Let’s change our goals around…
I think most people create huge, out of reach goals like, “I need to have $1,000,000 in the bank by the time I’m 40.” A great goal, obviously, but I think that may be going about things the wrong way. What if we took that type of goal and switched it around? What if we first started by setting a goal we can control and achieve now? What if we make our goal to have the lowest possible bills every month?
My new goal is to have my monthly expenses under $2,000 a month. It’s that easy. Think of all of your current bills and expenses. Throw in all the money you spend at Starbucks, fast food, mortgage, insurance, car payment, taxes, yadda yadda. How much do you realistically spend a month?
Think about it, if I only spend $2,000 a month, that’s $24,000 a year. At 10% interest, I only need $240,000 to break even. If I worked a 40 hour a week job all year, I’d only have to be paid $8.67 an hour to break even. There are an awful lot of easy to get jobs that pay that much in my area. Wouldn’t it relieve a lot of stress from your life if you knew exactly what you would have to make a year to not have to worry? Everything above that amount being extra for investing or anything else you wanted to do?
The only way to do this is by paying off your debt. Get rid of that $1,500 a month house payment as soon as you can. Get rid of the $400 a month flease or car payment. Brew your coffee at home, get a job that has free coffee, or do like my friend did and get a part-time job at Starbucks so you can get your coffee for free, or at a discount, while getting paid! I turned off my way overpriced $70 a month DirecTV and signed up for the $10 Netflix deal. I get TV shows or movies in the mail almost every day and I have $60 a month being automatically deposited in my stock account. That’s $720 saved a year right there, not to mention the $40 PPV’s that I used to get.
Most people spend $2000 a month in car payments and mortgage alone. That’s insane. Concentrate on paying that stuff off! Get those bills out of your life and bring your monthly expenses down to where there is no need to worry or stress about affording to live. When we get old our medical bills will be as big as Cramer’s ego, so by saving now and creating a huge nest-egg, by lowering our monthly bills, we won’t worry how we’ll pay for those things in the future. We’ll have plenty of cash lying around.
Think long-term by addressing the short-term. Address something that you can change now, today. Make your goal budgeting a monthly spending limit that’s below what you currently make and do everything in your power to get to, and stay under, that goal. Pay off the credit cards, get rid of the car with the bling-bling that you use to show people how ‘rich’ you are while the bills stack up. Get what you need, pay if off and roll in the extra money you’ll have. Imagine if your only bills were your utilities, gas, food, clothes, insurance and property taxes. If I figure out what my bills would be without my house payment, I’m looking at about $1,200 a month, including my property taxes split across 12 months. I think I could make $1,200 a month for life collecting aluminum cans if I had to. Once you see your bills that low, it sure takes a load of stress off. Then, instead of worrying about bills, you can worry about your slice on the links. I think I’ll take the rest of the day off and go play golf, it’s in my budget.
Invest in peace…
When he's not trading stocks, Steve is complaining about other things, playing guitar or hockey or working on websites and video games at his QA corporation, "The Testing Guys." He also has an on again, off again blog at www.undertrader.com where he really lets loose and doesn't hold back on the ridiculousness of Wall Street.
22 Comments Add your ownSubscribe
1. The Angry Commentor | November 17th, 2006 at 12:21 pm
You are always going to have bills, paying off debt is obvious but with housing the way it is you are always going to have a house payment. I think the better plan is try and earn more money and diversify your income to cover all expenses. The stupid thing is that everyone thinks your can make more money by some gimick “Buy houses with no money down and then resell them, it’s easy and everyone is doing it” . Make more money the smart way. Invest, get paid well, work hard.
2. Steve | November 17th, 2006 at 12:48 pm
I think you’re on crack. You won’t always have a house payment if you don’t want one. I was speaking with a friend yesterday. They have a $100,000 mortgage and he and his wife each make $50,000 a year, giving the household a $100,000 income. I said, “Good, you can pay off your house in 2 years, that’s awesome!” And he went, “Huh? no, we have 27 years left on our mortage.” TWENTY-SEVEN YEARS! If they just ’suffered’ through living on $50,000 for 2 years, they could take the other $50,000 and pay it on the house, in two years they’d have no mortgage and save 27 YEARS of interest payments and then have that $50,000 a year to spend on anything they want.
This notion of wanting to have a job to make money is silly. Wouldn’t you rather work 20 hours a week, have all your bills covered and interest rolling in and have the other 20 hours a week to play golf or play with your kids or go kayaking or biking? I certainly would.
The key to success is to work hard, get rid of your debt, including your mortgage, stuff as much cash away as you can for a couple years and then live off your investments and retire. I plan to retire at 40 years old, when do you plan to retire?
Invest in peace…
www.undertrader.com
3. Kimber | November 17th, 2006 at 2:49 pm
Steve,
Playing defense is all fine and good but no one ever wins the game by only playing defense. You have to put a few pucks in the net.
I think the Angry Commentor (or more like the Mildly Irritated Commentor) has a legit point. Expenses are never going to be zero. Never. There will aways be expenses that income has to cover. So I believe in looking at the total game. Income and expenses.
BTW…I reco retiring at 35. Why wait the extra 5 years?
4. Steve | November 17th, 2006 at 3:47 pm
Why? Because I’m already 35.
And I said that you’d have expenses and I said I am trying to keep mine below $2000 a month, that’s quite a bit of expenses. My point was to lower the expenses and invest the extra money, which is playing defense and offense. That would be the total game. The point was you can’t just think “I want to make a million bucks” because that’s not going to happen if your expenses are through the roof with mortgages and car payments.
5. Phil John | November 18th, 2006 at 12:04 pm
Don’t forget taxes - your friends would need 3 years to pay it back, not 2 (assuming 40k take home, plus the interest on the 100k loan).
Maybe they are maxing out their 401k contributions and Roths - which would not leave them with a lot to live on and still pump a heap of money into the loan…
6. Steve | November 18th, 2006 at 12:40 pm
Ok, so it takes 2 years and 2 months or so instead of 3 years, still much better than 27 years and I would argue that they could easily make up the difference through ebay, garage sales, a once a week 4 hour job, etc. Not to mention most people do their taxes wrong and get a decent sized refund every year, which could be plopped right on the mortgage as well.
You guys have weak arguements this week. You sure you don’t all work for Motley Fools?
Invest in peace…
7. Phil John | November 19th, 2006 at 12:59 am
haha - I don’t work for Motley Fool.
I didn’t say I disagree - when my fiance and I buy a place, I hope to have it paid off by the time we are in our early 30s, which gives us, say, 5 - 7 years if we shoot for 32. I may have to retrain for 3 of those 7 years, so realistically we are looking at 4 years to pay off 150 - 200k.
Phil
8. prlinkbiz | November 20th, 2006 at 10:56 am
Why would I pay down one house when I can use leverage to tur that $50K into much much more? The thing with trying to live on so little is that you never know what life is going to throw at you- nothing is static. What’s wrong with a job if you like what you do? Not everyone wants to spend 20 hours a week doing nothing. I agree though that you shouldn’t have to work , that you should learn to make your money work for you- but it is much easier to do that with cash flow coming in and utilizing leverage.
9. Steve | November 20th, 2006 at 1:25 pm
Leverage is great if that’s what you want to do, but do a search on Google for the latest housing information. Did you know forclosures DOUBLED in October? Did you know that people in Phoenix currently can’t even give houses away? Did you know that people with 80-20 loans are about to hit balloon payments and are going to either lose their houses, get foreclosed on or sell their houses at a huge loss?
Leverage is nice, IF you can live through downturns. I had a friend who wanted to leverage a 3 plex in Los Angeles. His plan was to rent out 2 of the units and live in the other. He figured he’d be getting 3 houses for the price of one when he got $2000 for each rental and he paid $2000 for his unit. A $6000 mortgage. What happens when his renters move out and he has to cover $6000 a month? He can’t. He’ll lose the entire thing. It’s a bad decision. However, if he paid off the 3-plex and had essentially $6000 a month coming in ($4000 in rent + the $2000 he’d save) for life with no risk of losing the 3-plex on a downturn in the markets, I think he’d be better off and STILL be rich.
Leverage definitely speeds things up, however you have to add the enormous amount of risk you are taking on into the equation and I think people tend to not do that. They only think of NOW. Before you leverage, try to find you a friend who works at a bank or a lender and ask them how many calls a day they make on foreclosed homes. All people who used leverage to ‘get ahead faster.’ It doesn’t always work out as you think it will and I’ll take the slow and steady, low risk path myself.
10. Steve | November 20th, 2006 at 3:02 pm
http://www.breitbart.com/news/2006/11/20/D8LGVJN82.html
” The feeble U.S. housing market showed more frailty in October when home sales plummeted in 38 states, hitting Nevada, Arizona, Florida and California particularly hard, government data showed on Monday.”
11. prlinkbiz | November 20th, 2006 at 3:19 pm
You have to know what you are doing and always buy right– you make your money when you buy. of course wanna be investors who bought at the top of the market using ARMS and such are losing their asses. If you understand markets and cycles, as well as know people who understand how to make money no matter what the market is doing, you can too can make money in any market.
All the people being forclosed on are creating a huge opportunity for real investors to step back into the market, and thats whats happening. Money is easier to find now because so many people have jumped ship- lenders are looking for people to loan to- the people who know how to make money are the ones who are left.
Of course anyone who is on the outside will be scared, like you Steve- quoting horror stories- however the real money is made now. You have to educate yourself instead of claim that all use of leverage (blanket term) is bad or dangerous. It’s simply a tool that when used properly can help you get ahead faster than if you had to save the same amount.
12. Steve | November 20th, 2006 at 3:33 pm
Even people who know what they are doing have horror stories. If I’m not mistaken, didn’t Trump declare bankruptcy? I know Dave Ramsey did. Didn’t Rich Dad, Poor Dad as well?
Everyone thinks they know what they’re doing. I’ve leveraged real estate before, and I did it right and I did fine, however, I still think it’s a bad strategy in the long run. I think it’s better to get your own house in order, then use your extra money to do the leverage thing. Horror stories, as you call them, are very real to very many people.
13. prlinkbiz | November 20th, 2006 at 3:43 pm
I’m not sure what your point is? Don’t use leverage because you might make a mistake? You can lose it all not matter what. It’s painful no matter how much you have- but it won’t kill you. Look at those who have learned how to use leverage usccessfully. Like Kimber says, you learn by doing, and sometimes you make mistakes. You learn and keep going- you don’t stop altogether. Well maybe some people do. My main problem with you suggesting that everyone live like you is that not everyone wants to live like you. Leverage is a valid option, like any sort of business or investing, you have to learn how to use it properly. So increase your financial education. Learn how to use different tools. Do what feels comfortable for you- if thats no debt- fine- but everyone has different goals and how we get to them is our own choice, and not one for you to judge is right or wrong.
14. Steve | November 20th, 2006 at 3:55 pm
Since this is an ADVICE site, I give my OPINIONS on what I do. If you don’t like my opinions, that’s fine, it doesn’t matter and you’re entitled to yours and that’s fine too. I’m quite educated when it comes to investing. I’ve bought real estate, stocks, bonds, CD’s, yadda yadda. Leverage is an option, I never said it wasn’t, however, if you’re leveraging your own house, I think that’s unnecessary risk. If you’re leaving a mortage or two or a home improvement loan hovering over your home, the place where your family lives, I don’t think that’s good either. In my opinion, I’d rather pay all of these things off so my family doesn’t have to worry and then take all the extra money and make a ton with it.
Sure, making mistakes are part of the game, I make mistakes all the time, (What was I thinking when I bought Krispy Kreme?) however, I wouldn’t risk anything my family would need. I wouldn’t risk money I don’t have and put my family in debt due to my mistake. That’s just my opinion. And I’m not saying everyone does this, but it does happen all too often.
There are millions of strategies to make money, mine is just one and I’m passionate about my strategy, otherwise I wouldn’t take the time to write on this site, or mine, sharing my strategy. By being a passionate writer when it comes to my strategy it has achieved my goal, which is to make people think and discuss and debate and argue and get angry or enlightened. I hate reading websites where it’s bland and boring and everyone agrees, there’s no point in those.
My point, from the beginning, was don’t be a slave to lenders, to steal from Dave Ramsey. .Whether people agree with me is neither here nor there, it’s an opinion and a matter of strategy. Mine works for me, if yours works for you that’s awesome. I wish no bad luck on anyone (cept the creeps at CNBC.)
Invest in peace…
15. Ken | November 20th, 2006 at 5:23 pm
Steve,
I did just that 2 years ago. I got my expenses down to about $1500/mo. I bought a $73k condo, had no car payment, no job, no expenses except cable & internet & food. I could have lived like this for the rest of my life. I was 32.
I can tell you that it was boring because if I wanted to go out and eat, it cost money. I couldn’t go on a vacation cause it costs money. Any little thing would blow my budget!
This is not the way you want to retire!!! I lived this way for 2 years. That’s why I don’t believe that lowering your expenses is the way to retire early. You should be increasing your income. Then when you retire, you can go on vacations, cruises, Vegas or whatever you want… not just sit at home
16. Mark | November 21st, 2006 at 5:51 pm
In all the comments about leverage and flipping houses and so on, I think Steve’s original point is getting lost. And even if his specifics aren’t something everyone can agree on, the methods are sound I think.
-Lower your monthly nut and keep it low.
-Get rid of your debt.
-Invest the difference between what you earn and what you spend.
You don’t have to live miserly - or miserably - but you make choices, and you recognize that most companies exist to part you from your money. Once you’re on the no debt / low cost of living plan, it’s pretty easy to stay on it. Get a raise or bonus? Sock away the difference. Keep driving the car you’ve got. Do away with the zillion cable channels and so on. It adds up fast when it’s leaving your bank account. But the opposite holds true too: it adds up fast in your brokerage account when you add to it every month.
17. Some Thoughts On Steve&hellip | November 22nd, 2006 at 5:22 am
[…] I was reading Steve’s article and thought “Steve you are a smart guy.” Steve is being smart because I think he is reading the market correctly and getting ready. I read the comments associated with Steve’s article and thought many are missing the message within the article. One comment that caught my eye. Of course anyone who is on the outside will be scared, like you Steve- quoting horror stories- however the real money is made now. You have to educate yourself instead of claim that all use of leverage (blanket term) is bad or dangerous. It’s simply a tool that when used properly can help you get ahead faster than if you had to save the same amount. […]
18. Phil John | November 23rd, 2006 at 2:01 am
Prlinkbiz
“All the people being forclosed on are creating a huge opportunity for real investors to step back into the market, and thats whats happening. Money is easier to find now because so many people have jumped ship- lenders are looking for people to loan to- the people who know how to make money are the ones who are left.”
You are a fool. Opportunity is what happens 5 years from now. You know, when NOBODY wants to buy real estate unless they are going to live in the property. My parents paid 80k for some property that is now “worth” 400k. Buying it at 350k is not a bargain. Of course - if YOU want to buy it, let me know and I will take you through. They are looking to offload a few properties - so if you want to use leverage, let me know.
You talk about leverage like you know what you are doing - but we both know that as the bubble crashes, unless you can afford to make the repayments without using rental income, there is a decent chance you will get burned. Banks are not selling foreclosures cheaply - that is a myth.
If you have purchased a foreclosure on the cheap, please indulge us with the evidence.
The US dollar is unstable - do you read about reserve diversification at all? If it crashes and the Fed decides to support it by raising interest rates, what do you think is going to happen?
Phil
19. j.h. | December 5th, 2006 at 6:39 pm
Steve, your post reminds me of Dave Ramsey’s little saying, about how if you live like no one else now, later on, you will get to live like no one else. Or something like that; i.e., if you tighten your belt, get rid of debt, save like mad now, so you can invest, then later on it will all pay off, and it can all go in your pocket rather than to one’s creditors.
Good job!
Also, I don’t know what the cost of living is where you’re at; I live in not-a-very-big-city, and my husband and I currently spend around $1400/month. Unfortunately, we don’t make a whole lot more than that, but anyhow, we have no debt whatsoever, and are slowly building up our investable money fund. Now, the question is learning to invest it wisely.
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21. bills | August 9th, 2007 at 10:53 am
I think breaking down one’s goal into smaller steps is a great idea. I remember when I went off to college, thinking in terms of 4 years or more was daunting. I broke my college career down into semesters. One down, 7 more to go. It made it a lot easier to concieve of reaching that coveted day- graduation, one semester at a time. It’s a mental game for sure, but if it works, it works.
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