Interest is to a great degree fixed spending when related to the loan on your sporty new convertible and the mortgage on your little gay cottage, though interest on credit card debt is discretionary spending. Controlling your spending at the mall on the latest threads yields the added benefit of less credit card interest spending.
What is interest anyhow? Obviously interest is the money you pay for the right to borrow someone else’s money, the added cost you pay for buying something before you have the cash to do it. But, what is interest? Interest is a penalty premium obscuring poor spending habits. If you pay interest your spending is not sufficiently planned.
Let’s look at the debts that incur interest and ways to reduce spending through reducing interest payments. It is important to think about interest as spending because many spenders think of interest as a nebulous fixed fee that they cannot control; nothing is further from the truth.
Mortgage debt, and consequently mortgage interest, is not necessarily a bad thing. When committing to a mortgage you have invested some portion of the purchase price of your home and borrowed the balance from a lender. In return, you pay the lender interest on the loan.
The loan amount you owe is fixed even as the value of the investment itself, your little gay cottage, can change. If you put $10,000 down on your $200,000 house, you invested 5 percent of the purchase price. As the house appreciates, you realize 100 percent of the appreciation even though you invested only 5 percent, because you promised to pay the lender interest for the use of their money. Putting a substantial down payment into the purchase of your home delivers a certain sense of ownership, reduces your total monthly spending and reduces the amount of interest you pay. Creating more savings before you buy lowers your total cost of ownership.
If you sell the same house for $300,000 you have realized a $100,000 gain on a $10,000 investment. Not bad, even when you consider the interest you paid to the lender for the use of their money. And as an added benefit, in most cases the cost of the interest on your mortgage is deductible from your federal income tax which reduces your spending even further, spending that would have gone to the Internal Revenue Service as additional tax. Mortgage debt and interest can work in your favor when handled correctly.
Yes, the value of your home can go down. The value of anything can go down. When the real estate market turns down there is little you can do. Unlike a stock or bond investment, real estate can’t be sold in the next trade on Wall Street. However, over time real estate markets have generally gone up at about the rate of inflation, and with the exception of a virus that knocks out half the human population of the earth, probably still will. A down real estate market only affects you if you sell, and if you did your due diligence and bought your house at the right price in the first place the amount your house will devalue is less than average. Enjoy your home and wait it out.
If you want to move, say closer into the gay activity of Wilton Manors, any adjustment in the value of your home is probably already embedded in the value of the property you are considering. Even though the value of your home is lower, so is the purchase price of the house you are considering. You needn’t fear selling and moving within your local real estate market. A realized loss can occur if you must sell and move to a different real estate market, say in the event of a new job in a distant city. A realized gain can also occur in the same circumstance.
Fear of a declining real estate market is no reason to not buy a home, and the bottom of a real estate market is actually one of the best buying opportunities you may ever have. Think of it as your dream home being on sale at 20 percent off! Nor is a booming real estate market necessarily the best time to buy a home; irrational exuberance can push prices to unaffordable levels.
Even though interest spending is discretionary in that you can choose not to buy on credit, interest becomes fixed spending on a purchase such as a home.
Fixed spending is spending you have to do to survive. It’s easy to determine. Food, clothing and shelter; that’s it! All other spending after food, clothing and shelter is discretionary; you choose to spend on those things you don’t really need. That is the spending you can easily reduce and along with it reduce the amount of interest you pay. The money you save looks better in your pocket.