Tightwad Gazette I Refresher - Day 14 - March 17

This is a long post with valuable information. First, these are all taken from the Tightwad Gazette I a book by Amy Dacyczyn and all of these ideas come from Amy and her readers. I have underlined my comments.

Let’s get started.

Page 137 – DEBTS AND DOWN PAYMENTS

In this article Amy discusses mortgages and down payments. Amy talks about newlyweds making more money than their parents, so they instantly feel they should be able to afford the same type of house as their parents.

Couples that have owned a home for 10 years or more many times do not know what their homes are worth.

Unfortunately during the day of subprime mortgages, almost anyone could qualify for a loan. There were some outrageous mortgages during the early 2000’s until it started to crash in 2006 and 2007. You didn’t have to state your income and many loans didn’t even require a down payment. Many of these loans were also adjustable rate mortgages and when they reset, the payments went up considerably. Also, there were even mortgages where individuals were only going to pay on interest and the principal was actually going to increase.

At the time of writing her article, Amy noted that real estate supposedly “has risen faster than the average wage”. Realtors I spoke with told me that houses appreciate about the same rate of inflation or 3% to 5% per year.”

Amy speaks about some economic issues such as double digit interest rates. We do not have double digit interest rates at this time.

Amy spoke to the problem of consumer debt. 20 years ago or more consumer debt was becoming a problem. She noted that young couples “tend to believe that they will live at the same standard of living that their parents gradually achieved over a period of years and the same standard of living as typical TV families.”

She does make some comments that were true back in 1992. That is that it was harder to get a mortgage as there were the traditional rules of lending. I remember what it was like around that time. Back then banks required a 20% down payment in order for them to give you a mortgage. They called your place of employment to see how much you made and how long you had worked at that place. They reviewed your bank accounts to check all assets and they ran credit reports to see about your debts and if you had missed payments or would potentially be a poor risk. Also, they would request copies of a couple of years’ tax returns to review. It took a while for them to decide if you would qualify for a mortgage.

Today, it depends on the bank and the loan product as to the amount of down payment that is required.

Amy shows a chart that reflects the price of a house a couple earning $30,000 could buy with different interest rates. For example, a couple could afford a $96,000 home with a 6% interest rate, a $78,000 home with an 8% interest rate and so on. As interest rates increase, the amount of house you can afford decreases. As a side note, back in 1992 $30,000 salary could buy a lot more food, gasoline, and such than today. You had a lot more buying power than you would today with $30,000. Right now a 30 year fixed interest rate on a mortgage is 4.74% and a 15 year fixed interest rate is 3.98%.

Your best bet at getting the best deal on your mortgage is to protect your FICO score and make sure you pay your bills on time and keep a high credit rating. If you have a high FICO score you will get a better interest rate on loans.

Amy does say that couples have a better chance of affording and buying a house if they have no consumer credit or a very small amount. Many times people say they cannot afford a home because they have a lot of credit card debt. Yet, if they didn’t have the debt, and if they weren’t already trying to live beyond their means, they would be able to afford a home.

Amy lists several ways to “buy more house than you can technically afford.”

1. Trade up. Buy a starter home and resell it after five or so years. This is an old idea that is coming back in vogue. Years and years ago people would buy a small house to start out with and sell it a few years later, making a profit, and then putting all the profit on a bigger home.

2. Buy a duplex and rent half to help pay the mortgage.

3. Save up a large down payment.

4. Buy a fixer upper if you have the skills, extra cash, and determination to actually do the work.

Each of these have factors that you need to weigh in such as renting for a longer period of time so that you can save up a bigger down payment. Some people would argue that you are wasting money on rent while saving up for a larger down payment. Yes, that is true, but putting more money down means paying less on interest over the long haul.

If you trade up, you need to keep your starter home long enough to make a profit. Markets change, so it can be a gamble sometimes. In today’s economy, people are starting to think more and more about buying a smaller house than they would have purchased years ago. It is cheaper in the payment, cheaper on utilities and easier upkeep.

Here is my advice, if a mortgage payment is the same as rent, it doesn’t necessarily mean that you should buy a house. You need to also be able to afford the property taxes, insurance and upkeep. And when I say upkeep, I am talking about setting up a fund so that when the furnace breaks down, the roof leaks or your appliances break down, you can afford to buy new ones without taking out a loan. I have seen too many people buy houses because the payments are equal to rent and then they get hung up within 18 months as they can’t pay the taxes and the upkeep. It is much better to save money for a down payment and to save more to put in the bank for upkeep, than to buy a house and get in over your head.

In the first 18 months of their marriage, Amy and her husband saved half of what they were able to save in seven years. They lived in a “dirt cheap crummy third floor three and a half room apartment.” Think about it, again it is so much easier to live cheap when you are first married, but many people will not sacrifice and do this.

Here is how Amy ends this article. “Whatever the market factors clearly the critical economic period in any marriage is the years before children. Typically couples tend to see this time as the final opportunity to have the fun ‘they deserve,’ squandering a valuable chance. Instead they should live in the cheapest place possible for a short period of time – one to three years. Using this time to the maximum, earning and saving more, while not acquiring debt, couples can propel themselves into a higher standard of living they will enjoy the remainder of their lives.”

I want to end this part of our reading by saying that it is important not to have too high of a mortgage payment. You have to live and eat. Also, you have to save for your retirement. I have seen different percentages, but one is that you don’t spend more than 35% of your gross income on housing which includes utilities and such while one person has suggested 25% of your net income.

Page 139 – GIFT GIVING THROUGH THE AGES

Amy was talking with a friend one day and she was sharing about all of the ideas relating to Christmas that her readers had sent in for the newsletter that she published. Her friend said “All this talk about Christmas is making me feel depressed.”

Amy said that this friend expressed in one sentence what many people feel about the holidays. “Will I have enough money? Will I have enough time” How will I handle the conflicting family values about Christmas spending? What will I buy to thrill my husband, or wife, or child?”

Amy thinks about Christmas this way “How will I solve the problem of finding wonderful and inexpensive gift ideas.” She goes on to question how this all came to me when Christmas is about joy, peace and celebration. Did you know that traditional gift giving has only been part of the holiday for around 100 years?

Throughout history, with exception of the most wealthy families, people generally only gave gifts to young children and to the poor. Remember the “Little House on the Prairie” books where Laura received a tin cup, candy or a hair comb as presents?

In the early 1900’s Christmas advertising featured toys for children and a few small gifts for adults. Then due to the industrial revolution, goods became less expensive and this accelerated gift giving. After World War I it was feared that the prosperity would become a sluggish peace time economy so advertisers stepped up their campaigns. Gifts remained practical during the 1930’s.

It was during the prosperous 1950’s that gift giving really stepped up and with more expensive gifts.

Now today’s holidays revolve around gift giving. “The stress surrounding giving could be summed up simply. You feel unable to do as much as you want to do or feel you are supposed to do. This stress robs you of some of the joy you should be experiencing. The solution is simple. Give yourself license to do less.”

Amy does focus a lot on Christmas because that is the one holiday that we can spend a lot of money on gifts, food and other things. It is the one holiday out of the entire year that can break a family budget and put them in debt the following year or even the following two years. It is because of what Christmas can do to our budgets that Amy feels it is important to discuss cutting back and changing our attitudes about the amount of money we spend at Christmas.

Page 145 - TIP TWO – MAKE YOUR OWN VANILLA EXTRACT

A reader of Amy’s newsletter wrote in to say that she makes her own vanilla extract to give away for Christmas presents. She goes on to say that you can buy vanilla beans at health food stores. Split a bean lengthwise and place in a tall narrow jar filled with vodka. It will have to age several weeks and it won’t be as dark as the commercial vanilla. I have been doing this for years. I buy vanilla beans from Vanilla Products USA. I split two beans lengthwise, and bend them and put them in a half pint canning jar. Then fill it with Vodka, put on the lid and I put it in a dark place for several weeks – usually about two months. Then I shake this bottle once a week. When the extract is used up, I add more vodka to the jar and start over. You can do this a couple of times. The end result is pure vanilla extract at a fraction of the cost of the commercially made. I too have given this away as a gifts and it is a welcome gift to someone who loves to bake.

Page 146 - TIP THREE – DO YOUR CHRISTMAS SHOPPING AT THE GROCER Y STORE.

A reader wrote in that she would rather have items from a grocery store for Christmas, than a gift she couldn’t use. She gave the example that she would appreciate a month’s supply of toilet paper. Many grocery stores now sell gift certificates. If this person were on my Christmas List, I could simply go into my pantry that is stockpiled with all sorts of things and I would be able to give a wonderful gift basket of several items from the grocery store. Also many grocery stores sell other “gourmet” items that some people would enjoy.

Page 146 – NEWSPAPER KINDLING

“Starting with one corner, roll a single sheet of newspaper into a long tube less than 1 inch in diameter. Fold the tube into a V. Continue by alternating and folding over the underneath side until you have only 1 inch ends left Tuck these under so they are secure.”

“This type of newspaper kindling is so dense you will need to use crushed paper to start them burning. They burn hot enough to start a log burning without the use of wood kindling. About 10 will be enough.”

Hey, I think this would make a great gift along with some of those long match sticks and some of those pine cone starters from page 124 (from our reading on March 14). Maybe you could find a used book with FDR’s Fireside Chats. That would make an interesting gift for people that love a fire in the fireplace and love history too.

Page 147 – THE SNOWBALL PRINCIPLE

“When a portion of savings is reinvested in tools and skills to save money or to earn money, the savings will compound or snowball.”

I am going to quote the following scenario that Amy gives. It is worth quoting in its entirety as it shows not only creativeness but a willingness to be patient to see a goal reached. This is pure Amy Dacyczyn.

Year 1. Craig and Susan Albright have goaled themselves to save up a down payment to purchase a house in five years. But Craig’s income is modest and at the end of the first year they have only saved $100.

$100 Saved.

Year 2. Craig and Susan put $50 in savings and spend $50 on cloth diapers. The weekly savings of $6 enables them to begin bulk purchasing sale items at the grocery store. The cloth diapers saves the family $312 and the bulk sale purchasing saves them $600.

$100 + $312 + $600 = $1,112 - This year’s savings
$50 + $3 interest = $53 - Last year’s savings plus interest
Total Savings so far = $1,165

Year 3. Craig and Susan put $600 into a three year C.D. The remaining $565 is used to purchase a sewing machine, a used freezer, and a used chainsaw. By freezing bulk purchased day old bread and sale meats, as well as their garden surplus, they are able to save an additional $600 on their food bill. Susan uses her sewing machine to repair clothing and to make handcrafted Christmas gifts to save $200. Craig uses his chainsaw to cut up delivered logs and deadfall to save $300 on their heating bill.

$1,112 + $600 + $200 + $300 = $2,112 – This year’s savings
$600 plus $54 = $654 - Last year’s savings plus interest
Total Saved = $2,766

Year 4. Craig and Susan keep their C.D. and put an additional $1,000 into savings. The remaining $1,166 is used to purchase a newer used car in excellent condition. The old beater car is sold for $200. This saves them $200 on gas and $500 on maintenance annually. Susan’s sewing skills improve and she is able to earn an additional $900 by selling her handcrafted items and doing alterations.

$2,112 + $200 + $500 + $900 = $3,912 – This year’s savings
$600 + $54 + $1,000 + $60 = $1,714 – Last year’s savings plus interest
Total Saved = $5,626

Year 5. Craig and Susan keep their $600 C.D. and leave $4,614 in savings. Craig uses $400 to purchase and fix up a utility trailer. With this he is able to haul home wood already cut and split for the same price as the delivered logs. With this time savings he hires out to clean garages and haul the contents to the dump. He gleans the good stuff and holds a yard sale. This effort earns $1,700. In a brilliant stroke of financial genius they spend the remaining $12 to subscribe to the Tightwad Gazette newsletter. The ideas they learn save $800.

$3,912 + $1,700 + $800 = $6,412 – This year’s savings
$600 + $54 + $4,614 + $276 = $5,544 - Last year’s savings plus interest
Total Savings = $11,956

Whew – that was a lot of typing, but I really needed to quote Amy verbatim. What she describes could still easily be done today. I know people that would pay for someone to come and haul junk away and have firewood delivered to their house. I also know of women, like some fellow bloggers, who sell their handcrafted items on the internet. Also, it is hard to find someone to do alterations and when you find someone, you tend to spread the word to others. So, everything that she described is still relevant today.

Amy does go on to describe a spendthrift couple that saved $100 at the end of year one. They spend the $100 on a dinner out on the town. The second year they have saved another $100. They buy a small TV for their kitchen. At the end of year 3 they have saved another $100. They have a friend that needs to sell his Nintendo so they buy it. At the end of the year they have saved another $100. This couple takes that $100 in year 5 and spends it on a hotel getaway. “This couple, Bunni and Clyde live next door to Craig and Susan. Bunni and Clyde think that people like Craig and Susan get all the breaks.”

I would like to say that just as this fictional couple, Craig and Susan, found ways to save money, the same can be said of “finding” money to put towards debt. I am a big advocate of taking extra money to pay on one debt until it is paid off and then take the amount you would have paid on that debt and put it all on the next debt.

While some individuals would say that you should concentrate on the debt with the highest interest, for me I would prefer to pay the lowest debt off first and putting the payment on the next debt. Usually everyone has one small debt that you are making a minimum payment on . If that payment is $50 a month and you can tighten your belt and put $100 on that debt and have it paid off in 3 months. Then you add that $100 to another debt, you will soon see the same snowball effect take place on paying down debt .

When looking at debt, you see a mountain. But if you were to look at those debts as individual little bumps on the mountain, you would be able to handle the debt better. Chip at it, one debt at a time until you have it paid off.

I hope today’s reading was helpful. Tomorrow we will tackle pages 149 through 158.