Thursday, January 14, 2016

Your Three Largest Expenses

Now that your credit card debt is all paid off, it's time to talk about the largest three expenses you have. They are housing, transportation, and food. These expenses can account for 35% or more of the average homeowners or renters income. Today I will talk about housing.

Housing is most likely your largest expense. Owning a home and having a mortgage or even renting an apartment can cost $1000. a month or more. Add your property taxes and insurance into the equation of owning a home and a significant payment goes to the bank every month. Rents may be a little cheaper but they don't give you the tax advantage that you get with a mortgage on your Federal income taxes. However renters are still paying out a significant amount of their income every month.

If you own a home, the best thing you can do to become debt free before you become financially independent is to pay off your mortgage. Not having to make this payment in early retirement is a huge blessing. What we did back in the early 1980's to become mortgage free was to make our payment with interest every month and then put as much of our income as we could after expenses every month as an extra payment on our principal. We paid our 30 year mortgage off in about 8 years. At the time we only had one income. We were dedicated to paying it off as quickly as possible. We still put money away for retirement every month while doing it but we considered that a fixed expense before we paid the extra principal payments. So if you really want to get rid of that mortgage payment, it can be done. We have owned two homes since then that we have paid cash for. No mortgage to worry about. Property taxes and insurance are enough to have to worry about.

I know that some say paying off your mortgage is not a good idea because mortgage interest rates are low. They say you can make more money investing that money in the stock market. That all depends on what stocks or mutual funds you own and how volatile the market is. I believe it is always beneficial to pay off debt. You will sleep better at night knowing that everything is paid in full including your home.

Over the years, I have heard many people use the excuse that they are investing the extra money in the stock market instead and not paying off their mortgage early. Some I am sure are disciplined enough to do this. But most aren't and just use it for an excuse. So when they retire, they still have a mortgage and no money saved. They rely on Social Security which is not solvent and may be gone in just a few years. Ask any senior who has been retired for any period of time how difficult it is to live on Social Security. They will tell you that inflation has eaten it away and it is very difficult to make ends meet. The Feds only give you a small raise every year tied to what they consider inflation. No raise for 2016 and some prior years because they say there was no inflation. Tell that to any senior who purchased food or had to buy drugs, or pay healthcare deductibles in 2015.

The best part of paying our home off early was all of the interest that we didn't have to pay the bank. It was in the thousands of dollars. You have to love that. 

My advice to you when you are looking for a home is to not buy the mega mansion. Look for a reasonably sized home that will work for your family. Keep your mortgage payment as low as possible. You will find it more affordable that way and easier to pay off before you retire.

When you are considering buying, check out what your school and property taxes will be. We lived in a good school district while the kids were growing up but it didn't have the highest school taxes in the area. When we purchased this home, we checked out the taxes first. Then we looked at other areas within a 25 mile radius. We found that the property and school taxes just 12 miles down the road were almost double for the same size house that we were buying. If we hadn't compared, we might have purchased in the higher area. 

You should also look for the best price on homeowners insurance that you can get for replacement coverage. Just call a few companies and compare or do it online. 

If I was going to rent, I would look for a reasonably priced apartment in a good neighborhood. The smaller the better. Especially when you are first working and trying to save for a home. When you are working all day, how much space do you need?

When one of my sons was renting an apartment while he was in college, he took on 3 roommates so that they each paid a portion of the rent. He was able to save money from his part time job to pay the rent, make his car payment, pay for gasoline and oil for the car, and eat. If you are single think about taking on a roommate or two. 

There are always ways to save on your largest expense, you just have to think about it and then take action. 

Tommorow I will talk about your second largest expense which is transportation.  

So did any of you win the Powerball? I saw that there were three winners. I was not one of them. I only had three numbers and one of them was not the Powerball. So I will not be buying lottery tickets for a long, long time.

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