Getting Your Own House in Order

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I see so many people who are just itching to be real estate investors. However, a common theme seems to be “I want to buy and rehab a house but I don’t have any money.” Not only are they lacking funds for investment, they have little or no income and are hopelessly in debt. Then they ask about getting funding or using creative financing techniques. This is a disaster in the making.

It seems that our society has been conditioned to expect instant gratification. We are bombarded by ads for “easy financing”, “12 months same as cash”, “no payments until 2009”, and on and on it goes. The big game is coming, we can’t possibly watch it without that big screen TV. We know we shouldn’t fall for the sales pitch, but we do. We convince ourselves that the 12 months of 0% financing is too good a deal to pass up. Besides, we’ll be able to pay it off before the interest kicks in. Of course, that doesn’t happen and all of that “free interest” is added back in. Now the burden of debt is even greater.

Financial Planning Background

I spent over 15 years as a Certified Financial Planner before moving into real estate investing. I was constantly seeing people who were approaching 50 years of age with kids in college. They were concerned about retirement yet had been unable to save for it. Between the mortgage, two car loans, kids in school and a mountain of credit card debt they were in a hopeless situation. Unfortunately this seems to be the rule rather than the exception.

Some startling facts:

  • At age 65, 97% of Americans do not have enough discretionary funds to write a $600 check.
  • In 2003 more people filed for bankruptcy than graduated from college.
  • In 2003 household debt was $2.3 trillion!
  • On average, 42% of household income goes to paying interest with interest charges exceeding $600 billion.
  • Major credit card companies spend more than $500 billion each year in advertising.
  • 83% of college students have a credit card and most graduate with thousands in credit card debt
  • Sears processes 700,000 credit card applications every month!

The Solution

The formula for creating wealth is so simple: Spend less than you make! Instead people are looking to get rich quick or find the “secret” to creating wealth. Our society is so focused on keeping up with the Joneses that they fail to realize that the Joneses are broke.

Most people have no idea how much they spend. They do not create a budget or set financial goals. Invariably they are unable to understand why they are always broke. Part of the problem is the use of credit and debit cards instead of cash. Studies have shown that people will spend more when using a credit or debit card instead of paying with cash. Try leaving the cards at home for a week and only use cash. You will feel a difference.

Snowball Your Debt

In his book, The Total Money Makeover, Dave Ramsey advocates creating a debt snowball. You do this by listing your debt from the highest to the lowest amount owed. Then you make the minimum payments on all but the smallest one. You use every available dollar to attack that smallest debt. When that is done you take the money you were paying on the smallest one and add it to the minimum payment on the next smallest. You keep repeating the process until all of the debt has been paid. This creates a snowball effect, which will allow you to pay off everything you owe. For this to work you must not acquire any new debt.

Financial logic would seem to say that you should pay the debt with the highest interest rate first. However, for psychological reasons, you should pay the smallest debt first regardless of the interest rate. The benefit that you get from achieving a financial victory will far outweigh the difference in interest.

Financial Freedom

Most people desire financial freedom. However they do not understand how to achieve it or are unwilling to pay the price to do so. Imagine how different your life would be today if you had worked years ago to eliminate all of your debt. What could you do if you had no bills other than basic living expenses?

“It’s clearly a budget. It’s got a lot of numbers in it.” – George W. Bush

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  1. Connie Brzowski on

    Financial bondage via consumer debt is slavery and nobody realizes they’re being lured into the cell with big screen TV’s and shiny new cars.

    The statistics you quote are just terrifying…

    Another timely and relevant article, Rich– couldn’t have said it better 🙂 Great job~!

  2. Ouch. I was raised with the mindset that if you can’t afford something now, then save for it in the future, except of course cars, an education, and a house, but these things are understandable.

    I think a big no-no for many people is that they mistake prioritizing for compromising, as in compromising the purchase of a new car for saving money. In reality, however, you’re sitting down and analyzing what is more important to you in the long run: a car that depreciates over time, or a piece of property that appreciates over time. You’re considering what is more profitable in the long run, and what will allow you to finance a second car later in the future. Prioritizing allows you to have your cake and eat it too. Compromising doesn’t.

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