Going out with friends is far and few these days, and one topic that seems to always come up when we get together is managing finances. Usually this segues into interesting topics like the retarded things that people do (myself included) financially, and all types of mistakes we have made over the years.

I figure it would be great to share some of the ideas we discussed, and then realized that I couldn’t fit everything into one post. So I’ve split up the idea into multiple posts

Thus begins our epic journey into the “What Should Be Common Sense!” Guide

Rule #1: Borrow Within Your Means Don’t Be Stupid/Don’t Get Stupider!

Boom time is good! Boom time is great! I mean who doesn’t love a good economical boom, hell I wish every day could be a boom-tastic slide into wreckless abandon where we no longer have to stand the unbearable lightness of being! Throw some money here, lend some there, we’re all happy right? Business is good. We’re all happier…

But what happens when we wake up?

What happens when that drunken stupor comes to a grinding halt and the bitter-sweet taste of sobriety sinks in….What if you realize that the stone cold fox that you hooked up with last night is in fact that chunky girl who always steals the last bite of your pita and has a “good personality”? (I digress…. to give her credit… she really did have a good personality)

Well…. these people found out (just replace Chunky Pita Babe with $600,000 loan):

Working in this industry, you really see some boneheaded moves perpetrated by both, consumers and by businesses. But this one really takes the cake. My favorite excerpt is:

“Her 29-year-old daughter, a graduate student with an annual income of less than $20,000, qualified for a mortgage of $600,000 with no money down, split into two different loans at 8.75 percent and 12.5 percent interest rates.”

There are so many things wrong with this statement that I don’t know where to begin! I mean she qualified for a $600,000 loan based on an annual salary of $20,000?!??!??!?!?

with NO MONEY DOWN?!?!?!

I don’t even know who to hit blame! Absurdity truly prevails during boom times.

Alas, this brings us to Common Sense Rule #1 (applicable during boom and non-boom periods):

Borrow Within Your Means

Borrowing large amounts of money pretty much ensures that you will perpetually be in debt (which is what creditors want). Rather than go all out on your home, analyze your monthly allowances and go for that modest, and nice home that you’ll be able to pay off sooner. If you choose a good property, the house will increase in value and allow you to purchase that bigger house sooner.

Sub Rules:

  • Put SOME money down: Typically a good rule of thumb is 25%. Any time you see a mortgage without any down payments usually results in a higher interest rate from lenders (or a variable rate that fluctuates with the prime lending rate)
  • Avoid High Risk Lenders: These lenders will jump at the opportunity to put you into the wonder land of debt, and charge a premium for it. These lending rates can sometimes be as high as 12% and result in longer servitude towards our banking overlords.
  • Pay more than interest: What’s the point of owning a house if you don’t truly own it? In order to gain equity you have to pay off that mortgage, and only paying interest results in lifelong servitude.

Now a house is definitely a worthwhile investment if done right (you can even start leveraging your equity to invest in securities or other investments, but that’s material for another blog post), on the flip side though, you can lose the shirt on your back if you listen to what these creditors want.

As I’ve said in prior posts… Common sense, use it liberally!

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