One of the financial blogs I enjoy reading is called MisterSquirrel. I’m well aware of the irony of taking financial advice from someone who shares a nickname with tree-dwelling rodents — but the author is spot on about personal finances. One of his newer posts is about the hierarchy of financial management, which outlines the path most people follow to economic stability.
There are ways to shortcut that process, though a lot depends on how committed you are to leading a debt-free lifestyle, and how you define success for yourself. Everyone is different, everyone lives by a different set of priorities, and every situation is unique; there is no one-size fits all financial management solution.
Don’t Finance a House
Unless you’re certain about your job, buying a home is very limiting in terms of economic mobility — and it’s a big expense. Even if your mortgage payment is less than rent on a similarly-sized home, most people vastly underestimate the ancillary costs of owning a home. Those would include the costs of insurance, taxes, and maintenance. Many are lured by the promise of deductible mortgage interest, only to find when tax time comes around that the deduction doesn’t really add up to that much. There’s also the conventional wisdom talking point about “building equity” instead of paying rent. If you look at how much equity you really gain in a house over the first five years, it’s a negligible return, especially considering you put up 20% of the selling price in cash.
Most people approach housing from a very narrow point of view, and ignore a world of non-traditional housing options that don’t require going massively in debt while committing 30% of their income.
Don’t Have Kids
It’s only been a very short time in human history that having children has become optional. Many of our societal views on children were shaped in times when having a large family was crucial to both financial success and to basic survival. Today the cost of having and raising kids has exploded, making a large family a luxury few can afford. The rising cost of raising kids may be one of the reasons having children has dropped off the priority list for many young couples.
In the mid-1990s, 65% of Americans said having kids was important to a successful marriage; today that percentage is down to 41%. Having kids now ranks in 8th place out of 9 qualities people say are important to a happy marriage. This trend is more manifest in younger women, where 43% of women in the 33-46 age group don’t have kids. Even women who choose to have kids are having fewer of them.
Never Finance a New Car
I’m constantly surprised by the number of people who have a mortgage, car payments, and credit card debt. Instead of treating transportation costs as an expense, too many make emotional decisions about buying a car. Buying a used car doesn’t have to mean you risk getting a clunker or inheriting someone else’s problems. With dealers like CarMax and services like CarFax, you can let someone else take the depreciation hit on a new car, confident that you’re not getting a vehicle with a washed salvage title.
In some areas it may be possible to get by with a used motorcycle as a second car. There are literally thousands of lightly-used motorcycles that the owner purchased, rode for a few thousand miles, and then parked in a garage where it sat for years. Those can be purchased for a fraction of the cost of new bike, reconditioned at a very reasonable expense, and then ridden for years of trouble free service.
Say No to Credit Cards
Credit cards are financial quicksand and make it easy to get stuck in debt, very difficult to get out of once you’re in. The suggestion that you need a credit card to travel and get around is a total myth. Living off credit cards is like commuting through a minefield every day; you’re one misstep, accident, job loss, or illness away from them blowing up your finances and saddling yourself with years of debt. Using debit cards does require paying attention to some vendors that may put a temporary block on your account. To get around that and the fear of using a debit card number online, we set up a debit account separate from our serious money, and use it like a prepaid credit card. When we know we’re going to be traveling, we can add a couple thousand to the balance. So far we’ve never run into a problem.
Not all of these suggestions will be right for everyone; it’s up to you to determine the balance between financial security, mobility, and convenience that’s right for you.