you will have been paying off your humble $70,000 home for 8 or 9 years. You will not owe $70,000 anymore! Especially if you follow my advice of pouring a good part your savings into your home mortgage. Plus, if you are lucky, the market value of your house might have slightly increased. So you can sell your house, pay off your mortgage, and still have $50,000 (or much more) left over to put toward the next house. Now you can buy a $100,000 house and still have a decently-small mortgage: ($100,000 new house - $50,000 cash from old house = $50,000) That is the key.

The key is to pay as little interest as possible, because that takes away from your net worth. Paying interest is a form of slavery. Any other use of your money can be justified (home improvements, giving to charity, new car, food, utilities, etc.) because you are doing something good with it. But interest is a
complete theft of your hard-earned money. No one likes paying an occasional $100 traffic ticket—why should they happily give up $1000 or more in interest every month?

And once you've picked out a decent house (one that you can easily afford, not barely afford), remember that mortgages are not eternal. You will NOT necessarily have to pay on a mortgage until you retire. That is simply not true. While your mortgage is a good chunk of change, it is not an astronomical sum that you will never be able to pay off early. In fact, you can pay it off much faster than you ever thought possible. Every thousand dollars you send in to pay down the principal means a savings of several hundred dollars a year in interest. And just think—when your mortgage is paid off, no more house payment! That is hundreds of dollars left over in your budget every month, to spend on whatever you want!

Before (with $5K in savings):
+ Earned $20 from savings account
- Paid $145 in mortgage interest
Net result: $125 in the hole

After (with $0 in savings, $5K paid to mortgage):
+ Earned 0 from savings account (now empty)
- Paid 100 in mortgage interest
Net result: $100 in the hole

Which is a better place for your money? Savings accounts pay you 3%, while mortgages cost you at least 6%, every month. It is pretty obvious that paying down the mortgage is better.