The mint makes it first, it is up to you to make it last. - Evan Esar (1899 – 1995)
Of all your living expenses, there can be no doubt that your housing will be the most costly. Whether you are living in an apartment or a house, statistics show that the typical American will pay more for their housing than any other expense. It is for this reason that I wanted to write a chapter that deals with saving money on shelter. If you wish to begin saving 30 to 50 percent of your annual income, this is one of the first places you will want to start. There are a number of ways to save money on shelter, and I will discuss them all in detail.
One of the most basic ways to save money on shelter is to get roommates. While those who are reading this may think that it is common sense, this is far from the truth. While many people get roommates for the purpose of saving money, many of them are less than successful. Fights and disputes over trivial matters often cause the roommates to go their separate ways, and they end up living by themselves, paying the brunt of their shelter alone. In some cases, roommates will steal from each other or cause other problems. A friend of mine is a prime example of what can happen when you pick the wrong
roommates. He moved in with a guy that he really didn't know, and he didn't take the time to conduct a background check. After just a few weeks, more than $2,000 suddenly vanished from his bank account, and he eventually found out that his roommate was the culprit. My friend was lucky. He managed to catch the fraud in time to inform the bank, and his roommate was arrested. The $2,000 was returned to his account, and justice was served.
However, there are many people who are not so lucky. There have been many cases of people who became victims of identity theft because their roommates got a hold of their personal information. Many have had their belongings stolen, and in the worst cases, many people have been assaulted or even killed by those they lived with. While getting a roommate can allow you to save thousands of dollars in the course of a single year, you could also put yourself in a situation that could be irritating or even dangerous.
Below is some financial data that will allow you to see how much you can potentially save by living with a roommate as opposed to living alone. The more roommates you have, the more money you can save. At the same time, the situation can become more unstable. The more people you live with, the better chances you will have two people who will not get along with each other, or one of them will be a con artist or free loader
1. Monthly Rent/Housing Number of Roommates Annual Savings Monthly Income
A. $850 $7,800 $1500
B. $850 $12,900 $1500
C. $850 $14,600.04 $1500
D. $850 $15,450 $1500
.
The number of roommates listed in this chart does not include you. For option "A," you would be paying $850 alone. This takes up a huge percentage of your income, and you will not be able to save more than 50%. With option "B," you now have one roommate,and the monthly rent has been cut in half. The both of you each pay $425 per month. As you can see, the more roommates you have, the more money you can save. While option "B" is more desirable than option "A," option "C" and "D" will both allow you to save a large percentage of your income. In this example, the $1500 is the amount of money you bring in each month.
The numbers above show that if you could get two people to be your roommates for two years, you would save approximately $29,200, not bad for someone who has an annual income of only $18,000. After just two years, you would have a net worth that is higher than your annual income, and close to the amount that the average American makes each year. This is enough money to buy a brand new luxury automobile, boat, or even to pay for your college tuition. It is for this reason that so many people move in together to cut living expenses. The problem is, most of them don't save this much money. As you get more roommates, you will lose privacy, and the space within your apartment may be limited. In addition to this, disputes between roommates can cause people to move out, weakening your ability to save a large percentage of your income. There are a number of things you can do to solve these problems. One of the most important is to pick the right roommates. One of the best roommates you can pick is members of your family or close friends. You already know them, and if they've lived with you before, they will be comfortable with you.
It is easy to move in with friends or relatives, because you are much more likely to trust them. If you have a girlfriend or boyfriend, these are also excellent people to move in with. However, they must be people you get along with. They should be familiar with your habits, and you should be familiar with theirs. If you decide to move in with a stranger, you will want to perform an extensive background check. A potential roommates credit may also be important. Ask them for their credit report before you decide to move in, and be ready to show them your own. If you can, you may also want to perform a criminal background check. Avoid becoming roommates with a person who has a felony or even certain types of misdemeanors.
If the person seems reluctant to show you their credit report when you ask for it, this is a sign that they are untrustworthy. If you get their credit report, and you find out that they have less than desirable credit, this could be another red flag. It is a sign that they will give you a hard time paying their share of the rent. In addition to their credit report, find out where they are currently employed. How long have they been working? How long do they typically hold a job? Do they hold jobs for more than a year, or are they frequently changing jobs every three months? These are important questions that you will need to have answered, and you should request it from friends as well as strangers. You should want to become roommates with the best people. The last thing you want is to move in with someone who doesn't work or pay their share of the rent on time. Remember, you may be on a lease, and this will require you to pay rent for a set period of time before you can leave. If you make the mistake of moving in with someone who is untrustworthy or lazy, you may have to deal with them for the term of the lease, or they may move out and leave you to pay the rent alone. It is important to note that families can also have roommates, leading to enormous savings resulting thousands each year. Imagine if you had a four bedroom home and two kids. You rented out one of your room for $700/month. That's an extra $8,400/year. We all can use an extra $8,400/year.
Having good roommates can be a valuable resource that will allow you to save substantial amounts of money within a short period of time. However, picking the wrong roommates can unlock your greatest nightmares. There may be some of you reading this chapter who may not want to have any roommates. Perhaps you value your privacy, or you may simply want to live alone. There are a number of things you can still do to save 30 to 50% of your income even if you choose to live alone. No matter which option you choose, the rule below will allow you to maximize the money you'll save on shelter:
Rule Number Three: Always Find the Cheapest Place to Live in the Best Possible Neighborhood. Make sure your rent or monthly housing payment doesn’t take up more than 25% of your income.
Those who wish to live alone can save a great deal of money by living in either a studio apartment or a small room. If you are living alone, you don't need a great deal of space. Since many Americans are struggling to pay for the cost of their mortgages, they may be renting out rooms to anyone who will accept them at exceptional rates. Again, you will want to take all the precautions necessary to make sure you can trust any landlord you move in with. When it comes to finding low cost housing, you must be able to balance cost with quality. When most people look for housing, they make either one of two mistakes. These mistakes are:
1. Moving into a neighborhood that is very cheap, but dangerous.
2. Moving into a neighborhood that is so expensive they can't afford to save much money.
Both of the statements listed above are things that effect different segments of the population, but it leads to the same results. Many of the so called "wealthy" people who are living in upscale neighborhoods are really in debt. They either live in homes in which they are paying large mortgage payments, or they are living in apartments where the monthly rent is extremely high. The vast majority of these people are slaves to debt. They owe large amounts of money to the banks and mortgage companies, but they are willing to take on this debt because they feel it is better than living in a lesser acclaimed neighborhood, and they may be right.
Some of the most dangerous neighborhoods in the United States are those which are the cheapest. Even though the rent is cheap, you may encounter gang members or drug dealers, and many other problems. Living in places like this can literally cause your life expectancy to drop. So what we need here is a balance. While you don't want to move into a dangerous neighborhood just for the sake of saving money, you also don't want to move into a neighborhood where 40 to 50 percent of your income is spent paying for housing. The secret is to find a neighborhood that has housing costs which are much
lower than the national average, but not in areas that are extremely dangerous. As of this writing, the national average for an apartment here in the U.S. is approximately $968 per month. I have recently read that the cost is expected to be increased by 5% this year. This means that housing will only become more expensive. The states with the cheapest housing are generally those that lie in the Midwest or the South. States which lie on the East or West coast of the United States tend to be expensive. Most of the major cities in the U.S. that have populations over 100,000 are expensive when it comes to housing costs. However, based on some research I’ve done, here are the largest cities in the U.S. with the lowest apartment costs.
If you are like many people, it is likely that you have a job and or a family which ties you down to a certain city. As a general rule, the states with the lowest costs of living also have lower wages. Even if this is the case, you can still use the rules in this chapter to find apartments that are cheap in any city. If you are living in an apartment where your rent takes up 40 to 50% of your monthly income, you should begin looking around for apartments in your area that are cheaper. Even if you only save an additional $200 per month, this will turn into $2,400 after 12 months. The safety of the location is the most important factor you should consider. Avoid living in run down areas at all costs, but don't live in an apartment so expensive that it is hard for you to save money.
I've heard so many stories of people having to choose between paying rent and their other living expenses. This is ridiculous, and it is a sign that we are living in a society that is rapidly deteriorating. A primary step to gaining your financial independence is to find the cheapest place in the best possible neighborhood. It is also important to make sure the apartment has good heating, power, and water. Power and utilities are another thing I wanted to talk about. Many people make the mistake of moving into apartments that have utilities which are not included in the rent. In addition to their rent, they will generally have to pay for the power bill, or the water bill or both. My advice to you is to avoid this.
Never move into an apartment where you have to pay for additional utilities, unless there is no other option available or you are getting an incredible deal on the rent payment. You don't want to be put at the mercy of the power companies when that responsibility can be handled by someone else. The power industry like most industries has seen and will continue to see dramatic increases in cost. Why put this burden on yourself when you do not have to? I made the mistake of moving into an apartment where I have to pay for utilities, and I've continued to battle with the power company ever since. Three years ago, our bill was $83 per month, two years later the bill was in excess of $200. Taking my advice literally, I moved out of that building and have been able to save over $2,400/year.
Before you move into an apartment, check with the landlord to make sure the power bill is included in the monthly rent. If it is not, find a place where the power is included. The last thing you want is to be paying hundreds of dollars per month on energy costs that will only continue to increase. Money will be taken from your pockets and given to companies that should not receive it.
Now that I've spent a bit of time talking about renting apartments, I want to spend the rest of this chapter talking about mortgages and houses. If you listen to mainstream financial experts, you will likely get the impression that having your own home is the greatest thing in the world, while renting is for people who are poor with a low income. This is completely inaccurate. While owning your own home does have some very solid advantages, it can be a nightmare if you don't know what you're doing. There are currently millions of people who did not know what they were doing when followed they secured some type of mortgage on a new home. These people are now facing foreclosure and financial ruin.
The typical couple moves into an apartment, saves up $10,000 over a few years, and then makes a down payment on a home with a 30 year mortgage. What I just described to you above is the tactic most people use to get a home. It is also a tactic that can lead to foreclosure. First, the couple saved $10,000 just to turn around and make a down payment on a home they don't own. It will still take them many years to pay off the property, and if they are like most people, they'll switch numerous jobs during this time. If they make the mistake of getting a mortgage with fluctuating interest rates, they
are sitting ducks for whatever the Fed decides to do. It is easy to see why this situation can become dangerous. The illustration I just described to you is exactly what happened to numerous friends and family members of mine.
Instead of thinking outside the box, most people use the common practiced approach of getting a home, and a few years later, many of them are forced into foreclosure. You must understand that banks and mortgage companies are designed to make a profit, not help you. It's just business. Alan Greenspan and the Fed blew up the housing bubble during the early 2000s, and it has now popped, putting a lot of Americans in a situation where they are struggling to make their monthly mortgage payments on homes that are not even worth the loan amount on the home. Even worse are those who fall for Adjustable Rate Mortgages, which are also known as ARMs. These loans sucker people in at low interest rates, but the interest rates will skyrocket after a certain period of time, making it hard for homeowners to make monthly payments.
I must emphasize that I'm not against having your own home. Being able to own a home is a part of the American Dream. Unfortunately, for many people, it has become the American Nightmare. Living in an apartment gives you a lot of advantages. The costs should be less than what you are paying for a mortgage, leases are relatively short, and you can move out as soon as it has expired. You don't have to worry about your apartment being foreclosed on. When you set up a mortgage, you essentially owe the lender whatever the amount of the loan was minus the down payment. In our current housing market, many people's loan amounts exceed the value of the house and their interest rate continues to rise. This means that most people making mortgage payments have a negative net worth of literally hundreds of thousands of dollars. Also most people are completely unaware of how much they will be paying on their home over the 30 year time period of their fixed loan. So how much will you pay?
COSTS
Price of Home: $250,000
Downpayment: $25,000 - 10%
Interest Rate: 6%
Yearly Property Taxes: $3,750
Yearly Homeowner's Insurance: $481
It should be noted:
Term: is a 30 year fixed which is the most common loan and least volatile in terms of interest rate changes.
Property Taxes: we have assumed a 1.5 percent property tax on the purchase price. Your actual rate may be higher or lower depending on a variety of circumstances.
Homeowners Insurance: We have used the annual premium of $481, which is the national average according to the Insurance Information Institute.
RESULTS
Principal and Interest: $1,483.89
Taxes and Insurance: $352.58
PMI: $80
TOTAL: $1,916.47
PMI: Your total payment includes an estimated $80 fee for private mortgage insurance (PMI) if your downpayment is less than 20 percent of the purchase price. Average PMI runs $50-$80 per month on a median priced home of $159,000, according to the Mortgage Insurance Companies of America. But it can climb to $150 or more.
Therefore the total cost of your $250,000 home after putting 10% down:
TOTAL HOME COST
$1,916.47 / month times 12 $23,716.92 / yearly mortgage payment
$23,716.92 times 30 $711,507.60 over the 30 year period
$711,507.60 minus $225,000 $486,507.60 paid to your lender for a $225,000 loan
$461,507.60 divided by 30 $15,383.59 per year in interest payments
The money the banks make from you over time is absurd. Imagine having millions of people paying you these extremely high payments for 30 years. The income lasts for generations for the bankers, while you work hard to put money in their pockets. If you had paid with cash, as the rich do in many situations, you would have saved $486,507.60 on the same house.
If you're paying a mortgage each month, take a look at your bank account and all your assets. Calculate your net worth, and then subtract the amount of money you owe on your mortgage. If you're like 80% of the population, it is likely that this number is negative, unless you have a great deal of equity or wealth. If you are thinking of buying a home, there are a number of ways you can do it without taking the "traditional" route. Because the housing market has recently declined, it is an excellent time for buying a house, but not in the traditional manner. When you listen to many financial experts on television, they will talk about how terrible the housing market is. What they are really saying is that if you use the traditional method to buy a home, if you make a down payment on a 30 year mortgage at a given interest rate, you will struggle in paying off that mortgage. However, what they don't tell you is to focus on the many homes that have been forced into foreclosure as a means to save a tremendous amount on your purchase. This is where prudent people are purchasing homes for incredible prices throughout the United States. When a bank is forced to foreclose on a home, they are taking a loss, since they are not being paid a monthly payment. The bank would like nothing more than to be able to earn money off these properties.
To do this, they will often sell the homes at an auction. It is at these auctions that prudent investors are able to acquire homes for pennies on the dollar. Instead of making a $10,000 down payment on a home that they are forced to foreclose five years later because they couldn't afford to make their mortgage payment, these investors wait until foreclosed homes are put up for auctions, and then they purchase them for cheap prices. The banks have used this tactic for hundreds of years, and it is not common knowledge even in this current economic market. I had numerous friends who were mortgage brokers during the housing market boom and each one would attempt to convince me to engage in some form of the business with them. Many of them made some good money over a short period of time, selling these mortgages to people who simply could not afford it. I felt it was foolish to benefit from those who would be struggling to pay their mortgages in short time with these interest only loans and adjusted rate mortgages (ARMS). Many of their clients are now facing foreclosure or trying to do a loan modification and many of my friends have wasted millions and are starting all over again.
While this is not a book about real estate investing, it is important for you to know that there are other options to purchase a home including foreclosure sales and tax liens. The tax lien is the bank's biggest secret. It is the method they've used to get properties for many years, and it is one of the most lucrative ways you can acquire a home. The process basically works like this: A person who owns their home (who has paid off the mortgage) begins having trouble paying their property taxes each month. The state and federal government is in need of this money to fund their many projects, so they place a lien on the home, and this lien is advertised to investors. The government hopes that an investor will pay off the property taxes, allowing them to get their money within a short period of time. Once you pay off the property taxes, the government will give the homeowner a certain period of time to pay back the money they owe. This period of time is known as the Redemption Period. If the homeowner is unable to pay back the taxes by the end of the redemption period, the government will do either one of two things:
1. The government will take control of the home and pay back your money plus interest. This interest can be as high as 25%.
2. The government will give you the option of foreclosing on the home. Once you foreclose, you can either take the home for yourself or sell it at an auction for a quick profit.
As you can see, the tax lien method is one of the most powerful ways to obtain a home, however it does have its risks. The big benefit is the money you pay is backed by either the state or federal government. You are essentially rewarded for paying the delinquent property taxes of the homeowner. As with anything in life, these deals do not come easy. An entire book can be written on this topic alone.
Very few mortgage representatives will talk to you about tax liens or foreclosure sales. The reason for this is because this is the method the bank uses to acquire homes, and it has no interest in revealing its secrets. After all, if you started using these strategies, you would be competing with them. The bank is much more content to put you in debt for hundreds of thousands of dollars, charging you interest on a regular basis. To win the finance war, you must understand that the banks are not in business to help you succeed. Banks are in business to make money. Any products or services they offer are designed to make them extremely rich. Banks could care less about your financial well being. Contrary to popular belief, it is still possible to save up for a home. You must remained disciplined and focused throughout the savings process. I have had friends who have saved for both a home and car, and they were firm believers in using cash. They did not believe in the use of credit. Even though inflation has weakened the dollar today, the rule still applies. Save as much as you can and pay for the things you want in cash. If you can't afford to pay for it in cash, this is a sign that you don't need it. You will only be working against yourself by putting yourself further in debt. If you are already paying on a mortgage, you will need to reduce your other living expenses as much as possible. If you have already put yourself in a situation where you owe hundreds of thousands of dollars on a mortgage, you can be successful, but you must tread carefully. If you should lose your job or suffer another financial crisis, you could lose everything you've worked hard for. Whether you're living in an apartment or home, it is crucial for you to save as much money as you can. The rising costs of housing continue to plague many Americans, making it harder for them to pay for their other expenses. Two things that have played a factor in this are the Fed and inflation. Indeed, the two are intimately related. The Fed has facilitated inflation by printing too much money, and while the consensus is Alan Greenspan performed poorly as the Chairman of the Federal Reserve, current chairmen Ben Bernanke is expected to be worse. He has already said that he will print more money into circulation, and this concerns many people, including fellow economists. However, this is just the tip of the proverbial iceberg.
Not only is Ben Bernanke saying he will print dollars in record numbers, his activities are largely shielded from the public. Not only are many Americans unaware of these things, many of them are ignorant to the fact that the Federal Reserve is not a part of the U.S. Government, despite its name. The Federal Reserve Bank is a privately owned institution, and all of its members are not known by the public. This private bank prints the money we use everyday, and they also decide the interest rates on mortgages. What should frighten you even more is that the Fed has little Congressional oversight. This bank has never been audited by the IRS, and its activities are completely secret. Most Americans don't even know who Ben Bernanke is, and if you don't believe me, just ask your friends, family members, or anyone you know. It is this lack of knowledge about the people that are controlling your money and interest rates that further cripples Americans. We have a powerful bank that prints our currency, and its activities are hidden from public scrutiny. With this lack of translucence it is even more important to focus on saving money. Next, I will focus on how to save money on food, clothing, and transportation, expenses that stop a lot of people from ever achieving financial independence. To win any war, you must know who and what you are fighting. Did you know who Alan Greenspan was before I mentioned him in this chapter? Did you know about Ben Bernanke? If the answer is no, I highly advise you to begin learning more about the players in the banking industry. They are the ones who control your interest rates and other important financial matters.
Ignorance is not bliss, and knowledge is truly power. By applying the strategies in this book, you will be light years ahead of Americans who get their advice from banks and mainstream financial experts, the very same people who are trying to enslave them.