6 years ago I thought I would never be able to pay for a house in cash. How would I? Houses are expensive, I had no money, I was bad at saving money, and I had a low income. This seemed impossible, then a year and a half ago I actually did it, and it was EASY!
I have written the details on this purchase in my deal #3 analyses which can be found (HERE). The total cost of the house plus rehab was $68,000. I didn’t save up any extra money than this to be safe, I just intended to spend everything I had to get this done. So where did the money come from?
The vast majority came from me getting rid of my car payment. That’s it.
If you have a car payment, you’re throwing away (at least a portion of) financial future. You can make all sorts of rationality about cost, maintenance, or try to reconcile the economic effects all you want. The fact is cars are a necessity to travel from A to B and anything above that is luxury. Unfortunately luxury is expensive, it depreciates, and its’ unnecessary. My car payment at the time was $415, which is about average. The car was a lease and had a bit higher insurance so my total cost per month came to about $650.
I sold my awesome car in 2011 and bought the cheapest, dirtiest, ugliest, truck I could stand to live with. Someone traded this old truck in at the car dealership I worked at and I paid $1500 for it. It had 250K miles worth of dents, scratches, peeling paint, a manual transmission, no radio just a hole in the dash. It had bald tires and a crack in the windshield. I later found it trying to be sold on craigslist for months at $2000 and no one would buy it because that was overpriced. I didn’t’ care about any of these things at the time though, I only cared about my future. All cars are temporary, nice ones become junk as time goes on so there is no reason to fall in love. Just look to buy the cheapest thing you can possibly stand to live with… then lower your standards a bit further and look again.
So while it cost me a bit of money to get the new truck running: ~$600 or so for tires and a windshield and a good cleaning. My cost basis for transportation had gone from $30,000 in debt and $650 per month, to $0 in debt and $50 a month (just insurance). This was around July 2011, and I bought the house in June 2016. That’s about 59 months.
59 months * $650 car payment = $38,350
The next thing I did was start learning about real estate. So between this story and the time I bought my first rental, I had to move my fiancé and I into a single family house and out of my condo. I made a similar sacrifice as the car. I knew we could afford a decent newer house that we would be proud of and would be similar to homes our peers were buying, the rule is to stretch when buying a house right?
You’ve heard that buying a house “is the American dream, that’s the best investment, that’s the goal”. Wrong, wrong, wrong. That’s nonsense, and just because people say it, doesn’t make it true. My goal is financial freedom, not stretching to buy a somewhat nicer house and then getting stuck in it for 30 years. Instead we bought a foreclosure vastly underpriced. It wasn’t pretty but we did some small work to it over a year and it didn’t take much rehab before we were able to refinance the loan and take out a big chunk of cash without increasing our monthly payment. We didn’t need money to make money; we used knowledge to make money!
This added $20,000 to our pool
The last thing I did was save a little bit extra each month that I normally wouldn’t have. This was tax returns, a little bit of cash each month; interest earned, any bonuses, etc. We didn’t take trips, we skimped on Christmas, things like this add up. Sure it sounds annoying, but really the ambition of seeing our goals come together was worth far more. My house pays every month now, and will continue to for decades. Most people don’t have their car from 5 years ago or remember what they got for Christmas 2 years ago. What seems like sacrifice is actually quite insignificant. So with tax returns going to this and interest earned the total increase in actual savings was well under $200/month on average, but that’s what they combined to be.
$200/month average * 60 months = $12,000
Lets total this up:
12,000 + 20,000 + 38,500 =$70,500
The total amount saved was a tiny bit over $70,000 and I spent all of it to get this deal done. It wasn’t that risky as I had done enough research to know I had exit strategies, what to expect, and what the worse case scenarios were.
So instead of paying out $650/month in car payments and insurance, I now have a house that makes me $950/month and will continue to do so for decades. This doesn’t even account for the equity I’ve made, the tax benefits I receive, and the high cost of depreciation I’ve avoided by selling the car. 5 years of driving a cheap car changed my financial life forever, and it feels like no sacrifice at all looking back. Making car payments is never going to build you wealth, but having a car payment might prevent you from building wealth. None of this is profound, it doesn’t require a high income, and giving up a fancy new car isn’t really much of a sacrifice. The real thing you need to commit to is TIME, and luckily, you’re going to spend this time no matter what. You can make that time extremely useful by thinking of your future self and how best to treat them. They won’t care about how cool your car is now, they will care about how well you have set them up for a future of low stress, and high opportunity.
Are you willing to give up your car payment for financial freedom?