Should you afford what you can afford?

I live (and want to live) a comfortable life but I do not want to maximize my consumption just because I have money to do it.

In 2014, I was in the looking for a house to buy (primary residence). Like most rational people, I wanted to start with a budget. I wanted to find out answer to the following question:

“Given my income, what is the least amount I should spend on housing?” I searched for days and weeks, but did not find an answer.

Let me first elaborate on my question. I have good income. I tend to be frugal (simple living). But I did not want to be frugal to the extreme, I did not want to end up below the ‘suggested bottom’. I had often heard people talk about “You should not spend more than x% of your salary on housing”. I wanted to hear something like “You should spend at least y% of your salary on housing”.

I did not find my answer, here is what I found – I found hundreds and hundreds of websites and blogs telling me ‘the upper limit of how much should I spend’. Here are some examples:
1. Your monthly total debt should not be more than 43% of your take home pay
2. Your house should not cost more than 2.5 times your gross annual base pay

This related to my car buying experience too – the salesman always kept on coming back to monthly payments saying “It is only $391 a month, you can afford that”. And I was thinking in my mind “Should I afford it just because I can?”.

Coming back to my housing question – I do not have an answer today on how much is the minimum you should spend. Frankly, I did not start to write the post looking for an answer.

Affordability calculator

Affordability calculator

All I would like to discuss today is – should you afford what you can? Since no website was able to tell me the ‘suggested minimum’, I believe most people are not thinking along those lines.

Per the affordability calculator present on www.zillow.com, someone earning $100,000 a year without any other debt can afford a house worth $489,216. They make the calculations using some assumptions and those assumptions are not our focus today.

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Playing the game of Credit

Rich and poor both use credit. Poor need credit while the rich have mastered the game of credit. For them, credit means leverage, tax benefits, and liability insurance.

A few days back, I had posted ‘Why did I refinance my car loans today‘, I had someone ask me “Oh, so you went into debt with 2 cars” -> That is what prompted me to write this post.

What is Credit?

Let us first define what do we mean by Credit -> Credit is any form of borrowing. The most common forms of Credit include credit cards, student loans, auto loans, and mortgage.

Why rich use credit

Everyone uses Credit – rich as well as poor

Everyone uses Credit, the poor as well as the rich. At first it sounds ironical – why would someone rich borrow money (use credit/ go under debt). Well, read on, and by the end of this post you will know why?

The image conceptually represents what I am trying to say – poor use a large proportion of credit lines available to them. The middle class tries to minimize the use of their credit lines, and then the rich again try to use as much credit as possible.

This chart is more conceptual, we will make a couple of minor tweaks to it as we develop this post today.

Why do Poor use Credit

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