How Smart People Do Dumb Things

I’d like to tell you a story about my friend Robert. His story holds a powerful secret which I think is important to share.

The secret behind the true meaning of financial freedom.

Robert is a delightful person, and smarter than your average bear.  He had a 4.0 grade point average in high school.  From there he went to one of the top universities in the state where he graduated in just 3 years.  So there’s no denying he’s one smart person.

After college he quickly found a good paying job and moved to Florida.  Trying to get ahead he made a smart decision, and bought a new town home. This was a great time to buy as it was right before the real estate boom.  He got in early so this was looking like a wonderful start.  It was always his goal to be financially free.

Then he made an even smarter decision by getting 2 roommates to help pay the mortgage.  And talk about smart, their rent helped him pay about half of his mortgage.  This went on for about 3 years until Robert changed.  Almost all of a sudden Robert stopped realizing what financial freedom really is.

Through his hard work he had gotten some nice raises.  He also got caught up in the real estate boom and started making some poor decisions.  Robert figured he was on a goldmine since his townhome was now worth nearly double what he paid.

So Robert traded in his newer mid-sized Chevy for a high end European SUV.  He hadn’t finished paying off the Chevy yet so he just rolled that into his new payment.  After all he was making a good living and wanted to keep up with the Jones’.  Plus there was some other money he knew he can tap into…

His home equity!

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So Robert took out a HELOC to pay off some credit card debt, go on a 5 star honeymoon, and buy some new expensive furniture. I don’t know what the hell he was thinking at the time. Any financial expert (hell even a financial dummy) could tell you taking out a loan against the equity you’ve built up in your home is a bad idea.  Yes, there are some exceptions like using the money to invest in higher yielding investments or a legitimate emergency.  And no, a first class vacation to the Caribbean because you’re stressed out is not an emergency.

Taking out a HELOC to pay off a credit card debt is just plain dumb.  There are a FEW cases where it works, but that’s a whole other article for a different time.  The reason why it doesn’t make sense is that you’re spreading your credit card payments out over the life of your mortgage-which is typically 20-30 years! Now I’m no math wizard but isn’t the idea to pay off your credit card debt as fast as you can instead of as slow as you can?!  Plus you’re moving your unsecured debt into an asset creditors can come after.

The other 2 items he bought-the vacation and the furniture are not appreciating assets. You get no financial gain from going on vacation and the old couch held his butt up just as well as the new one.

Uggh! I was so upset with him when he told me about this. He is such a smart guy, but he made some dumb financial moves.  To make matters worse he and his wife decided to sell their town home and move to an even bigger house in a speculative area.  And this house was 3 ½ times more expensive than what he paid for his townhome.  He also lost the roommates.

Now he was in a much bigger house with less people helping to pay the mortgage, higher property taxes, and all that extra square footage means higher electric bills! And if you thought that was bad enough…  Shortly after moving into their new house his wife lost her job!

As you can imagine Robert has had a rough go of it for the past few years. All of this happened over roughly a 4 to 5 year period. Unfortunately I do not have good news to update you with on Robert’s story in 2010. Robert used all of his savings up and even tapped into his retirement savings. Luckily he still has the house, but things aren’t as easy as they once were.   Each month is a struggle for him just to get by.

It exhausts me whenever I tell this story. What was one bad decision snowballed into a 5 year span that changed Robert’s financial future.  All because he didn’t understand the power of financial freedom.

You might know a similar story. Stories of people buying things they can’t afford, and losing their homes have been plastered across every newspaper in the US. Let me just say this. The ‘perceived’ need for bigger, faster, better ‘stuff’ can quickly turn smart people into idiots.

What Robert failed to recognize is the power of financial freedom and the joy it brings. It’s the best gift you could give to yourself.  People like Robert need to realize financial freedom does not mean… Owning the big house, driving the fancy SUV, or taking 5-star vacations.

No, financial freedom is living comfortably within your means.  It’s not a certain dollar figure or class status.

I’ll say that again because it’s something I really want you to understand.

Financial freedom is living comfortably within your means.  It’s not a certain dollar figure or class status.

There are millionaires who can lose everything at the drop of a hat.  They’re not financially free.  They just have a lot of money and the bills to match.

Imagine if tomorrow you woke up and didn’t have to worry about making your mortgage payment, you no longer had credit card debt looming over your head, and you weren’t worried about a single bill. Just imagine the freedom. It’s very liberating when you don’t have to worry about, how to pay for your ‘stuff’.

Financial freedom can do this. What I’m talking about is ditching the bigger is better mantra. Instead opt for sensibility in spending. Take an honest look in the mirror and assess your situation. Look for areas of your life where you over spend consistently or can cut expenses.

>    Do you have a home phone and a cell phone? Ask yourself do you really need both?

>    Cut your cable bill. Do you really need 600 channels and cable boxes in every room? If you cut down to just basic cable that can save you hundreds of dollars a year!

>    Do you need a 5 bedroom house instead of 4 or 3 bedroom house? For many people their biggest expense is housing. If you can reduce your largest bill other bills will in turn be smaller like electric, heating, property taxes, etc.

>    Do you really need a 55 inch LCD flat screen or is a 32 inch box going to work the same?

>    Does a BMW get you to work any better than a Chevy?

>    Can you shop at Wal-Mart for clothing basics? Are the ones at Macys really all that better?

>    Will anyone know if you get your dining room table from a store that previously rented out their furniture or a brand new one from a furniture store?

I know this article sounds like you would be giving up a lot of ‘stuff’.  Though I can promise you that it’s actually quite the opposite.  This is about gaining something that will make you a whole lot happier than all that ‘stuff’.

I promise, when you implement these changes it will give you a greater appreciation of life’s little pleasures.

Keeping Money in Your Pocket,

Nancy Patterson

     
     
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