Readers,
Throughout my lifetime as a Citizen of the United States of America, I’ve come to realize how far so many of us live outside of our means.
When I was growing up, my family “upgraded” from trailer life in Texas to a small house built by my father and finally to our very own bought-off-the-market home. On the fore-front, we looked like we were moving up in class. However, I was well able to see the back-end design of my family’s entire financial situation, and with each argument, discussion, or bill-paying session, I was educated.
Trailer life was my family’s richest point in the history of my lifetime. We had the worst credit, the least debt, a solid place to rest our heads, and our family life was thriving. There were few credit cards or interest payments, and there was very little mortgage to speak of.
After saving just enough to qualify for the down-payment on a home, my parents skipped a few hard-earned steps and chose a life that was well beyond their means. Two and four hundred thousand dollar homes were now within reach without any need to have two or four hundred thousand dollars in hand.
My parents would later explain they put themselves in debt to provide me with a life that they didn’t have, and I would later argue that they could not have given me a better first-hand, what-not-to-do, financial education. My parents have now gone from home to home for more than a decade and a half, eventually paying enough in interest to afford their own home outright without additional investment.
The credit score and history that one will find for me is low, because I’ve not built it up. I pay all of my bills on time for the things that I use. Contracts are avoided wherever possible, and the only contract in which I currently take part is for the condo-apartment in which I reside.
The condo-apartment is rented, not “owned”, but they are trying as hard as they can in this market to sell the unit out from under me. The condo-apartment is known as Kennedy Point in Madison, WI, and the rented units are managed by Urban Land Interests in whom I have come to realize great disappointment.
I recently received a letter from management informing me that they would be offering a 5% down qualification for a loan to purchase the two hundred and four thousand nine hundred dollar condominium ($204,900). The letter informed me that for the first year, they would “buy-down” some of the cost and make the first year’s interest rate stand out at 3.5%. The second year would take on a similar deal, but it would rise to 4.5%. And finally, I would pay at 5% interest for the remaining twenty-eight years.
Throughout the letter, they used mild pressure-tactics that were sure to let me know that if I chose not to entertain their offer they would be showing my apartment throughout the remainder of my lease (7 months) to any prospective buyers. At the end of my one-year lease, I will not be allowed to renew and will be forced to vacate for that lucky buyer who wins the 5% twenty-eight year interest rate. I was also informed that final details would be mailed to me soon.
First, let me address the fact that a 5% interest rate has been praised in the current condition of the economy. Everyone is hand over fist in their excitement for now being the time to mortgage a home.
“Get in while the gettin’s good!”
“Right now’s the time to buy!”
I’ve heard it placed in a million different ways. As one of the characters in the greatest animated film on the face of this earth, Happy Feet, puts it, “Let me tell something to joo!”
Paying 5% interest for a period of thirty years puts the total payout, in thirty years, at right around four hundred six thousand nine hundred dollars ($406,900). If you recall, the originally advertised price is two hundred four thousand nine hundred dollars (204,900). Should I choose to save that money instead of mortgage my life away, my children will be able to buy a home outright or make sound investments.
If you’ve been keeping up with my blog, you know I’m an investor, so I will invest that money over the course of those thirty years as it comes in and have several million dollars by the end of it all. Imagine handing your children even a small chunk of a final net worth like that one day.
For those of you who do not have thirty years, the best gift you can give your children is a financial education and capital punishment for crimes of credit. I’ve seen so many parents hand their children money in return for a promise. The situation works out to be something like the following:
“Mom… I need a cell phone…”
“What do you need a cell phone for?”
“Everyone has a cell phone! I will be able to text my friends and let my friends call me. And you’ll be able to call me too! Whenever you want.”
At this point, Mom’s thinking about her child growing up and being too young, she’s thinking about the point of control she now has on her teen, and she’s agreeing with the ability to call her teen at any time she feels is necessary. The trouble is, the child has little or no money, no financial education, and there are very few completed chores to speak of.
“I will get you a cell phone under these conditions…”
More often than not, the parent hands over her part of the deal before the child takes care of his. The cell phone is a simple example, but I’ve overheard conversations like this one on day-to-day desires. The child wants something, and the parent attempts to bargain for a new level of control. In any example fitting this bill, the parent is asking the child to pay her back in one way or another at some point in the future.
How that translates is that all of these examples, and others fitting the same bill, are of parents extending children their first lines of credit. Many times, the children do not pay back their newly acquired lines of credit, because they know that their parents can’t affect their credit score, their teen lifestyle, or break their legs. All this does is increase hostility in a household.
When the child makes it into the world and is forced to struggle through their own financial education, the first thing they look for is another Mom. They find Mom in banks, mortgage companies, credit card companies, cell phone companies, pay-day today style organizations, their local Target, and other lending institutions. The child is already used to receiving reward before effort instead of the sensible reality that effort yields reward.
By the time said child grows to a level that “saving” is possible, the next step is owning his own home. His total net worth is closer to a real net of fifteen or twenty-five thousand dollars which is money that has gone completely un-invested. There have likely been many early years of late struggle, he has racked up debt in countless other ways, and now he truly believes that the next step is to put himself into the greatest debt of his life with a home.
I received that second letter, regarding the sale of my condo, from management the other day. The letter outlined the complete plan for their “buy-down” that was supposed to lower the first two years of interest payments. As it turns out, the amount “they cover” is the exact equivalent to the price I would be asked to pay in closing costs. So in reality, I save nothing over the first two years. More importantly, once the third year hits, I’ll be paying exactly what I’m paying right now from month to month.
What disturbed me the most was a passage I read at the bottom of the page. It said something to the effect of, “People don’t buy homes based on the total cost of ownership. They buy them based on the monthly fee they have to pay.”
First of all, I’m not sure why they think that statement is going to sell condos. Second, you can bet your ass that statement is correct, because very few look
at much more than the monthly cost during final discussions with Mr. or Mrs. in-debted to society. But more than that, why would I be interested in paying exactly what I’m paying now in monthly fees, plus be locked into a thirty year mortgage instead of a one-year lease, and be forced to pay an immediate $14,245 in down payment and closing costs. What a ridiculous proposal!
Further, if I somehow chose to look past the idiocy of the offer and accept it, I would be living beyond my means. I have not earned two hundred and four thousand dollars that I can use as spending money, because it would be more than a quarter of my net worth. At this point in my life, it’s more important for me to invest than spend. If I signed any kind of mortgage right now, I can expect to set myself back by more than most Americans can handle.
Credit turns people against people, companies against people, companies against companies, government against companies, and countries against countries. It breeds lies, mistrust, and more pain than war. The losses can span generations and take strong holds in our families better than the traditions we once observed. If we are going to live in a society that depends upon currency, let’s at least learn to manage that currency properly.
Do you and yours the greatest favor and drop the credit. Give up your house and discover a true home when you live within your means beside your thriving family. It’ll be your first step to killing the credit cards and removing the claws of this credit from your family. Give the gift of hard lines and financial education to your children, and turn a blind eye to “offers” from thieves.
To live within your means is to be certain that you and your children, your true legacy, are outright cared for before you declare any kind of reward.
Your loyal Financier,
-Aaron