Borrowing Doesn't Have to be the American Way

I recently became interested in how banks make money. I never really thought too hard about that topic before. Obviously, they invest the fund that we put in the bank in order to pay us bank interest on savings right? Well, no actually. That’s a very small part of bank operations. Banks make a heck of a lot more money by lending. They loan money in the forms of mortgages, credit card accounts, personal loans and small business loans. They sell many other financial products as well, all of them earning money in fees and services.

In my travels, I came across the following statement at eHow, “While paying interest may not seem to be a great financial move in some respects, it really is a small price to pay for using someone else's money. Imagine having to save all of the money you needed in order to buy a house. We wouldn't be able to buy houses until we retired!” I want to make sure every one of you knows one thing... that statement is a pile of horse dung!

You Don't NEED a Mortgage

On the surface, the statement seems sensible...houses cost a lot of money, so you’d have to save money forever to pay for them. But when you look deeper, you see the truth.  First, a 30-year mortgage hardly takes you until retirement to pay off the home. Second, if borrowing were not the top method for buying houses, the values would be much lower. Borrowing makes more cash available, which makes home sellers jack the price up as high as they can possibly get it, figuring someone will be able to borrow enough. In the absence of borrowing, a house would have to be affordable, or it would never get sold.

The American Way?

My mother, now a U.S. citizen, emigrated here from her native Germany. This past summer, she told me about a conversation she had with her father when she had her first mortgage. He couldn’t imagine how she slept at night with a mortgage hanging over her head. All she could say to him was, “Dad, it’s the American way.” In Germany, mortgages were not nearly so common. He built his home with his own two hands, a little at a time, as he made the money.

Saving Instead of Borrowing

The lower the home price, the less time it takes to save money to buy it. Talk to someone who bought a home in the fifties or sixties. They cost as much as a compact car costs now. One friend of mine paid only $16,000 for her home...and still lives in it today. Although no one is going to find a house at that price right now, there will be plenty of smaller homes available for between $125,000 and $150,000. If you saved $1,000 per month, starting at age 18, you would have enough money to buy a home in 11 or 12 years. 

Although that may sound like a lot of money, if buying a home is your primary goal, it can be done. Borrowing doesn’t have to be the American way. It’s simply a matter of priorities. Ask yourself, is it more important to have a TV or a house? Does your current living space need to be so well decorated? Can you get by without that new microwave? Here are some practical ways to reach roughly $12,000 savings per year:
 

• Smart grocery shopping: Savings $3,000 per year
• No TV/Cable Bill: $1,000 per year
• Hand-me downs over new: $3,000 per year (appliances, clothing, decorations, etc)
• No Car Payment: $1,000 per year (interest savings)
• Share a single phone, wi-fi-only mobile phone: $1,000 per year
• Frugal Energy Habits: $1,000 per year (water, electricity, gasoline, oil, propane, gas)
• Frugal Cleaning Products: $1,000 per year (vinegar, lemon juice, rubbing alcohol, peroxide)
• Vacation Locally: $1,000 per year (drive don’t fly, house swap, day trips)

In fact, if you just wait ten years to have kids, you have the money already. Daycare alone costs 10k – 15k per year. Even if home prices go up again, you’ll still have a significantly lower mortgage that you can pay off much sooner at a much lower interest rate. Then you can afford those attractive decorations, daycare, far off vacations, etc. The coolest part about this plan, is that you won't really want to do those things any more. Once you get into a frugal lifestyle, it stays with you. You'll be financially healthier for the rest of your life if you take this approach.

Jessica Bosari is an Internet copywriter and blogger for various publications and her own telecommute writing jobs blog. You can read more of Jessica's work here. If you have any comments or questions about Billeater or about saving money, leave your comments in the form below or email jessica@billeater.com. Thanks!