As I listen to the federal government’s repeated rhetoric in response to the severe and ongoing housing crisis in the United States, I ponder what it means Reasonably priced. The government seems to ignore this basic idea. On the surface, they seem determined to keep people in the homes they bought before the recession, despite their financial circumstances—an approach that creates false hope, and inevitably leads to frustration.
Since the government does not set affordability standards, its rhetoric appeals to public sentiment and pits people against financial institutions. To be sure, before, during, and after the last recession, many financial institutions acted unethically in their dealings with homeowners. However, each homeowner decided to purchase her home, with several subprime mortgages. Sadly, some may have to, and some may have to leave their homes because they can’t afford to keep it. This leads us to three questions:
- What does the right price mean?
- Who decides affordability?
- What should happen to people who live in homes they can’t afford?
Reasonably priced
I suggest that the overarching goal of every family is to live a debt-free life. In this context, what does the right price mean? I think we should answer this question separately for purchases other than a private home, and for purchasing a private home.
For purchases other than one’s home, affordable means…
The ability to pay for an item and not take on debt, and not compromise current and projected family budgets, plans, and commitments.
To buy a home with affordable means…
The ability to purchase the home, with or without a mortgage, so that the total estimated costs in progress do not impact current and projected family budgets, plans, and commitments.
I believe that no one should borrow to purchase any item other than their home. Accordingly, with the exception of your house, which I deal with in the second part, you cannot buy an item if you have to borrow it to get it! To purchase a car, refrigerator, stove, or other consumer item, pay with cash, including using a credit card and paying the balance in full.
Pay cash for your personal vehicle
Pay cash for personal transportation? Yes, save up for a car, truck, and other personal transportation. These are not investments that are increasing in value – they are constantly losing value. You may have to start with an inexpensive car while you save up for the perfect one. If available and convenient, while saving, use public transportation during the week, and rent as needed on weekends. Get creative, and test out non-borrowing alternatives to achieve your debt freedom goals with regular, convenient, and reliable access to transportation.
You need to start early to save regularly for your first car; Keep saving to replace it, and keep repeating this action. Monthly, set aside a car payment in your personal savings account – learn to be disciplined and don’t neglect it.
Pay cash for other non-accommodation purchases
What about your purchases other than your personal car and your own home? The same principle applies. Is there any consumable item worth borrowing with? i don’t think so. furniture? hardware? vacation? grown up playing? They can wait! The key is to learn how to identify wants and needs so that you don’t automatically think about replacing them when items break or wear out. If your refrigerator breaks down and you can’t use it, instead of making an instinctive decision to replace it with your heavily indebted credit card, while saving up to buy another refrigerator, look for alternatives to keep foods cold and frozen. Ask for temporary help from your neighbor, church, Bible study, or other group. You will need patience and humility.. a lot!
As with your transportation, save systematically to purchase, replace, and update furniture, appliances, and all purchases outside of the operating budget; They always save regularly for these specific items.
At least annually, budget for potential purchases, other than your condominium, with individual values over $100 (or whatever other amount you specify), and a lifetime of about two years or more. For each item, estimate the following:
- Today’s value of the item’s potential replacement cost ($12,000)
- How long before you can replace the item (6 years)
- Annual Amount to Save: Divide one by two, and divide the result by 12 for the monthly amount to save ($2,000 and $167)
Remember, for purchases other than your home, affordable means The ability to pay for an item and not take on debt, and not compromise current and projected family budgets, plans, and commitments.
Understanding compound interest as it applies to loans, and knowing how much to spend for interest on non-mortgage loans, may motivate you to focus on affordability before spending!
In the second part, you examined affordability and the purchase of a private residence; What does it mean to not compromise on budgets, plans, and commitments before answering the two remaining questions:
- Who decides affordability?
- What should happen to people who live in homes they can’t afford?
Copyright (c) 2011, Michel A. Bell