As I am writing this, our nation’s political leaders are engaged in a fever-pitch debate that will determine whether or, rather, how abruptly we will go over the so-called fiscal cliff of expiring tax cuts and new spending cuts that will cause some level of financial indigestion for virtually all American households.
Regardless of the outcome of those debates, I submit that there is a more pressing issue at hand.
Many Americans play chicken with the borderlines of their own fiscal cliffs (money dramas, dilemmas, conundra and Catch-22s of their own making) on a constant basis. We create these cliffs by denying the realities of our money matters, avoiding what we fear will be the boring, impossible or frightening work of planning and investing for the future, and by holding fast to inaccurate and self-defeating money beliefs and behaviors. And as a result, the average American household is inclined to overspend, overdebt, undersave and underprepare for the financial future.
What’s this all got to do with real estate? Our decisions around your home are more impactful to and impacted by all the other areas of your life than any single other possession we will ever own. We’ve all heard that more American millionaires made their money in real estate than in any other field — and I suspect this is probably true. But I’ve also seen more Americans get into catastrophic financial trouble with poor real estate decisions than with any other money behavior or habit.
You can’t control what happens in Congress much beyond exercising our basic civic duties like voting and writing our representatives. But you have total control over your own decisions and actions, and your own decisions and actions have a much greater impact on our money endgames than anything that goes on in Congress or the economy at large.
Come what may, here are a few things you can do in your own personal finances to avoid creating and nose-diving off your own real estate fiscal cliff:
1. Buy and borrow sustainably. Take responsibility for your own financial future. That means making sure you can handle your mortgage, property taxes and other home-related obligations over the long term. Before you buy, ensure that you have a legitimate emergency savings in place to handle your home-related expenses in the event you have an interruption in income. Make sure that you don’t take home loan obligations that you can fulfill over time only if some major contingency takes place, like the market spikes, you get a wildly better job than you have now, or you are able to refinance the place.
Many homeowners who took no-down, interest-only, adjustable-rate mortgage (ARM) loans during the last generation banked on being able to refinance, which they couldn’t do when the market crashed. Then, they found themselves stuck with skyrocketing payments they simply couldn’t make when their ARMs adjusted. Don’t get caught in this trap: the trap of poor planning.
2. Plan, save and account. To buy and borrow sustainably, and bolster your personal finances against the shifting winds of the economy, it is more essential now than ever to consistently plan, save and account to yourself for the state of your money matters. The simple exercises of planning and accounting — in and of themselves — almost always inspire some level of action.
By putting down your existing income and expenses on paper (i.e., taking the first step of creating a spending plan), you can instantly spot places where you are spending more than you make, see where there’s a shortfall in the amounts you are saving and investing and shift your spending to align better with your values and priorities, as well as your future. Same with setting up an automatic savings or investment plan at your bank, or putting an hour on calendar every other Saturday morning to go over your finances and account back to yourself for how your spending is (or isn’t!) mapping back to your plan and targets.
If the idea of planning out your finances is just dreadful to you, consider using a do-it-yourself tool like Mint.com or track down a fee-only financial adviser, like those you can find at LearnVest.com.
The hidden upsides of planning and accounting is that they empower you to make sure you set aside funds for the fun experiences of life; when you’re developing your spending and savings plans, make sure to incorporate a line item of savings for travel, for adventures, for your pets or for whatever other sources of enjoyment you choose to engage in. That way, you can make sure that 2013 doesn’t end like so many others, with you having made a bunch of purchases you don’t remember but taken none of the trips or adventures you dream of.
3. Stand guard against the temptation to pull cash out or move up for its own sake. 2013 will be a year full of temptations to borrow to level up or move up, especially against your house. Rates will likely remain low; many Americans will start to see a recovery in their credit and income from recession levels; and lending guidelines are already shown signs of loosening.
If you want to move up because you need the space or change of location and your increased income and savings can support the move painlessly, go for it — this year will be great for that, too, as home values have a ways to go before they get back to their pre-recession highs. But if you’re just tempted to move because you (finally) can, or you think you should pull cash out against your home while you can, just to have it on hand, think long and hard before making such a move.
Financial integrity is now more important than ever for those who want to avoid repeating the mistakes of the last generation of homeowners, many of whom borrowed so heavily against their homes they found themselves upside down during the recession only because of their excessive refis and home equity lines of credit (HELOCs).
Before you make a move up, make sure you have the cash cushion in place to support six or even eight months of living expenses with no income, and that the new mortgage obligations will not disrupt your ability to save and invest for the future.
And before you pull cash out in a refinancing move, remind yourself that you are now putting your home on the line for whatever it is you plan to spend that cash on. Medical musts, home improvements or education might make the cut, but vacations, cars or other frivolities are certainly not worth risking your home for.