Down and Out on $250,000 a Year - TheFiscalTimes.com

Down and Out on $250,000 a Year - TheFiscalTimes.com:

While this analysis is very gentle toward the quarter million dollar family, it is still an interesting different perspective.

The key points for me as a bankruptcy attorney are that, just because a family can qualify for a traditional mortgage at 80LTV (translation: 20% down, which is loan at 80% of home value) and get car loans for two nice cars, that is not necessary good financial practice.

Qualifying for a large loan does not mean living comfortably with a large loan.

The lessons here are not income related. The lessons are ratio related. The banks loan money at acceptable ratios -- as the bank defines "acceptable."

If the family were to try these goals from the start, what would the difference be?

1. Payoff student loans aggressively within about 5 years of starting this experiment.

2. Take a home mortgage with the same down payment but seek a 50LTV qualification. That means lower home value which means likely a smaller house, smaller utility bills (if house is actually smaller), cheaper homeowner association dues, lower property taxes, smaller yard so less costly landscaping and maintenance, fewer rooms to fill with furniture and furnishings, less storage space so less clutter possible, etc.

3. Keep cars for 8-10 years (mileage and maintenance allowing).

Essentially this family will have more disposable income inside of 5 years than they have now.

It is very conceivable, assuming only a 10% increase in recreational spending, they could have $100,000 saved outside of retirement plans.

Now they can upgrade homes, keep the same ratios, without severely affecting their costs of living. Why? All the income now spent on student loans and car payments might be available for the larger mortgage. The money previously saved on house maintenance, property taxes, and landscaping, may no longer be saved, but a cash savings built up gives breathing room. The prior payments toward principal on the mortgage become additional leverage (assuming a break even or better on the old home). in the new down payment.

The cash in savings is generating interest or dividends. It should grow nominally in most markets (see "modern portfolio theory" articles to outline investment methods).

The key to living better is limiting loans, especially home mortgages. Realtors have many wonderful things to say about mortgages and their interest deductions. They are true -- as far as they go. But realtors are not tax advisors. They don't look at the added costs of more expensive homes like higher property tax payments, more rooms to furnish, more landscaping costs, larger utility bills, larger homeowner association dues, etc. I would hazard a guess that the interest deduction from your income taxes is exceeded by the increased costs of ownership. That doesn't even address the "keeping up with the Joneses" problem.

If the old lesson about enemies is "Keep your friends close and your enemies closer," the financial equivalent is "Keep your loans small, and your mortgage smaller."

Another old line is "The path to Hell is paved with good intentions." I would suggest a financial spin, "The path to Bankruptcy Court is paved with a large mortgage." For the more financially technical minds, "The path to Bankruptcy Court is paved with a large LTV."