What I’ve referred to as “The Everyday Economy” has us fooled. The mindset of America has been programmed with credit, interest rates, and monthly payments as part of the bourgeoisie vernacular.
Debt, we are led to believe, is a way of American life. As consumer debt levels reach record highs, there seems to be no stopping the indoctrination. While the burden has become crippling, onward we march. A house payment to make, a car payment due next week, and a student loan payment for a degree that happened a decade ago.
Can we reconsider the thought process?
Buying A Home
What the world says: Finance the maximum amount for which you can qualify. Don’t worry about PMI, it’s no big deal. Put down as little as possible in the form of a down payment. Zero to 3% is fine. Extend the term of the loan out 30 years to lower your monthly payment. Pay the interest only for the first 20 years, and then let the principle payments kick in for the final 10. You’re going to re-finance or move before then anyway. Your house will increase in value so much it won’t matter 20 years down the road. This allows you to buy more house with lower payments. You want a brand new house too. As it increases in value or as you get a raise, sell it and buy a bigger house in the newer and most popular neighborhoods so you stay current and in the trendy areas.
What a sensible person might say: Save up enough cash to put 20% down as a down payment, thus avoiding expensive PMI. Aim for a 15-year conventional mortgage so you pay as little interest as possible over the life of the loan. Ensure your payments are no more than 25% of your take home pay in your monthly budget. This will mean buying a modest house but your exposure to debt, fluctuations in interest rates, and real estate market valuations will be far less. Pay off the loan as quickly as possible. Don’t move often – moving is expensive as you will be constantly be paying commissions, closing costs, moving expenses, and possibly taxes. Be on the lower end of your neighborhood in terms of size and cost. This tilts valuations your way and makes your home easier to sell, even as it appreciates faster.
Fact: The average U.S. mortgage size has hit a record-high of $354,500 and 90% of homebuyers choose a 30 year mortgage. You’ll want to run counter-culture here for sure!
Buying A Car
What the world says: Car payments are just a fact of life. You’ll always either have a car loan or lease payment, so just be prepared. A good car costs at least $20,000 or more, otherwise you run the risk of it breaking down all the time and leaving you stranded on the side of the road. You need to buy a new or almost new car to drive anything worth driving. There are some good deals out there where you don’t have to put any money down and you can pay very low interest over 5, 6, or even 7 years in order to lower your payments. Leasing is a good deal too since you never have to worry about selling a used car. You just take your car back after 3 years and they give you another one.
What a sensible person might say: First off, leasing is the absolute most expensive way on the planet to operate a car. Second, there is absolutely nothing wrong with a $5,000 car with a 150,000 miles on it. You can find a used Toyota, Honda, Nissan, or Hyundai for $5,000 that will last you as long as you care to drive it, and you’ll still be able to get a decent amount when it comes time to sell. For $10,000 you’re golden in terms of a serviceable car. Save up and pay cash. Financing a car makes about as much sense as playing the lottery. You’ll be paying interest on a depreciating asset meaning the money you are putting in to the car is moving quickly in the opposite direction of its value. Another great investment is a decent set of tools and few hours of time learning to do things like oil changes, brakes, tune-ups, and other maintenance items.
Fact: Even at Carmax the average car sold is over $20,000 with well over 75% of transactions financed. Be a non-conformist here, please!
Paying For College
What the world says: Student loans are the only way to pay for tuition these days. College costs have grown so high that everyone has a student loan. They’re really no big deal. You can defer them until you’re out of school anyway, and then base your payments on your income after you graduate so they fit within your budget. The degree you get is going to mean you’re going to be making good money after college. That means you’ll be able to knock out the student loan really quickly once you get a good job after graduation. What’s important is going to a “name brand” school that everyone recognizes. You’ll want to go to a popular school or a private school. Prospective employers will be impressed by your expensive degree so be prepared to borrow accordingly.
What a sensible person might say: In Tennessee you can complete 2 years of Community College free. FREE! That is hard to turn down! In other states it can done very inexpensively. This allows you to knock out basic courses and then 100% of the credits will transfer to a state university. Stay in-state to keep costs down. Apply for scholarships + Pell Grants. Work within your career field to earn your way through school. Stay away from expensive “name brand” universities, and avoid out of state or private school tuition. Major in something that actually means something and impress your prospective employers with work experiences along with real-life qualities and abilities. Lastly, consider trade schools instead of college. It’s possible to attend a 2 or 4 year trade school and enter the job market making serious coin in several industries.
Fact: The average student loan is over $30,000 and repayment takes, on average, around 21 years. This is absolutely insane.
We haven’t even touched on credit card debt, where the real madness can begin. Suffice to say it may be time to reconsider our cavalier approach to debt.
I do know one thing – I know we’ve hit on strange times when paying cash for goods and services has society treating me like a rube, though I’m curious who the rube may be in this game…
Cheers, and thanks for reading!