|by Jason Steele|
Yesterday, I wrote about how reward cards are just one part of an overall financial lifestyle that allows you to profitably seek rewards. Today, I will continue to explain how this philosophy works for me.
Rule Three: Be Conservative
I am not talking about politics, I am talking about how you make large financial decisions. I remember the first time I purchased a house. I had just gotten my first job after college, and I was ready to move out of my parents house (my parents were very ready). When I spoke with a mortgage broker, they explained that I could borrow up to the extent that my monthly payments would equal one third of my monthly pre-tax income. I did the numbers and was shocked.
If I earned, for example, $36,000 a year, or $3,000 a month, that would mean that I could get a loan with monthly payments of $1,000 a month. Federal, State, and Local taxes would eat up about a third of my paycheck as deductions, so then, I would really be paying half of my take home salary as a mortgage payment. Then, you have to figure in heat, air conditioning, electric, water, sewer, trash, phone, and insurance. That would have easily added up to a substantial fraction of the remaining $1,000 a month. Finally, I figured a house required repair and upkeep that would be paid by management if I lived in an apartment. Lawns needed to be mowed, plumbing would have to be fixed, and appliances would spontaneously break down.
Had I borrowed the maximum amount, I would of had to live off of a few hundred dollars a month for food, gas, clothes, and entertainment, let alone savings. I would be living paycheck to paycheck. It would have been a recipe for default, foreclosure, and bankruptcy.
In the end, I chose a property well below what I could have gotten a loan for, and I got a roommate to help pay the mortgage. Not only was I easily able to make my mortgage, but my roommate became my best friend, and I had the money to replace the air conditioner when it failed during a heat wave.
When I make a large financial decision, I always choose the more cautious option. You never know when you might be laid off of your job, or come down with an illness that is not properly covered by your health insurance. These things happen, and being able to cut back when times are tough is often the difference between making your mortgage and loosing your home or worse.
Rule Four: Be Organized
I have written before about organizing your personal finances. If you have not read it, I encourage you to do so. While the methods I outlined are great ways to ensure your bills are paid on time, it is more of a financial tactic than a strategy. The overall strategy for keeping your finances organized is at least as important as the way you do so. Pay off all of your high interest debt before your low interest debt. This practice is well known to people who carry a balance on their credit cards, but is also useful to people who have other outstanding loans such as car, home, and school loans.
President Elect Barack Obama remarked during the campaign that he only paid off his school loans a few years ago. That would be a smart strategy, even though he could have paid them off earlier. Subsidized education loans are typically at lower interest rates than home loans. If he has a home loan, he is better off paying the royalties from his books towards his mortgage than his school loans.
The other way to be organized is to maximize your return on cost saving efforts. This blog is devoted to saving money with your credit cards, and I provide tips daily on maximizing your reward card returns. Some people clip coupons for 10 cents off of this or that, but I prefer to find two for one dinner specials that save me $15 when my wife and I eat out. It is not about being frugal, after all, we are still eating out. It is about realizing that we don’t have the time to find every coupon out there, and we will only focus our energy on finding the largest discounts.
What To Expect Tomorrow
Tomorrow, I will conclude with Rule Five, but also share some notable exceptions to the rule. Until then I welcome your comments, concerns, additions, and revisions.