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Financial independence worth short-term sacrifices

I saw a recent news blurb that indicted the mortgage industry is now considering 50-year home mortgages. How ludicrous can you get? Would any sane 30-year-old really sign a mortgage that won’t be paid until he’s 80? I suppose there must be some demand for it or no one would be offering the product.

Speaking on mortgage loans I’m always amused, but mostly irritated, watching those commercials where folks chop up their credit cards after paying off the balance with a home equity loan. Never a word about changing the behavior that ran up those credit card balances in the first place. After re-financing the house and paying off the credit cards one is presumably now in a position to get more credit cards and do it again.

Why are we Americans chronically overspending and under saving? Economists tell us that our national saving rate has reached near the zero mark. I suppose everybody thinks things will just work out because our parents did OK. Well, things just worked out for our parents because they suffered through the Great Depression and understood the importance of saving and deferring gratification. It’s been my experience that things don’t just work out unless I start doing things differently. You know the worn out saying that if nothing changes then nothing changes. It’s true.

How does one go about doing things differently? Here’s a novel idea. Seize control of your personal finances with a fixed and steady determination to live within your means, provide for emergencies and set back something for retirement. Simple to say but, obviously, it’s extremely difficult to do.

Here’s a starting point. Don’t buy a house you can’t afford. Well, how much can I afford? That’s a complex question. Some people place great value on their home and want to buy as much house as they can possibly afford. Others see a house as a place to live and value having some spending money left over after the mortgage payment is made. Between these extremes we each have to choose our comfort level. Financial planners say that no more than 25% of income should be spent for housing and, I suppose, that’s a good place to start.

Regardless of which end of the home affordability spectrum you find yourself, don’t sign a mortgage longer than 15 years. If you can’t make the monthly payments on a 15-year mortgage, you can’t afford the house.

The next logical step might be to rid yourself of credit cards altogether. They’re very difficult to control and lead to the financial downfall of many people. So, don’t carry temptation in your wallet. Take out a bank loan and pay off the cards if there’s no other way. Remember, even under the best of circumstances, using credit cards means spending tomorrow’s money today while paying cash means spending today’s money tomorrow. Give that some thought the next time you’re tempted to plunk down the plastic.

Having committed to a house you can afford and swearing off credit cards should result in your having a little cash left at the end of the month. Don’t hesitate to set some aside for emergencies, major purchases and lavish treats. I like having cash. I’ve always liked cash and I’ve never regretted that I saved a little bit along the way.

And, now for retirement. Social Security will survive but it just isn’t going to be enough. It was never intended to be the sole source of retirement funds. Depending on lots of variables, Social Security is not likely to replace more than 30% to 40% of your salary. No body, particularly anybody facing a 50-year mortgage, is going to want to have that drastic cut in living expenses upon retirement.

With fewer and fewer people being provided a pension by their employers, it’s incumbent on the individual to provide his own Social Security supplement. 401(k) plans are a good option, as are all the various types of IRAs. These should be viewed as minimums rather than maximums. There’s no law prohibiting you from setting up a saving plan beyond tax-favored, qualified plans. Just open an account and put money in there every payday. Buy a diversified portfolio of low-cost mutual funds and live happily ever after.

I hate to sound preachy, but financial independence is really pretty simple for folks with average or above income. People who overspend do so because they either can’t control their urges or don’t choose to do so. Setting aside a nest egg means that you can’t spend every penny you touch.

Pay off those credit cards, set up a saving plan and make extra principal payments on your 15-year mortgage and you’ll be heading down the road to financial freedom. Otherwise, as Shakespeare said, “all the voyages of their life is bound in shallows, and in miseries.”

Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.


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