High income-earners must also watch spending
Having a great income doesn’t guarantee that you’ll have no money problems. You’ve heard me say this before: it doesn’t matter how much you make, if you’re spending more money than you bring in, you’re headed for disaster.
Let’s take the example of Alex and Sam, who both have great jobs, two beautiful kids and a nice home. Yup, they have it all. But Alex and Sam suffer an ailment common to lots of hard-working, high-earning couples: It’s the We-Make-Lotsa-Mon- ey-So-We-Don’t-Have-To-Worry Syndrome! It was the WMLMSWDHTW Syndrome that had Alex and Sam move out of a perfectly good home into a much bigger home than they needed or could afford. When they saw how much equity they’d built up, it seemed like a good idea to use it to leverage themselves into a larger place.
Then — bam! — Sam’s job disappeared, and a minute later they were moving again, downsizing to get their housing costs back in line. The result: they eroded most of their equity with all their sales costs, and they ended up with less house than they had when they started. It was also WMLMSWDHTW Syndrome that had Alex and Sam guesstimating their expenses. After all, if you make more money than you can imagine spending, why do a budget at all? You can just wing it, right?
Wrong. That’s how Alex and Sam ended up spending four-and-a-half times more than what they thought they were spending on food.
People often operate under the false idea that bad things can’t happen to good people. That’s the only explanation for why they don’t have emergency funds. So when Sam was out of work for almost six months, the couple was totally unprepared for the drop in their income and ended up using a line of credit to fill the gap. When Sam got back to work, paying down the huge line they’d racked up became the next stress in their relationship.
People have an obsession with their equity as if it’s worth anything at all. But “equity” is only a word; it only becomes “money” if you downsize from a home that’s pretty much paid off to a home that’s valued at a lot less. Otherwise, equity is just an opportunity for borrowing.
That’s great for lenders, not so great for people who have to pay the interest on all that money they’ve borrowed. So get over feeling rich because you have equity. You aren’t rich until you’ve converted that equity into cash. And for heaven’s sake, stop thinking of your home as a source of credit. Your focus should be on working hard to get rid of your mortgage, not finding new ways to make more debt.
Today, if you haven’t already done so, talk to your lender about switching to a weekly accelerated-pay mortgage. You’ll end up making one extra monthly payment a year that goes directly to pay off your principal. On a $100,000 mortgage at 7 per cent, that extra monthly payment will save you $24,000 in interest. Gail Vaz-Oxlade is the host of Til Debt Do Us Part and Prince$$. Follow her on Twitter @GailVazOxlade. She blogs daily at gailvazoxlade.com.