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Unfortunately, I've noticed that a lot of people these days want everything yesterday. It's easier to get loans and go into debt over non essential things.
Paying interest is not a winning wealth-building strategy ...
While I agree with a lot of what you are saying ... it also depends on how much that interest is costing you. The interest on my house costs about 5 percent after you take into account the tax deduction. Not very much ...
However, to pay down my house, I've got to pay the government a third of my income .... just to save a measily 5 percent ... because I'm in a high tax bracket.
So ... instead of paying off my house, I put all of my extra money into the tax deferred retirement account instead. That way ... at least a big chunk of my income that would ordinarily go to taxes is now actually working for me.
It's important to remember that when you do pay off a house, you basically have to pay a premium to the government first before you can save any interest. Why not put that hefty tax premium to work for you instead?
I also understand what you're saying about investments but, to avoid those pitfalls, I pulled out of stocks last summer to avoid the bear market so, I'm not suffering huge losses in my retirement account like others are right now. And ... my account is actually managed by my non-profit pension fund, so I avoid alot of those exorbitant Wall St. fees.
Debt isn't that bad unless you do to much of it at high interest rates. But with my small, $150K mortgage at 5 percent ... I'm in no hurry to pay it down.
So ... as always ... it depends on HOW you do these things.
I wouldn't disagree with your strategy, Sheri. While I was paying down my mortgage, I paid the max into my 401k, IRAs, and had the requisite cash reserves savings as well. I wasn't making a choice between them. I do think you need to pay off credit card debt first (higher interest rate), invest in retirement and take advantage of any matching funds and the tax deferment. Part of the calculation should be that fact that you need shelter and that will be a significant expense that is not available for alternative investment.
My idea is to live mortgage free in retirement which greatly reduces the amount of money I'll need. In addition, I have a huge equity to pay for possible living arrangements with help that I might need in the (far) future. If I had bought more and more expensive houses, racked up a lot of equity loans, I would not be sitting in the rather good situation I am now.
I just think the idea that people should keep big mortgages and take cash out of the house to gamble on the stock market is a foolish long term strategy and can make it impossible to retire because of the big debt. Over extension of debt is the big, big economic problem right now. The beneficiaries of that sort of strategy are the brokers, banks (if they avoid foreclosure), and fund mangers. It is especially foolish in a sinking real estate market - you can easily end up with more debt than the house is worth while the money you invested isn't making all that much either or even losing money. OR maybe the idea is that if your house value sinks, then you let the bank take it at a short sale foreclosure. That would be a form of fraud to my mind if done deliberately.
I've been reading this thread, trying to figure out if there's something, anything, I could or should have done differently. I did all the right things - when I first started working, the jobs I had with companies that provided benefits were temp jobs so I didn't qualify, but I did put $$ away for the future. I got married to someone who turned out to be a compulsive liar and con artist [to this day, I don't know if I was his first or even only wife] who basically cleaned me out and left me penniless halfway across the country from my home. I picked myself up and started over again. I went to another state, worked minimum wage jobs but once again, I saved. I hooked up with someone else, and we had a couple kids. He quit his job - one with health insurance, I might add - the month before our first one was born, so there went all the $$ again. At least this one owned the house we lived in, he'd built it himself. He went back to work again, at a better-paying job but one without benefits [then] and the second baby came along. No insurance - and that one was a premie, who got medevaced half-way across the state and spent his first weeks in a neonatal ward. There went all the $$ again. Then my ex decided he didn't like being part of a couple, he just liked being Daddy, so he took off and left me with the house, which he'd never finished, but there was also a second house on the land that I rented out for grocery $$, and I went back to work. First it was summertimes and weekends only, because there was no way to pay for childcare and work - I'd have been paying twice what I'd be earning. Finally I went to work for a place that did have really good health insurance, so both of the kids were covered 100% between me and their father, but the first year I still had one child in daycare full time and it cost me to work. After that first year, things got better. I kept getting pay increases, but eventually they were capped and long-term [10 years and over] employees got only COLA, no pay increase. I got tired of living in an unfinished, unheated house that froze every winter that I didn't have either the time or money to finish. I found another place that I could afford to buy, only it turned out after I'd signed the papers the lender [the state, actually] had a list of things that needed to be done to comply with all the terms of the contract, none of which were actually IN the contract. By the time that was done, the mortgage I could afford and had been approved for nearly doubled, and that was what the payments were based on. I ended up working 2 full time jobs to make the payments - and I had no other payments, just utilities - until the house burned down. Then I discovered that the full coverage replacement insurance I'd been paying for would only pay for a depreciated amount, and it took a court fight to convince them that I actually did have all the things I'd claimed were lost. The contractor we hired [by then I was married again] to build a new house, turned out to have developed a substantial drug problem between the last house he'd built and the one he built for us. He also rescinded his bond, in that state all contractors need to be licensed and bonded. And we found out well after the fact that we'd been misinformed by the lending officer, we wouldn't have had to rebuild anything, we could have paid off the mortgage with the insurance settlement and lived in our little Airstream while we rebuilt at our leisure. Oh, and did I mention that the agent who handled the sale in the first place really screwed up on the property lines? There was a wonderful building site right next to the little house that burned, but it turned out it wasn't ours, it belonged to the lot next door. During all this time, my husband couldn't work, he'd broken his back when a boat he was on sank. In fact, the main reason we got married was so that he'd have medical coverage. We eventually got rid of that house, and bought a smaller one outright. Then DH had back surgery, no problem. I'd gone to work for another place with good health insurance, and they paid. We had a 500.00/annual family deductible, great, right? He got sick again, this time with a chronic and terminal condition. Insurance kept on paying. We thought. In the meantime, we'd bought a bigger house, and he kept going to the doctor, going into the hospital every so often, and the hospital was sold. The buyer had a team of accountants go over the books and one day I got a statement saying 'Please remit within 30 days' for 13,000.00+. Seemed that the previous bunch had been rather lax in submitting bills to various insurance companies, and so much time had passed by then the companies wouldn't have paid anyway. Besides, the place where I worked changed companies every year like clockwork. He kept getting sicker and sicker, and after a couple of episodes of being in a coma and on life support, the docs said he absolutely had to get to the Lower 48 where more sophisticated treatment was available. We packed up and moved and listed the house with the same agency we'd bought it through, with the condition that it be rented as well as sold. When we bought it, we repaired the roof, rebuilt the front deck, replaced the plumbing, replaced the water heater, replaced the furnace, replaced the woodstove with one that met code. When we bought it, the agency was renting it for over 900.00/month. After all the repairs we did, and after we left, we found out that they'd split the sales and rentals into two separate divisions, and the rental side declined to handle it. I blew a gasket at the agent who hadn't bothered to tell me about it, I reminded him that was part of the deal I'd signed, and he just shrugged it off. Not much I could do, nearly 6,000 miles away, anyway. In fact, I only found out because I got a notice from the seller's lawyer informing me they were repossessing it! By that time, it was way too late to do anything about it, it was a done deal.
DH finally died late last fall, because the only clinic in this county that would take medicaid patients with his condition refused to treat him. There were no other options available. Now I own outright the place where I live, but the COL is going through the roof, to the point where having only to pay space rent is too much, and I can't afford to keep living here. I will have to sell it and move somewhere else, but at least I'll be able to do that - IF I can do it within the next few months, or simply living, no frills, will start eating into my savings and I'll be stuck in a place I can't afford and I very much dislike.
So what didn't I do right? I shouldn't have married the first jerk, but that was forty-odd years ago, and has nothing to do with here and now. What could I have done about having a defective item burn down my house and leave me with a handful of cast iron skillets and a sleaze of an insurance agent who declined to provide insurance again? What could I have done about the hospital screwing up it's accounts? What could I have done about getting a different contractor, when his previous places looked great, he had all his documents, and the people who knew about his problem didn't bother to say anything until after the fact? I saved as much as I could when I could, but I wouldn't trade my kids for any of it, and that's were a lot of it went. I wouldn't have traded my late husband for any of it either, and that's where the rest of it went.
All I can say is that all you who harp on 'why are people in such bad shape financially' just have been very lucky to have not gotten whammied by life. Sometimes it isn't anyone's fault, it just is. You can make all the plans you want - I have to make plans, too, for any contingency I can think of - but plans are just a starting point and are generally subject to change or reversal without notice.
Your story describes why there needs to be regulations and social security so when people get rooked, they have some recourse. Maybe if yo had a good lawyer you could have challenged the old hospital bills. If they didn't submit the bills in the first place, then they shouldn't be able to come back years later. But good lawyers are very expensive.
I hope your luck is due to turn for the better. It sounds like you are overdue.
Interesting article. As far as the profit of "only" $175,000 ... that's actually a pretty good deal ...
Considering he did three refi's that obviously paid for a hellava lot more than just home improvements.
I think the article makes some great points but ... if you DO sell your house at the right time in a market that does appreciate well ... you can make quite a nice profit.
That's certainly our retirement strategy ... to sell our home at the peak of the market (when the market comes back, of course.)
I wouldn't disagree with your strategy, Sheri. While I was paying down my mortgage, I paid the max into my 401k, IRAs, and had the requisite cash reserves savings as well. I wasn't making a choice between them. I do think you need to pay off credit card debt first (higher interest rate), invest in retirement and take advantage of any matching funds and the tax deferment. Part of the calculation should be that fact that you need shelter and that will be a significant expense that is not available for alternative investment.
My idea is to live mortgage free in retirement which greatly reduces the amount of money I'll need. In addition, I have a huge equity to pay for possible living arrangements with help that I might need in the (far) future. If I had bought more and more expensive houses, racked up a lot of equity loans, I would not be sitting in the rather good situation I am now.
I just think the idea that people should keep big mortgages and take cash out of the house to gamble on the stock market is a foolish long term strategy and can make it impossible to retire because of the big debt. Over extension of debt is the big, big economic problem right now. The beneficiaries of that sort of strategy are the brokers, banks (if they avoid foreclosure), and fund mangers. It is especially foolish in a sinking real estate market - you can easily end up with more debt than the house is worth while the money you invested isn't making all that much either or even losing money. OR maybe the idea is that if your house value sinks, then you let the bank take it at a short sale foreclosure. That would be a form of fraud to my mind if done deliberately.
The OP was why are Americans in such bad shape financially. You have hit the nail solidly on the head. They take risk to try to get more then they need instead of having a solid base.
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