When EeBee turned six we threw him the obligatory childhood birthday party and invited everyone in his Kindergarten class to attend.
Being the person in charge at a child’s birthday party isn’t really my forte. So while I was trying to make small talk and be a good party host (while trying to hide my inner desire to sweat buckets), my very social mother was able to converse casually with some of the other party guests.
Later when the guests were gone she told me about her conversation with one of EeBee’s friend’s mothers. The family had just purchased and moved into a new condominium. Since their life goal was to live debt free, they had purchased the condo for cash. However, the mother expressed that it wasn’t in the greatest part of town. And when she mentioned the cross streets, my mother confirmed – sketchy area.
This got me to thinking. They had two small girls, both under the age of six, and they were living in a part of town that isn’t so safe, all in the name of being debt free.
Are they taking debt-free living too far?
I get that paying for a house with cash and living mortgage-free is HUGE, especially with the current job market. But is it worth it, if you don’t have to?
So I started thinking more about their situation to see if I could make any sense of it. Since I didn’t talk to them personally, a lot of my thinking is just pure wild guesstimating. But let’s say they have a plan. Say they purchased this condo as a foreclosure for $50,000 (it’s not an uncommon figure in my town these days). Now they live there rent free, and can funnel all the income they were once paying on rent to another new house fund.
How much do you think they could put away per month? $3500? Considering they probably don’t have student loans or credit card debt, both parents have good jobs, and they’re paying no rent, that might be a logical estimate.
$3500 per month would turn into $42,000 per year. In two years, they would have $84,000. If the market cooperates, and they can sell their current condo for a profit at $65,000, that would give them $149,000, which could easily buy them a pretty decent house in a nicer neighborhood.
If this is the case, their actions make a little more sense to me now. Two years in the sketchy part of town could equal a new house in the burbs for cash.
But say they didn’t buy the condo, and instead continued to pay rent until they had $149,000 saved up. Then how long would it take?
I come up with only three and a half years. (My calculations are below, but they’re kind of boring so feel free to skip ahead.)
Let’s just say they paid $1200 in rent for an apartment, that would bump their house fund savings down to $2300 per month. Assuming they already had $50,000 (what they hypothetically spent on their condo at the beginning of scenario #1), they would need to save $99,000 more. At $2300 per month, it would take 3 1/2 years to save that much for a new house.
(Start reading again here –>) I don’t know about you, but I would much rather rent for three and a half years in a safer part of town, than live in a not so nice part of town for two years. But that’s just me and my
snobby mortgage-loving ways.
Or possibly their saving budget is smaller and they are looking at 3 years in the condo vs. 5 years of renting. In that case, maybe it would make more sense. Either way, it brings up something to think about.
Would you live in a bad part of town (with or without kids) for two years if it meant living 100% debt free down the road? How about three or four years?
Where do you fall in the spectrum of “good” debt vs. no debt at all?