Home mortgage and home ownership
I came out strong enough against home mortgage in last weeks renting vs. mortgage article that I errantly gave some the impression I was opposed to home ownership; that could not be farther from the truth. What I am opposed to is the home mortgage. This is because a home mortgage will cost the average homeowner more than twice the asking price of their home over the life of the mortgage. Some feel this is no big deal – as long as the monthly payment is manageable – and that quality of life issues outweigh concerns of being in debt. My biggest concern is how much a home mortgage will steal from your future standard of living; which is true of most forms of debt although mortgages deserve special attention since they tend to be our largest debts.
Cash flow and earning potential
Most people think in terms of monthly cash flow because they pay their bills monthly – nothing wrong with that. However, something many people fail to consider is the limit to how much money they can make in their lifetime. This is especially true of young people – for whom retirement and cessation of work is a far off – who like to think they will make more money “some day” but may never actually see the growth they might first imagine.
For the most part what we choose to do for a living decides our wages and we can usually estimate those wage with some variation for job experience and cost of living. Our earnings scale will be similar with others who share our occupation so using current wages and demographic data we can estimate what our income will be each year from now until we retire.
Annual income example
Let’s use me as an example. I made about $50,000 this year. I am on a pay scale that starts at about $40,000 but with hard work can quickly jump to about $80,000 over the next 5 years. Then that is it. In good years I might receive a cost of living adjustment (1.7% this year) and if I want more, I either have to have the aptitude for competitive management positions, or try to work as much overtime as I can (which has limits.) If I wanted to make a heavy six figures, I probably should have done something else. 🙂 My little side hustle writing for DFA is nice, but it is not about to bump me over the $100,000 mark. Even investing, as wonderful a tool as it is for preserving savings against inflation is not going to skyrocket me to new financial heights.
Future wealth example
Using my salary and an example closer to the national average salary, I created a simple spreadsheet that shows projected salary with some cost of living adjustments after 30 years of work for me and average Joe. Before taxes, I stand to earn around $3.3 million, and Joe will earn about $1.4 million. That looks like a lot. After some rough adjustments for taxes however, (and who knows what those will do in the future) I am left with $2.4 million, and Joe still has about $1.1 million. More staggering, an average inflation rate of 3%/yr results in 100% inflation every 18 years (that’s a 50% loss.) That means after 36 years I would have just under $620,000 and Joe $298,000 of today’s dollars. These calculations include salary increases that outpace inflation, and have not yet factored in spending any money.
Consider income limitation with home mortgage
This analysis is far from exact. There are many variables, and it is difficult to precisely value currency, investments, and income across time. What I wanted to demonstrate is that none of us have unlimited supplies of money, and are therefore limited in the number of things we can buy in a lifetime.
Before entering into a home mortgage make sure you roughly consider how much money you stand to earn over the course of your life.
Because most of us cannot make significant changes to our income, we can better affect our future wealth and standard of living by limiting how much we buy and spend. The more informed we are about our earning potential, the more apt we are to use our money wisely. These considerations are especially important when making a large purchase such as a home. With all the other things we do to save money and get good deals, it does not make sense to turn around and spend double the price tag on a house by using a home mortgage. I mean, does it really make sense to rate chase for savings accounts only to end up spending twice the purchase price for our homes? No, it doesn’t. It makes mathematical sense to parlay our wants by saving for a few years… and paying cash – if at all possible.
Financial decisions always catch up with us
Whenever we overspend, at some point in time we will have to give something up to pay for it, even if that time doesn’t come for decades… it will come nonetheless. Consider this a plea to take greater care when making purchases. We work very hard to earn what we have so let’s make sure we spend as wisely as possible!