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?

How Generation X can take this country back

I’ve done some reading in recent days. First I read that GenXers aren’t happy with Corporate America and the feeling is largely mutual. It appears I’m not the only one.

But I see an opportunity in this. We have a window to take this country back. And I have a plan.The way I see it, the unholy triumverate of big government, big corporations, and big labor has done its best to ruin this country. Big government’s mess needs no introduction. While big labor drove some necessary reforms, it lost its way, asked for too much, and today we see the result when we look at the sticker prices of GM, Ford, and Chrysler vehicles. And as for big business, I could get into specifics, but I see the problem like this: Large corporations think only quarter to quarter, chasing short-term profits and never considering the long term. They hand out raises to their workers that don’t keep pace with inflation, while their CEOs make six- and seven-figure salaries plus equally large bonuses, no matter how badly they do their jobs. Since the people who do the work feel undervalued, they tend to jump from job to job a lot, so institutional memory becomes a thing of the past.

Forget them. It’s time to escape and start over. Here’s the plan.

Minimize the risk.

You can’t very well escape corporate America’s stronghold while you’re saddled with debt. Most small businesses die within three years because at some point in that timeframe the owners find themselves unable to pay the bills. So as long as you have debt, you are corporate America’s slave.

But you can escape. It doesn’t really matter how much you make or how much money you owe–you can be debt free in seven years or less. The main reason this works is because creditors generally won’t loan you more money than you would be able to repay in seven years.

I don’t know how long this movement has existed. My mother and father in law did it in the 1980s. A classic entrepreneurial book by William Nickerson, published in the 1950s, mentions the phenomenon, so it must have existed then.

There are lots of subtle variants on the plan, but it boils down to this. Gather up all your debts–car payment, credit cards, mortgage, student loans, furniture, whatever. Figure out the minimum payment on them. Now take 10 percent of your monthly income. Pick one bill, and add that 10 percent of your monthly income to what you pay on it. (If you can afford more than 10 percent, pay that.) Make the minimum payment on all of your other bills.

After you pay off that first bill, take what you were paying on that bill and apply it to the next one. Let’s say you have two $300 car payments and a $1,000 mortgage. You could start paying an extra $300 a month on one car, for a total of $600, and pay $300 on the other car, and $1,000 on the mortgage. When the first car is paid off, the $600 moves to the other car, for $900 on the car and $1,000 on the mortgage. Once the other car is paid off, pay $1,900 per month on the mortgage.

The hardest part is initially coming up with that $300. The rest is fairly easy because you’re always paying the same amount every month, but the longer you go along, the faster you’re retiring your debt because you’re paying more principle and less interest.

How you pick the order is up to you. Mathematically speaking, you’re always best off applying your extra payment to the debt with the highest interest rate. But in every analysis that I’ve seen, the difference between paying them off in the best possible order and worst possible order is only a month’s worth of payments. Many people suggest paying off the debt on which you owe the least first, so you get the psychological boost of having eliminated one debt.

I started in November 2004. It took less than a year to pay off my car. Not long after that I got married, and it only took a few more months for us to pay off my wife’s car. Right now the only debt we have is the mortgage and my wife’s student loans. Barring unexpected emergencies this year, we should be able to pay off our remaining debt by the end of the year. (We may keep one of my wife’s student loans, since the interest rate is lower than the rate we get on one of our bank accounts.)

This is the most important thing: I fully expect to own my home outright at age 33. If I played by the rules most people play by, I’d make my last payment on it at age 58.

Here’s why I say to eliminate your debt. Take a look at what you spend every month. When my wife and I looked at our spending, we found we were spending more than $2,000 a month on car payments, the mortgage, and her student loans. Meanwhile, we were spending less than $1,000 on food, utilities, and everything else. So in theory, without debt, we could live on $12,000 a year.

Which leads to the second part of the plan.

Find a business you can start that will make you more than $12,000 a year

I’m not talking about multi-level marketing or any garbage like that. Start a real business that you control and makes money for you.

I won’t tell you what business to start, because I only know what works for my wife and me. But I’ll give you some questions that will get your mind rolling.

What can you do better than anyone else? There must be something that you know how to do really well and can leverage. Find it.

What do you know how to find or make less expensively than anyone else? This can replace the question above, or supplement it.

What do you enjoy doing? If you actually enjoy doing it, you’ll work harder and more productively. I would moonlight fixing Amiga computers if there were any money in it. Frankly I find modern computers uninteresting, so I don’t moonlight fixing other people’s computers at home, because I find it boring and stressful.

And finally, what problem do people have that you might be able to solve for them?

Mull those questions. It’s OK if you don’t immediately know the answer to any of those questions, or if you know the answer but they don’t bring a business plan to mind. Keep thinking about it, and keep looking around for opportunities.

I started looking for something in mid-2004 when I realized I didn’t make enough to support my wife and me if she was in school. I don’t remember now when I first had the idea that ultimately worked, but I followed through on it in June 2005. It took two weeks for anything to come of it, but it did finally work, and it’s still working today.

Once you get an idea, explore its feasibility. Look and see if anyone else is doing it. See if you can do it better or cheaper, or in a slightly different way than everyone else does it.

If the idea looks feasible, start doing it part-time. Don’t quit the job yet. The idea is to get established while you still have the safety net of a 9-to-5 job. If you’re thinking about a service, start advertising on Craigslist. If it’s a product, eBay and Craigslist are possible venues. The upside to Craigslist is that it doesn’t cost anything to advertise there. The real key is to look at your questions as an opportunity to get creative, rather than as blockades to your progress.

Here’s one strategy for dealing with those questions. Ask yourself those questions, especially around bedtime. Your subconscious will mull over the question even while you sleep. The answer will take some time to come, and will probably come at an unexpected time. But I’ve tried it and it works. Your subconscious mind may be the most powerful tool you have.

Notice I didn’t say to go borrow money. One of the reasons businesses die young is because they can’t pay their debts. Keep your overhead low, and you have a better chance of being successful. Operate on a shoestring.

Once you have an idea and something to do, give it a try on a small scale. At this stage, don’t put up any more money than you’re willing to lose, and don’t be afraid if your initial attempts don’t get anywhere or fail. You’re learning. If you’re starting while you still have a job and you’re in the process of paying down your debt, you can afford to fail a little. At the early stages, gaining information and wisdom and knowledge is more important than success. Get enough of those three things and you will find success, and if and when success wanes, you’ll find it again.

The problem with big government, big corporations and big labor is that they are successful, but by and large they are not well informed, they aren’t knowledgeable, and they certainly aren’t wise. That’s why we’ve seen so many spectacular failures in the last 10 years.

I see lots of small business owners who aren’t informed, knowledgeable, or wise either. When their success runs out, that’s probably the end of them. But there are also small businesses in St. Louis that stood the test of time and became institutions. Lots of Fortune 500 companies have come and gone in St. Louis since Ted Drewes Sr. opened a frozen custard stand on Natural Bridge Road in 1930. And lots more will come and go before the two Ted Drewes locations close up for good.

During this time that your small business is struggling and you’re gathering knowledge abd wisdom, you’re still working for someone else and you’re paying off your debts. But along with those struggles, you should have some encouraging successes. Follow those successes, and tweak things along the way.

Chances are, by the time you have your debt paid off, you’ll have a successful small business that’s capable of bringing in enough money to support you full-time. So you can step out of the corporate world and into business for yourself. From there, the sky’s the limit, because you’re no longer working hard to make money to support the pyramid of management above you–you only have to support yourself. And without the burden of personal debt and corporate overhead, you’ll be more free to be successful.

And how does this save America?

On May 11, 2006, Robert X. Cringely wrote, “I’m counting on Google and eBay to save America.” He didn’t elaborate, but here’s what I think he meant.

Just before the dawn of the 20th century, there weren’t a lot of large corporations in the United States, but there were plenty of bright entrepreneurs with ideas. Thomas Edison, Henry Ford, and the Wright Brothers are examples.

The problem today is that large public companies don’t breed great people like Edison, Ford, and the Wrights. The shareholders won’t stand for it. Shareholders care only about the profits on the next quarterly report, and if the company doesn’t deliver, investors dump their shares, the stock price drops, and then (and only then) executives start losing their jobs. So companies tend to play it safe to protect their executives.

We’re seeing this problem with eBay right now, of all things. While eBay remains hugely profitable, its investors got spoiled with exponential growth. Now that the profits are steady but growth has leveled off, investors are whining, and eBay is trying all kinds of goofy things to try to recapture the magic. None of it’s really working, but they sure are alienating a lot of their best merchants.

Two years after Robert X. Cringely wrote those words, I no longer know if eBay is the right company for this recipe to save America, but it has the right business model. Someone else will pick it up if eBay decides it doesn’t want it anymore.

The small entrepreneur can’t afford to compete head to head with General Motors. But Google gives small businesses affordable, targeted advertising, while eBay and other online marketplaces provide small businesses with a low-overhead distribution channel. Google and eBay (or their replacements) won’t directly save America, but the small, bright, nimble businesses that they enable will. Small businesses can afford to think long-term, they can deliver a better product with better service (and do it faster) than the huge, lumbering behemoths, and they aren’t slaves to whiney shareholders who have lots of money but little idea how to run the companies they invested in and no vested interest in the company’s long-term health because in five years they’ll have their money somewhere else.

And since small businesses have more control over their own destinies, they’re in a better position to adapt.

If we believe the Businessweek article I linked above, corporations need us GenXers. But in my experience, as well as the experience of hundreds of people who commented on the article both at Businessweek and on Digg, by and large the corporations don’t want us. So the best thing for us to do is to compete with them. And in the long run, I think this country will be better off for it.

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.

Don’t try to do it all at once

I’ve been writing a lot about personal finance lately. I make no apologies for that; it’s what’s on my mind. Something that happened this weekend reminded me of why it’s hard to get on the personal finance treadmill to begin with.

The numbers are big. They’re intimidating. You can’t possibly fix it all right now.

So don’t try to fix it all right now.I had an unplanned incident this weekend. It was unplanned, avoidable, and expensive. Some people will spend $400 at the drop of a hat without flinching, but my wife and I aren’t among them. I wouldn’t let myself get upset over it, but truth be told, I thought about it a lot over the weekend.

Mainly I tried to formulate a plan to make the money back quickly. And making $400 is certainly doable, but most people don’t come up with a way to make an extra $400 in just a day.

And that’s when it hit me. Don’t try to do it all in a day.

It’s like in baseball, when a team is losing by 8 runs the way the Indians were against the Red Sox for most of last night. Usually when a team is down by 8 runs, they’re going to lose because everyone’s going to go up there and try to hit an 8-run home run. But it’s physically impossible to hit an 8-run home run.

The way you win a game when you’re losing by 8 is by getting on base any way you can, and then getting around and scoring any way you can. If enough people manage to do that, they can chip away at the lead and soon it’s a close game again.

And that’s the way I have to approach this unexpected expense. Look for the opportunity I normally wouldn’t bother with. Take snacks to work so I stay away from the vending machine for a while. Chip away at it, whether it’s a dollar at a time or ten.

That trick works with big debts too. I once used a mortgage calculator to figure out the smallest amount of extra money you could put toward your mortgage and still see a benefit. On my mortgage, the amount turned out to be $10. Just paying $10 extra per month every month would pay the house off a full month early. Ten lousy bucks. Up that to a hundred and you can start talking about years.

So that’s the key. Nickel and dime your way out of debt, and then you can be on your way to nickel and diming yourself into prosperity.

"I don’t have enough saved up for repairs on a used car…"

I found myself involved in discussion about cars today. Two people are looking to buy something. One’s leaning toward a used car, while the other is bound and determined to buy a new car.

I know which will be retiring first.The logic behind buying used: There are lots of very low-mileage used cars out there, some of which are even recertified, have the bulk of the factory warranty on them, are eligible for an extended warranty, and cost $4,000-$5,000 less than a new car.

The logic behind buying new: For "only" a few thousand more, you get new car with a 100,000 mile warranty in its entirety.

The problem I have with that logic is that I’ve never sunk $4,000 on repairs into a car. The most expensive repair bill I’ve ever faced was $800 for a blown head gasket, and that was on a car that had well over 100,000 miles on it. If you’re paranoid about repairs, you’re much better off, from a financial standpoint, to buy the used car, figure out what the payments on a new car would be, and sock that money away in a bank account so you have it if and when you ever need it.

The person arguing in favor of a new car also argued a new car is more reliable. But not necessarily. A warranty isn’t a guarantee you won’t have problems. It just means that if the problem you have happens to be covered under the warranty, someone else is footing the bill. And no, most warranties don’t cover everything. Sometimes you get a choice between a power train warranty or a bumper-to-bumper warranty which will cover pretty much everything, but that bumper-to-bumper warranty will be a lot shorter.

And a lemon is a lemon, whether it’s new or old. You’re much better off researching what models are reliable and buying one with a little age to it rather than buying something assuming that it’ll be reliable because it’s new. The last thing you need is to get stuck with a lemon and be making high payments on it. Then you have the worst of all possible worlds.

Car companies have programmed us to think we need new cars all the time. It’s a pretty nice scam they have going. They sell us a car, sell us expensive preventative maintenance on it to keep the warranty good, charge a nice fat interest rate on the loan, and then in 3-4 years they convince us it’s time to trade it in for a new one. Then they get to sell the car for a big markup to some other sucker and the cycle starts all over again. Meanwhile, the consumer has nothing tangible or useful to show for it.

Somehow they’re still losing billions of dollars in spite of having one of the sweetest business models ever concocted, but that’s their problem. It shouldn’t be yours.

With proper maintenance (we’re talking things like regular oil changes here), most cars on the road today can go for 200,000 miles. If you’re concerned about breakdowns, carry a cellular phone at all times and get a AAA membership so you’ll have roadside assistance. The cell phone is something most people have anyway, and the AAA membership is a lot cheaper than perpetually making payments on new cars you don’t need.

That’s why the last car I bought was a Honda Civic with about 26,000 miles on it, and I doubt I’ll ever buy a new car again.

Buy a reliable car that you can pay off quickly, and then you can pay your house and other debts off that much more quickly because you won’t be sinking $400 down a bottomless pit every month for the rest of your life.

How to retire a millionaire without doing much of anything

I just finished reading The Automatic Millionaire by David Bach. It’s a good book. It promises to turn just about anyone into a millionaire in one easy step–if you do it right, you can make one phone call, do nothing else, and retire a millionaire.

I recommend the book.He’s saying essentially the same thing a lot of popular financial advisors right now are saying, but the spin is a bit different. You have to market something.

Essentially, what he says to do is to open up some kind of an IRA, be it a 401(K), 403(B), or Roth, and set up automatic deductions every month that happen before you get a chance to spend any of your paycheck.

If you were to start doing such a thing at age 16, it’s entirely possible to pile up more than $13 million by retirement age. Of course the later you start, the less you’ll pile up, but $1 million is within reach for most Americans.

It’s a boring way to make money but it works.

Of course he also advocates paying off all debts early, which makes it possible to save even more.

I believe that over the next decade, the rich are going to get richer and the poor are going to get poorer, maybe much poorer. People will blame the politicians, but I don’t know that politicans have much control over this situation. Here’s what I expect will happen.

A lot of people are getting non-traditional mortgages without necessarily understanding all of the terms. In many instances, at the end of five years, they will owe the entire cost of the house. Large numbers of people aren’t going to be able to afford to do this, and they aren’t going to be able to afford to refinance because they won’t be able to afford the higher monthly payments.

The homeowners will be forced to sell. And since so many of these mortgages are being handed out now, at some point there will be more sellers than buyers. That will be the end of today’s real estate boom. Thosee who have cash will buy these houses at depressed prices and rent them out to former homeowners who can no longer afford to buy a home.

When the real estate market recovers, which it will, the people who bought lots of real estate at bargain basement prices will be extraordinarily wealthy–both from the rising value of the property they bought, and the money they made by renting it out.

I know what I need to be doing. I’m ahead of the game on paying off my mortgage. I need to get better about dumping money into a Roth IRA. And right about the time I make the last payment on the house, I expect I’ll get my yearly bill from the county, and for the first time ever, the number on it will be lower than it was the year before. That’ll be when I know it’s time to go for a walk and look for For Sale signs.

This is a good time to be buying financial books, using their advice to get your finances in order, and wait for up-and-coming troubled times. Because for the people who get out of debt now, the next depression (let’s not mince words here–when the economy is in the toilet, it’s called a depression) will be an opportunity.

Pay off a mortgage in five years

Thanks to some circumstances where somebody knew somebody who knew somebody, I found myself tonight at a seminar where John Cummuta was speaking. He’s the guy who you may have heard on the radio hawking a system called Transforming Your Debt into Wealth. From him, I learned how to pay off a mortgage in five years.

Hopefully I won’t get into too much trouble by presenting the simplified version of his plan.The secret of credit is that creditors will not extend you more credit than you can conceivably pay off in a fairly short length of time (like, less than a decade). The secret is to make that work for you, rather than for them.

His system is simple enough that you can plug it into an Excel worksheet. Mine has three equations in it. Here’s what you do.

Take 10 percent of your monthly income and use it to pay down debt. Pick the debt you can pay off the fastest. Forget interest. Pay the minimum monthly payment on all of your debts except the one you can pay the fastest. Add that 10 percent of your monthly income to the debt you’re working on. So if it’s a credit card balance with a minimum payment of $22, and you make $2,000 a month, you pay $222 towards that credit card.

Then, when that credit card balance is paid off, you take the debt you can pay off second, add its minimum monthly payment to that $222. Keep cascading the payments until you’ve paid everything off.

Using that formula, I can have my car paid off in a year and two months, and my house paid off in five years and two months after that.

The more money you can plow into paying off debts, the faster it goes.

He said the interest rates are pretty much irrelevant because you are paying the debts off so quickly. So it doesn’t make sense to refinance or consolidate debts or anything like that because you won’t recoup the closing costs.

The formula is a bit crude because it doesn’t take into effect the minimum monthly payments you are making, nor the accumulated interest on the on which debts you’re making minimal progress. But he said those numbers pretty much end up in a wash. Following this crude formula, you’ll be within a couple of months or two.

Also, he suggested putting off investments until you have your debt eliminated. The exception is 401(K) or similar plans where employers match your contributions. The logic is that the compound interest on your debts will almost always be larger than the compound interest your investments can earn.

However, he did not say you should empty your bank accounts to pay debt. If you have enough money in the bank to be able to take half of it and pay your smallest debt, go ahead and do it, but otherwise leave your existing bank accounts and investments alone, suspend contributing to them (or do the minimum), and then, when you have the debt paid off, you can afford to contribute to them very aggressively. Remember, at the end of the plan, you no longer have those monthly house and car payments to make.

Someone who makes $40,000 a year and works 40 years will make $1.6 million over the course of that career. The idea is to pay as little of it as possible in interest, so that money is working for you instead of your creditors.

It seems to me that debt ought to be like college. It ought to be something we do for a few years in order to get something we need, but after a few years, it’s over. And if we have to make a few sacrifices along the way, just like we did for college, we ought to do them.

Update: It worked. Thanks to finding better paying jobs and applying that, we were able to pay the mortgage off ahead of schedule.