Wednesday, August 5, 2015

"Home, Debt-Free, Home" Chapter 5: How We Saved $135,970.80

"Home, Debt-Free, Home”

Chapter 5

How We Saved $135,970.80

Really Understanding the Credit “Shell Game”

Today I want to show you that every time you are using accumulated credit debt of any type, you are paying back much larger amounts of money. Make no mistake, I intentionally referred to credit as a “shell game”.
Often we are so grateful to get into a house, chasing the American dream; we blithely overlook the fact of how much actual money we will be paying.
The shell game consists of three shells and a pea, it is presented as a game for gambling, but in reality, when a wager for money is made, it is almost always a trick used to perpetrate fraud. People are blinded by what they see short term.
While the mortgage loan industry is legal therefore not fraud, but I believe that the game has gone on so long that people tend to blindly ignore the bottom line of what it actually costs to use credit or a mortgage loan. Like the shell game, we focus on the pea being so easy to find and forget to watch the fact that the shells come up empty. We are so focused on what we are able to spend each month, we don't pay attention to the long term actual cost of signing a mortgage loan.

Let me show you just how much real money you are able to save if you get yourself out from the crush of the credit game.

While I have technically known that you really pay a
lot to borrow to purchase a house, I went to a mortgage calculator and discovered: I keyed in a mortgage amount that was in the ballpark of the price range we were looking at to purchase our new home of $165,000.00.
If we had taken a 30 year mortgage loan at 4.5% (the going interest rate when we purchased), the monthly payment would only have been $836.03. Doesn't that sound reasonable? Now that is all that showed up on the online mortgage calculator.

But then I pulled up MY calculator (on the left above) and multiplied the monthly payment of $836.03 by 360, which is the number of monthly payments we would have been making over the course of the 30 year mortgage loan.

The total amount paid would have been $300,970.80 (money spent)
– $165,000 (loan amount)
= $135,970.80 (our cost to borrow that money).

Does that number hit you as hard as it hit us? That is why we worked so hard to buy our new property for cold hard cash. 
This my friends, is the envelope that arrived with the Deed to our property, instead of a coupon payment book.

Now that you see how the credit game works, I present the not so smart way to pay off your credit cards...
I do not recommend this next step. At several points we refinanced the house to pay off our credit card debt. We were still on the brink of financial toxicity in our thought process. But, we wisely started using cash only from that point.
We focused on three points
1) Not using our credit cards. Basically we got rid of them, with the only exception for one card for online purchases. With this card, I immediately go to my bank account and pay the amount to the credit company. You should actually think about that too. Decide if having your information out there is worth the risk.
2) Using cash only. If we didn't have the money, we just don't buy it. Once you get the credit cars payment eliminated, you might be surprised how much more money you have to spend. Suggestion: Why not add up how much you are paying in credit card debit each month? Are you only paying minimum payments?
3) Building up an emergency cash reserve to pay for those things that you need. We are dedicated to this principle.

Honestly, I haven't read or taken the Dave Ramsey financial courses, but I know somethings we do fit into that system and it is one I would recommend highly, particularly how to pay off credit cards, budgeting with envelopes and prioritizing the establishment an emergency cash reserve.
Now I want to share some personal thoughts from some people in our community. Peter had some excellent suggestions I wanted to make sure everyone got a chance to read his thoughts.
"A couple things I would like to add. A bank is not a good place to store all of it keep an emergency fund on hand. Along these lines realize that paper and even hard currency will lose it's monetary value when the system crashes (Perky's emphasis added). One word about debt and bills which comes in 2 types IMO. Things like electricity, phone, food, etc. which are either the same or variable monthly charges can be budgeted for but hey if you don't pay and something is shut off be able to do without are not something to worry much about. Budget for them and well if you can't afford them or the system goes down be ready to do without. Other things like mortgages, car loans, credit cards, etc have a set monthly payment on a debt you owe. All of these things can be paid with 10% added to the payment (less or more is okay I make 20% on our vehicle) in order to pay them off and get out of debt quicker. This also has the advantage in some cases depending on your financial institution of being ahead in payments so that if you say had to stop paying for a time you would be covered. Now keep in mind secured loans are ones that they will take the collateral (home, vehicle) so in my mind part of prepping is making sure that does not happen thus the extra payments. Thing is if the system crashes who is to say I owe this and force payment as well so I guess I could put that same 10% into a savings but then what do I know my house is paid for and I am about a year ahead on my only vehicle loan."

LESSON from Bobbie: “Wish we would have had time to pull ours out before the crash. My husband actually called our agent telling her to get us out now (before the market even started crashing). She agreed and then left for a 2-week vacation. She did not inform us that we would need to sign a certain form to close our accounts. We were left out to hang and burn and that is exactly what happened. No money left to pull out of our accounts.
It was a sad day for us - even my husband's 401k's were lost. We had been contributing since the 1970s! Poof, gone in 15 minutes.
No more - WE control what little money we have now
Me too! I hope what happened to us doesn't happen to anyone else. It's an awful experience watching your life's savings go down the toilet right before you eyes.”

Did you take the first challenge and track your expenses as requested in Chapter 1? Any thoughts to share so far?
In conclusion, just remember every time you are using accumulated credit debt of any type, you are paying back much larger amounts of money.
So there is still another really scary step we took that enabled us to purchase our new home with cash, I will be sharing that soon.

Getting our of debt is important, so I have included links to two of David Ramsey's books on getting your debt under control.
Another way to save money is to learn how to do things yourself. That is the focus of the other two books (Foxfire is a series) below.


Contributor at the Homestead Bloggers Network

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