A Cautionary Tale
This piece here serves as a cautionary tale, for those who have dreams, hopes and aspirations. I hope to provide you with this warning, on some of the things you should consider before dragging yourself deeper into debt. Life can be viewed as a balance between sacrifice and experiencing the things that bring you joy. Unless, you are extremely lucky the experience of one, normally means living without the other, and that is something to always consider as you indulge yourself in life’s pleasures. So now I want to break down how over indulgence cost me $135,000 dollars at the age of 23.
The Long Term Goal
After graduating college, I had been saving and working towards the goal of eventually purchasing a home. In my eyes, investing in a home serves to be a proper hedge against keeping money locked up in equities, and other tradable financial assets. A home is like gold, it is something with inherent and tangible value. People will always need a place to live, so if you have a home you will always have a worthwhile asset. My first job post my undergraduate degree was at a property management company in the upper region of my state, and this experience further spurred my interest in real estate. So since the initiation of my employment, I had deliberately included in my plans to save money in the hopes to save enough to put a down payment on a home as an eventuality. In order to do this, that meant creating a precise budget to have a clear picture of where my money went and how it was spent, so that I could work towards my goal.
Lifestyle Creep
After working at the property management company for a couple months, fortune fell my way, and I was able to land a higher paying job, in a more desirable field of work for my major, so of course I jumped at the opportunity. However, as the well known saying goes, more money, more problems. If you haven’t heard of it before, I fell victim to a little known thing as “Lifestyle Creep”/ “Keeping Up with the Joneses”. While I was working at the property management company, I had a much more modest income, so I purchased a 2018 Subaru Legacy with about 35 thousand miles. It was a perfect car, with a host of safety features, which was also fuel efficient, just the vehicle I needed for what was then a daily hour long commute. Another standard strategic play to eventually reach my goal of saving for a home. However, once I landed my new job, my eyes quickly averted to the newer and shinier thing on the wall. Despite not needing a new vehicle, that is what I wanted the most, and in haste I decided to purchase a brand new Mercedes Benz. I can hear you shaking your head.
Debt to Income Ratio
How did this purchase hamper my eventual foray into real estate investing? Here’s how. Before you can purchase a home, you will need to find something important, money. In most cases, that means finding a lender that will lend you the amount of money you need for a home. What goes into the bank figuring out how much they can lend you to purchase a home, you ask, why, your debt to income ratio goes into figuring that out. Your debt to income ratio is exactly what it says, it compares how much debt you have outstanding compared to how much money you are bringing home gross.
Let’s Talk Numbers
So, for example, lets say that for Bank ABC, the maximum loan they will give you will be contingent upon you having a debt to income ratio of 50% (a little bit higher than standard practice). For the sake of this example, lets say you make $100,000 dollars a year. Then the maximum payment Bank ABC is willing to lend you would be $4,167 dollars, if you have no other outstanding debt obligations. Doing a little bit of reverse math and magic we can say that this would translate to a loan total of roughly $600,000 dollars for a home. Now lets see what happens when you add a $1,000 dollar car payment to this example. In short, if you were to add $1,000 dollars to your monthly debt obligations, it would cost you about $180,000 in potential loan dollars! and that, to a somewhat lesser extent, is exactly what happened to me.
The Hard Truth
So the fact of the matter is, the rash decision to purchase a brand new car, that wasn’t needed, directly cost me in the amount of $135,000 dollars towards a potential worthwhile asset, a home. This is the critical thing you have to think about when you make a decision. Often when you make a decision there will be an impact, or implication somewhere down the line. The thing is you have to learn from these decisions, and make the right or more financially smart decision. Think of the long term goal, and how your impulsive decision can impact that.
What do you value more?
What do you value more, that is indeed the question? Through reading this article, you may believe that I completely regret the decisions I’ve made due to lifestyle creep. However, this couldn’t be further from the truth. The things I purchased have brought me joy, and act as a stress reliever for myself, so do I value that joy and stress relief more than $135,000 dollars, hard to say? But, these are the questions that you will have to ponder and think about. What matters more to you? As I said before, life is finding the balance between sacrifice and pleasure, and I hope this article has elucidated to you a potential example of how to navigate that balance. Thank you for the read and find your excellence.