Success Warrior: The Blog That Embraces ADHD

Crossing the Line

It's going to be a short post today because I have to get ready for my trip tomorrow.

I just want to restate that the goal of this plan is to cross the line.  To go from paying interest to earning interest. 

That's one of the reasons the rich get richer and the poor get poorer.  For many people, it is possible to cross the line but it's going to get more difficult in the future from the sounds of things.

Start now.

Just Out Of Curiousity, I Had To Check This

I like to look at the options that I have for my money.  I think that it helps me keep things in better perspective.  I can't make use of all the options yet but I think I make better decisions now based on what could happen in the future. 

Take for example, our house payment from yesterday.  The one where we would be paying $1,300 in interest a month for the first year.  I had to wonder what would happen if I was investing that money instead.  What would it be like if I was earning interesting instead of paying interest?  What would the difference be.

Well if you put $1,300 into a mutual fund for 30 years, you would end up with over $1.5 million if the market continued to act as it has for the last 50 years.  I could live on that.  And it sure beats the heck out of the hundreds of thousands I would be paying in interest. 

I know that you don't actually pay that much per month over the life of the loan.  Principle goes up and the interest goes down.  Still it's a good thing to to see, at least for me.

Most people could pay off their house in about 5 to 7 years if they wanted.  If you took the house payment and invested it for the last 25 years, you wouldn't make as much money but you would still have $1.1 million.  That's still not too bad.  If you were able to keep making the payments for 5 more years, you'd have $1.8 million.  And the calculator I'm using suggested an 8% return.  Some people say that over 30 years, it would be closer to 10%.

For me, this shows just how important it is to cross the line between paying interest and earning interest.  Life changing.

Do people think about it? Do they want to think about it?

Let me start off with something that I forgot to do the other day and that's to tell you how the interest has changed on the loan that we are paying off.  When we started our plan we were paying $6.68 a day in interest.  That really doesn't sound bad until you times it by 365 days.  We would have been paying $2,438 a year in interest.  Quite frankly, I have better things to spend a couple grand on.  Right now, we are paying $2.12 a day in interest and every week we try to bring it lower.

I think this is something people don't really look at with their money.  And quite possibly, the don't look at it on purpose.  Maybe they don't want to know how much money they are paying in interest.  Out of curiosity, I decided to look at a new house purchase pulling info from the net.  One source listed the average house at a cost of $264,000 and interest rate quotes for this area were right around 6%. 

That would give you a house payment (without pmi, taxes, and insurance) of $1,582 and for the first year you would be paying around $1,300 in interest. 

I wonder if most people just accept this as being the "house" payment.  Would it be more helpful to people if they understood that the house payment was $200 and the interest payment was $1,300?  Do people consider this or do they turn a blind eye to it.  Do they go one step further and figure that $1,300 a month is $15,600? 

Probably not until tax time, eh?  Then they somehow see it as a good thing because it means that they won't have to pay four grand in taxes. 

"Honey, we are so lucky that we gave the bank 15k or we would have had to pay the government 4k.  Whew!"

I don't know about you but 15k in my hands would be a nice thing.  Even after taxes, I could probably do some good things with 11k.  And if I couldn't think of anything to do with it, I wouldn't complain about just having it around, just in case I thought of something that I needed to buy . . . like a food dehydrator.

"But I can't afford it"

"Success Warrior, I understand what you're saying, I really do.  I see how buying things with cash allows me to buy more and gives me more control over my life but I can't afford it.  I don't have enough cash on hand."

My reply might seem over-simplistic but here it is.  If you can't afford to buy the object, how in the world can you afford to spend more for the same thing?

If you can't afford $1,000 for a TV, how can you afford to pay $1,300 for the same TV (if you get 8% interest)?

If you can't afford $100 for groceries, how can you afford to pay interest on those groceries for 20 years?

If you can't afford to go out to eat, why are you going out to eat?

If you can't afford the vacation to Disneyland, then...

Obviously, if you can afford 6%, 12%, and even 25% (with the new bankruptcy laws in place) in interest, then you really can afford to pay 0%.  People just don't want to.  Not wanting to is not the same as not being able to.

And the bottom line is that for smaller purchases (less than cars and houses), people can afford them.  Banks wouldn't allow you to buy stuff if they didn't think you could afford it plus the interest.

The bottom line is that you can afford it.

Tomorrow: Do it in reverse

Which question is more important? Which one is asked?

I think that we agree that no one in their right mind would pay 3X what something is worth right up front.  No one is going to pay $20 for a value meal.  What kind of value is that?  But people do pay $20 for a value meal.  They pay $9 for a gallon of milk.  They are paying $7 a gallon for gas.  Everytime you put something on a credit card, they are imposing a rate hike of phenomonal proportions.  And they are choosing to do it.  What good little consumers they have become that they are willing to charge ourselves way more than things are worth. 

And why do they do it?  Either through ignorance or from putting the blinders on intentionally and asking the wrong question.  They are asking a question that advertisers and banks want them to ask.

How much are the payments?

What a devilish question designed to trap humans in financial bondage for their entire working careers. 

The question that people should be asking is, how much will this cost me?  That's the important question.  That's the one that matters.  Payments, schmayments.  How much is that value meal going to cost you?  $6 if you pay cash right now or $6 at 15% interest for 30 years.

I am being kind when I say that people pay 3x as much when they charge.  If you bought the value meal above with a 15% credit card and you were allowed to make minimum payments on $6, you would pay the credit card company $50.08 for that value meal.  That's some good value...for the bank.

But you are allowed to make minimum payments on a value meal aren't you?  When you add it on top of a card that you are already paying more than the minimum monthly payment.  You better savor that $50 Whopper like it's the best steak in town.

Tomorrow: "But I can't afford it"

What are the options to not settling?

If settling kills dreams, we should definitely be looking at ways not to settle.  Dreams, hope, and excitement make life so much more fulfilling to experience.  If you're going to live, you might as well have fun doing it.

So what options do we have at our disposal to combat settling?

1.  Credit.  You can buy what you want and need on credit.  Simple enough and it can work for a couple of years.  After that things kind of have to slow down because your credit cards are maxed and your house hasn't appreciated enough.  You live like you want for a year, maybe two, and then you try to just get by for a few years until you can get to that next sinister refi.  Then you can do it again.  This will work as long as your house continues to appreciate and you don't take any paycuts.  One or two good years followed by 3 or 4 very, very long years.

2.  Have more money on hand.  There are a couple of ways to do this with the most obvious being to earn more money.  The other option is to have less debt.  Having less debt automatically means you have more available money.  Sometimes it's easier to have less debt than it is to make more money. 

Don't forget that when you pay cash, everything is cheaper.  Even if you want to buy the best, it's going to be cheaper if you pay cash.  In fact, it can be argued that the more something costs, the more you will save compared to someone who finances it.  An expensive items means that more interest will be paid to finance it.

You get to choose which plan you want to follow.

Tomorrow: stress

Interest, PMI and the sinister Refi

I have seen a pattern in the people around me play itself out several times.  It's a pattern that ensures their financial slavery.  The five year refinancing of their homes.  The trap has so many factors going against people that it is surprising that people do it...but they do and so we will discuss it here.  What's wrong with the 5 year refi?

1.  We have talked about what a complete waste of money PMI is.  When you keep your loan from going below the 80% mark, you are making sure that you are always paying PMI.  You can't continue to throw money away if you want to make money.  PMI is a gift from you to the bank.  Does that bother you at all?

2.  Do not ever be confused by the "great interest rate" that you are getting.  If you have a 6% interest rate, there is only one way to pay that amount of interest.  You have to pay off your house in one year.  If you don't, you are paying more than 6%.  The longer it takes, the more interest you are paying.  If you are going to pay for 30 years, then you are talking about something in the range of 180% interest (30 years X 6% a year).  Is there anyone out there that wants to pay 180% interest on anything?  But that's a discussion for another post.

What I want to get at is this.  Take your payment and subtract your PMI, your home insurance, and your taxes.  What is left is the amount of interest you are paying.  What you will see is that each month, you are paying something in the area of 80% interest in your first few years.

Everytime you refinance your house, you keep yourself paying this incredibly high amount of interest.  Think about it each time you make a payment.  80% of your payment is profit for the bank and doesn't help you.  Can you really afford to throw away 80% of your money?

3.  The last part of this trap is the icing these people put on their cake.  They do a refi so that they can pay off all their other bills that have accumulated over 5 years.  Pay off medical bills, pay off credit cards, and pay off the old car.  They now have a lower overall outgoing payment.  This can be good!  It really can, if used correctly.  It's not great but it can still be worked into a great thing.

But that's not what happens, is it?  Gee, now they have more money left over each month so what do they do?  Go buy a new car.  Run up the credit cards.  Live life like they make more money for a year or two and then what?  They try to hold out for a few years while the value of their house goes up so that they can get it refinanced and do it all again.

Each refinance doesn't get them ahead, it puts them further behind until there is little chance of ever achieving financial freedom.

Tomorrow:  Keeping up with the Joneses.

Interest: those that understand it receive it, those that don't pay it

That's what one of my economics professors told me about 20 years ago.  It has stuck with me even if it has taken me this long to figure it out completely.  It's a lesson that I want to pass on to anyone that will listen.  Interest is one of the biggest factors when we talk about the rich getting richer and the poor getting poorer.  There are other factors such as PMI which just outright penalizes people that don't have enough money but I think interest may be the single most important factor.

You are either losing money or you are gaining money.  This quickly tells you which side of the line that you are on.  If you are investing money and paying interest at the same time then you have to figure out which one of the two you are doing more of to find out where you stand relative to the line.

Quite frankly, the object of the financial game is to be on the side of the line where you are earning interest.

If you want to take control of your financial future, you can't just give money away to banks. 

On top of that, it just makes no sense.  Why would people pay more for something than it's worth? 

There are several answsers.  To satisfy instant gratification.  Conditioning.  Everyone buys things on credit right?  Because that's the only way they can afford it (now there's a joke).

If you can't afford it, can you afford to pay extra for it?  If you can't afford a $500 TV, can you really afford a $600 TV?

But people do it and banks are ready to "help", while they stiffen up bankruptcy laws to make it harder to get out of the trap.

And it all comes back down to interest.  Are you paying it or receiving it?

Tomorrow, we visit PMI again.