Financial Freedom in One (Not) Easy Step

Like the rest of the U.S. this weekend, I was thinking about independence. (Okay, and beer and snack foods, but really, independence was the thing I thought about the most.) I was specifically thinking about financial independence, and how that relates to creating a life where you can spend all your time on things that matter.

Last week we talked about the baby steps that add up, and in the financial realm that can be brown-bagging your lunch or canceling cable. But if you want to make a lasting impact on your financial independence, you have to also tackle the big expenses, and I’m guessing your biggest one is housing. (Please don’t say it’s cocaine, because that will just make me sad.)

This might seem totally wackadoo, but the best financial move you can make for the long term is this:

Get rid of your housing payment.

Put that keyboard down and hear me out. I don’t mean this month or next year or even in five years. I’m talking about making this the One Giant Financial Goal of Your Life. You could be like Sisyphus finally pushing that boulder over the top of the mountain. Pure freedom.

If you’re young and/or renting, this concept might seem especially ridiculous. But I was once young and renting, and I did it. I had a big hit of luck that made my story move a lot faster, but the basic premise is the same.

My First House

I lived in the Bay Area for almost 15 years, and toward the end had built a successful consulting business. (I was in my early-30s.) I worked all the time and was making more money than I ever had, which still wasn’t a lot, but for me it was plenty. I was tired of paying rent and knew it was now or never, so I held my breath and jumped into the insane Bay Area real estate market.

I ran the numbers to see how much mortgage I could afford, which wasn’t much in that overpriced market, so I bought a tiny, cute house in a decent neighborhood in Oakland, and took out a 15-year mortgage, which meant a slightly higher monthly payment but way less interest paid over the term of the loan.

LESSON: Give yourself a budget (mine was 33% of my income) and stick to it. Don’t buy the best house, buy a pretty good house. (I would have loved a stylish condo in the city, but it was out of my price range.)

I fixed up my little bungalow and hung on for five years as the neighborhood improved, then hired a fantastic real estate agent and sold. For a lot more than I paid.

(The insane Bay Area real estate market is the part that sped up my story, but even if it would have taken a lot longer, my steps would have been the same. And I didn’t make a million bucks or anything – this isn’t that great of a story.)

LESSON: Do the work yourself, be patient, and find experts to help you.

My Second House

Now I was ready to get out of the Bay Area and move to Taos (with its much cheaper housing market). What I didn’t do was take the money and say, Well, I could buy an even nicer house and have a regular-sized mortgage. Nothing extravagant, maybe a couple hundred thousand. It’s the American way, for crying out loud! It wouldn’t kill me, I’d just have to work full-time, but look at the place I could get! In fact, I’m sure I need those steam showers and extra bedrooms! I do! Because I might have a party and everyone will want to sleep over! And take a steam shower!

I looked at one place in the mountains that was big, with all the extras, on five acres. I drooled openly. I looked at a gorgeous smaller house in town where I could walk to the Plaza and the grocery store and my beloved Taos Inn. After putting a lot of money down I still would have had a “reasonable” mortgage. Wasn’t it worth it to have a gorgeous house with all the trimmings?

No. It wasn’t.

I ended up buying a very nice, but modest, house north of town. It’s got a terrible road and schizophrenic internet and phone access. I have fantastic neighbors and the house is just big enough. And I don’t have a mortgage.

(Again – put the keyboard down. It can be done.)

LESSON: Stick to your budget! Go for less than you think you can afford.

This is getting long, so I’ll try to wrap up. Even if you’re a in a normal, non-Bay Area housing market and starting from scratch, here’s what you can do:

1. Buy a house you can afford. Consider buying even less house than you can afford.
2. Take out a 15-year mortgage.
3. Throw all your extra cash at the payment. Even if you put an extra $100 in every month, you can reduce those 15 years by a big chunk.
4. Make that last payment and either live there as long as you want, or sell the house and buy something else free and clear. Voila. No housing payment.

I’m simplifying, but not by much, and obviously, there are a lot of baby steps involved here, too. If you’re not ready to buy yet – you’ve got other debt to pay off first, you haven’t saved enough for a down payment – this will take longer. Everything worthwhile takes time. And if you already have a house, consider refinancing to a 15-year and at the very least, pick up on step 3 above.

And before you complain that my story is one in a million, it’s not. I know other people that have done this – different situations, same end result. Same freedom to pursue a Life on the High Wire. What do you think?