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Financial planning for DEBT JUNKIES is very different from the financial planning for people who are not DEBT JUNKIES!
Why?
Because massive debt causes a massive waste of money that could be used to build massive wealth!!
Home Costs & Mortgages
Currently, in order to qualify for a mortgage in Orange County, CA, you would have to make over $150,000/yr. to buy a median-priced house at $705,000. But, in order to qualify for a mortgage on a median-priced house of $151,300 in the Dallas area, you would only have to make about $30,000 in gross income. The difference in annual interest cost is $35,588 vs. $7,637. So the size of your mortgage has a huge impact on where you can afford to live!
By the way, just because the fair market value of your home has gone up since you bought it does not mean you have a huge profit. Let's just say that you bought a home for $400,000 about 4 years ago and now its fair market value is about $600,000. You would have paid about $80,768 in interest alone and about $30,000 in property taxes, private mortgage insurance, homeowner's insurance and maintenance. In order to sell it, you would pay about $36,000 in real estate commission and about $3,000 in closing costs and it would probably cost about $5,000 to move to another home. All told, your gross profit of $200,000 would be offset by $154,768 in money paid out leaving a net profit before taxes of only $45,232!!
So basically, unless the fair market value of your home is rising faster than one and one-half times your mortgage interest rate, you are losing money by owning your present home!
Other Debt
Currently, auto loans are running at about 8% and about the same for home equity loans or lines of credit, but credit cards are averaging closer to 14%. If you have an auto loan of $30,000, the interest is costing you about $2,400/yr. and if you have credit card debt of about $30,000, the interest is costing you about $4,200 or a total of about $6,600/yr which is not even tax deductible. If instead of $60,000 in debt, you had $60,000 invested in any of the top-performing no-load mutual funds, you would be earning about $7,800/yr. The difference between borrowing $60,000 to spend instead of investing $60,000 is costing you the total of $6,600 and $7,800 or $14,400/yr. Which means that you are literally throwing away $1,200/mo. by your doing what you're doing! Just like taking twelve $100 bills and flushing them down the toilet every month!!
Financial Planning for Debt Junkies
First of all, re-evaluate whether or not you can afford to keep your present home and your present mortgage. Both cost money and if you can't afford the mortgage and can't refinance with one you can afford, you need to find a place to live that you can afford. And if the value of your home is not rising faster than one and one-half times your future interest rate, then you need to find a different place to live.
Second, you need to analyze your expenses and develop a budget so that you can cut them enough to begin seriously paying down your most expensive debt. And that means literally cutting up your credit cards so that you aren't adding to your debt load. Remember that interest on debt is wasted money, so you need to eliminate your debt before you start investing any money.
Third, if you can generate extra income, it will dramatically speed up the process of eliminating debt so that you can begin the wealth-building process.
If you can not discipline yourself to start doing these 3 things right now, then you need to find a reliable credit counselor immediately or you will always be just another DEBT JUNKIE!
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Small minds cause
more headaches!
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