Monthly Archives: September 2010

My First Place On HGTV: How to Spend Your Next Thirty Years House Poor

Posted on by  at  11:06 am
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I spent the latter part of last week in bed with a nasty virus. Because I was so wiped out, the only thing I felt like doing was lounging and watching old movies. In between Godfather DVDs I caught an episode of My First Place on HGTV. I’m fairly confident I have seen this show before, but as I was reaching for the remote control, a comment from the young couple being featured caught my attention.

“Our budget is $475,000 to $490,000.”

Huh? These young people barely looked old enough to buy an adult beverage, and they were considering a half-million dollar home? They had my attention.

For the next thirty minutes or so I watched these young people roam from house to house with their real estate agent. I was extremely impressed with their thoughtful considerations of each house. You know, like which one had enough room in the backyard so their two dogs could play without feeling “claustrophobic,” and which house would be best for “entertaining.” After all, these are important considerations when just starting out. End sarcasm.

It was at this point that I began to regain my strength. I think it was adrenaline actually, as I had the overwhelming urge to reach through the television and smack some sense into these people.

Admittedly, I know very little about this couple, other than one is an “account executive” and the other is in medical sales. However, I think it is safe to assume that unless they inherited a couple hundred thousand dollars, they planned to borrow most of their first purchase.

$3,000 a Month for Thirty Years

Let’s run some numbers working with our assumptions. I think the couple settled on a house listed for $490,000 and paid about $475,000 (I don’t remember the exactly sale amount). I’d like to think they saved up at least 10% to put down, which is a fairly large amount of money for this size house. Perhaps they did have $50,000 to put down, and financed the remaining $425,000 on a 30-year mortgage.

Their monthly payments would be around $2,281 before taxes and insurance, which could easily add another $800-$1,000 a month, bringing their total monthly mortgage payment to over $3,000. Let that sink in for a moment.

This 27 year-old couple was about to sign a binding contract promising to make 360 payments at $3,000 a month for the next 30 years. They would be 57 years-old by the time they paid off the mortgage.

During those thirty years they would likely have children, and have to continue working like maniacs to make that $3,000 a month payment. They would need to save for retirement, pay for the annual vacation (or two), buy, maintain and replace seven or eight cars between them, deal with a medical emergency, deal with a medical emergency with their parents, deal with a job loss, etc. They would have to deal with all of life’s curve balls with a $3,000 a month obligation hanging over them.

“But We Can Afford the Payments”

When I watch people engage in this type of transaction, I can’t help but be a little sad for them. And my feelings aren’t limited to those taking out a huge mortgage – even though these are usually the longest of financial commitments. Many people borrow money for expensive cars and such which obligate them to costly monthly payments for a number of years because they can “afford the payments.”

Hearing the statement, “we can afford the payment” is a sure-fire sign someone can’t afford the payments. Marketers have won the battle of convincing us that we can afford things we can’t if we only have to pay for it every thirty days, rather than all at once. But what happens when you hit a bump in the road? What happens when life happens? Because trust me, it will.

Someone will get sick. Someone will get hurt. Someone will lose a job. Someone will get stuck in a soul-sucking job and dread Monday mornings like a trip to the dentist. Life is not always rosy. Things happen. I’m not being a pessimist, I’m being a realist.

It’s hard to tell that to a couple 27 year-olds with their whole life ahead of them and without a care in the world. Sometimes people have to find out the hard way. I just wish people would listen to others who have been down the same road (if you are a parent, you can relate to this).

My First Place: An Alternate Ending

Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000. Their monthly payment drops to about $800 before taxes and insurance, they avoid having to pay private mortgage insurance (PMI), and they can seriously consider a 15-year mortgage, or paying off a thirty-year mortgage in the same amount of time. They could easily be debt free before 40, house and all.

Yes, they would be giving up a little space for entertaining, and the dogs would have to get used to a smaller backyard, but imagine the freedoms they would enjoy. Imagine them as a 40 year-old couple with a $225,000 house, a modest pile of savings, and zero debt.

Imagine a young mom having the option to stay home with the kids. Imagine those kids going to college and graduating without debt because their parents can afford to help. Imagine those kids getting married and making a similar first-home purchase decision because they admired their parents’ frugality. In one single decision, that couple could complete change their family tree, and one day leave behind a legacy of debt freedom for generations to come.

This post appeared in the Canadian Finance Carnival

Weekly Roundup: College Football Kickoff Edition

Posted on by  at  5:00 am
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Just a simple question for you..are you ready for some football? I know I am. And what’s this rumor about extending the NFL season to 18 games? I don’t like it. As much as I love football, I don’t think extending the season would be popular. With 16 games, every game counts. With 18 games, each game counts a little less.

Besides, the season would drag well into the next year. Imagine Superbowl Sunday in March. Just doesn’t seem right.

The Frugal Roundup

It’s Still a Good Idea to Buy a House in this Economy. You should only be looking to buy if you are debt free with a solid emergency fund, and have a decent down payment. Record low interest rates are not enough to make up for poor financial footing. @Free From Broke)

12 Reasons Why You’ll Be Happier in a Smaller Home. One of the biggest early expenses of buying a much larger home is buying more furniture to fill it up. If I had more money to spend on real estate I’d buy more acreage, not more square footage. (@Becoming Minimalist)

My College Savings Plan, Look Out for #1. It’s fairly easy to convince people to save for their own retirement before savings for their kids’ college education. Perhaps other financial goals should come before college savings, too. (@Budgeting in the Fun Stuff)

Finding the Rhythm. I can certainly relate to this one. As soon as I get in a groove with anything (money, diet, etc.) I hit a speed bump and it completely derails me. (@The Simple Dollar)

7 Simple Ways to Say No. The word “No” continues to be one of the more difficult words to say in the English language. If you struggle saying no, to people, to stuff, to whatever, I suggest reading this one. (@Zen Habits)

Best of the Rest

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Do Your Kids Have Too Many Toys?

Posted on by  at  5:00 am
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When my son was little he had a mild addiction to Thomas the Train collectibles. Those things were everywhere (you may remember Harold the Helicopter’s flight to the bottom of our guest toilet and my mission to retrieve him)! Then it was monster trucks. Now, Legos are all the rage.

And what about these new Legos? When I was a kid you could buy a ton of plastic Legos blocks for cheap. They came in four colors – red, blue, green and yellow. Now, a larger Star Wars Lego set runs about $99, and includes hundreds of tiny pieces and 37-step instructions for assembly! I digress.

You see a pattern developing here? My son, like many kids, goes from one greatest thing to the next. Individually, these things are not that expensive (save the aforementioned Star Wars Lego sets), but collectively they can add up.

In addition to being expensive for parents, they do have a cost for kids, too. And I’m not just referring to toys’ way of eating into allowance savings.

Too many toys usually means too many distractions. Between the television, the Wii, the computer, the buckets of army men, trucks, Legos, etc, etc. there is little time to devote to things like books, and outside play.

I’m certainly not advocating getting rid of all toys. In fact, some toys can be quite educational. Others can be incorporated into outside play (my kids love the game Hyper Dash). But often toys are played with a while and then tossed aside, collecting dust and taking up space in the kids’ closets and toy boxes.

The number of toys accumulating never seems to diminish, nor does our kids’ appetite for more of them. Are kids born with a consumer gene?

Hey Mom and Dad – Make Sure You Don’t Own Too Many Toys

Kids learn much from the behavior modeled for them by their parents. Many parents are guilty of buying too many toys themselves. And many of us fall for the same toy fads that kids do, although our “toys” are often much more expensive.

Need evidence? Just hang out around a Best Buy store the morning Apple releases a new product – any product. I’m quite certain most people in line for the iPhone 4 already owned a phone – maybe even an iPhone 3. But they had to have the latest and greatest.

Kids notice this stuff. Maybe Dad buys a new pickup truck every two years. Mom picks up a new laptop with the first hint of a problem with the one she just bought 6 months ago. And both parents are always buying new shoes, new clothes, new jewelry and watches, etc.

Allow Kids to Buy Their Own Toys…At Least a Few of Them

At around age 5 we started giving our kids an allowance. Over the years we’ve gone back and forth on whether or not this allowance should be tied to chores. A final compromise was to identify a set of basic chores to be performed throughout the week that must be completed as a contributing member of the household. Additional chores could be performed to earn extra money, or not, depending on school schedules, motivation, etc.

We encourage the kids to use a portion of their allowance for spending, a portion for saving and some for giving. With their spending allotment, they usually pick up something small during weekly grocery/household supply trips – a magazine, a CD, a movie, a game, etc.

Of course, we still buy them a few things all along (I rarely turn down a request for a new book), and don’t expect them to pay for things like clothing (not yet, at least) and basic supplies. Eventually, as they mature, I’d like to increase their budget and include more spending categories for which they are responsible.

We’ve noticed that the kids are much more selective about what they buy, and often fret over “spending all their dollars” on a new game – leaving them with an empty wallet for another week.

I’m not unlike any other parent. I want my kids to have things better than I did. I want them to have more. I want them to have the best. But I also want them to grasp the connection between having nice things and the sacrifice required to earn them. I want them to be able to say “no” to themselves; to avoid the trappings of debt and consumerism as they grow older. Maybe they will avoid some of the mistakes I made along the way, or at least be prepared to learn from the ones they are bound to make themselves.