Wednesday, March 9, 2016

246. Take some interest in interest, save thousands

Most people work hard for their money and it is then with good reason that they hate paying taxes.

Taxes take up a significant part of our income and it seems every time we turn around there is another one. It’s not just federal income taxes, there are state taxes, sales taxes, and taxes on individual items like gasoline and cigarettes. Then there are local levies and taxes, which include schools, mental health, and even football stadiums.

The questions should be: Where are our tax dollars going and are they are being spent wisely? But of course, not everyone agrees with where their tax dollars are spent. Some get upset over their tax dollars being spent to help others but feel having the largest military on planet is purposeful spending. I might think it is ridiculous that we pay for football stadiums for billionaire owners and their millionaire employees and that more money should be spent on education, regulating clean air, infrastructure, and veteran services.

However, there is something worse than taxes that many people seem to ignore, even justify. Perhaps it’s an accepted consequence of materialism. For me, the money I hate paying is interest.

It’s not just credit cards, where if you don’t pay the balance off each month, the dinner at Roadhouse went from costing $50 to $60; or the living room couch went from $600 to $700. And it’s not just student loans, where interest on the cost of education takes an already ridiculous tuition to an outrageous amount and ties students to years of debt.

For me, the biggest waste of money is home mortgage interest. Even at the best rates, mortgage interest can take years of your salary from you, as total interest payments on a home can easily reach the $100,000 mark or in many cases double the amount of money you pay for your home.

People will often engage in tense negotiations over the smallest charges, or drive five miles to save three cents on a gallon of gas, but then readily accept the cost of time they pay for their house.

For me, it is not just the cost, it is where the money is going. Taxes provide many functions in our society. They employ people, provide services, keep us safe, educate us, help the needy, and provide infrastructure. Interest goes… where? Interest goes to the banks, their executives, and shareholders.

If someone purchases a $150,000 house for 30 years at five percent, after 15 years they have paid around $100,000 interest. That money is gone, poof! And if you pick up and move after 15 years and take out another mortgage for 30 years, the bank is basically charging you interest on your own money.

Home-buyers will haggle and debate over a couple of thousands of dollars on the cost of a house — mostly because they want to feel like they got a good price — and then freely engage in decades of throwing thousands of dollars down the drain. Just like buying a car, where salesman push the monthly payment, people don’t often consider the actual cost of what they are purchasing. Mortgages are built around monthly payments and the sales price, but not the total cost of the home.

And, as I wrote in an earlier column about mortgages, not many people stay in their homes for 30 years — they move and pay even more interest on the new mortgage. If someone owns three homes at the $150,000 level and stays an average of 15 years, they may spend as much as $300,000 just in interest over 45 years. That is more than $6500 after taxes (maybe about three months’ take-home salary) thrown away year after year.

Many justify this decision because of the mortgage interest deduction; however, the deduction is highly overrated for modest home purchases. Not surprising, the biggest benefactors are the purchasers of very large homes.

For good reason, it’s advisable not to touch retirement funds, but some out-of-the box thinking might wonder if whether the money is better spent paying off the mortgage, which is both an investment in itself and saves up to hundreds of thousands in interest. It pays to do the math and consider the many options, but paying off the home and accepting the tax consequences might be a win for everyone except the banks. Certainly there has to be a better way than having 70 percent of your early mortgage payments vanishing into essentially the cost of the loan.

Most people follow the expected financial path and understandably most people can’t pay for their homes in cash. But I might suggest, like buying a car, look at the big picture, not the monthly payment.

Consider the total cost of home ownership, including interest costs and private mortgage insurance, and compare it to other saving projections and tax implications. Also strongly consider 15-year loans, putting as much down as possible, never taking out a second mortgage, and making biweekly instead of monthly payments.

Of course, this is just my opinion and the take-away from this column is, I hope, that people work hard for their money and should consider where it goes. Taxes, despite their bad reputation, are the foundation of this country. When spent wisely, it provides the framework that not only ensures a First World existence but also creates free enterprise, preserves our freedom, and most importantly, affords opportunity.

On the other hand, most of us end up paying hundreds of thousands of dollars in interest over the course of our lives. It is money wasted, and it is what people should really be upset about.

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