Frugality, Thrift, and Success

Don’t believe the hype: you aren’t wasting money on rent.

You gotta live somewhere, right? And that’s gonna cost money, right? So what’s the difference if it goes to a landlord, a housing complex…or a big bank? Banks have done a fabulous job convincing us all that paying a landlord is a waste of money.

But…is that really true? To a point. Having real estate is decent, if you can afford it, but don’t think that home ownership will be a panacea–and it’s not worth straining your wallet if that’s what owning requires…

The world is weird. The values don’t make sense, and my industry makes even less sense. People rush off to do is to become homeowners, and they want to spend more moneythey should on their homes. Lots of late 20’s-early 30’s people have great wages, little assets, little net worth, and even less “cash” that they can get their hands on. And yet they are willing to incur the maximum houing payment they can get approved for…

People enter the home ownership process not wanting to spend any money on an appraisal, not wanting to spend any money on an inspection (crazy), and maxing out their pre approval amount without regard to their budget.

Who’s complicit? Their realtors, who stand to earn 5-6k in commissions with each sale…the Mortgage Lenders…who stand to earn $3-5k with each sale…the people who lend based on the assumption that family will bail you out…?

The wrong question to ask is “how much home can I afford.” Instead–think “what is my purpose for owning at all.” How does it help me? It makes NO sense…to have a large percentage of your budget consumed by a total housing bill.

By total housing, think of rent/mortgage (incl taxes) + insurance + upkeep + utilities. My industry will cheerfully loan money, provided about 45% or less of your gross income is not consumed by your very BASIC housing expense–meaning just the payment. And–if under 55% of your total gross wages, you’re probably going to get approved. So if you earn 45k a year, that is 3750 per month (pre tax). Take 45% of that, and we’re at an approved payment of 1687 a month + or minus. This is what current, more conservative lending offers prime customers.

Let’s think about this. After housing, you can have up to $375 +/- of your money obligated otherwise and still have under a 55% debt to income ratio. And this is just what shows up on your credit! Car insurance, utilities, cell phone, cable, groceries…all of this stuff doesn’t show up on your credit report!

A $1700 payment will buy you a $200,000 house at 6.75% interest. (Rates are a sconch Lower) $205,000

• Principal and interest: $1329.00;
• taxes: $256.25;
• Homeowners insurance: 43.12 (that’s a low end quote.)
• PMI (for zero down customers): $85.42.
• Total: $1714.01.

OK.; let’s take this $1714 and add just one car payment at $350.00; out of the gate the total obligations are $2064.00 . After taxes, $3750 a month is as much as $3,000 without adding anything else into the payment. That’s about the most you can expect to get…in after tax dough. So you’ve got $750 a month left.

And you’ve got car insurance ($86 bucks). You’ve got electric ($140 bucks) You’ve got the internet…$25 bucks. Cell phones? 2 people: 90 bucks for a well priced plan. You’ve got a gas bill. $90/average. Gas in your car, that’s a necessity. $100/month. Minimum. Food: A family of three spends an average of $380/month on food. Let’s take that down by 20%…$304. Before we get to clothing, medical care, we’re at $911 a month. home maintanence (usually 1%/year)- non existant. If they have $150 more a year

Now–on this kind of a scheme, how do you save? This is a “safe A+ loan,” in my industry. And if the safe loans stick the poor homeowner eating ramen noodels…is praised as being “smart,” and as making “good” decisions.

Not everyone is this extreme–i realize that. But, most people aren’t too far off–only having $300-500 in excess of their bills. For me, having a nice house is pure vanity. How much less stress would there be if I lived in a $800/month place instead? How much more of Jack could I see? How much more could I give to my church, to charity?

I feel very blessed to be in the industry I’m in, even though it’s wierd. I also do see a lot of people doing it right. It’s smart to minimize your expenses, live frugally as possible. And, not worry about what other people are doing. When we were first married, Heather and I had a $300/month apartment in Westerville. It was tiny. We rushed into a house because that was the thing to do–but really–if we had wanted just to stay in the $300/month place for a year or two, we would have had a great time…we would have saved so much money…and figured out other ways to get along, and eased into things.

What if you had a tiny house payment, and dramatically lower expenses? What could you manage to pay for? What is the purpose (biblical/other) of having an expensive home? If you don’t need the size, why not save your earnings, have a budget, and then go after home ownership from a position of strength.

I’d say that good guidelines would be no more than 30% of your gross wages on TOTAL housing expenses–this includes payment, electiric, gas, and everything else. If you make a decent amount ($70k year/family) then it’s OK to go above this, provided that you can continue to save money as time permits.

I saw this post–the blog is excellent–and very on point and on topic. http://www.thesimpledollar.com/2007/09/22/when-a-frugal-life-and-social-gift-giving-come-into-conflict/