In response to my last post, Would You Ditch A Car For $1,000,000?, a reader made the comment: “As a grad student in an urban area, I don’t have a car (nor could I afford one) and I use public transit. … I wish there was a “big ticket” item like that that I could easily cut out of my life, but there just isn’t. Instead I try to cut back on small things and aggressively invest for cashflow.”
While savings do accumulate faster when you cut back on the biggest budget-buster categories (housing, transportation, insurance and taxes), the little things do add up. Take for instance:
My Million Dollar Lunch Recipe
Replace your $9.50 restaurant lunches (sandwich, fries, soft drink, sales tax, tip and mileage) with a nutritious $3.00 lunch brought from home.
Deposit your $143 monthly savings ($6.50 daily, 22 working days a month) into a Roth IRA retirement account.
Invest in equities (stocks, mutual funds) at a 10%* annual long-term average rate of return.
Let your account simmer for 41 years.
Recipe Yield = $1,000,837
Serve: During retirement with whipped cream and a cherry on top.
Ingredients: Total deposits = $70,356 Total interest earned = $930,481 Total taxes paid = $0 Total Saved= $1,000,837
Combine with a 20 minute walk to the park for lunch.
Yield: 1,277,232 calories— enough to keep off (or lose) 365 pounds!(Calculated for a person weighing 140 pounds walking 4mph for 20 minutes (1.33 miles) 5 days a week for 41 years.)
Pack a lunch for your spouse.
Yield: An additional $1,000,837
Add a group of supportive friends for lunch to work on the Baby Steps to Financial Freedom together. Yield: Financial freedom – with friends who will have the resources to enjoy it with you!
Isn’t it amazing how much money you can amass by investing small amounts over long periods of time?
Once you think in terms of investing instead of spending, look for ways to duplicate this process in other ways. Consider the following actions:
buy staples in bulk and invest your savings
invest your employee bonuses
invest unexpected financial gifts and inheritances
invest your tax refunds
buy a term life insurance policy instead of a whole life one and invest your monthly premium savings
buy a used car instead of new and invest the difference in price
borrow books, movies and music from your local public library and invest your savings
save and invest your pocket change
Imagine this: Starting with $0 and depositing $5,000 annually in a Roth IRA account over 41 years (at a 10%* annual rate of return compounded monthly), you will have $3,081,554.
Ingredients: Total deposits = $210,000 Total interest earned = $2,871,554 Total taxes paid = $0 Total Saved= $3,081,554
Choose affordable and cost-effective options and rather than feel deprived, feel excited that you get to invest the difference in yourself and your future.
~ Bon Appetit!
*The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com).
Total savings are calculated in actual dollars (not inflation-adjusted). A common measure of inflation in the U.S. is the Consumer Price Index (CPI), which has a long-term average of 3.1% annually, from 1925 through 2008.
The real estate and mortgage industries are trying hard to convince us that NOW is a good time to buy a home. They use low mortgage interest rates and the soon to expire First-time Homebuyer Tax Credit program (which I qualify for since I’ve purposely been a renter for the last 6 years) as their rationale.
Don’t expect unbiased advice from salespeople! What most won’t fess up to is that if I (or you) buy a home now, we’ll likely be throwing our precious money away because home prices are still under great pressure. I’ll wait until the knife stops falling, thank you very much.
We are done with subprime resets but… pay attention… there is a second wave of mortgage resets to endure. What is a mortgage reset? It’s when the homeowner, who bought a house with a low “teaser rate” and planned to refinance when the house price went up, gets a new payment that is far higher (not always, but usually). Many homeowners can’t afford these resets, especially with unemployment and underemployment rates at these levels. Lenders are cautious and tightening their underwriting guidelines so refinancing may not even be possible for many borrowers.
The first wave of resets was subprime. The subprime wave is over. Whew! That hurt! But Alt-A and Option ARM resets aren’t over and combined, they represent a much larger category of mortgages than subprime. Most of these mortgages are alreadyunderwater: the home has negative equity; the home is worth less than the mortgage owed. The combination of resets plus the underwater status will likely add fuel to defaults and foreclosures, putting yet more downward pressure on home prices.
Some argue that the problem with adjustable rate mortgages resetting to higher payments isn’t as important now because many of those loans defaulted early. Even so, we still face the major problem of shadow inventory: distressed mortgages facing foreclosure and bank-repossessed properties that have not yet reached the market. At the current rate of sales, it could take almost 9 YEARS to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years (according to LPS Applied Analytics).
Another knife that has the potential of slashing home prices further is the increasing prevalence of walkaways (strategic defaults): the decision by the borrower to stop making payments on a mortgage despite having the financial ability to make the payments. Walkaways happen after a substantial drop in the house’s price. The borrower is underwater so she decides to free herself from the burden of mortgage debt. Once free of the mortgage, she is free to use her income for other expenditures. The borrower, after deciding to not make payments any more, can live free of the costs of mortgage payments until the lender forecloses — which may take the lender from several months to years!
A study in September 2009 from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. While I haven’t looked for a more recent statistic, I can only guess that this number will climb as more homeowners get mad at Wall Street and as walkaways become less morally and ethically charged.
I’ve been told by countless Realtors that I should buy a home NOW because having been a renter for the past 6 years, I qualify for the First-Time Homebuyer’s Tax Credit. But what do you think will happen to house prices once the tax credit incentive expires? I’d say houses will not sell as well as they have lately (with the credit artificially propping the market up) which will increase the supply of homes on the market… and push down on prices.
I’ve also been told by Realtors that I should buy a home NOW because mortgage interest rates are so low. But I don’t worry about rates because I have the cash to purchase our next home outright if the interest rates move up. Even if I did need a loan it wouldn’t change my mind because as Patrick Killelea astutely points out,
It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.
Your property taxes will be lower with a low purchase price.
A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life.
As interest rates fall from high to low, house prices increase.
Paying a high price now may trap you “under water”, meaning you’ll have a mortgage larger than the value of the house. Then you will not be able to refinance because there you’ll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.
Additionally, if interest rates rise, the number of borrowers who can qualify for a higher mortgage payment will drop. Less qualified buyers in the market means… you got it… more downward pressure on home prices.
In summary, I see no rational or compelling reason to buy a home right now. 2012 or after? We’ll see!
Note: This post was featured in the most creative Carnival of Personal Finance I’ve ever read — check it out! The Origin of the Piggy Bank by Well-Heeled Blog
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