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What salary do I need to buy a house?

What salary do I need to buy a house? I struggled with that question in my 20s and it probably kept me renting a year or so longer than I really needed to be. Then again, considering the housing crisis of 2007-2008, renting a year or so longer was a small price to pay to avoid potentially making the biggest financial mistake of my life.

One of the reasons for that financial crisis was not enough people asking that question. A second reason was banks being dishonest about the answer. For the record, I think buying a house is a good idea and it’s worth it. But you have to be sane about it to keep from getting into trouble.

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Linguistic analysis isn’t hooey

For the second time in two months, I’ve seen a case where a linguist analyzed writing and tried to conclude whether someone was or wasn’t the author of a suspicious e-mail message. The first was a threatening letter purportedly sent to Christopher Coleman, who was convicted last month of murdering his family, and the other was Paul Ceglia’s attempt to prove he owns a substantial share of Facebook.

The inevitable flood of comments calling such analysis “black magic” followed. But as an author, I have to give validity to it.

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Why working fast food and retail was good for me

One of my former high school classmates is concerned. Her seven-year-old’s life ambition is to work at McDonald’s.

I told her not to worry. I didn’t work at McDonald’s, but I spent 2 1/2 years working another, nearly defunct fast-food chain, and that motivated me more than anything to go to college. And then, working two years off and on in retail motivated me to finish college.

At 16, I applied for a job at my favorite fast-food chain. It was in decline at the time, but I didn’t really know that then. What I knew was they were hiring, and if I was going to work somewhere, I might as well like the food.

I blew them away at the interview, and I’d barely made it back home when I got the phone call offering me the job.

I had a lot to learn, but it wasn’t long before the district manager declared I was the smartest guy in the whole district. Himself included. I worked with a lot of interesting people. Some were my age. Some were much older than me.

One was even smarter than me. She was hired a year or so after me. She was an honest-to-goodness, card-carrying MENSA member. She talked like William F. Buckley Jr., including the accent. I understood about half the things she said, but at least I understood half of it. She talked to me more than anyone else she worked with, not that I was much of a challenge for her. But intellect is hard to find in fast food, so I guess you settle for what you can get.

At the end of the summer, she quit. I told you she was smarter than me.

Most of the people I worked with, and for, were much less successful. A lot of them came and went. We were high turnover. Management liked it that way.

On a couple of occasions, I nearly got turned over. One time, a shift supervisor called me lazy in front of a customer. (I wasn’t.) The customer said, “Well, you’re the one leaning against the door while he gets my order ready.” He didn’t like that at all. Pretty soon, he was challenging me to a fight. Knowing there was no way to win in that situation–I could stay and get beat up, or fight back, still get beat up, and get fired on top of that–I took a nonviolent approach. I wiggled my way out of the corner he backed me into, ran across the parking lot, and found a cop.

The shift supervisor wanted me fired over that. I wanted him to spend the night in jail. Neither happened.

The other time, I fell victim to a professional quick change artist. He was slick. He ordered a 50-cent cup of coffee. He paid with a rolled up $20 bill, which he tried to pass off as a single. He acted surprised when I handed him back $19 and change. So he had me change back for a $20.

At that point, I should have closed the drawer and asked him to leave. I know that now.

Being 17 and naive, I tried to keep up with him. And I thought I was doing a pretty good job, until he tried to get me to give him a $100 bill. I didn’t have a $100 and I knew it. And at that point, I called him on his attempt to shortchange me, and called a manager over.

The manager watched him mosey out the door, and we proceeded to count down the drawer. It was short beyond the allowable limit. He had taken me.

He couldn’t fire me on the spot, but he told me that would probably happen the next day, and sent me home.

I went home, told my parents what had happened, then retreated to the basement. I fired up the computer and wrote my account of what happened, including what the manager did wrong. And to defend myself, I also gave a nice account of other goings-on at the store. If I was going down, I was going to take the store’s poor management with me.

The letter quickly found its way to the corporate office in Ohio, and it wasn’t long before I was getting calls all hours of the day. Including when I was at school. Corporate was amazed to find out the letter that was causing such a stir had been written by a 17-year-old.

“With all due respect, your corporate policy sucks,” I told one executive. She asked what I thought they should do.

“Train your employees.” After all, they were trying to fire me for handling a situation improperly, but nobody had ever told me how you were supposed to handle that situation.

One day, while all of this was going on, the vice principal of the school took me aside. “What’s going on?” he asked. He knew something was bugging me. I told him the story.

“Imagine yourself a single mother with no education, not even a high school diploma,” he said. “You’d be completely at the mercy of those people.”

I didn’t agree with the man all that often, but he was right about that. And I resolved to never be at the mercy of those people again.

A year or so later, after all the store management churned, I told one of the new managers if he was bored, my file was probably the most interesting reading in the whole file cabinet. An hour or so later, he came out and told me I was right.

I quit in early August 1993. I was starting at the University of Missouri. The company was in bankruptcy, and the store closed about six weeks later. I visited one last time before it happened. By the end of the year, the chain had pulled out of Missouri entirely. I understand the chain is still in business, barely, but confined to a dozen or so locations in and around Ohio. Ironically, I’m traveling to the city it used to be headquartered in next week. On other business.

I have a fiery streak, and it was visible then, at least as much as it is now. My manager at my second-most recent job told me once that I could be difficult to deal with, but that was because I care, and given the choice, he’d take the guy who cares. Every time.

I worked retail for two summers and spring/holiday breaks as well, while I was in college. I sold computers. I had a mixed relationship with management there too. Some of the managers liked me because I knew my stuff and could sell a ton of product, as long as I believed in it. Some of the managers hated me because they couldn’t tell me what to do. I wasn’t going to steer a customer toward a Packard Bell computer just because some manager wanted to move a bunch of Packard Bells. I had more integrity than that. And one manager hated me just because I was white and had some college education.

I worked hard and I sold a ton of Compaq computers in my time there. And there was only one time a customer ever stumped me with a question. He brought in a weird cable and wanted an adapter to connect it to a modern PC. I now believe it was an IEEE-488 cable. What? Exactly. I don’t feel bad about that, because I guarantee there wasn’t anyone else who would have known what that cable was either.

But if they needed a memory card for an obscure IBM clone computer, or needed to know if a certain piece of software or peripheral would work with their old computer, I was your man. I either knew whether it would work, or it would take me about two minutes to figure it out.

I was good at what I did, but I didn’t like being controlled. I didn’t like that I wasn’t paid on commission, but the managers got bonuses based on monthly sales. So in effect, store management got commissions on my work.

But mostly, I didn’t like what one of the managers did to me the day after Christmas.

His name was Steve. He called me at home and said he needed to talk to me. In person. I asked if it could wait for my next shift. He said I needed to come in immediately. So I drove 20 minutes to see him.

He told me I was being laid off. The store was getting rid of its Christmas help.

Never mind I was going back to school in five days and probably would only work a couple of shifts anyway. Never mind my dad had just died and I really needed the money from those last few shifts. Never mind I’d always done everything they asked me to do. None of that mattered.

I saw him the day before I left for college, when I went in to pick up my final check. “How’s it going?” he asked with a fake game show host grin on his face.

“I’ve been better,” I said.

“What’s wrong? Are you sick? Are you hurt?”

“I’m leaving for college tomorrow, and I really needed the money from working this week. But none of that matters to you.”

On various occasions, the managers who did like me tried to talk me out of going back to school. Stay with the company, they urged. Look at them. Look at what they’d done without a college degree.

Yep, look at them. The best of them are probably still managing stores, somewhere. One of the managers who didn’t like me got demoted. And Steve, the manager who laid me off, got fired for sexual harassment.

I graduated college in May 1997, with a bachelor’s degree from one of the most prestigious journalism schools in the world. The same school hired me, fresh off my stint in retail, to unbox 400 IBM PC 330s and install memory, network cards, and operating systems on them. I understood the job was temporary.

When that job was done, they found money to keep me around. I worked for them part-time, off and on. A semester before I graduated, they offered me a full-time job with benefits, as a network administrator, and allowed me to work around my class schedule.

Today I’ve worked full time in some form of information technology or another for 13 years. I’m also a published author on two continents.

I’m successful. Not as successful as I want to be, but successful. I don’t necessarily have everything I always wanted, but my family and I definitely have everything we need. I’ve had some ups and downs, but the last two times I’ve quit a job to move on, someone’s tried to talk me out of leaving. And both companies tried to lure me back months afterward–one successfully.

Not wanting to sell junky consumer electronics again and really not wanting to sell processed sandwiches and fries again has something to do with all that.

Paid in full.

This week, my wife and I drove to the bank and signed some papers initiating a wire transfer to our mortgage company.

Yesterday, I had the satisfaction of logging into the mortgage company’s web site, clicking on my account, and seeing the words “paid in full.”

I moved into this house in October 2002. Five years and eight months later, I own it outright. Between the house and our cars, my wife and I have paid off nearly $180,000 in debt in those five-plus years.We aren’t completely debt-free yet. We still have some student loans from my wife’s college education.

Some would argue we should have paid those before the house. I opted against it because one of the loans has a very low interest rate (lower than the house), and because the payments are small. If I walk into work tomorrow and find out I no longer have a job (that very thing happened to me not once but twice in 2005), I can easily make those student loan payments. Scraping together enough for a mortgage payment is harder.

But I’ve gotten ahead of myself. Here’s how we did it.

The debt snowball
The trick is to make your minimum payments on all debts, but pick one debt to pay off first. Then scrape together some extra money to pay it off sooner.

In my case, I started with my car. The payment was about $300. I tried to pay at least $600 on it. Sometimes I paid $900. When I got my tax refund, I paid a whole lot more than that.

By mid-2005, I owned the car outright.

By then I was also married, so we turned our attention to my wife’s car. Her payment was also about $300. So we paid $300 plus $600, the amount I’d been paying on the other car. I had a better job that summer, and we had my wife’s income too, so it wasn’t all that long before I realized we had enough surplus piled up in the bank to pay that off too. So we did.

And that left the house. The mortgage payment was around $1,000. So we paid $1,900. When we started making more money, we increased that. In recent months, I’ve been paying $3,000 on the house since I now make quite a bit more than I made in 2005.

Last month, I noticed we were very close to having enough in the bank to pay the house off while still leaving a comfortable emergency fund. I called the mortgage company to find out exactly how much we’d need to do it, and to get payoff instructions. I figured out that every month we didn’t pay the house off was costing us more than $200. So scraping was worth it.

Finding extra money
I’ve always been a tightwad (just ask my family), but in my late 20s I fell into some bad habits. I didn’t rack up debt, but I definitely wasted more money on conveniences than I needed to. I saved a lot of money the last five years or so by packing a lunch and bringing my own coffee and breakfast to work.

Do the math. I used to spend $2 on coffee and breakfast, plus $5-$6 for lunch. Call it $8/day. Figure 240 working days a year, and that’s $1,920.

I figure I whittled my daily food bill down to about $3 per day, so I saved $1,200 per year. That’s $4,800 over the course of four years. That alone allowed me to pay the house off at least nine months early.

Don’t let other people spend your money
But this is the big one. Everyone has their own ideas what kind of car you should drive, what home improvements you should be making, and other status things that really don’t matter that much.

I drive a 2002 Honda Civic with more than 100,000 miles on it. I know some people look down on that. But the car is still in nice shape, still runs like new, and has never needed anything more than routine maintenance. Plus it consistently gets 35 MPG.

If I had traded that car in after driving it for three years like the marketers say you’re supposed to, it would have slowed down the house payoff by six months. Had we done the same with my wife’s car, we could make it a year.

Frankly I’d rather have the house. In fact, if I could turn back the clock to 2003, I wouldn’t buy the same Civic I bought then. I would have been better off buying an older one that I could pay off more quickly. I could have saved an extra $4,000 or even $6,000, and we would have had everything finished a couple of months sooner.

So what about the cars now? Well, what about them? Remember, I was used to paying $3,000 a month on the house, and that obligation is gone. A year from now, there’ll be enough cash piled up in the bank to buy two cars outright if necessary. Not that I expect to need that, since Civics are famous for going 200,000 miles and beyond. The last time I went to the dealer, they told me someone had traded in a Civic with 500,000 miles on it.

As for home improvements, yes, now it’s time to do some. But why do them sooner? The boob tube tells you to do it to increase the value of the house. But why would I want to do that? So I can pay more taxes? Without me doing a thing, the paper value of this house has risen nearly $40,000 since I bought it, at least according to the county assessor. That means I paid $400 more in taxes in 2007 than I did in 2003.

Unless I was planning to move, there’d be no reason whatsoever to be concerned about property value.

On the other hand, at this point in the life of the mortgage, I was paying more than $200 per month in interest. Now that I’m not paying interest, that’s like getting $2,400 per year for free. That’s enough to finance a modest home improvement project.

But then again, if there’s something else my wife and I want that costs $2,400, we’re entirely free to go after that instead.

In what order should you pay off loans?
This is the paralyzing question for some people. Mathematically speaking, you should pay them off in order of interest. If you have a credit card balance at 19%, a car loan at 7%, a mortgage at 5%, and a student loan at 3%, then you should pay them off in that order.

I’m not enough of a math genius to run the figures, but paying them off in the worst-possible order (reverse order), generally only slows you down by a month or two.

We paid ours off somewhat less than optimally because the student loan is less paralyzing than the mortgage. The minimum payment on the student loans is about 1/5 what the mortgage payment was. When I was out of work, the mortgage was a bit of a struggle to make during a couple of those months, whereas the loans are comparable in size to a utility bill.

If nothing changes between now and then, we can have those loans wiped out in another year. If the economy tanks and I lose my job and my income drops to nearly zero, I can nurse those loans along almost indefinitely, since I have numerous options for making the $1,000 per month it would take to cover utilities, groceries, and those loans.

What about retirement?
Some people argue you should give retirement planning priority over your debts, while others say the reverse. My wife and I haven’t done much for our retirement since we got married in 2005. Frankly I can see the arguments both ways. But we’re still in our early 30s, and now we’re in position to contribute the legal limit into Roth IRAs from now until the government starts making us collect. There’s still time for both of us to pile up enough to retire.

The counter argument is that it’s foolish to invest when paying down debt gives you a guaranteed return. In this economy, given the choice between investing or paying down debt at 6 percent, what’s safer?

While there’s room for criticism if you go either way, either way is preferable to doing nothing. Unfortunately there are all too many people who have lots of debt and little or nothing saved for retirement.

Don’t refinance!
This is another big one. I refinanced in 2004. I got a lower interest rate, and I switched from a 30-year mortgage to 15. The interest rate dropped, but I got nailed for a $2,000 closing cost.

I saved $500 in interest the first year, but I didn’t have the loan long enough to recoup the closing costs.

If your mortgage is the last thing you’re going to pay off and if you can drop the rate, or if refinancing will allow you to consolidate some higher-interest debt, it might make sense to do it, but factor in that closing cost. If you can pay off the mortgage in less than five years, it makes more sense to just pay it off rather than go to the expense and hassle of refinancing.

In my case, if I hadn’t refinanced, I may have owned the house a month sooner.

What about the tax deduction?
Short answer: Forget about the tax deduction. The tax deductions for mortgages are more overrated than Derek Jeter.

Let’s say you’re in the 25 percent tax bracket. I’d have to ask my accountant if such an animal exists this year, but the numbers are convenient. If I’m in the 25 percent tax bracket and I paid $1,200 in interest this calendar year, then that means in return for me paying my bank $1,200, the government is giving me back $300.

Every other time you spend $1,200 and get $300 back, it’s called losing $900.

For the past five years, I’ve been paying a lot more in interest than I ever got back as a tax refund. Eliminating the mortgage won’t completely eliminate my tax refund, but it did eliminate that interest. In effect, by paying off the house, I gave myself a $1,200 raise this year.

So there’s no sense in keeping a mortgage solely for tax purposes. If you need tax deductions, take your tax return to a good accountant. The accountant’s fee is tax deductible, and the accountant will probably find you additional deductions you didn’t think of.

If you’re in a higher or lower tax bracket, it can make a little more or a little less sense, but you’re still trading dollars for small change in any case.

In conclusion?
There are any number of things we could have done differently. But the important thing is we now own our home and two cars outright. It’s possible that doing a few more things might have made it happen a month or two sooner. But if I’d done everything the traditional way, I wouldn’t own the house outright until age 58 (if I’d kept the original 30-year mortgage) or 44 (since I refinanced to a 15-year mortgage). Compared to 11 additional years of paying interest, what’s an extra month or two if I get a couple of details wrong?

The argument for paying your mortgage off early

I’ve had a number of people tell me I’m making a mistake paying my mortgage off early. If all goes well, my wife and I will be rid of that debt sometime this year.

I can understand the logic behind keeping that "good debt." But that’s idealistic. I have lots of reasons for getting rid of that as soon as possible.First, there’s my personal experience. Right out of college, I invested everything I could, and for a time I looked like a genius because the market was doing gangbusters in 1998 and 1999. Then the double whammy of the dotcom bust and 9/11 happened, and I literally lost half of it. Now that those investments have mostly recovered, the market is in the toilet again. How much will I lose this time?

Of course, when the losses are piling up it’s a great time to buy at low prices and hold. If that were the only factor, I might do it.

But in the meantime, I know exactly what the return will be if I pay off the mortgage early. And it doesn’t really matter what the rest of the economy does.

The second factor is job security. Let’s look at my recent history. In 2005 I lost my job. About six weeks later I found another one. It wasn’t ideal, because the company was having financial problems and I knew going in that it might not last. I took it because I was on the hook for pair of $400 car payments and an $1,100 mortgage. By my math, the money I had in the bank would last about four more months. I took the job because I didn’t like my odds of finding anything better.

The job lasted four months.

When that ended, I interviewed with another company for a temporary job. It was anything but ideal: About an hour away, and it was only for two months. But it was late October, not a good time for job-hunting, and this would get me through the holidays. The interview was a home run.

I didn’t get the job though. Later that very day, the company did a round of massive layoffs, and the job I interviewed for ceased to exist. I lost the job before I even had it.

For two months I looked and didn’t find anything. I couldn’t even find a desktop support job.

Finally at the end of December I got another job. It wasn’t ideal either. The biggest problem was that it was 45 minutes from home. For seven years I’d worked 10-20 minutes from home. Did I want the job? No. Did I have a choice? Given my recent history, not really. My car was paid off but my wife’s wasn’t yet, so we were still on the hook for $1,500 every month. This job was secure for at least a couple of years, which was a lot better than the last two opportunities. So I took it.

I’ve looked for something closer since then. The problem is that there are so many other people who want any job that comes up. I’ve had a few phone calls, but never an interview.

My job is reasonably secure until September or October. Beyond that, it’s anyone’s guess. If the house is paid off before then, it doesn’t matter nearly as much.

In decades past, if you got a job with a good company, there was a reasonable expectation on both sides that you would work for that company until you retired. That world doesn’t really exist anymore. A lot of companies want turnover, because it keeps wages down. It almost seems like some companies try to make sure you won’t be around more than five years so they don’t have to give you a third week of vacation.

Other companies run themselves into the ground before you can stick around five years.

In that kind of environment, being on the hook for $2,000 a month for 30 years just doesn’t look very appealing. There will be periods of time in your career that you won’t have that money coming in. The only question is when it will be, and for how long.

Changing careers becomes much easier without a mountain of debt. A lot of us end up in jobs that don’t really suit us, for whatever reason. We go to college and study four or five years, hoping to figure out what we want to do with our lives. It’s really not enough time, and most of us don’t actually find ourselves until we’re somewhere north of age 30. By then it may be too late. We’ve built up our debts and our lifestyles to the point that we can’t afford to change careers and start over at the bottom of the pay scale again. And if you have to go back to school on top of that? Ouch.

What if you want to chase the American Dream the classic way and go into business for yourself? The problem with that is that most businesses can’t make enough to support the owner until they’re two or three years old. This is why most businesses don’t survive more than 18-24 months.

If you’re not on the hook for $2,000 a month, you can much better afford to weather a few lean months or even a couple of years until you can either climb the pay scale in a new career, or your business matures to the point where it can support you. Getting rid of debt puts you back in control of your own destiny.

Finally, I’ve seen what it’s like to not have debt. Some friends of my mother in law and father in law convinced them that it would be a good idea to pay off all of their debt, and they gave them a plan to do it in seven years. They did it. And even though the two of them had modest salaries–she was a schoolteacher and he was a disabled veteran with no college education, which limited him to jobs that didn’t pay a lot–without that debt, they were able to live very comfortably and retire while they were in their 50s.

Imagine what it would be like to have the freedom to change to a career that suits you, reach the point where you’re able to retire in your 50s, but not really want to retire yet because you enjoy what you’re doing.

Not having an anchor of debt hanging around your neck opens a lot of possibilities, doesn’t it? I think it’s worth sacrificing a couple of years of investing to get to that point.

Palladium and You

There’s been a lot of talk on the Web lately about Palladium. If you don’t have strong feelings about it, it’s probably because you’re not a bleeding-edge computing enthusiast. That’s OK. You’ll hear about it in time.
Basically, Palladium is Microsoft’s initiative to reinvent the PC and make it more secure. There’s a big uproar about it because it reeks of ulterior motives. Some fear Palladium means you will surrender all rights to your PC and cede them to Redmond.

I’m not totally convinced this is a bad thing.Read More »Palladium and You