Tag: home

A Tale of Two Families

Young Ned and his wife Sally really want a home of their own. Ned has been at the same job for a couple of years and Sally stays home with their 1 year old. They have been reasonably careful with their money. They have an old, but reliable, Honda Ned’s parents gave him when he graduated from college and no credit card debt. Ned makes $50K a year and Sally’s parents have given them $10K to use as the down payment. Ned and Sally go to an online lender to get pre-qualified for a mortgage. Using the lender’s  “Home Affordability Calculator” Ned and Sally are told they can afford a monthly payment of $1,499.76 including taxes and insurance.  Estimating taxes and insurance at $5,500, Ned and Sally start shopping for a $200,000 home.

Not too far away another young couple is dreaming of a home of their own as well. Paul and Janet have a new baby and are finding their tiny apartment rather cramped. Paul makes $50k a year but has 15% of his pay going to his 401K. Paul and Janet never see that money, so they budget as if it doesn’t exist.

Paul and Janet have recently struggled and sacrificed to pay off the credit card debt they ran up when they were in school.

Janet has been reading money management books and knows that they should put at least 10% down on a house and that their mortgage should be no more then 25% of their take-home pay. Using Paul’s take-home pay after taxes and the 401K deductions, Janet calculates a maximum mortgage payment of $764.  She knows they can afford a $100,000 home with a 15 year mortgage.

Before they can go home shopping, they know they must save the down payment and build their emergency fund to equal at least three months of expenses.

Paul takes on as many overtime hours as he can get at work and Janet takes the baby to the neighbors three times a week to watch their 3 year old. With this additional income and cutting their expenses as low as they can go, Paul and Janet are able to save $2000 a month for 8 months.

Ned & Sally end up with a $200,000 home. Their mortgage payment is $1,019 a month and taxes & insurance add another $450 per month. Paul & Janet have found a nice little starter home for $100,000. Financing their home over 15 years gets them a lower interest rate and shortens the term by half. Their mortgage payment is $671 and taxes and insurance add $200 a month.

Ned & Sally                        Paul & Janet

Take Home Pay $3550 $3056
Housing Cost $1469/41% $871/29%
401K After 5 years $0 $43,436
Interest paid on Mortgage after 5 years $45,614 $16,185
Principal Paid after 5 years $15,526 $24,083
Net Worth Increase $25,526 $77,519

Ned & Sally’s budget allows them to live on $2031 after housing costs.  Paul & Janet get just a hundred dollars more but their utilities and maintenance costs are about half of Ned & Sally’s. They have their retirement saving working for them and enough room in their budget to save and pay for a better car.

Paul & Janet were careful, after learning their lesson with credit cards, not to be lead astray by lenders who make more by lending you more. By the time they managed to pay off the old debt, they could not even remember what they had bought. They swore it would not happen again. They vowed to live on less then they make, to save aggressively and to give. We hope Ned & Sally get a wake up call soon.

How low can you go?

I want to teach you a cool game. The winners of this game get huge cash prizes; I won a paid-for house.

The game is called, “How low can you go?”

To play, we need to create a low or no-income budget.

I hear some of you saying, “Wait, what, another budget? I haven’t done the first one.”  Well, since this one is easier than your real budget – get going.

In some instances this really is a worst-case budget – as in you have unexpectedly and unhappily lost your source of income. In other cases this is a best-case budget – as in you have joyfully taken the leap to a new venture or retirement. Either way, let’s play the game.

If you lost your income, how little could you live on?

With no income, entertainment becomes a walk, a bike ride, a trip to the library. So scratch the movies, the bars, and the vacations.

Eating on as little as possible does not involve fast food or restaurants or steaks. E-Mealz (a really cool menu planning system) can provide menus and shopping lists that will feed a family of two for as little as $30 a week.

If you had no income would that AC be set to 68? Would you be jumping in the car and motoring across town 4 times a week; or might you consider exploring the use of the city bus?

Really get radical here – consider what you spend on clothes and nails and hair color; how can you look presentable for less?

Itunes, Netflix, Redbox ? Not with zero income.

Take a look at that cell plan; you have no income. You don’t know when you will have some again. Can you get it lower? Do you really need it?

Do you have an extra room? What if you got a roommate? No, not forever, could you do it for a while if you needed to?

Things you can’t give up:

Insurance: you need health coverage. If you have dependents you need term life. If you drive, you need auto and if you own a home you need homeowners.

Taxes: you must pay you property taxes, auto tags and renew your license etc.

If I stayed in our home (paid for), kept both cars (paid for) and the cell phones I could go as low as $2,100 a month.

Fully half of my as-low-as-I-can-go expenses are insurance (home, car, health and life) and taxes (property, tags). If I needed to go lower we could easily live with one car (saving insurance, tag and maybe some gas) and ditch the cell phones. But to go any lower than that would require a housing change.

Ok here’s the fun part.

It’s just a game (hopefully you haven’t lost your income or if you have you had already worked out a plan) but what if you played for real? What is the monthly difference between your as-low-as-I-can-go expenses and you normal expenses?

What if you went only half way to as-low-as-I-can-go and applied the rest of the money to reducing debt or increasing savings? If you played for 6 months what would your financial picture look like? How about a year?

This is how we paid off our house. We played the: “How Low can You Go?” game for two years. It really wasn’t about huge sacrifices because it was just a game; we knew we didn’t have to live that way but we wanted to win.

Riding the bus or your bike, going to the library, carrying your lunch, having friends over for dinner and a board game instead of going out is not a drag. After you do it for a while, you may find parts of your low income life that you actually enjoy more than your old free-spending ways.

Can you beat me?  What’s your as-low-as-I-can-go number?