Category Archives: Home ownership

Misdefining success can crush you

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“Here’s the deal, Pete. I’m a successful guy. I make over $200k per year, I drive a BMW, and live in a $500k house. But we can’t get ahead financially. It’s a constant struggle. We are actually racking up debt. What are we doing wrong?”

I get some form of this question at least twice per week. It comes in different forms, but I usually hear “why don’t my high income and superior intelligence result in financial stability?”  It’s actually a pretty simple answer: high income and superior intelligence have nothing to do with financial stability. They can, however, provide you things that you can mistake for financial success. And this is where the party begins. And by ‘party’, I mean ‘misery’.

I’m about to ruin a Dan Brown book for you. But if you’ve read one, then you’ve read them all. In The DaVinci Code the characters are looking for the Holy Grail (the cup used at The Last Supper). Loooooooong story short, the Holiest of Holies…wait…I think that’s different. Okay, the long-sought after cup isn’t actually a cup. The “big secret is different” than what the characters were expecting. (This isn’t where I reveal that I am actually a descendent of Jesus Christ. Although I did grow a beard this week). My point? You can run all over the world trying to find what you are looking for, but setting your sights on the wrong prize will lead to failure every time. The same can be said for your financial life.

Take a moment and ask yourself “what does financial success look like?” Does it mean that you have the perfect job? Does it mean that you make $300k per year? Let’s define success for you, and then make sure that it makes sense. Let’s make sure that your definition won’t actually lead you to a financial catastrophe. I think through my own journey of “success” discovery, and I shake my head in awe. I almost screwed up badly.

Over the last 12 years, I have defined my own idea of personal success in several different ways. I’m going to share these with you. I’m embarrassed by some of them, but I’m pleased with my current definition of success.

The earliest and saddest success goal that I had was to “make more money than my dad did.” I shuttered having just typed those words for the first time. I’ve done several a-hole things over my lifetime, but trivializing my father’s life’s work by setting my income against his, is as bad as it gets. I truly feel shame for this. My dad reads my blog. Pops, I’m sorry. Dick move by me. Thank God my brain has continued to develop.

Next was a $1000 watch. I wanted to buy a TAG Heuer watch. Every successful person that I knew had either a Rolex or a TAG Heuer. I’m not much of a Rolex guy, so the TAG was the watch for me. I set a sales goal in the first year of my career, hit the goal, took $1100 cash into a jewelry store, and bought the watch. I was so proud. I was a success. What a dick. I’m so embarrassed by this time in my life that I can’t even bring myself to wear this watch anymore.

My next definition of success was to “be able to afford whatever I wanted”. Okay, that’s not terrible, but it’s not great. This definition had me “chasing dollars” to accomplish my goal. I have found that to be a fruitless journey. Being “able to afford whatever I want” doesn’t really work because my idea of “afford” is pretty subjective. Most people get into financial trouble because they buy things that they subjectively think that they can afford, when in fact they objectively cannot.

My current definition of success has me feeling very peaceful. To me, success is not striving to have more, but constantly needing less to feel satisfied with my life. I don’t want to strive to have more. I want to strive to be comfortable with less. Since I have taken on this definition, my income and wealth have grown substantially. For example, several people have complimented me on my wedding band. It cost me $12. I tell them this. Mrs. Planner gave it to me for our 10 year anniversary because it’s the one I wanted. People don’t believe me that it costs $12. It’s a very cool looking ring. They are in even more disbelief when they see that I have no shame over wearing a $12 wedding band. This wedding band has taken on dual meanings for me. First and foremost, it’s my sign of commitment to my marriage. But second, it’s my daily reminder that money WILL NOT define me.

What are you striving for? Will it lead to financial ruin? My current definition of success may not work for you, but that’s okay. Create your own definition.

You didn’t qualify for the loan. Oh, and you’re terrible at soccer

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Chances are, you sucked at soccer. Now whether anyone told you this or not, is actually more important than the actual suckiness itself. But you most likely got a trophy for being the worst kid on the worst team. Some people view this as sweet and fair. However I view this as a financial disaster waiting to happen. I’m not suggesting that the worst team in the league is executed. I’m just suggesting that they have to make do with their juice box, oatmeal cream pie, and not a trophy. Sometimes knowing the truth allows a person to move on. And when appropriate, do better. But when we coddle peoples’ failures, and make them un-failures, then we risk hurting the person more.

Has a bank ever turned you down for a simple mortgage loan? And by simple, I mean a 30 year fixed mortgage. If so, then you probably shouldn’t buy a house in that moment. If you have to “get creative” with the loan (e.g. interest only, Adjustable Rate, etc.), then you really can’t afford the house itself. You failed to qualify. But it’s what you do next, that makes all the difference in the world.

When rejected for something significant like a mortgage or a car loan, you basically have two choices. If you choose wrong, then your ignorance of failure (in a bad way) will persist. Here are the two choices.

  1. Learn from your financial failure- If you choose to learn from your failure then this means that you take the time to assess the situation, and make yourself better. Did one bank reject you for a loan? I don’t necessarily suggest bulling forward to find a bank that won’t reject you. You need to take the time to figure out why the bank viewed you as a poor credit risk. Use the failure as an opportunity to succeed. Don’t ignore the failure, which would direct you toward a bigger failure.
  2.  Get a yes- “Mom, can I go outside and play?” I ask. “No,” my mom says. “Dad, can I go outside…” You know how that goes. Getting the answer that you want to a question isn’t progress. Don’t mistake “getting a yes” for perseverance. Perseverance is way over-rated. If a legitimate bank rejects you, don’t keep trying to find different ways to borrow the money that you never should have borrowed. It’s not your RIGHT to borrow money. It’s privilege. And it’s a privilege that you haven’t earned.

There are a great number of people who purchased homes between 2001-2007 that have an incredibly rude awakening coming their way. They bought something that they couldn’t really afford. I refuse to place blame on the banks for this situation. Since when do we rely on other people to tell us how much money we can afford to spend? Your bank may have loaned you money that they shouldn’t have loaned you, but don’t forget that means that you borrowed money that you shouldn’t have borrowed. You will never get rejected for a loan that you can truly afford. And you will never make a poor housing decision if you know what you can truly afford.

Rejection is a tell. Rejection is a clue that something isn’t right. The car dealer tells you that you can’t get the car deal that you want? Then this is a major clue as to what the situation really is. I have no problem with the popular concept of “rejecting rejection”. Often times I try to push through business and financial adversity. But “rejecting rejection” means that you still need to proceed cautiously and responsibly.

Be tenacious. But don’t be tenacious for the wrong reasons. Fight for your right to succeed, but don’t fight blindly for a “yes” in the face of an important “no”.

Small financial mistakes are worse than big financial mistakes

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Have you ever bought a car on a 6 year car loan? That’s okay. You can easily fix that. Have you ever had an interest-only mortgage on your home that later caused you trouble? That’s okay. You can easily fix that. Have you ever had a bad dining-out problem? Uh oh. That’s kinda a big deal.

As people have shared their financial lives with me over the years, one thing has become abundantly clear: mistakes cause more financial problems than emergencies do. This means that your financial success is more dependent on your behavior than it is mother nature, Greek Gods, and/or bad luck. Your ability to avoid mistakes, and then correct past mistakes, will be the key to your financial success.

In studying peoples’ mistakes I have learned that there are two primary types of financial mistakes. Big mistakes. And little mistakes.

Big mistakes (house, car, education, career, or family/money mistakes) seem as though they will create the biggest problems. However, small mistakes actually can do the most long term damage. It’s because small mistakes are created with poor behavior and habits, while big mistakes are based on poor judgement. Learning your lesson from a big mistake is actually quite easy. Did you buy too much house? Fine, don’t do it again. Lesson learned. Do you spend too much on convenience dining-out? Uh oh, this is going to be challenging. Why? Because of all the habits involved. Big mistakes are usually caused by a lack of knowledge. You didn’t know that you should buy a house that is the maximum amount that the bank lets you buy? Well, you shouldn’t. Lesson learned.

In order to stop making small mistakes, like too much convenience dining out, you must change a tremendous number of habits. You must become a better grocery shopper. You must become a better cook. You must become better at time management. You must become a better planner. You must improve your will power. Etc.  All of these skills/habits must improve to correct one simple mistake.

Most people find themselves predisposed to either big mistakes or small mistakes. They usually have a grip on one, but not the other. I’d rather run across people that make big mistakes because they are easier to prevent in the future. Whether you know it or not, this entire website is dedicated to helping you prevent/fix mistakes. I mainly focus on small mistakes because they are the hardest to fix.

There is the rare occasion that I run across someone that makes both small and big mistakes. This is a problem. Not only does this person have to change their habits, but the big mistakes that they made will make it harder to fix their little mistakes. The big mistakes usually affect cash flow on a longer term basis. It can be a very frustrating process for them. It literally takes years to fix someone in this situation. But THAT’s OKAY!! The alternative isn’t a good choice either. Not addressing your financial mistakes is shockingly common, and predictably a terrible idea.

So, what kind of mistakes do you make? And are you committed to fixing them?

Comparing the 15 yr and the 30 yr fixed mortgage

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There was a time when mortgages were 4 years long. You agreed to buy a house, you moved in, and then you had 4 years to pay it off. It that was still the standard today, then many of us would be renting and/or living in much less expensive homes. Stretching out the length of time on a mortgage has been the single biggest reason that home-ownership rates skyrocketed through the middle part of the 20th century. While the 30 year fixed rate mortgage certainly has become the most common type of mortgage, the 15 year fixed rate mortgage often times makes more sense,  but not always.

By their nature, 15 year fixed rate mortgages will always have a lower interest rate than 30 year fixed rate mortgages. This is just the way that debt and liquidity work. For instance, you let your bank borrow your money for 6 months (via a 6 month CD), they may only pay you .5% interest. But if you let them borrow your money for 5 years (via a 5 year CD), then they may pay you 2.5%. This is because you will have much less liquidity if you have your money locked up for 5 years. This liquidity, or lack thereof, is the primary factor of being able to charge a higher interest rate.

Let’s look at a 30 year mortgage at 4% on a $200,000 loan (no taxes and insurance)

As you can clearly see, you will have paid $343,739.01 to payoff a $200,000 loan. You would have paid the bank 72% more than you borrowed originally if you complete the entire mortgage. But in exchange for this large amount of interest that you will pay, you will have a relatively low monthly payment. As you will see in my next example, the low payment isn’t a product of anything other than “spreading out” your repayment over 30 years. And as I have suggested time and time again, you need to keep your mortgage payment around 25% of your take-home pay.

Now, let’s look at a 15 year mortgage at 3.25% on a $200 ,000 loan (no taxes and insurance)

Like I said before in the CD example, the shorter period of time that money is borrowed, the less the rate of interest charged to borrow. So just for having “full access” to the equity in your home 15 years sooner, you will pay .75% less in interest rate. But how much less will you pay in interest? Try $90,778.25. That’s 63% less interest than the 30 year fixed rate mortgage. But, your payment is 47% higher on a monthly basis.

But in my estimation is comes down to one thing. You guessed it, your budget. If you can afford to be smart, then be smart (15 year mortgage). If you can’t afford to be smart, then don’t be stupid. Trying to get a 15 year mortgage when the payment would hurt you financially on a monthly basis is one of the stupidest things you can do. You need to be realistic. If you can’t afford it, you can’t afford it. You don’t need liquidity if your cash flow is tight, you need “stretched out” payments. Is this the best technical financial advice in the world? Nope. But it’s realistic financial advice. And that’s what you get here at PeteThePlanner.com.

Removing Private Mortgage Insurance (PMI) from your mortgage needs to be a priority

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One of the nasty side effects of the financial Crapocalypse has been the increased (lifelong) cost of Private Mortgage Insurance (PMI). It’s that terrible little (big) expense that you pay when you don’t have at least 20% ownership (equity) of your home. Lenders require you to pay for a third party, a Private Mortgage Insurance company, to insure your ability to pay your mortgage company. The cost of this premium is based on the size of the loan and the quality of your credit score. Generally, this PMI goes away after a few years because you have “achieved” 20% equity in your home. This is accomplished through housing market appreciation and/or mortgage paydown. Well, things have changed.

You see, the housing market forgot to appreciate. Yes, this sucks, but now it sucks for yet another reason. It seems like it’s going to take you forever to get rid of that stupid Private Mortgage Insurance expense. In fact, you may own less of your home than you did prior to the recession because the value of your home has fallen. Here’s what that turd looks like:

July 2007:

Home Value $200,000

Mortgage Amount $180,000

Equity 10%

July 2011

Home value $170,000

Mortgage Amount $170,000

Equity 0%

Oh SNAP!!! You bought the home and assumed that you could drop the extra $189/month (estimated) PMI expense in a few years once you’ve paid down your loan and the market continued to rise (thus giving you 20% ownership of your home). Well, I intended for my forehead to not turn into a sixhead via hair loss. But shiz happens and now I have more hair on my forearms than my sixhead.

So, what should you do? I’d just give up. Giving up always works. As my wife’s grandmother once told my marathon-running wife, “if your run ever gets too hard, just give up.” No, really. She said that. She’s a lovely woman, but that might have been the worst piece of advice ever doled out. Of course you shouldn’t give up. You should put together a plan. You are throwing money away towards PMI. It protects the bank, not you. Yes, it’s tax deductible, but who gives a damn? You need to consider the amount of money that exists between your current home equity (presumably less than 20%) and your “goal equity” of 20% as credit card debt. Ugly nasty-ass credit card debt.

What do I mean? Look at this:

Current Home Value $170,000

Current equity 12% ($20,400)

Goal equity 20% ($34,000)

Difference $13,600

Therefore you need to view the difference ($13,600) as nasty-ass no-good pointless stupid credit card debt. Channel your anger, and point it toward this awful sonofabitch-of-money.  Get my point? You need to view it as evil. Seriously, vial.

If you work hard to pay this off, then you will have accomplished two really important things. 1) You will have increased your home equity. 2) You will eliminate your PMI expense. If you do this 5 years early, which is entirely possible, then you will have saved $11,340 in PMI expense based on ($189/month PMI). You could use that $11,340 for anything you want. May I suggest hairplugs for your favorite snarky financial blogger?

Who’s your boy?

******Special thanks to Steve Jackson from Main Street Financial for helping with some PMI info.