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Financial Freedom

Financial Freedom: Own the roof over your head

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Life on the treadmill

We’ve been talking, on and off, about routes to financial freedom, defined as a life off the day-job treadmill that leaves you free to do what you want to do with your time, not what someone else decides you should do. It takes time to achieve this freedom. You need get enough education or vocational training to land a job that will produce enough income to allow you to build some savings, and you need to live not only within that income but below it. An important part of your early-escape strategy is to get a roof over your head that’s paid for.

Yes. Pay off your mortgage.

In some circles, that’s tantamount to sacrilege. But the fact is, the largest chunk of cash flying out most people’s doors is the mortgage payment, and most of that payment consists of interest. The putative income tax break, if you look hard at it, is negligible compared to the amount of money that goes down the toilet in the form of loan interest. Mortgage interest can more than double the amount you end up paying for your house.

If you have a program like Quicken, it’s easy to figure that amount. Using the loan calculator, enter your principal, the interest rate, and the number of months to pay-off, and the program will generate an amortization schedule showing, in detail, how much each payment reduces the principal and how much, in total, you will have paid by x or y date. You can accomplish the same calculation, though, with Excel or an open-source spreadsheet. Over at The Simple Dollar, Trent provides an easy step-by-step guide to setting up your own loan calculator in Excel.

However you arrive at the full picture, what you find can be startling. M’hijito and I owe $211,000 on the downtown house. At 4.3 percent, over 30  years we will pay $164,907 in interest alone, meaning that if we hang onto the place that long (and it this point it appears we will be forced to do so), we will pay almost $376,000 for the house. When I bought my first house, I paid $100,000 for it, borrowing $80,000 at 8.2 percent on a 30-year traditional loan. At that rate, I would have paid $169,200 for interest alone, way more than doubling the ultimate price of the house.

Whether it’s worth that much in 30 years is beside the point. The point is, a $211,000 mortgage represents $376,000 that doesn’t go into savings. It’s $376,000 that doesn’t go toward achieving bumhood. Every month that we pay toward this loan is a month that a principal-and-interest payment of $1,044 goes into someone else’s pocket.

If he were paying toward rent instead, that also would be money down the toilet: the renter puts money in someone else’s pocket with no hope of ever owning anything and no end to the outgo. At least when you buy a house, you have a chance of paying it off and putting a roof over your head that costs you little or nothing, from day to day.

(It must be noted, though that owning your house is never free. You still will owe taxes on it, and you’re crazy if you don’t buy insurance. Maintenance and repair costs can be significant. These expenses require most mortgage-liberated homeowners to self-escrow something each month in an account to cover such costs.)

The key to bumhood is getting out of debt, and that includes mortgage debt. A thousand bucks (or more) that stays in your pocket each month represents a large fraction of the amount a bum needs to live in comfort and contentment. Given that a person who lives modestly in a city with a reasonable cost of living really needs only about $2,000 to $3,000 net a month, a thousand dollars gets you a third to half-way there!

So…how on earth do you go about doing this? The cost of a house is crushing. What human being can possibly afford to pay for one in full in anything less than an adult lifetime?

Well, I suspect most people can. Here’s the strategy:

1. Buy a house that’s within your means.

Where is it written that you have to live like Pharoah? No one really needs a McMansion. Many smaller houses offer charm, comfort, decent neighborhoods, and ease of maintenance.

If living in a prestigious district is your thing, look for middle-class neighborhoods that border fancier areas. My house, for example, is in a very ordinary neighborhood that abuts a district of million-dollar homes, two blocks from a lovely park. Obviously, if you have kids the school district is important, and so you’ll need to add that consideration into your calculation. It’s worth investigating whether sending a child or two to parochial or private school might actually be cheaper than buying a more expensive house in an area with top-rated public schools, especially if you can qualify for scholarships or tuition assistance.

2. Get the shortest conventional loan you can manage.

Because interest rates on a 15-year loan are lower than those for a 30-year loan, the payments are not that much higher. For example, with a 6.5 percent rate on a 15-year loan for my original $100,000 home, the principal and interest would have been only $128 more than what I was paying toward the 30-year instrument.

Never take on a variable-rate mortgage. Adjustable rates always adjust upwards. Even when the prime rate goes down, banks find excuses to raise the mortgage payments.

And, given the communal experience of the past couple of years, we know never to accept anything “creative” from the loan department.

3. Pay extra toward principal.

Even if you have a 30-year loan, you can speed the payoff date by paying down principal each month or, if you’re paid semiweekly, by applying some or all of your so-called “extra” paychecks to principal. Another strategy is to apply all of one spouse’s net salary to principal, if you can afford to live on one partner’s income.

The downtown house, for example, cost so much that there was no way we could have made payments on a 15-year basis. However, if we added $130 a month in principal payments, we would pay the house off in 24 years instead of 30. Applying all of his roommate’s $400/month rent payment toward principal would pay the loan in a little over 17 years. Combine the two—$130 out of our pocket and $400 from the renter—and we could kill the loan in 15 years.

4. Build side income streams and apply that money to principal.

A spouse’s salary, a second job, a roommate, a hobby monetized: all these sources of cash can be used to pay down the mortgage. Because lowering principal cuts the interest portion of future payments, it’s helpful to pay extra toward principal on a regular basis (whether it’s monthly, quarterly, semiannually, or even just once a year). But no law says the extra payments can’t be sporadic. Whenever you get a chance to earn extra money, take it, and then use the net to pay down the loan.

5. Apply all windfalls to principal.

I paid off my first house by saving every post-tax penny of spousal support (having lucked into a decently paid job) and investing it. About five years after I bought the house, I used the cash I’d saved plus a small inheritance to pay off the mortgage.

Was it easy to break a chunk out of my savings to throw at the house? Nope. Have I ever regretted it? Nope.

It probably was the smartest thing I ever did. Once SDXB moved out, I could not have paid the PITI and survived on my net income without a roommate or a domestic partner, neither of which was in the cards. The house’s value continued to grow, so that when I was ready to move to a somewhat nicer house in a quieter corner of the neighborhood, I could pay for the next place in cash. And when I was laid off my job, there was no worry about whether I would lose my home.

6. Choose your house wisely.

Purchase with an eye to staying in the place permanently. That’s right: for the rest of your life. Consider whether the neighborhood is likely to remain stable or even improve over several decades, and whether the construction will stand the test of time.

Remember, your house’s value will increase in lockstep with all the other real estate in your area. While the place may appear to double in value over 15 or 20 years, so has everyplace else! This means that if you’ve paid off your mortgage and you want to avoid taking on new mortgage payments when you move, you’ll have to buy a comparable house. Paying off a mortgage means that you’ll be living in similar housing forever, unless you’re willing to take on new debt.

As you can see, this project entails some trade-offs. Unless you earn a ton of money, you likely will not be living in an elegant palace. To get into a decent school district, you may have to take a lesser house than you could have afforded in a neighborhood with weaker public schools. And you’ll need to seek contentment and ego gratification from sources other than real estate, downsizing your housing expectations to fit your long-term goal.

Freedom’s not free. But it’s worth it.

Financial Freedom:

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle

Image: U.S. Air Force Photo/Staff Sgt Araceli Alarcon. Public domain.

Financial Freedom: Escape from debt and build savings

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Debt and savings are directly linked. Every dollar you have to pay toward debt is a dollar you can’t put into savings.

Making your money work for you—investing plenty of savings in instruments that will pay returns that one day will support you—is key to building financial freedom. The only way you can get off the day job treadmill is to get out of debt and stay out of debt. In that respect, debt really is slavery: for those of us who are not wealthy at the outset, indebtedness means we must keep working to pay our bills. At the same time, debt sucks our savings away from us,  keeping us trapped on the treadmill of never-ending labor.

My argument is that you don’t have to be rich to be free. Instead, you need to build a comfortable lifestyle that does not require large amounts of cash flow, you need to be out of debt, and you need to establish several sources income (dividends from savings; side jobs) to help you build wealth.

The truth is, too many Americans literally are saddled with debt. The consequences of this have become obvious since the crash of the housing market: something between a fifth and a quarter of Americans owe more on their mortgages than their homes are worth. This issue has become so aggravated that many people who can in theory afford to continue making payments are choosing to simply walk away, rather than continue to throw good money after bad.

So: obviously, the best course of action is to avoid debt. When buying a house, select one whose cost is low enough that you can pay it off in 15 years or less. And in day-to-day life, never charge more on a credit card than you can pay with your current month’s income.

All of which is easier said than done.

If you’re already in debt, step one on  the road to financial freedom is to unload all revolving debt. Get rid of any department store and credit card debt—if it’s not mortgage debt, pay it off now. Any number of personal finance gurus provide lots of advice on how to get quit of debt. Dave Ramsey is probably the most popular, with his “snowball” approach to pay-off. I’m partial to “snowflaking,” proposed on the now dormant blog, I’ve Paid for This Twice Already. PT’s strategy sets a certain monthly payoff amount that exceeds the minimum required payment, and then she adds every bit of “found money” and every windfall, no matter how small. These “snowflakes” are paid against the debt immediately, as they happen.

In fact, getting out of debt is not so complicated that you have to subscribe to a guru’s system. All you need are will power, a goal, and consistent, regular payments against principal. The strategy goes like this:

1. Quit charging. Even if it means you have to parcel out your paycheck in cash secreted in envelopes to cover budget items, do not put anything on a charge card that has a balance due.

2. Pay substantially more than the minimum due against all charge-card and car loan balances. If possible, consolidate credit-card debt onto one card and pay that down as fast as you can.

3. To accomplish this:

a) Live frugally. Economize tightly until you can get rid of the debt.
b) Develop a second income stream and devote all of it to paying off debt.

The immediate goal, of course, is to get rid of noxious debt that cuts your buying power. Every penny you pay in interest for something you bought on time reduces the value of your dollar. So, if you’re paying some bank 21 percent for the privilege of buying things on its card, every dollar you spend on the merchandise is actually worth only 79 cents. That’s how much credit-card debt shrinks your standard of living!

But the long-term goal is freedom: financial freedom. Once you’re rid of revolving debt, you can work toward buying your shelter free and clear. And when you have that, you’re more than halfway to the exit from the day job.

After you’ve succeeded in paying off credit-card debt, it’s time to shift strategies. Now you have a newfound cash flow: the chunk of cash that was going to pay creditors is coming to rest in your bank account!

Hawai’i beckons. But resist the call.

Instead of diddling away your new real income, continue to live below your means. When using credit cards, never charge more than you can pay at the end of the current month’s billing cycle. If you find you can’t control spending on cards, then pay for everything in cash. This strategy will maximize your actual income. Instead of holding your salary less what you owe to lenders, your bank account will contain…yes! Your salary. Your whole net salary.

By living below your means—a habit you’ve already developed while paying off the cards—you will accrue money to put into savings. Take all the money you were spending on servicing debt and stash it in mutual funds. Some should be in a stock fund, some in a bond fund, and some in cash (i.e., the money market, CDs, or treasuries). This creates a kind of hedge: as a general rule, when stocks are up, bonds go down; when stocks go down, bonds rise. Because you earn more in the stock market, over time, than you do in the bond market, it’s a good idea to have somewhat more than half your investments in stock funds. To avoid being ripped off by fees, choose a low-overhead mutual fund issuer such as Vanguard or Fidelity. Arrange for dividends to be reinvested, and at the same time send in a set amount to each fund every month.

Do this above and beyond any 401(k) or 403(b) plan your employer offers. If your employer matches your retirement contributions, do not neglect to participate in the job’s plan. Even if there is no match, a 401(k) or 403(b) may allow you to contribute more pre-tax dollars than you can put into a regular IRA. Check. Also find out if you can put money into a Roth IRA, and if so, how much. Roths are preferable to regular IRAs because, even though you fund them with after-tax dollars, you don’t have to pay taxes on their earnings and you can pass the money to your children without having the government take the lion’s share.

In any event, the point is to get yourself into as many savings schemes as you can. If your employer offers a savings or a pension plan, by all means enroll in it. But also save and invest on your own. Your employer’s plan should never be your only investment.

At this point, you have laid the three building blocks for financial independence:

1. Live below your means.
2. Develop more than one income stream.
3. Save and invest all funds not needed to cover living expenses.

You now have only one remaining challenge: Get a roof over your head that costs you close to nothing. Once you have that, financial freedom is within your grasp.

More, then, to come…

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle
The roof over your head

Should you pay off your mortgage?

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Preparing to write the next installment in a series on achieving financial freedom, I ran some figures to compare the result of paying down a mortgage with extra monthly payments toward principal with investing the same amount monthly in a mutual fund. What I discovered runs against my theory that you’re well served to pay off a mortgage as fast as you can.

I still think that’s true if you’re getting close to retirement. In retirement, every debt should be wiped off your books, because you will need all your cash flow to live on. However, if you’re younger—say, anywhere between 20 and 45—and your mortgage rate is low compared to returns on equity investments, it would be to your advantage to invest extra dollars in a mutual fund earning around 8 percent. At today’s rates, this strategy allow you to accrue enough to pay off the principal faster than will throwing a monthly amount at the loan principal. Here’s how this shakes down:

M’hijito and I have a 30/15 mortgage at 4.3 percent. This means that for the first 15 years, we make payments at the 30-year amortization rate, but after the 15 years have passed, we either have to pay off the loan or we have to refinance it. The loan’s principal is $211,000.

We chose this mortgage because, at the time we bought the house, we believed the real estate market was nearing the bottom. We believed the house would drop in value another $4,000 or $5,000 and then begin to rise, probably at around 3 percent p/a. We figured that in five to ten years we could sell or rent the house and either break even or make a small profit. As everyone now knows, this was dead wrong: in fact, real estate was in free-fall, and the house is now worth at best $170,000, but more realistically around $150,000. This turns the loan into a real albatross. One strategy we are considering is to try to pay down principal with whatever extra monthly payment we can make (which ain’t much!), so that in 15 years, the amount to refinance might at least be no more than the house is actually worth, possibly allowing us to sell the house at that time.

In 15 years, with no extra payment toward principal, the loan balance will be $138,338. Monthly principal and interest payments are $1044; PITI comes to something over $1200.

Note that the projected loan balance is less than the most pessimistic present-day valuation. If the market finally has bottomed out and housing increases in value at 3% a year (a figure that is now being bandied about), in 15 years the house will be worth $233,695. That is less than we paid for it, but at least if we sold the house at that time we would walk away with a little cash in our pockets.

With me out of work, about the most we can afford to pay extra toward loan principal is about $100 a month.

Using Excel’s full value (=FV…) formula, I calculated the the return on a $100/month investment in a mutual fund earning 8% per annum. (Over at Vanguard, a number of stock funds and even a few bond funds are returning at this rate; one of them is Windsor II, in which I happen to already have a little cash.) I then used Quicken to run an amortization schedule, and compared the amount a $100/month investment would be worth in 15 years with the amount an extra $100/month principal payment would reduce the loan balance.

Assuming that our mutual fund investment averaged an 8 percent return, if we sent Vanguard $100 a month, in 15 years we would accrue $34,604 (full value =(.08/12,15*12,-100). If we paid an extra $100 a month toward the loan principal, in 15 years we would have paid the balance down by an extra $18,000 ($100 x 180 pay periods). According to Quicken, we would still owe $113,116.

With no extra payments, remember, we would still owe $138,338.

$138,338 – 113,116 = $25,220

Compare that with the $34,604 we would have earned in the mutual fund. Clearly, we would be ahead—by over $9,000!—by investing the money in a mutual fund with low overhead, such as Vanguard and Fidelity offer.

Well, now. Suppose you were not out of work, and so had plenty of cash to throw at the principal. Let’s suppose you really have plenty of cash and you decide to pay the equivalent of an entire P&I payment toward principal. Then what?

If you put $1,044 into a mutual fund every month, in 15 years you would have $361,264. If you paid $1044/month toward principal (in addition to your regular payment) on a $211,000 loan, you would pay off the loan in 10 years.

But by putting the cash into a mutual fund returning 8 percent, in 10 years you’d earn $190,995. Since in 10 years, with no extra payments, your loan balance would have dropped to $167,901, you’d still come out ahead:

$190,995 – $167,901 = $23,094

In other words, if you put the amount of an extra loan payment in an 8% investment, in ten years you would have enough to pay off the mortgage and still leave $23,000 in your pocket. If you used the same amount to pay toward the loan once a month, you would pay off the debt but would have no cash left over.

The conclusion is obvious: If your goal is to pay off your mortgage, you’re better off investing a regular payment in a decent mutual fund than paying the same amount toward principal.

This assumes your mortgage interest rate is lower than the rate of return from an equity fund. Note also that my figures do not take into consideration the small tax advantage gained by paying mortgage interest; this factor also would tend to improve the picture if you invested in the market.

Risky? Sure. But we now know that investing in real estate is wildly risky, too: more so, it develops, than the stock  market. My stock investments are rapidly regaining their pre-crash value, but there’s no credible sign of any recovery in the real estate market here. Even if the value of the house starts to increase at 3% p.a. today, in 15 years it won’t be worth anything like what we paid for it. If property values remain flat for any length of time (as it appears they will), we will lose not only our shirt but our pants, socks, and underwear.

I used to think my father was crazy because he refused to buy a  house until after he had saved enough to pay for it in cash. All the time I was growing up, we lived either in company housing or in rentals. His reasoning indeed was crazy—he bought into The Protocols of Zion, an irrational tract that led him to believe all mortgage lenders were part of a hallucinatory international Jewish conspiracy. However, the effect was that when he retired at the age of 53, he had enough cash to buy a house and a car and to support himself and my mother in a middle-class lifestyle without having to work.

Crazy like a fox, that old boy was.

A rabid fox, but still…

Financial Freedom: Work

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This is the third post in a series about aspiring to Bumhood—that is, achieving financial freedom so you can get off the day-job treadmill and gain control over the way you spend your life. Today let’s talk about gainful employment.

One of my editors at Arizona Highways told me about the anguish he felt during a three- or four-month period of unemployment after he’d been laid off a job. His wife earned a good salary, so it wasn’t that they didn’t have enough to live on. But he felt devalued as a human being. The words he used—I remember them to this day—were “If you don’t have a job, you’re nothing.”

Well, no.

Paid work exists for one reason and one reason only: to put food on the table and a roof over your head. You are not your job!

Some of us feel a calling for certain kinds of work. From the time I was about six years old, I wanted to be an academic, for example (having no clue what that really meant); my ex- always wanted to be a lawyer. Many of these callings are none too profitable: teaching, for example, is poorly paid in relation to the actual number of hours a good teacher puts into the job, and I don’t imagine many clergy or social workers earn much. Some of us still have no idea what we want to do when we grow up, and so have to take whatever job comes along.

Truth to tell, unless we fall into a large inheritance or win the lottery, to achieve financial independence most of us will have to pass part of our adult lives in a day job. We need to earn enough to provide for our children and to establish our own permanent financial security. This will likely entail holding a job for at least 15 or 20 years while at the same time practicing some basic money management.

So…what to do to make a living? Whatever brings in some cash.

Do you need to earn a six-figure income to break free from wage slavery? I don’t think so. Certainly SDXB did not: he was a reporter, and although The Arizona Republic paid a decent wage compared to other publications in this right-to-work state, it still wasn’t great. The period in which he made good pay as a freelance PR man was brief, during the bubble that occurred right before the savings and loan crash, which led to a recession almost on a par with the one we’re seeing now. But he did have an income, and by dint of frugal living and steady investment, he managed to step off the treadmill at 47.

Similarly, the Adirondack Chimney Sweep passed most of his adult life in modestly paid work, but because he lived within his means and had built a small sideline, when the city offered him a buyout long before he’d reached retirement age, he was in a position to accept. A friend of mine cleaned carpets for a living. He retired a millionaire, gave the business to his son, built a beautiful house in the woods, and went fishing.

I believe if you live sensibly, stay out of debt, save regularly, and invest your savings, you can build financial freedom no matter what you earn. I know a corporate lawyer who earns a fine income, but because he never put a high priority on managing his money, he’s still trudging to an office every day—and he’ll be 70 next fall. Others who have held lower-paying jobs as teachers, tradesmen, nurses, or, like my father, merchant seamen have been able to quit working altogether or to start new careers that pay less or interest them more.

There are three tricks to converting a job, any job, into financial independence:

1. Live below your means.
2. Develop more than one income stream.
3. Save and invest all funds not needed to cover living expenses.

Living below your means is going “live within your means” one better: the trick here is to stay out of debt and to live sensibly enough that you don’t spend all your income. Then use your unspent income to build savings. If you have a 401(k) or 403(b) to which your employer is contributing, be sure to take advantage of that. But save more, above and beyond pre-tax contributions from your salary.

As part of his strategy to quit his job at the earliest possible moment, my father never went into debt. Any debt. All the time I was growing up, we lived in rentals. He didn’t buy a house until he had the cash to pay for it in full. Now…he had some ugly reasons for this that had nothing to do with personal finance—I’m not giving his bigoted thinking enough credit to describe it here, except to say it was a symptom of the times in which he grew up—but the practical effect was that all the money that might have gone into house maintenance and mortgage insurance went into his savings, which he invested for the long term. The less debt you carry, so-called “good” debt included, the more you can save.

From my own experience, I can see that having a side income stream is crucial, especially if your day job is modestly paid. Teaching on the side allowed me to pay off the second mortgage on my home a year before the Great Desert University canned me. And, when my beloved employer kindly delivered six months’ notice that my office was to be shut down and I and all my staff thrown into the street, I landed a noonlighting job that allowed me to rack up a $10,000 cushion. It will keep the wolf from the door during this difficult 2010, when Social Security rules will bar me from earning more than a subsistence wage.

I feel extremely lucky (or maybe smart?) that over the years I’ve developed more than one set of marketable skills: I write, I edit, and I teach. Today the three of those allow me to earn salaried income and self-employed income: blogging, freelance editing, and part-time teaching in the community colleges. These will carry me over the period required for my investments to recover the $180,000 lost in the crash of the Bush economy.

At this point, I’m free of the day job, light part-time work will support me without having to draw down my savings, and I have enough independent income to deal with the other baleful result of the late, great economic mirage, an upside-down mortgage on a house my son and I mistakenly thought had fallen in value as far as it would fall at the time we bought it.

Things could be better: to be fully confident of having enough to carry me through old age, I would have preferred to work, save, and invest for another five or six years. But because I’ve lived below my means, invested everything in sight, and cranked extra money on the side, I’m far better off than most single women my age, and I’m clearly in a position to enjoy life without ever having to take on another full-time job.

Financial Freedom

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle
The roof over your head

Financial Freedom: Education and training

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The other day, Funny about Money started a series on making your way toward financial freedom, the state where you find yourself independent of the day job and free to do what you want to do with your life. We identified several components in this project, all of them having to do with personal finance.

Today, let’s start with the first of those: Education

One issue we should bear in mind is the difference between true education and vocational training. A bachelor’s degree in business, engineering, or nursing (for example) may line you up to get a decent job, but it may not make you an educated person.

Education furnishes your mind. Broad reading, writing, thought, and discussion make you a wiser person and cultivate your ability to think logically, to recognize flim-flam, and to make good decisions. For that reason, a good undergraduate degree in the liberal arts is useful—maybe even indispensable—to anyone who hopes to take a leadership role in industry, government, education, and the  law. Those of us who aspire to high-powered careers in any of those need a strong undergraduate degree in the liberal arts followed by a graduate or professional degree in business, law, science, or technology.

Some graduate degrees are scams and should be avoided. A master of fine arts in writing, for example, will leave you fully unemployable while teaching you nothing that you wouldn’t have learned by spending the same amount of time applying your bottom to the seat of your desk chair. Graduate degrees in vague new pushmi-pullyu programs with no real entry requirements, such as Arizona State University’s “master of liberal studies,” are similarly suspect: if you want a degree in the liberal arts, take the GRE and get yourself into a solid program such as English, history, or mathematics.

Undergraduate technical degrees are useful in that they provide high-level vocational training for young people whose cast of mind is not especially academic. Often the resulting job opportunities are better paid, at least at the entry level, than a bachelor’s degree in the liberal or fine arts will generate. Over time, however, people with bachelor’s degrees in subjects like business, education, and technology may need master’s degrees or professional certifications to move up in their trades.

On the college level, vocational training—which defines a large number of undergraduate and graduate-level programs—will set you up to get a job, assuming jobs in your major are available by the time you graduate. Vocational education includes degree programs in business, nursing, medicine, engineering, computer sciences, graphic arts, education, and journalism, to name a few. It must be remembered that none of these guarantees high-paying work. To the contrary,  some, such as journalism and education, pretty much guarantee their graduates low pay. Some, such as accountancy, provide entrée to trades that make a good living but that may bore the pants off you.

Many people truly are not suited for higher education. Sometimes this has to do with the student’s level of maturity—some should delay college until they are focused enough to profit from it. Having to earn a living for a while speeds maturity and creates a much better college student. Others are more likely to succeed in the trades than in low-level white-collar jobs; in the case of young people who are not interested in school or who find study painfully difficult and discouraging, a short stint in a community college and a decent apprenticeship may be a smarter strategy. A person with skills in the trades is likely to earn as much as or more than an ill-educated college graduate. Remember that most millionaires in the United States are owners of businesses that provide services like pest control and plumbing. The beauty of the trades is that the work can’t easily be offshored. Even though some of these jobs pay little more than minimum wage, an ambitious young person can learn the trade well and then build his or her own business. Once you’re hiring someone else for minimum wage, you’re in a position to make a good living.

Choose wisely and choose well: consider first what you really want to do; then whether you want to do that for the rest of your life; and finally what you can earn with the credentials the degree provides.

None of this, as we all know, is likely to be cheap. A young person who’s savvy to personal finance or an older but wiser person who’s going back to school can find ways to minimize the damage. The idea should be to avoid a heavy burden of student loans, which can saddle a young person for years—even, possibly, for the rest of one’s life.

One obvious strategy that many people overlook is simply to take your first two years of undergraduate work at a community college. These schools are much cheaper than universities and are often close enough to home that you can live with your parents for an extra couple of years. Yeah, we know: what a drag! But have you priced apartments lately? Lower-division courses at community colleges are usually staffed with professionals who are dedicated to teaching, in contrast to universities, which often foist the scutwork courses onto exploited graduate students, underpaid junior faculty distracted by the grinding quest to attain tenure, or senior faculty more interested in their research than in teaching.

It’s important to be sure that courses you take in a community college will transfer to the university of your choice. Many state universities have articulation programs with local colleges, and some state legislatures have mandated that their universities accept credit from community colleges; however, these rules may not apply to out-of-state colleges.

If you’re an excellent student but can’t afford an expensive private college, seek “Ivy League public schools,” such as Michigan or Berkeley. If you’re fortunate enough to live in a state that hosts one of these institutions, by all means try to get in. Savings can be huge, and the quality of education is good. If you have to go out of state, consider living and working there for a year or two to establish residency before enrolling—most state schools require a local driver’s license and evidence that you or (if you’re still a minor) your parents have paid state taxes.

Whether you go to a community college or an in-state university, living at home can save a great deal of money, lightening the load of student loan debt by many thousands of dollars.

Working your way through school is a hard row to hoe, but the reward can be huge: freedom from student debt. The federal government has a work-study program designed for students in need. If your family’s relative affluence renders you ineligible for this program, most universities and colleges have their own work-study programs or part-time job opportunities that provide a small salary and enough flexibility to work around class hours.

Summers offer you the chance either to take on full-time work temporarily, racking up some savings for the following school year, or to speed your way toward graduation by taking coursework. Two summer sessions of six credits adds up to twelve credits, the equivalent of a full semester. In your lower-division years, consider a community college for summer school—just be sure, before you sign up, that your university will accept transfer credits for the classes you take.

An alternative to work-study is a regular 50% FTE job at a university or college. Most institutions provide a tuition waiver for employees. Pay, especially in public schools, is usually abysmal, but it should cover studenty lodging and help pay the other bills. Jobs not considered part of a work-study program may have rigid hours that preclude attending certain classes. However, schools are famously flexible (it’s part of political correctness), and so you often can obtain work on campus that will allow time to take your courses. Pay, though poor, is usually better than student work, and you get a full range of benefits.

Look for scholarships, fellowships, and grants to help underwrite the cost of college or vocational training. A surprising amount of free money goes unused, simply because people are unaware of the opportunities. Some are offered by local groups, service clubs, communities, and churches and are so specific that even candidates who qualify for them don’t think of looking for them. Check websites that aggregate information on scholarships, and ask at college and public library reference desks for leads to funding opportunities.

Some students come up with enterprises to help underwrite costs, such as the guy who realized he could make a profit buying back students’ used books for more than the bookstore paid for them and then reselling them for less than the bookstore charged. Find a need and fill it: this requires some ingenuity, but a microbusiness run out of a dorm room or an apartment can go a long way toward defraying the cost of education.

Speaking of dorm rooms and apartments, refrain from regular drinking, partying, or drug use. These cost a ton of money. You’re already spending enough to keep you in the traces for the rest of your life. Why make things harder on yourself?

Book publishers, seeing a captive audience, have turned textbook publishing into assembly-line fleecing of the sheep. Textbooks are so expensive that some colleges are seriously considering abandoning books altogether and having students use websites. This is a recipe for further dumbing-down of America’s already dumbed down educational system, but that’s another topic…  Consider ways to keep at least some of the wool on your back.

First and foremost: buy books anywhere but at the campus bookstore. Amazon.com is almost invariably cheaper than college bookstores. Try to get your books used, and sell them back through Amazon, using the bookstore’s repurchasing program as your last resort. Look online for sellers and buyers; some online outfits offer a better deal than either Amazon or the bookstore.

A cheaper but less convenient alternative is to use the library. Many texts are put on reserve and so can be accessed during library hours; others are available for check-out and often can be re-checked for the better part of a semester. If a course’s texts are not on reserve, ask the professor if she or he will put them in reserve.

I don’t recommend asking the professor if you really need to buy the book. It’s extremely annoying. Faculty know about and dislike the cost of textbooks. If the professor didn’t think you needed the book for the course, he or she wouldn’t have put it on the syllabus! This strategy flags you in the professor’s mind as someone who’s in school for a rubber-stamp degree and who doesn’t care about the course, its content, or its value. It starts you off on the wrong foot: avoid!

Starting off on the right foot, though, is what adequate education or vocational training will do for you. Even if you have to go back to school later in life to obtain the training you need, a degree, a certificate, or an apprenticeship will help you to earn enough to position yourself for your future of financial independence.

Financial Freedom

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle
The roof over your head

Financial Freedom: An Overview

by

Having finally arrived at financial freedom, I’d like to write a series for Funny about Money on how to achieve financial freedom before you drop in the traces. We’ve seen that SDXB managed to escape in early middle age and that he’s never had to go back to a day job. So we know that with luck and smart financial management, it can be done.

If and when reasonably priced universal health care coverage becomes available in this country, quite a few Americans will be in a position to get off the treadmill. Too many of us work in miserable day jobs, pushing paper or waiting on other people who are in equally miserable day jobs, for no other reason than that we must have health insurance and there’s no other way to get it. When we’re freed from that trap, the possibility of running our own daily lives becomes a realistic choice…but only if we can achieve financial freedom: freedom from debt and from the pervasive cultural and psychological influences that herd us toward debt.

To engineer financial freedom, several components of personal finance need to be dealt with and brought under control:

• Education
• Work
• Debt
• Housing
• Transportation
• Savings
• The health insurance hurdle
• Strategies to maintain financial freedom

Though none of this is nuclear physics, it’s a process takes several years. Short of inheriting a fortune or winning the lottery, you can’t achieve financial freedom overnight.

To begin with, you need some education or training that will allow you to earn something more than minimum wage. While you don’t need to earn big bucks to find your way to financial freedom, you do need to earn above the bare subsistence level. You need enough income to pay off debt that can’t be avoided (such as student loans and mortgages), to stay out of credit-card debt, and to build savings.

Then you need to find housing that’s affordable, not only in terms of what you earn but within the framework of your goal to escape the rat race. The cost of your roof, whether it’s rent or mortgage payments, has to be low enough to leave something to put into savings.

The same is true of your personal mode of transportation. If you live in one of the few U.S. cities that provides good public transport, you’re in luck. The rest of us have to own a car. We need to find ways to keep the cost of car ownership from consuming funds that could keep us out of debt or be invested in savings.

The foundation of financial freedom is freedom from debt. All debt, including mortgage and car loans. This is tightly linked with another key component of Bumhood, building and investing a fund of cash. Debt and savings have been talked to death on the personal finance blogs, but we’ll review those issues in the coming series.

Finally, there’s the question of how you manage to stay free once you’ve managed to break free. Any number of issues bear on your continued financial freedom, ranging from adult children who need help to the lifestyle you want to (or can) sustain. Since that exploration is about to become the subject of FaM, over the next few months we should make plenty of discoveries along that line.

Financial Freedom

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle
The roof over your head