Financial Checklist Plan Part 5:
Paying Off Cars and Homes
Who doesn't like a shiny new car and a big garage in a big home to park it in? This is the American dream, isn't it?
The problem for many is that acquiring this dream and then maintaining it can be two very different things. As the saying goes, "Everyone loves to buy, but no one loves to pay." For most of us, cars and trucks are a necessary part of life and we all need a place to live, but the joy found in both our automobiles and our homes can be lost quickly if we aren't financially wise with how we buy, pay for and own these big purchases. |
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Cars / Trucks / SUVs and more: Except perhaps in large cities, the automobile has become a staple of modern American life. We need them and we love them, but rarely do we own them outright. Almost 90 percent of all vehicle purchases involve some sort of financing or leasing - 90 percent! This means monthly payments and often interest charges. All too often we find ourselves owning vehicles that we're paying interest on while they slowly go down in value.
Here's a novel idea: Pay off your car and wait to buy your next vehicle with cash.
Sounds easier read that done, right? Well, not entirely so. A little budgeting discipline can go a long way to quickly paying off a vehicle. As you work the financial checklist, once you have paid off all personal debt (except for cars and your home) and have then begun saving for retirement and college, now you're ready to tackle paying off your car and owning the thing outright. Remember, until you pay off your vehicle in fulll, it is not owned by you, but instead by your lender. If you budget carefully, by the time you reach step 5 you are ready to apply extra payments from eliminated personal debt toward your vehicle. Every pre-payment you make reduces your interest cost and gets you that much more quickly toward paying off the balance due in full sooner.
Along with paying off your vehicles as quickly as possible, you may want to also re-evaluate if your current vehicle is either too expensive to own or too valuable in cost compared to the power of paying down other debt, like your home. Perhaps ask yourself if you still need a that is worth as much as your car is worth. If the answer is no, consider selling your vehicle and buying something less expensive. More expensive vehicles don't always equal more reliable and less expensive vehicles don't always equal issues or higher repair costs. Consider that driving a less expensive car could save you hundreds or thousands toward, say, your home if you took the difference and paid down your home more quickly.
Tip: Always buy your vehicles used. New vehicles, on average, lose almost 50% of more of their value in the first 4 years of their ownership. Why not let some other new car buyer take that financial hit and buy their nicely cared for 4-year old car, for example, for pennies on the dollar. The depreciation curve slows down rapidly after 4 years and this can save you lots of money on a commonly depreciating asset.
Here's a novel idea: Pay off your car and wait to buy your next vehicle with cash.
Sounds easier read that done, right? Well, not entirely so. A little budgeting discipline can go a long way to quickly paying off a vehicle. As you work the financial checklist, once you have paid off all personal debt (except for cars and your home) and have then begun saving for retirement and college, now you're ready to tackle paying off your car and owning the thing outright. Remember, until you pay off your vehicle in fulll, it is not owned by you, but instead by your lender. If you budget carefully, by the time you reach step 5 you are ready to apply extra payments from eliminated personal debt toward your vehicle. Every pre-payment you make reduces your interest cost and gets you that much more quickly toward paying off the balance due in full sooner.
Along with paying off your vehicles as quickly as possible, you may want to also re-evaluate if your current vehicle is either too expensive to own or too valuable in cost compared to the power of paying down other debt, like your home. Perhaps ask yourself if you still need a that is worth as much as your car is worth. If the answer is no, consider selling your vehicle and buying something less expensive. More expensive vehicles don't always equal more reliable and less expensive vehicles don't always equal issues or higher repair costs. Consider that driving a less expensive car could save you hundreds or thousands toward, say, your home if you took the difference and paid down your home more quickly.
Tip: Always buy your vehicles used. New vehicles, on average, lose almost 50% of more of their value in the first 4 years of their ownership. Why not let some other new car buyer take that financial hit and buy their nicely cared for 4-year old car, for example, for pennies on the dollar. The depreciation curve slows down rapidly after 4 years and this can save you lots of money on a commonly depreciating asset.
Homes: As the last several years have shown, home ownership can be a blessing and home ownership can be a curse. Which way it is for you depends on how savvy a home buyer or homeowner you are or are willing to become.
A paid for house is a beautiful thing, but far too few "homeowners" are even close to owning their homes. Most of us are content to take out long term mortgages (30 or even more years) and pay tons in interest while very little of our monthly payment goes toward the principal. When you reach step 5, now is the time to work tirelessly toward paying off your home. Along with your car and retirement and college, make this a top priority. Save in your budget in such a way as to enable yourself to make extra mortgage payments toward principal. Consider also if refinancing your home mortgage is a worthwhile endeavor. The common thinking with refinancing is that if you can save at least 1% on your rate and you plan on living in the home for more than 3 more years, refinancing may make sense to pursue.
Along with paying off your home, consider also being a smart home buyer. Remember the 3 rules of real estate:
Location, Location, Location. Location is huge in selecting a home to buy and buying less home that you are approved to afford will save you bundles down the road. When you reach step 5, pay down your mortgage as quickly as is possible. Make a goal to own your home far more rapidly than your current mortgage repayment schedule.
Here's some great tips that will serve you well as you wade through the waters of real estate:
1. Buy less home than you can afford.
2. Get a 15 or 20 year mortgage, or less, or better yet pay cash for your home. This will force you to be disciplined toward owning your home outright.
3, Put 20% down on your home or pay it off to 20% ownership as quickly as possible. This will help you to avoid or eliminate mortgage insurance and in the long run lend nicely toward your growing personal wealth. If you can't put 20% down, and as painful as this may be to read, perhaps you are not a candidate to be a homeowner just yet. Rent until you are in a solid financial place and then consider buying a home.
4. Your Personal Reserve fund will be critical to have as a homeowner. Surprises can and will come along at any time with costs ranging all across the map. If you have a strong Personal Reserve fund then this fund will act nicely as your backup home insurance toward any needed repairs or needs at the moment they are necessary.
Finally, buy your homes with resale always in mind. Odds are that one day you will need to sell your home, and when that day comes you want to get a solid return on your investment and make a quick sale possible. Along with selecting a great location, find a home with a solid floor plan that future buyers will also love. It's also not a bad idea to live in the smaller, less expensive home in the neighborhood. Many future buyers will be happy to live among bigger homes and wealthier people than to buy the big home in a small home neighborhood. This is a mistake that many make, but be wise in buying and owning your home and you'll be well on your way toward financial security in life far sooner that most of the world around you.
A paid for house is a beautiful thing, but far too few "homeowners" are even close to owning their homes. Most of us are content to take out long term mortgages (30 or even more years) and pay tons in interest while very little of our monthly payment goes toward the principal. When you reach step 5, now is the time to work tirelessly toward paying off your home. Along with your car and retirement and college, make this a top priority. Save in your budget in such a way as to enable yourself to make extra mortgage payments toward principal. Consider also if refinancing your home mortgage is a worthwhile endeavor. The common thinking with refinancing is that if you can save at least 1% on your rate and you plan on living in the home for more than 3 more years, refinancing may make sense to pursue.
Along with paying off your home, consider also being a smart home buyer. Remember the 3 rules of real estate:
Location, Location, Location. Location is huge in selecting a home to buy and buying less home that you are approved to afford will save you bundles down the road. When you reach step 5, pay down your mortgage as quickly as is possible. Make a goal to own your home far more rapidly than your current mortgage repayment schedule.
Here's some great tips that will serve you well as you wade through the waters of real estate:
1. Buy less home than you can afford.
2. Get a 15 or 20 year mortgage, or less, or better yet pay cash for your home. This will force you to be disciplined toward owning your home outright.
3, Put 20% down on your home or pay it off to 20% ownership as quickly as possible. This will help you to avoid or eliminate mortgage insurance and in the long run lend nicely toward your growing personal wealth. If you can't put 20% down, and as painful as this may be to read, perhaps you are not a candidate to be a homeowner just yet. Rent until you are in a solid financial place and then consider buying a home.
4. Your Personal Reserve fund will be critical to have as a homeowner. Surprises can and will come along at any time with costs ranging all across the map. If you have a strong Personal Reserve fund then this fund will act nicely as your backup home insurance toward any needed repairs or needs at the moment they are necessary.
Finally, buy your homes with resale always in mind. Odds are that one day you will need to sell your home, and when that day comes you want to get a solid return on your investment and make a quick sale possible. Along with selecting a great location, find a home with a solid floor plan that future buyers will also love. It's also not a bad idea to live in the smaller, less expensive home in the neighborhood. Many future buyers will be happy to live among bigger homes and wealthier people than to buy the big home in a small home neighborhood. This is a mistake that many make, but be wise in buying and owning your home and you'll be well on your way toward financial security in life far sooner that most of the world around you.