This column is dedicated to a simple concept; we don't always stop to think before we act and the consequences can be disastrous. Or they can simply be bad.
I was in an automobile accident two years ago where the results weren't good even though I was completely, 100% in the right. My eight day old car was declared a total wreck and I walked away from the accident. For two years I have tried to figure out what I could have done differently to avoid the collision and the only answer I can come up with would be to not have been on my cell phone because I may have been more aware of impending disaster coming from the south. On the other hand the police report showed that I probably may have saved some lives as a mother and baby were in line to be hit by the speeding truck, who ran the red light, and their older car wouldn't have had the protection mine had. I only bring all of this up because I believe we sometimes do our best thinking after the event with the consequences instead of before when we can still change the outcome.
Do you realize why credit cards were initially invented? To give immediate credit for the short term so we wouldn't have to carry a large amount of cash around or we could do or get something that we didn't have the money for but would have said money by the end of the month. That was it! The Federal Reserve has the same thing for its member banks: short term loans for banks who need the money to fulfill a need for less than a month. They can get the money from the Federal Reserve Bank or from another member bank and the rates they pay are high, 5.25%. (Federal Funds Rate and the Re discount Rate). Banks can currently get two year money at 4.95% so you wouldn't expect them to keep the short term funds for two years. That would be a poor economic decision.
Why do you finance capital good purchases, trips, dinners, clothing, etc. with credit cards at rates I dare say are probably double what you think they are? I know you had planned to pay them off but "things happen". The answer is they can't happen if you have a house with equity. Not unless you haven't thought about the consequences. That $7.50 purchase for fancy coffee and a muffin could cost $10 if you wait a year to pay it off; $12.50 if it takes two years and double, $15, if it takes three years. And the bad part of this is it does happen to more people than you could imagine.
How's your credit? Have you missed some payments, punished a vendor for something they did to you that you won't pay for (and later find out you are punishing yourself) or just ran out of money before you ran out of bills and all of this has ruined your credit? Not if you have a house with equity. Can't happen unless you want it to.
What about the 401k program at work? Do you put in enough to have the employer match it or do you find that you're just a bit short so you put in as much as you can even if it leaves some of the employers money on the table? Shouldn't ever happen if you have a house with equity . Your choice in this case takes no brain power at all.
I have done many (un)scientific studies and when it comes to automobiles I find that whether you buy one and pay it off with monthly payments or have one that is paid off you generally end up spending about the same amount of money each year. In the first case it is for the purchase while the second case is to keep the car running: repairs and replacements.
Most people can handle the certainty of the payments but only few can handle the enormity of the sudden repair and replacement costs. Why? Americans do not have sufficient reserves but that can't be if you have a house with equity!
If you are one of the approximately 47 million without health insurance and you own a house with equity I have but one question, WHY? You can't possibly want to gamble that you or your family won't have something catastrophic happen and either can't get help or can't pay for it and be forced into a horrible situation.
So the answer seems to be a house with equity. The real estate market is not increasing, so the news tells us daily and in fact might be falling in some places. Sales are at 6 year lows. To most people not involved in the real estate industry that translates to them as prices have reverted back to six years ago prices. I am not going to discuss the media and peoples thoughts on the real estate market. I am going to tell you that anyone can have equity in this house at any time, in any part of the real estate or business cycle, if they want to. A pretty bold statement? Not really.
We have 10 year fully amortized loans, 15 year fully amortized loans and 20 year fully amortized loans. The vast majority of our citizens have 30 year fixed or now even 40 or 50 year fixed loans to allow them to qualify for more house than they can afford. Even if you fall into the later category you can still build equity with a plan. Once you start building equity it becomes a mission and eventually a house without a mortgage.
But I talked about using your house for many reasons, all of which would take equity out of the house instead of putting it in. I think that if you sit down and study the results of my suggestions you will see that your cash flow will increase and you will be able to tackle your new plan that much easier. And do not forget that reserves are really the key so pull them out or your house and put them into the bank first.
Once you are on your way you will know the answer to the question in the title: there isn't one because you will have made sure that all your financial ideas are good.