Ms. House of Cards – A Case Study – Part 2

One week ago I introduced my friend, Ms. House of Cards. In the past week there has been some good news, and some great progress. At the same time the house of cards that Ms. House of Cards built nearly came tumbling down. Before we get into this stuff. I want to correct something I said in the last post. Last week I told everyone that Ms. House of Cards bought the house she has now as a fixer-upper and that the renovations were killing her financially. I was only half right. She originally bought this house that she has as a place to live. During the course of 2009 she discovered that it lacked in some areas, one being insulation. That started a process of putting in new insulation. Later a leaking crack in the foundation and incorrect plumbing and this little job of adding insulation blew up. The nightmare all started with a desire to stay warm in the winter and save a few bucks on heating costs.

One week has passed and Ms. House of Cards is standing in a better position. She is using YNAB, which she is finally getting her head around. She has conquered some of the more difficult ways of entering in data. She is now tracking all the money she spends. This is a great thing because she is now more aware of the money she has and the money she owes. This tracking lead to the first change in Ms. House of Cards, she recognized that come friday, if she didn’t do anything, her mortgage check would bounce. I would love to know if any of my readers have experienced that feeling? Looking at the bank statements and realizing that ends are finally not going to meet. I’m sure this wasn’t a great feeling for Ms. House of Cards. Her mortgage payment comes out on Friday and she gets paid on Monday. Also she’s sold her house and the deal closes in late March, she has to survive till then. Here are the options I presented to cover the $70 she still needs to make that mortgage payment on Friday:

1. Take a cash advance from her credit card. if she paid this back on monday when she got paid then everything would be fine and there’d be little cost.
2. Take the money from her line of credit. Yes, exactly the same as option as number 1, just a different account.
3. Stop the automatic savings programs. Can’t afford to save money if it means going into the red on the checking account.
4. Get paid on Friday. For most this isn’t an option. Since Ms. House of Cards runs her business with a business partner, she’d just have to get an okay from her partner.

In the end Ms. House of Cards went with two of these options. She stopped the automatic savings programs and she moved her pay-day. The first two options were more things I would do in the given situation and me just being an employee, I wouldn’t have the benefit of moving a pay-day. She made it through what I think is the first major issue in the trek to late March and the sale of her house. After this Friday, she will need to make 3 more mortgage payments before the housing sale closes and she can move on to a better and brighter financial future. This past week has been like trying to build a house of cards while someone is shaking the table. Ms. House of Cards managed to get through this without too much difficulty.

Ms. House of Cards is also starting to realize that besides tracking her transactions she can take the bold leap to telling her money where to go with the budget page on YNAB. I love telling my money where to go and being the Dominatrix of my cash is a lot of fun. I’m hoping that in future updates I’ll start to see some planning happening on the budget page. If Ms. House of Cards takes this next step, she will be planning and trying to predict ahead of time where she is going to spend her money. Remember budgeting is all about telling your money where to go instead of wondering where it went. Ms. House of Cards is approaching that stage of becoming financially literate.

I’ve also been asked by Ms. House of Cards, about what she should be paying on her credit card. I know I might get some disagreement from my readers but I told her to only pay the minimum on all of her debts. The sale of her house will allow her to pay off all of her debts. This is happening in just over a month. Right now the important thing for Ms. House of Cards to do is to take care of the essentials, transportation, food and shelter, That is it, nothing else needs to be worried about and if she is going to be successful at this, she needs to save for that first and last month’s rent payment that is going to be coming along.

So the goal now for Ms. House of Cards is to continue to learn the YNAB package. The next goal is to survive till late March, when with the sale of the house coming through erasing all her debts and she can start with a fresh clean slate. Pay the minimums and worry more about the essentials.

Readers, do I have this advice wrong? How would you deal with mortgage payment and not enough money to make that payment? Am I steering Ms. House of Cards in the right direction? What advice would you give differently?

Buying a Home

Last Thursday I posted about the only time it was acceptable to use other people’s money. The topic started off on Wednesday. I was basically telling you to run away from financial authors that recommended that the only way to get rich was to use other people’s money.

Today I wish to discuss some of the concerns raised by commenters on my thursday blog post. I mentioned in Thursday’s post that “There is no sense in buying a home if you have to market it in 5 years and move.” It was a small sentence stuck in the middle of a paragraph and I didn’t think it would stand out. I still stand by the belief that selling a home and buying another every 5 years or so is not a great idea. I do accept that if you are looking for work you might have to re-locate. If you are looking for work, you are probably jobless and your first job when jobless is the job hunt. Once the job is secured you might have a long commute at first. I’d be willing to accept that at first. Then after taking care of the job I’d move closer to where the job is.

If I lost my job today in telecommunications, I’d begin the job hunt immediately. There are no IT jobs in the town I live in, so I’d be looking at 3 major centres. The first is a 1.5 hour drive to get to, the second is a 1 hour drive and the last is a 45 minute drive. I would not consider moving to get the job till I have finally secured the work. This could mean many months of long commutes, but that is the price of having to get a job in a different town.

While, yes, I am looking for a home that my wife and I can retire into, yet still raise a family, we would accept moving to be closer to work if I ever lost my job. However I wouldn’t move till I had secured that new job. What about moving up in the company I work for? I will not always be in the position I’m in at work. I hope to move up the ladder some day. This could also need a move for the job change. I would have to run the numbers if I required to move to see if I was making a profit at the change or a loss. Mostly likely I’d have to move to a higher cost of living area where housing prices are higher, this would mean taking on more debt and extending the length of the mortgage. That is two options I wish to avoid doing.

I also think it’s not a good idea to sell and move every 5 years or so, because most people get trapped into not reducing the term of their mortgage. If you get a $100,000 mortgage at 6% for 5 years of a 25 year term when you buy your first home. If you move in five years you will still have a mortgage worth $89,836.70. Believe it or not, of your $639.81 payment, $28,225.10 went to interest. Only $10,163.30 went to paying down the loan. Now if you accept a new 25 year mortgage when you buy the new place, and have the same mortgage debt carried forward, you are adding 5 years on to your term. If you want to move every five years for work, then great do so. However you need to remember to cut your amortization period by the number of months you have paid your current mortgage at.

If you can float the loan from one house to the second house you wish to buy and if you cut the amortization by the period of time that you were living in the old home, then your mortgage will stay the same. But if you are like most people and just accept the bank telling you to get a 25 year amortization period, then every time you move, you tack on extra time to the time it will take to become debt free.

The goal of buying a house should be to own the house outright eventually. I will agree that sometimes people have to move for work. If you are one of those people, then great, go for it. However, moving just for the sake of trying to upgrade every five years is not the best idea. Find a first home that you can grow old in. If you can see yourself old and grey in the home, then thats the home to get.

Once again here are Jason’s rules for using other people’s money:

1. The house is the place you are making a home for a long time. You have to live there.
2. You need to come up with 20% down payment
3. The mortgage has to have as short a term as possible, I like 15 years.
4. The payments should only eat up 25% of your net income.
5. Make sure there is room in the budget for other costs (utilities, home maintenance, home beautification)
6. If you have to move for a job. Find the job first *NEW*

I didn’t get any responses to my question I posed on Thursday, so I’ll ask a different one, Can you see yourself growing old and grey in the home you are living in?

Debt Free Forever – Part 1

Today is the first of a four-part series looking at Gail Vaz-Oxlade’s newest book Debt-Free forever. I will cover three chapters each friday of this month.

I’m first going to admit that 3 chapters reviewed in the span of 2 hours is going to be hard to do. I’m going to try to I hope to give the book a solid review.

Chapter 1: Analyze Your Spending

Gail starts off holding nothing back. The chapters starts off with “Now comes the hard work! Crap! Really? I have to do the math?” getting down to business is what this chapter is all about. Gail walks the reader through five steps to figure out what your spending is like for the past six months. She does this, I think, to really get people to admit to themselves what they are spending their money on. Without knowing where your money has gone how can you create a realistic budget and stick to it. I think the idea here is to admit to yourself if you spend a ton of money on shoes or gifts or eating out. You need to be honest with your spending. Most people don’t track what they have spent their money on, like I have, so this chapter would really be an exercise for them. For myself I have 22 months worth of budgeting and spending tracking in the form of the YNAB spreadsheets we use. I can just use that data to do the analyzing of my spending.

Here are Gail’s Steps:

1. Find out where your money is going
2. Plug in those numbers
3. Figure out your monthly average
4. Figure out your income
5. What’s the gap?

The idea here is to create a spreadsheet to put down all the categories you might have spent money in. You will then grab six months worth of bank statements and plug-in those numbers to the spreadsheet you’ve created. figuring out the monthly average is next. The last two steps is to figure out your average income over that period of time and then look at it and compare it to what your brought in and see if there is a gap between what you spent and what you brought in.

Got that enormous task all finished off? Great! it’s time to move on.

Chapter 2: Face up to your Debt

Now that you are all fired up on the math, Gail insists that it is now time to face up to the debt. Just like in the last chapter, you have to find all the debt you have and the interest rate charged and list them all. You will also need to put down what the minimum payment is on each debt. Here is where the math comes in, Gail then wants you to figure out what the interest costs are on that debt for one month. once you have all interest calculated out, you take the minimum monthly payment and subtract the interest. This number you arrive at is the real money you are paying off the debt every month. The rest of the monthly minimum payment is going towards debt.

I found this chapter easy to do because I have one debt left. If Gail had written this book back when I started this Journey I’d have a lot more work to do. I have had three student loans, two credit cards and one line of credit. Almost feels like I can sing about that to the tune of “Twelve days of Christmas” but thats the truth. Since all is paid off except the line of credit I’m not going to go back and calculate all the interest I’ve paid.

Once you get all the work done in this chapter Gail says to take a breath. She actually reminds the reader to breathe. Sometimes facing up to the large hole we’ve dug ourselves is enough to send us into shock. I remember estimating my debt at $20,000 then adding it up and getting a higher number. I shocked myself. So remember if you are adding up your debt and the repayment amounts, remember Gail’s advice and breathe.

Chapter 3: Decide What You Really Want

Gail just did a 90 degree turn mid book and I wasn’t expected it. I have never seen a financial author talk about spending time to sit down and make a list of your core values or a master list of the goals you wish to achieve. I’ve never seen a chapter of a personal finance book dedicated strictly to your goals in life and setting down some milestones to make it there. I found this activity extremely rewarding. I’d recommend buying this book strictly on the basis of this chapter alone. I think it’s often forgotten that our dreams and goals in life will affect our financial health. Competing goals and values will also hurt our limited resources. Writing down our goals and values help us to see what is really important to each of us. The only wrong answer in this process is if you are not truthful with yourself. Writing down the goals and values help to show which of these are in conflict with each other.

I’m not going to show the process with you as I’m already strongly recommending this book. What I will say is since I’m married my wife and I had an extra step, this was to combine our master lists. I found it strange that when we went to do that the first half of the list was the same. The order was slightly different and we had to discuss that, but for the most part our master list of goals had a list of the most important goals that were the same. The bottom half of each of our lists were more personalized. Those goals of mine, she has not much interest in and those goals of hers, while I can help her try to achieve them, I’ve either already accomplished them in my life, or they hold no interest for me. Knowing what my wife’s goals are, even if they are different from mine, will help each of us know where the other is going. Hopefully this will help us grow closer together.

Next week I review chapter 4 to 6.

Other People’s Money – Part 2

Yesterday I talked about other people’s money and how if a book or financial author is recommending you get as much credit as possible to run away from that advice. Using other people’s money will only result in lots of leveraging and that means increased risk.

So when is it okay to use other people’s money? Yesterday I said if you are buying real estate to rent or flip to avoid other people’s money at all cost. Today I’m going to say it’s ok to use other people’s money to buy real estate. I’m sure my readers are now completely confused.

The difference between the two is that the only time you can ever use other people’s money is to buy the “family home.” This is the home that you plan to live in for a long time. If you have young children, you should plan to stay in this house till they grow up and move out. If you don’t have children, plan on being in this house till either you do have children and need more space or you grow so old you need to move to a retire home. Yes, I rent. I don’t own a house. However, when I do go to look at houses this long-term view is going to be top of mind. There is no sense in buying a home if you have to market it in 5 years and move. I don’t think I’ve heard of a single person that actually likes to move. Mostly when someone tells me they have to move it’s with a whiny voice “Oh my god I have to move again.” To avoid moving plan your purchase with an eye out to live in this home till you die of seriously old age.

I also have a few other criteria I’ll be using when I buy a home. For one I want to put at least a 20% down payment. Notice the words “at least” in the last sentence? The more I can put down the less other people’s money I’ll need. If I can put down 100% of the cost even better. I’d like to avoid using other people’s money even for the purchase of this house. The problem is I’d have to wait till I was 40 years old before buying a house. If I don’t want to wait that long I’ll have to use other people’s money.

I also look at the mortgage I’d have to get, this is the other people’s money of course. I’d want mortgage payment to take up no more than 25% of my net income. Anymore then that and I’ll be seriously house poor. I also don’t want to keep their money tied up in my house for a long time. 15 years is the maximum term I’ll go for. Anymore and I’m just looking at more years of risk. The less time it takes to pay back this loan the better off my family will be. I’d like to own the home outright before being carted off to the old age home. I’m almost 30 years old now. If I got a traditional 25 year mortgage now, I’d be looking at paying off the mortgage when I was 55 years old. I want to retire at 55! If I got a 15 year mortgage I’ll be 45 when I have a paid off house and that will give me 10 years before my future children dump me in a retirement home and visit me once a month.

I also want to make sure I have money in my budget for the home. While I want to make sure I have room for 25% of my income to go towards debt repayment, I also want to make sure I have room to cover utilities and home repairs and insurance costs and all those other costs that come from being a home owner.

Here are Jason’s rules for Using Other people’s money:

1. The house is the place you are making a home for a long time. You have to live there.
2. You need to come up with 20% down payment
3. The mortgage has to have as short a term as possible, I like 15 years.
4. The payments should only eat up 25% of your net income.
5. Make sure there is room in the budget for other costs (utilities, home maintenance, home beautification)

What is your criteria for when you can use other people’s money? I sure hope it’s not “When there’s a great sale on shoes!”

Other People’s Money

I could also have titled this post “how to go bankrupt” or “How to lose everything.” Today I’m actually going to tell you how to get rich. I’m also going to tell you how to avoid getting ripped off. I’m sharing a big secret here and I hope the powers that be aren’t going to come after me.

The question is how do you get rich? The answer is twofold. First you spend less than you make and secondly you invest safely the extra. If you can get your expenses down to 80% of your income so that you can save 20% of it, then you are well on the road to riches. In 30 some odd years, please look me up and thank me for giving you this advice. It will take a long time.

There are many financial gurus out there. Most will tell you exactly what I just shared with you. Maybe they will use different percentages, but the basic theme is the same. Spend less than you earn and save the difference, the larger your savings, the quicker your investment portfolio will grow, the quicker you will become rich. Any book by any financial author worth their weight in salt will say this. Some will have programs to help get you out of debt like Dave Ramsey’s Total Money Makeover, Or Gail Vaz-Oxlade’s Debt-Free Forever.

Watch out. When looking for good financial advice in the personal finance section of the library or bookstore you will also see authors that advertise using other people’s money to flip real estate. Some times this can be called OPM. I will be the first to admit, that yes if done properly you can possibly make a killing using other people’s money. Most of these authors will tell you that this is low risk. I’m going to tell you that this is a high risk strategy. You are doing something called leveraging. By using other people’s money, you are taking on a huge amount of risk. If the deal doesn’t pan out you will end up either with less than you started or even bankrupt. If you get stuck holding on to a house for too long the mortgage payments will eat up the profit margins. Please don’t continue to read these books and avoid these seminars at all costs. Trust me, the road to riches is just a book away, but the book has to avoid using other people’s money to do it.

Recently Market Place airing on CBC painted a pretty bad light on the Rich Dad, Poor Dad empire. It is worth it to have a look. I’ve read Robert Kiyosaki’s book Rich Dad, Poor Dad, but I didn’t find it very useful. I’m one that believes very strongly in the get rich slowly scheme of spend less than you earn and save the difference. I don’t have the time or effort to buy real estate to flip it or create rental units. Sure if I had some serious start-up cash that might be one way of investing my money, but I absolutely disagree with the need to use other people’s money.

Avoid OPM advice. Stick to the slow and steady road and hopefully you will be able to retire in comfort. Real estate can be a very risky business and isn’t for everyone.