This week, I’d like to encourage a little common sense when it comes to your finances and the purchase of a home.
First on the list is debt. Nearly all of us carry it like an albatross around our necks. There can be a healthy debt load, but there can also be the dangerous kind. We’re not going to delve into all the potential woes if your debt becomes too much of a monster.
The goal here is to trim it down to a more manageable and tolerable level. My parents just purchased a new (to me) vehicle. It turns out they have great credit (owning a home and not missing payments will help with that). They don’t carry a very large debt load (literally none) and pay off any bills they have on time and in-full.
On average, Americans carry almost $60,000 in household debt and about $11,000 in credit-card debt. That is a significant weight to bear even in a strong economy. With unemployment rates as high as they are, those numbers become even more stressful.
Long gone are the days when people only purchased what they had the cash for. It is important to note that not all debt is a negative thing. The average student today graduates with $25,000 in student loans. You’ll have a hard time convincing me that that is a bad debt (Unless that student majored in causal relations in alcohol consumption!). The lesson here is to be crystal clear of where your debt load stands and your plan for shrinking it.
We often sing the praises of home ownership and you’ll be hard pressed to find someone that doesn’t believe it is a great long-term investment. Now that the lending companies have started using more intelligent lending practices and have raised the bar for buyers, it is more important than ever to have a healthy credit score and a decent chunk of money for a down payment. In order to start the process towards that end, you will need to evaluate your “in-come” and “out-go” and make adjustments as necessary.
You do not need a degree in accounting (more student loans) to get a solid handle on your budget. On a simple piece of paper, make note of your monthly bills including the checks you write for heat and lights as well as the debit card swipes for groceries, gas and candy bars.
If you have never done this exercise, chances are you’ll be slightly amazed. The first time I put my expenses down on paper, I couldn’t believe how much money I was wasting in small, seemingly insignificant chunks. A simple cup of coffee on the way to work can easily add up to $50 every month and $600 a year! We all know $600 can buy a whole lot of coffee beans and filters for the coffee machine on our kitchen counter.
“One of the more common ways to start working on your debt is to focus on the high interest loans first,” Badger Realty agent Eileen Difeo said. “We should all know by now that paying the minimum amount is never going to get us anywhere.”
If you target the high interest loan first, pay the minimum on the others and put any additional money towards the targeted high interest bill. This is a slow and steady process, but you will be pleasantly surprised at the results when the balance starts to shrink and you’re soon able to eliminate that expense. Imagine how quickly you will pay down your next targeted loan when you apply the previous payment to that bill.
If you can’t increase the payment right now you must at least make your minimum payments on time. Never, ever pay late. I learned this lesson when I was still in high school and it has stuck with me ever since. If you absolutely cannot make this month’s payment, and it happens to all of us, contact the lender and make sure they are aware.
Many lenders will work with you and won’t report the missed payment to the credit bureaus. As someone who has owned rental property in the past, I promise you the knowledge that a payment is immanent versus wondering if my tenant has just decided to stop paying, makes all the difference in the world. This impacts my budget and my perception of said tenant.
Remember that your credit score is based on your ability to pay and your history of payments as well as the amount of available credit you have. If you have $30,000 in available credit, but you are using $25,000 of that, you are using over 80 percent of your limit. This is a scary ratio for lenders and it will start to negatively impact your score.
The lesson here is once you pay off a credit card, assuming there are no annual fees, do not close that account. If the card you just paid off was at $10,000, your available credit is now up to 50 percent. Still too high for most lenders, but it looks far better than the 20 percent you had before.
The idea of adjusting your lifestyle along with your spending habits is not very attractive to many people. At this point, it comes down to an alignment of your priorities.
I love eating out for dinner. It is nice to meet with friends in a social place, have a decent meal (prepared and cleaned up by someone else). As I was going through the process of evaluating my budget, I realized the amount of money I was spending on these meals. This was clearly an unnecessary expense and one that I could easily remedy by a weekly trip to the grocery store.
The sacrifice was not fun. I would obviously prefer to enjoy the full night out with friends. But a simple adjustment of eating at home and then joining up with my friends saved me the money for the meal but retained the real goal of a fun night out.
We are living in a society that rewards immediate gratification and thinking long-term is no longer the norm. If you can adjust your mindset and maintain your goal of living in your very own home (or just living debt free), that long-term reward will be an even sweeter treat when you finally attain it.