About 6 months ago, I turned 29. It’s not 30, but 30 is next in the queue. The idea of 30 terrified me, that I’d be leaving “young” and entering the middle. I took an inventory of what I’d accomplished so far and how that compared with what I wanted to accomplish in the middle.
Kids. I’ve always wanted kids. I am way too silly to not have kids. If I had a kid today, things would work out, but it would be messy. I’m unmarried and I live in a 1 bedroom 784 sq. foot condo. I’ve always imagined raising kids in a house with a wife.
But sadly I live in California, where a decent house, maybe $1500 sq. ft., runs $500k. And while the condo had been a very smart purchase in 2009, I only had $225k of equity. My balance sheet looked roughly like this:
Assets ($440k total):
– $340k condo
-$100k yo-yo collection (hard to sell)
– 2008 Honda Civic Si w/ 60k miles
Debt ($130k total):
-$114k condo mortgage
– $15k credit card debt
Net Worth: $310k
But if I don’t want to sell my beloved yo-yos…
And all of that is from the appreciation in value of the condo. I bought it for $150k, and now it’s it’s worth $340k.
So if I wanted to buy a $500k house, I’d have to take out a $300k loan. My take-home pay is $3668 twice a month.
10 year: $3400/month, $50k interest
15 year: $2800/month, $113k interest
30 year: $2100/month, $280k interest
So if I take out a mortgage, I’m either going to pay half my income in a loan or take a 30 year and basically be renting from the bank by paying out the nose in interest.
Well crap. I don’t like any of these options. I don’t want to be locked into taking high salary jobs until I’m 40. And I don’t want to give some asshole bank a ton of my hard earned money. Bottom line – if I want a $500k house, I need to purchase with cash.
In 2009 when, I first purchased the condo, I took a 30 year mortgage for $122k. here’s the amortization table for the first 5 years:
Year, Interest, Principal, Balance
So I’d paid off 8% ($10k) of my mortgage in the first 5 years… and i’d paid the bank $37k for the privilege.
In 5 years:
$37k for the bankers. $10k for me.
I was getting screwed, and worse, I signed up for it myself.
Since 2009, I spent almost all my extra money trying to make myself happy. Mostly books, yo-yos, and electronics. I took trips to NYC. I bought $100 bottles of tequila. Relative to my income, my housing costs were low. As the economy recovered, my housing costs were much lower than people who rented, plus I made $200k in added home value. But still:
In 5 years:
$37k for the bankers. $10k for me.
I never calculated that number until just now. I never wanted to know it. I knew I should refinance, but since I had $15k in credit card debt, I didn’t know if I would qualify, and I didn’t have $3000 for closing costs, so I never checked into it. I just lived in denial and tried to make myself happy chasing the next purchase – a camera, a knife, a gun, a video game, an ocarina. Toys.
It wasn’t until 29 that I was forced to face this reality. It really bothered me emotionally, and I felt a great pressure to pay off all of the credit card debt. In December, when I visited my financial advisor (who I share with my mom), I had to ask my mom to leave the room so that I could tell him about the debt, and tell him I needed to sell all of my non-IRA money (about $8k) to pay off part of the debt. I then told him I needed to stop contributions until I paid off the rest. He agreed. It was very embarrassing to me.
I had the remaining debt paid off by March 2014. I wasn’t as intense as I could have been (I spent some money on Christmas), but I’d say 80% of my discretionary income went to paying off the debt.
Once the debt was paid off, I knew I needed to refinance (if only to lower my interest rate, which was 5.875% on the 30 year – I didn’t have enough credit history at the time to qualify for something better). My credit score was now 816. I called my B of A loan officer (I hate B of A really hard, but I figured the refinance would go faster b/c they already had my paperwork, and they would have decent interest rates b/c they do so many) and asked what the current 15 year rates were. He said 3.5%. Sounded pretty good to me. Then he mentioned that they had a 10 year for 3.125%. Even better! I thought about it for a few hours and then opted for the 10 year. I sent in the required paperwork that same day. Here’s the amortization schedule:
In 5 years:
$13k for the bankers. $49k for me.
A much better deal! And because I had bought a property very conservatively to begin with, the new, increased payment was still below 25% of my take-home pay (within Dave Ramsey’s guidelines for a *15* year mortgage). $3k in closing costs were folded in with the loan, so I now owed $117k, but the refinance would pay for itself in 18 months.
Then I learned about Dave Ramsey from a guy at work. I wrote out a budget in Google Docs. I figured out I could save/invest $4k-$5k a month, depending on variable expenses (i.e. if I had to visit family on the east coast, that would definitely be a $4k month, but if I stayed at home every weekend and didn’t purchase anything extra, I could save $5k).
Dave Ramsey excited and inspired me. Saving $4k-$5k a month, I could pay off the condo in less than 2 years! Once I paid it off, I’d have $5k-$6k I could save or invest. I don’t have a long attention span, so I really need goals on a short time horizon. If I prepay $4k a month starting in July 2014:
In 2 years:
$7k for the bankers. $114k for me.
Hell yeah! Screw the bankers.
It’s May 17, 2014. I’ve paid off all my debt. I had $2k in a savings account and $10k in my non-IRA account. My IRA is fully funded for 2014. I am pumped. At 31, I will own a $340k condo outright, and I can completely end my connection to evil, disgusting B of A. With no condo payment, it’ll take another 3 years to save enough money, and then at 34 I can purchase a $500k house with cash. Or I can just let the money grow in the bank and stay in the condo for a few more years.
I may have imagined starting a family with a house, but kids are blobs for the first few years anyway. There’s no rush.
On May 7, 2014, I cut up my last credit card and began the nuking of my FICO score. Mostly as a way to force myself to follow through with this plan and pay cash, but in part because I know that I’ve had a bad history of self-control when it comes to credit cards. Could I control myself now? Probably. I think so. But I also think the companies issuing credit cards are evil, and I simply don’t want to do business with them. Looking at the statistics and listening to callers on Dave Ramsey’s show – credit card companies aren’t providing Americans with a valuable service. They’re just taking advantage of peoples’ impulses. People in American have been trained to equate consumption with happiness. I’m no different. I love commercials from the 1990s. I love products. I have spent down to my last dollar for years chasing happiness. It didn’t work. I’m opting out.
Beyond Dave Ramsey’s books (primarly “The Total Money Makeover”), I’ve also been reading “The Millionaire Nextdoor.” The primary take-away from that book so far is that purchases should be considered not as a percentage of your income, but as a percentage of your net worth. Personally, I consider net worth as spendable cash in the bank, because I like picking conservative criteria. If you have a $1M house and 0 cash in the bank, you probably shouldn’t be purchasing anything but the essentials.
$80k car if you make $140k a year – possible but stupid.
$80k car if you pay cash and you have $1M in the bank – fun toy.
It provides a clear criteria for knowing what you’re allowed to buy at what point in time. You’re not allowed to buy the fancy car until you have $1M in the bank. If you prefer a $40k audio system to a $40k car at $1M, then at $250k you can probably afford a $10k audio system.
What should your net worth be? The book says it should be:
Net worth = age / 10 * yearly income
So for me that’s $406k. I’m pretty far from that right now, but if I save and invest like I am now for the next 10 years, I’ll have $1M in cash at age 41, when my net worth should be (conservatively) $615k. In other words, I can catch up, and I can do it in less than 10 years. And once I do, I’ll know exactly what I need to do in order to retire comfortably, live without fear of financial catastrophy, and buy some fancy toys along the way.
But I’m not there yet. I have to push myself hard, at least for the next 5 years. That’s why I want to make it a club. I want some friends to do it with me. 5 years to pay off debt, budget, invest in the future and change our lives.