Updated on 08.09.11

Small Steps to Buying a House (and More)

Trent Hamm

A week or so ago, a friend of mine purchased a house with cash. It’s a bit of a fixer-upper, but it’s more than roomy enough for his needs.

How did he manage to come up with the cash to just buy a home without a loan? Small steps. Nothing more, nothing less.

He doesn’t go out to eat very often. Instead, he makes most of his meals at home. He goes out if there’s a situation with friends or family, but without that, he doesn’t bother.

He doesn’t go “out on the town” very often, either. His social calendar mostly revolves around free community organizations and sports as well as events at the homes of friends. If he wants to do something, he does it, but his schedule is usually full enough that when he does have a free evening, he rests up and reads a book at home.

If there’s a service he doesn’t use very much, he doesn’t have it. Thus, he doesn’t have internet access at home and just uses it at work for fifteen minutes or so after he’s done with his tasks if he needs to.

He doesn’t buy a soda at the gas station after filling up (in fact, he usually bikes to work, as it’s about a mile away from his home). He doesn’t toss stuff into his cart in the checkout aisle. He doesn’t stop at Starbucks for a “quick pick-me-up.”

He does not need these things for happiness in his life. They are just products that are well marketed or services where you pay out the nose for the right to sit down.

Every time he makes one of these little choices, he saves a bit more money. The “expenses” part of his balance sheet is a little lower, meaning there’s more money left at the end of the month.

Month after month, that money builds up in a savings account until, a few years down the road, he’s suddenly writing a check for a home of his own.

Little steps. Little steps are the key to victory. Big, grandiose steps might look good, but without the little steps to sustain them, they fall flat. Little steps, day in and day out.

Little steps lead to better health. Going on a walk instead of watching a TV show. Ordering a water instead of a double mocha latte. Eating one sandwich instead of two. Eating fish instead of a giant burger.

Little steps lead to a bigger skill set. Spending an evening learning a new protocol instead of watching American Idol. Choosing the challenging path instead of the easy path at work.

Little steps lead to a healthy retirement balance. They lead to a better job. They lead to a career you dream of. They open you up to completely unexpected opportunities.

The only difference between the successful and the unsuccessful is the willingness to take those little steps over and over again.

When you see someone who is successful – even if the impression they give is of someone who is talentless – often you’re seeing the result of a lot of these small steps hidden behind the scenes. They were choosing certain things over and over again that might not have been the easy road in some way or another.

There’s nothing stopping you from doing it, too. It just takes willpower, regular good choices, and time.

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  1. Shannon says:

    Except Trent your friend bought a house probably in rural Iowa where you can buy a house for considerably less than $100,000 especially since its a fixer-upper. For those of us who live in cities this is not possible, no matter how many “small steps” we take. I’ve increasingly found this blog to be so provincial in its outlook.

  2. chuck says:

    “a few years down the road, he’s suddenly writing a check for a home of his own.”

    really? cutting out some indulgences for a few years is enough to buy a house cash? Maybe for one of those war torn detroit homes you see in the news. i’d like to see the numbers for this one trent.

  3. lurker carl says:

    So much information is missing from this post to make it relevant for readers. Something tells me the friend is single and earns a whopping salary while living on practically nothing with Mom and Dad.

  4. Katie says:

    Yeah, I’d guess most people aren’t spending, like, $30k a year on discretionary items that don’t affect their quality of life. If only.

  5. Johanna says:

    Trent didn’t include any numbers, so I’m going to make some up.

    Let’s say the house cost $100K (purchase price plus closing costs plus all the fixeruppering he has to do). Let’s say that “a few years down the road” = 5 years, and the interest he earned on his savings during that time was negligible. So Trent’s friend’s “little steps” were netting him $20K per year, or $1700 per month, or $55 per day.

    That’s a lot of Starbucks pick-me-ups.

  6. Adam P says:

    My indulgent spending let’s say is about $10k a year (my vacation, eating out, and hobbies spending added up).

    A 3 bedroom place within a 30 minute commute to work where I live is about $550,000. A shoebox 1 bedroom condo nearer to work is about $350,000.

    Maybe my math is fuzzy, but I don’t know that I can pay for a house in a few years just by cutting out my indulgent spending. I’m working on getting my $100k together for a 20% downpayment tho.

    “How did he manage to come up with the cash to just buy a home without a loan?”

    Living in an area with really low cost housing helps, I suppose.

  7. Jon says:

    Being totally made up also helps. Another of trents ” just last week blank happened to me” fictional posts.

  8. Des says:

    Yeah, I’m not buying that this was small steps – I think it was the one really big step of living in a low-cost-of-living part of the country (combined with, perhaps, a half-way decent income and not being an idiot with money). I checked Craigslist ads for property in Iowa – wow! Its actually tempting me to move, if I didn’t have such strong roots where I am. Gorgeous houses on huge plots for a fraction of the cost here. I’m jealous.

    That doesn’t diminish this person’s accomplishment – it obviously takes some sacrifice to buy a house outright when you could clearly get a loan for more. Good for him. The post is just a bit disingenuous.

  9. Tracy says:

    Gazillionthed that this just feels made-up and not relevant. Where are the real numbers of where this person cut out tens of thousands of dollars out of their budget every year? What kind of salary was he making?

    IF this person exists it all, it wasn’t a matter of ‘small steps’ but one large step – getting a job that pays an extremely high salary in an area with a relatively low cost of living.

  10. Carole says:

    There’s nothing like a blog about paying cash for a house or car to bring out the fangs!

  11. Laura in Seattle says:

    For all the “you totally made that up” people:

    I live in the #3-ranked neighborhood in Seattle. Even the condos are way, way out of my price range. I have very small savings (~$1000).

    Auction(.com) had a condo literally across the street from my apartment building, in a building with a lake view, for $49,000 cash. It was a foreclosure (non-damaged, there were photos) that normally went for 3-4 times that amount.

    GovListed is another site with houses at unbelieveable prices b/c people have walked away from their mortgages and the bank is trying to get someone to buy it for whatever’s left.

    You won’t find that stuff on Craigslist, but it is out there.

    And I kicked myself for not having $49,000 lying around. I don’t make a lot, but if I had been saving say, 30% of my income for the last 5 years, I would be pretty close to that.

  12. Tracy says:

    @Laura in Seattle

    I think you’re missing what the ‘totally made up’ people are saying. It’s not that it’s not possible that the guy bought a house – it’s very possible.

    It’s that we don’t believe that he did it because he didn’t buy starbucks and soda at a gas station. The ‘small steps’ that Trent claims made it possible. We’re saying that there’s a huge piece of the puzzle missing. Finding an incredible deal on the house would be another big step, not a small step.

  13. Gretchen says:

    Cash for a bit of a fixer upper* means nothing if you need to take out a home loan to redo the roof. Or whatever.

    *maybe, there are a lot of forclosures and similar on the market right now.

    But really. Not having internet and Starbucks doesn’t really equal a mortgage payment.

  14. Johanna says:

    I was just going to say what Tracy said. Unless you’re the world’s biggest Starbucks junkie, cutting out Starbucks is not going to get you anywhere near saving 30% of your income.

  15. Des says:

    @Laura – I wouldn’t jump to the assumption the property was undamaged. I do have $49k lying around, and have been trying to get a decent rental property with it for months. Places in that price range (in major cities) have some kind of significant damage, which is not always in the pics. Here in the northwest, it is very often black mold, which is toxic and remediation is expensive. Foundation issues are also common (though, not with a condo), or tax liens, or title issues. Just because the broker only posted the good pics doesn’t mean there weren’t issues.

    There are plenty of investors with that kind of money waiting in the wings to buy good foreclosures for cash.

    There are definitely deals to be had in this market, but if something sounds too good to be true, it usually is.

  16. Mister E says:

    A feat like this is just so completely geographically dependant as to render the message virtually useless.

    I won’t say that the story can’t be true because I actually know someone who did something similar – lived ridiculously frugally by most people’s standards, well into his 40’s, and bought a tiny townhouse in a distant suburb (distant enough that it was considered more to be cottage country until maybe 10 years ago) for 130K cash.

    I can’t imagine how many “nights on the town” would have to be cut out to buy a house for cash in my city where a half a million dollars doesn’t really get you much.

    I mean, “cut down on uneccesary expenditures to be in a better financial position” is a good message on it’s own. Trying to enforce that with an absolutely ridiculous example will completely overshadow the good of the message with the ridiculousness of the example.

  17. Oskar says:

    OK, why is everyone so negative…this is a PF blogg where we are supposed to support taking the small and large steps to improve our finances. It is not easy to bui a house cash in some parts of the country so what? If you take the little steps and have $100K in the bank in a few years or a smaller morgage? I belive in the small steps as it is what me and my wife has done, we have soon payed of our morgage and we live more or less like most of our friends just that we spend a little less on most things that in the end adds up to a lot of money over a few years.

    And remember – support not negativity!!!

  18. Larabara says:

    Well I have to chime in because I did the same thing as Trent’s friend, but with my car. I don’t think Trent included everything his friend did to save money, so I don’t think the points he made are the only things his friend did, but for me it was the result of cumulative nickel-and-dime saving.

    I had a low-paying job, but I lived frugally, didn’t go out to eat (unless someone else was paying–which was rarely), and even saved up aluminum cans to redeem toward my “car fund”. I would actually go around the cafeteria at lunch time, asking my co-workers if they were finished with their soda, and ask for the empty can. I didn’t go to Starbucks often (about once a week) but those few dollars a week was put toward the fund.

    In about 3 years I saved $16,500. I apologized to my co-workers for being so annoying about the soda cans–and went out and paid cash for my new car. It was a 1993 Saturn, the “test drive” car, and I bought it during the “year end clearance” in early 1994. I drove the car as I went back to school and got my advanced degree, and then got progressively better jobs.

    Fast forward to the present, that car has almost 400,000 miles on it, and I’ve got a much better paying job now. But I’m still driving that car, even though my family is leaning on me to buy a new one now that I’ve “moved up in the world”. But I’m going to keep driving my old Saturn until it dies, and I’ve been saving up for the last 5 years or so to buy a new car with cash (I’m leaning toward a Chevy Volt, which is about $40,000).

    I was about halfway to that goal when I got my new job, so hopefully I can buy that new car in a couple of years, since my Saturn is showing signs that we are nearing the end of it’s life :-(

  19. Larabara says:

    And now that I notice, Trent did say the house was a bit of a fixer-upper.

  20. Laura in Seattle says:

    You guys inspired me to find some acutal numbers for some of the examples mentioned. (Note: These are Seattle numbers, rates in your area may differ – though, your cost of living will also differ, so let’s do this already)

    Say you decide to cut two visits to Starbucks a week. We’ll value them at $2 each, so a $4 savings per week.
    $4 x 52 weeks = $208 per year
    $208 per year x 5 years = $1,040

    Out here Internet runs around $30/month.
    $30 x 12 = $360 per year
    $360 per year x 5 years = $1,800

    Going out with friends:
    Say you cut one evening with friends once a month for $20.
    $20 x 12 = $240 per year
    $240 per year x 5 years = $1,200

    Eating out/takeout:
    Say you eat out or get take out 2 meals per week, for a cost around $50 total, and you stop doing that.
    $50 x 52 = $2600
    $2600 per year x 5 years = $13,000

    Add them up:
    For a 5 year period, that’s $17,040. (Maybe if you had a savings account paying a bit of interest, you could nudge it up to an even $18K in that time period.)

    That is not enough to buy a house for cash in Seattle. I can’t speak for Iowa.

    However… I would feel a lot more secure about my financial outlook if I had an extra $17K in the bank.

    I keep looking at that dollar figure for eating out. Think I’m going to put together a budget tonight. I might not have a house in five years, but I might have a down payment.

  21. Nancy says:

    I lived in a family where my dad was very adverse to debt, as he was a product of the Great Depression. My family of 7 people lived in a tiny 3 bedroom apartment for most of my childhood and 25 years of my parent’s marriage. My dad then built a 4 bedroom, 2 bathroom house house after work with the help of a neighbor who was a carpenter who worked on the house during the day. We moved in the summer before I went to high school and the next summer he paid off the mortgage.

    Though my dad passed away in 2008, my mom still lives in their very solidly constructed home. That experience has stayed with me all my life.

  22. Priswell says:

    I don’t know about cutting out Starbucks and buying a house with the leftover money. I’m not saying it’s not possible, but I don’t think we ought to expect similar results.

    Our “small steps” usually net us smaller rewards. We eat out rarely, we have no “nights on the town”, etc. Doing so means that when the car breaks we can pay for repairs. Our bonus is that when our granddaughter is born, we can spend the ~$1000 it will take to fly across country (very nearly all the way across) to see her.

  23. jo says:

    to all the people saying that “you can’t save enough for a house by not having starbucks”, that’s NOT what he meant. he meant that small steps lead to more small steps which eventually lead to better savings. he didn’t say this guy just quit starbucks. he said this guys doesn’t use gas for a car often, doesn’t pay for internet (and for me, that would be 80 bucks a month savings) or tv, he doesn’t eat out, he doesn’t buy a bunch of crap… that CAN add up to a house (they are going in good condition for 40-60,000 here in texas) in a few years.

  24. Lesley says:

    I get that small steps in frugality can lead to savings…but from the title, I was really hoping for more from this article than the usual frugality bit. Frugality is the best way to save money–I get it. But what about small steps toward buying a house specifically?
    I’ve been broke most of my adult life (graduated with a ton of student loans and went into a low-paying profession). I’ve already been living frugally. Now I’m about to get an income boost, and I want to start thinking about buying a house. It’s going to take me a few years, but I’d like to know the small steps I can take to start–what should be my target savings goal? How does saving for a house differ from saving towards my other goals? What should I be looking into regarding mortgage rates, insurance, etc.? I know Trent doesn’t read the comments, but if anyone else can point me in a good direction to start, I’d appreciate it.

  25. todo es bien says:

    Actually, it is possible to save enough money to buy a house. It takes a while. I know, because I did it myself. (saved the money, didnt buy the house though) First, you have to make decent money. Next, you have to live like you dont. Then, let time do its thing.

    That being said, why anyone would pay cash for a house when you can buy one on a 30 year mortgage @ 4%(tax deductible, non-recourse!!!) is beyond me. Let me put it to you this way, if any of you guys want to loan me money on those terms I will take all you want to loan.

    I would say anyone who pays cash for a house (or for that matter pays down a 4% mortgage) is extremely unsophisticated financially, so perhaps for them it is the right thing. But I will tell you this, virtually NO ONE of substantial means who is financially sophisticated would prepay a loan on those terms. Its nearly free money.

    I realize on this blog this will not be a popular viewpoint, but contact someone you know who has made a million or more dollars by the sweat of their brow and ask them if they would prepay a 4% 30 year loan (tax deductible, non-recourse). One thing I have come to realize from reading here is this site is good around issues of frugality but poor around issues of creating wealth. I still like it here though. Anyway, YMMV, hope this is useful for someone. todo es bien

  26. Jennifer says:

    The key is to find the balance between being so frugal as to not live life and spending so much that you’re constantly in debt. The biggest problem for so many people is that our discretionary spending has gotten so out of hand. Between Starbucks daily, $40+ dinners out, cell phones, data plans for the cell phone and iPad, cable, Internet, etc., our discretionary spending can now easily surpass $500 monthly. Looking back to the 1980s most of these expenses didn’t exist and cable was significantly cheaper. Dinners out were less frequent and certainly much cheaper.

  27. Lindsay says:

    I’m with Lesley on this one – my husband and I just paid off our land, and while we still have significant student loans, we are ready to start saving for a house because so many folks where we are pay less for their mortgage (plus maintenance) than they do for rent. I was really hoping to see a constructive article on how to do it. And, frankly, I hear everyone say you need 20% down, but then everyone you talk to has PMI (even the PF bloggers), so what’s the reality here? Is it realistic for your first home? Anyway, I’m on a full tangent here, but thought I’d throw it out there…

  28. Kate says:

    Geez, y’all are so negative! The point about small steps adding up to big results is a good one. I do quilting by hand, and intricate counted-cross-stitch pieces, and some of the stuff I’ve made took a year or more to complete. That’s a year of 20 minutes in the evening, 4 or 5 times a week. Believe me, it sure doesn’t feel like I got much done after 20 minutes… but I just keep deciding to do a bit more the next time, and a bit more, and next thing you know, it’s done. Now I’m doing the same with my dissertation!
    @#24, just start saving. For a regular mortgage loan, a down payment of less than 20% usually incurs an extra cost (PMI). FHA loans are different (harder to qualify, potentially lower down payment) so study up when the time comes. If you are in an area with both manufactured housing and “stick” or built housing, it gets interesting – some lenders will only do a mortgage on one type. And I only found one insurance company that would do homeowner’s insurance on my manufactured that I bought last year, so no shopping around there.

  29. lurker carl says:

    I have purchased fixer uppers but spent in excess of the purchase price turning them back into nice houses. In other words, spending $30K for an ugly house with issues often requires $50K for structural repairs and cosmetic renovations. The work can be performed considerably cheaper if you do it yourself. It’s like having 2 full time jobs, one to earn money to spend on the house and the other is working on the house to keep from spending more money. Be aware that many jobs require licensed professionals, an experienced work crew and expensive equipment to perform.

    For the price you’re paying to purchase and renovate, you could have bought a similar house in excellent condition around the block. The cost of obvious repairs is already deducted from the fair market value of the property. What makes costs skyrocket is all the unseen problems that are discovered when fixing the known issues.

  30. deRuiter says:

    #22 Priswell, Establish a Continental frequent flyer miles account for yourself and another for your husband, these are free. Get yourself a Continental Airlines credit card in your name, free for first year, with bonus of perhaps 25,000 miles which is good for a domestic round trip flight. Buy with card only what you would pay for in cash anyway, and pay off the card with your online banking twice a month so you never pay interest. Get card in your name only. Then add your husband as signer only. Use card for 11 months, racking up free miles. Then have husband get Continental card in his name with you as signer, and get rid of your card before the renewal and fee for second year. Your husband will get his 25,000 sign up bonus and you will have gotten 2 free round trip tickets domestic flights in 12 months. You pay only the fees and the flight is free. IMPORTANT: when you sign up for card, do not check box to let them send emails. After you get card the airlines will offer you 500-1000 free miles to sign up to accept emails and then you agree for free miles. Continental offers little promos each month where you can get 100 free miles for reading a short paragraph and answering a couple of easy questions about what you have read. If you buy a ticket on the airlines, using your card, you get double miles. With the card you also get to carry one free bag for you and your companion, a savings over having to pay for the first bag. There are so many opportunities for free miles that you’ll be traveling more often, for very little money, to see your relatives. If you plan to buy anything, see if you can get the same price by going through an airline portal, and you will get double, triple or quadruple miles per dollar spent. Of course if you can get a better deal for cash (like buying gas) then that is the best way to buy and do so. The miles are there and if you don’t take them you lose. Any payment which is deducted from your checking account monthly can be deducted instead from your credit card account and you will get free miles for that money, a bonus. The only caveat is to always pay the account off monthly, carry no balance. The miles are free. No, I don’t buy more because I have a credit card, and I never buy something I don’t really need, wouldn’t buy anyway, to get miles. If you have self discipline, and a bit of curiosity, you can occasionally fly very cheaply. Do NOT get British Airways ff card or credit card, their fees are so high as to negate the point of this. The other major American carriers have similar deals.

  31. deRuiter says:

    The other American airlines have similar good deals like the Continental Airlines frequent flyer miles program, they do not gouge on fees like BA does.

  32. Jules says:

    I don’t quite get the resentment people seem to be having against the guy. Sure, there are lots of details that are missing, but the main message–saving lots of little things lets you get a big thing–is perfectly true. Maybe not so big as a house, but certainly a fancy-schmancy dinner at Michelin-rated restaurants, with a night at the accompanying hotel (because, after all that booze, nobody’s driving!). We pay for that with pocket change–literally…okay, we get it counted at the bank first, we’re not *that* obnoxious….

    But the point is valid, and little things do add up. It’s a matter of personal preference where to draw the line–for me, Internet is indispensable–at what’s “little”, but I’d venture to guess that, if you’re reading TSD, you probably–that’s PROBABLY–have room to trim, if you really want to. Most people, though, have better things to do than obssess about which brand of toilet paper to get.

  33. Brian Carr says:

    A lot of my friends have this problem – they’ll set up very large savings goals for themselves and then become frustrated when they fall short. I keep trying to tell them to incrementally step up so that they keep having successes, which will only encourage them to continue.

    Glad to hear your friend gets this. Maybe he can talk to my friends!

  34. TheBudgeteer says:

    Congratulations to Trent’s friend for making some smart spending decisions and having an excellent long term financial goal.

  35. Kevin says:

    “He does not need these things for happiness in his life. They are just products that are well marketed or services where you pay out the nose for the right to sit down.”

    Aw come on, Trent, why’d you have to go and ruin it with a blanket judgement like that? The first sentence is fine. *HE* does not need those things for happiness. That’s great, I can totally understand and accept that. But then you had to go and say that those of us who DO spend money on those things are just weak-minded lemmings, brainwashed by slick marketing.

    Can you really not understand that some of us actually ENJOY cable television and internet at home? Can you not fathom that maybe I get VALUE out of traveling beyond my country’s borders?

    The post was fine, but it’s little things like that statement that hint at the undercurrent of contempt you have for anything you can’t afford. You spend so much time convincing us that all you really want is endless hours playing in the dirt with your kids that I often wonder if it really is US you’re trying to convince, or yourself.

  36. kk says:

    I think this was a very encouraging story. I ultimately want to live in an area where 60 K can get you a nice decent little house & I want to pay cash for it. I’m about half way to this goal but sometimes I lose patience because it doesn’t happen as soon as I would like. Thanks for the ant and the grasshopper type story. And thank your friend, the ant, for the inspiration.

  37. Rap says:

    #35 Kevin, ah but see, we need to get our required shaming over our frivolous “necessary” expenses.

    No matter how much enjoyment one might get from watching tv (and I’ve read this website enough to know that Trent is a fan of Battlestar Galactica) only frivolous spenders spend money to get tv. Likewise only money wasters buy newly released books when they can wait months for the library to get it. Anyone who enjoys going out is wasting money and of course, why go out when you can stay home and play board games with like minded friends.

    Don’t get me wrong, I think this works for Trent, its the stink of “I’m better than you” that prompts a lot of the negative comments. Here’s a different example. I’m completely debt free. I have an emergency fund of 8 months of money. I have a – excluding the current market issue – healthy 401k and a seperate mutual fund balance. I also have cable tv and a data plan for my ipad and any number of paid for toys that I enjoy… and my job is not some high paying place. Its possible to be financially sound and not pinch *every* penny until it squeeks and not every hobby *has* to be a a life affirming magnificent new skill.

  38. Jen says:

    I think the naysayers here are missing the greater point of this piece. Little things, when combined, make a huge difference. This idea is extremely important for people overwhelmed by anything really. If you want to buy a house, cutting out lattes and sodas won’t do it all, but at the end of the day less money will be spent. If you want to lose weight, just cutting out one soda a day will certainly get the ball rolling. In my opinion many who commented on this post are already well versed in responsible finance, and perhaps this post wasn’t aimed at you, but for anyone who feels totally overwhelmed, the overall idea of “starting somewhere,” can be positive.

    To that end Trent, I would appreciate more posts geared towards people on solid financial footing who would like to buy property in more expensive areas…..I’ve heard rumors that the local/federal government offer subsidies, special boosts sometimes. Is this true?

  39. Johanna says:

    @Jules: It sounds like you actually agree with us more than you disagree: The point is not that little steps are useless (or that buying a house with cash is impossible), but that the little steps only go so far. And for most people, they fall way short of letting you buy a house in cash in “a few years.”

    Let’s say that your fancy-schmancy night on the town costs 1% of the cost of a house (and that’s either a really expensive night out, a really cheap house, or both), and that your pocket change buys you two nights out a year (and that’s a lot of pocket change, although in euros it might be doable). Then it would take you *fifty* years for your pocket change to add up to the cost of a house.

    I totally agree that for many people, little steps can make the difference between being in a bad financial place and a good financial place. But that too is a far cry from being able to buy a house in cash in a few years.

  40. Jonathan says:

    I’m not sure why I continue to be surprised by the negativity in the comments on TSD. There are a few points I’d like to address.

    First, this was a motivational post, not a how-to guide. I knew that Trent was making a mistake by providing a few examples. I wish he would learn that anytime he does that there is going to be a lot of complaining in the comments. Yes, Trent left out a lot of details about how his friend pulled this feat off. The details were not the point, however. The point is that the key to doing something like paying cash for a house is making small steps that add up over time. The same holds true for other achievements as well, as Trent suggested with his comment that “Little steps lead to a bigger skill set”.

    Second, why do people get so upset when Trent makes a comment like ” They are just products that are well marketed or services where you pay out the nose for the right to sit down”? Do you honestly disagree with the statement? I believe the statement is accurate, even though I pay money for such services, as Trent does as well. Why is it so hard to hear the truth about products or services, without resenting the person telling that truth? I spend $50/month on internet, which is something I want to do, not something I have to do. I know that is money spent on a want, but knowing this doesn’t make me feel guilty or feel like I’m less of a person than someone who doesn’t, and hearing the truth about such an expense doesn’t make me resent the person stating the truth.

    Third, there were several comments about the costs of repairs to a fixer-upper, and suggestions that loans might be required. The point of a fixer-upper for many is the ability to make repairs over time as money allows. It is not necessary to get the house in market-ready condition right away if you plan to live in it for years. For some people that is the fun in buying a fixer-upper; you buy the house and live in it while doing renovations on weekends or in the evenings.

    Last, the impact of the little steps that Trent mentions are going to vary greatly from person to person. Laura in Seattle gave some numbers that add up to $18k over 5 years. I can very easily see the savings being much higher for some people. Let me give some examples.

    Starbucks – Cut out 5 trips/week @$5/trip = $1300/yr

    Internet – Disconnect internet service of $50/month (this is what I pay for 6 mb/s service in a rural area) = $600/yr

    Going out with Friends – Cut out a weekly night out with friends that includes a meal and drinks, averaging $30/wk = $1560/yr

    Dining Out – Cut out 5 lunches/week and 2 dinners per week, averaging $10/lunch and $20/dinner = $6240/yr

    Going out of town – Cut out 4 extended weekend trips/yr averaging $500/trip = $2000/yr (obviously this could be much higher if the person was taking 2 week long trips per year that include airfare.

    The total savings for my example come to $11,700/yr or $58,500 over 5 years. It seems very reasonable to someone could buy a fixer-upper in a rural area such as Iowa for that amount. True, this doesn’t work in an area with higher housing costs, but it would work in many areas throughout the country, not just Iowa.

  41. Matt says:

    It looks like the friend bikes to work (a mile away) most days but still has a car, which means he has to pay things like maintenance and insurance. So the biking is good, but it really only saves him the cost of gas. If he actually didn’t own a car, he could be saving thousands more per year… which would make this story a little more believable. According to AAA, car ownership costs on average around $9000 per year. I’ll give this guy some slack and assume he drives an older car and doesn’t drive it much… so maybe he’s only spending $5000 per year on it. That’s another $25k in 5 years… which is a lot, but even when added to #24 Laura’s total, isn’t enough to buy a house in most areas of the country.

    As many others have said… there’s got to be more to the story.

  42. Katie says:

    Yes, Trent left out a lot of details about how his friend pulled this feat off. The details were not the point, however. The point is that the key to doing something like paying cash for a house is making small steps that add up over time.

    Personally, I can come up with vague motivational concepts myself. If I’m reading a blog, it’s nice to have solid details that give me information I might not have known or considered. Different strokes.

  43. DOT says:

    #25 todo es bien
    With the information we are given about Trent’s friend it SEEMS highly unlikely that he is itemizing his deductions.
    A 100K loan at 4% would only generate $4000 in interest, while the standard single deduction with yourself as a dependant would be $9500. Therefore, no tax deduction for the interest paid on the mortgage and paying cash would be a good choice… unless of course he could find a safe investment returning about 10%.
    Being as financially sophisticated as you claim maybe you could recommend a high yielding SAFE investment producing 10+%. ( Which buy the way, the only investment I have that has CONSISTENTLY returns more than 10% is my mortgage free rental real estate)

  44. Matt says:

    @ #40 Jonathan –

    If someone is spending $11,700 per year on Starbucks, internet, going out/dining out, and vacations, then they’ve got quite a bit of flex in their budget to begin with… and a lot of discipline to cut it all out entirely!

  45. Jonathan says:

    @Katie – #42 – I agree with you. I also prefer details. Some people, however, do need the motivation. Some people need to hear that others have done what they dream of doing. I imagine with a blog such as TSD whose readership covers several demographics the type of posts need to be similarly varied to keep the interest of and help everyone.

  46. Jonathan says:

    @Matt – #40 – I also agree with you. The people I know with similar spending habits are very unlikely to have the discipline or desire to make such deep cuts in order to save. It doesn’t make it impossible, however, and maybe Trent’s friend happens to be one of the people who could make it work.

  47. Tracy says:

    I honestly don’t understand why some people think that pointing out that Trent left out a huge piece of the puzzle is being negative.

    This is what Trent said in his post:

    “How did he manage to come up with the cash to just buy a home without a loan? Small steps. Nothing more, nothing less.”

    I can’t come up with a financial scenario that supports his nothing more, nothing less conclusion. Nor have any of the defenders of his post. Jonathan, even your example doesn’t provide enough money to purchase a typical house in a small town in Iowa (keep in mind, the homeowner *isn’t* in the ultrarural Iowa where you *might* be able to buy a house for 60k, maybe – he lives less than a mile from his job and he lives in an area with a robust community and lots of free activities).

    FOR this scenario to take place, we’re absolutely missing some key piece of information. Maybe he saved up 30,000 from cutting out small steps – and he saved another 50,000 because he had a high paying salary. Or because he lived with his parents and didn’t pay rent. Or because he worked a second job. Or he shared a tiny apartment with 4 roommates. Or some other piece of the puzzle that we don’t know.

    But we DO know that Trent is being disingenuous when he says that it was ‘small steps, nothing more, nothing less.’

    Little steps are great. Little steps are FANTASTIC. I take a ton of them. Little steps are *extremely helpful* – but in this situation, they’re not the full truth and truth is better than dishonesty.

  48. Johanna says:

    @DOT: $9500 is the standard deduction plus one personal exemption. The standard deduction by itself (which is the number that’s relevant when you’re deciding whether to itemize deductions) is $5800 for a single filer in 2011.

    That’s still more than the $4000 interest on a $100K mortgage, but it’s unlikely that someone would have no deductions other than mortgage interest. State and local income taxes plus charitable donations, for example, may push you over the $5800 threshold.

    In fact, I don’t even have a mortgage, and I still itemize my deductions.

  49. todo es bien says:

    43 Dot. – Your point is interesting, but your calculations are incorrect. And, I never claimed to be a sophisticated investor, though in truth those who know me probably would aver this. (Since you tout your 10% return, I would note for you that I am running 45% annual returns COMPOUNDING (correct) since the crash. Unleveraged, no options, long only. Go and check what percentage of mutual funds, etf/etn, hedge funds, and anything else you want to look at has matched this over last 3 years. Thats 45% annual, COMPOUNDING. (i know you are sophisticated, so let that sink in.)
    You can easily get 7% return on investment with NO taxes (assuming you are in one of the bottom two tax brackets, which according to the assumptions you posit this person would be) So, lets see… pay it down and save 4% out of pocket, or put the money elsewhere @ 7% tax free. As to safety of the investment, nothing is completely safe, but what I would suggest would certainly be as safe as housing.
    BTW, congratulations on owning your rental property. Thats a great position to be in, and I can understand why it is nice to be completely unleveraged in such alarming times. On the other hand, you have lost a huge amount of money in last three years in equity I would imagine.
    Housing is certainly NOT a safe investment at this time (if by safe you mean capital preservation. On the other hand, I think it is an ATTRACTIVE investment at this time if you can do the following:
    1) Use leverage
    2) Cash flow close to even
    3) Have no forseeable need to sell in next 10 years.
    4) Afford to have it managed assuming that is not in your skill set.

    I am WILDLY excited about any loan I can get that would lock me in to 4% interest for 30 years, non-recourse. I am surprised (only slightly, given your previous comment) that you would not be excited to get the same. So, I guess I will ask you, since you dont want to OWN that loan, would you be willing to ORIGINATE that loan? I didnt think so.

    I think for some, real estate is a really nice investment at this time. But why have so much of your capital exposed? In your case, since you claim ROC of 10%, lets look at the following:

    Assumption for sake of example property = 100k income from property = 10 k your roi = 10% Instead, buy 5 houses with 20% down, now instead of 10k in income you are getting 50k less 20k in interest expense. Triple the income.
    Probably a sophisticated investor like you doesnt need to triple your income, and I realize this is an overly simplistic argument, but there is only so much education I will give you for free.
    Well you say, why risk the leverage? Well, if you dont believe in real estate, why would you invest WITHOUT non recourse leverage??? You gotta be internally consistent here. Now, I am NOT saying that real estate is the way to riches for all, or even a good investment (good btw being an incredibly vague word when it comes to any investment, really a useless phrase.) I am saying that virtually all major companies and attendant major individual fortunes are connected to intelligent use of leverage. (aapl) being an extremely interesting exception. Though even in Apples case, many say they should borrow money and invest just because they can get money so cheap and still realized a good return. To emphasize, you can make a great case that Apple should be borrowing 50 billion or so EVEN THOUGH THEY HAVE 75 BILLION IN THE BANK.
    Study leverage, it is not for every situation, but it is terrific in many. (too dangerous in stock market imho, though every once in a while it is easy money borrowing it for a day or two I must admit)

  50. Kevin says:

    @todo es bien:

    I have a $314,000 mortgage at 3.69% that I’m paying down as fast as I can.

    Did your head just explode?

  51. Georgia says:

    About PMI – I have been out of the business for at least 25 years, but I always advised my clients of a better option, if their down payment was lower. I don’t know if this is still possible, but always check when buying —-

    I would advise my clients to purchase a large term insurance policy and assign the portion of the money to your lender. They would still get their money if anything happened to you and you would end up with money also. PMI pays only what you owe at time of death and is at a higher cost. I especially remember one family doing as I suggested.

    A man and wife came in to borrow for a home. They had 3 children from wife’s previous marriage. They bought a $250k term policy for much, much less than PMI. They assigned the mortgage amount to our company. A year later, he fell asleep at the wheel of a semi and died. The insurance company paid off the mortgage with that insurance money and the wife had about $200k to finish raising her young children. Everybody benefitted – the family and the S&L.

  52. DOT says:

    Well todo es bien, if I were the CFO of a multi billion dollar corporation I would leverage the equity in my company by borrowing money. However, as a small time indivudual investor I gain leverage by buying fixed assest without borrowing money thus creating more income ( and wealth).
    Accounting 101
    In additon to fixed assest I also aggressivley invest in mutual funds, etf/etn, stocks etc. and if you claim you are long with a 45% annual return, Kevin is correct your head must have just exploded ….and there are marbles rolling around in there.

  53. DOT says:

    Johanna, Yes the standard is 5800 I just lumped the two together as an example. It would have been more clear to seperate.
    However, everything we comment on is just based on assumtions and examples by not having a large amount of information in the post.
    I too itemize with out mortgage interest.
    HOwever, far too many times I hear someone claim that they purchased/financed a house for the “deduction” when I know without a doubt that they do not and can not itemize.
    I am on the side of the fence of saving longer to not pay as much ( or no) interst at all.
    For all we know Trent’s friend could of purchased a “bit of a fixer-upper” on a 5000 acre corn farm for 6 million dollars…all while not eating out or drinking Starbucks.

  54. Johanna says:

    @DOT: “far too many times I hear someone claim that they purchased/financed a house for the “deduction” when I know without a doubt that they do not and can not itemize.”

    I understand and agree with this point. So many people are uninformed about how taxes work, and how the amount they pay is calculated. (The one that gets me is the people who talk about deducting this or that as a business expense, as if they think that means they’re getting the thing for free.)

  55. todo es bien says:

    DOT, no offense, what you are doing does not fit any construction of the term “gain leverage”. Please ask someone with knowledge of the field. Alternatively, consult Investopedia, a decent primer for financial terminology. Also, I would be pleased to provide documentation via my broker as to my results, but I wont do it for free.

    Kevin, it doesnt explode my head that you are paying down your mortgage. It just tells me that you dont know how to get a better return than 3.69% on your money despite the fact that it is a tax deductible and non-recourse (presumably) loan. There are lots of people like you. Given that, I would say you are taking the correct actions. Sure beats blowing on the dough on fast living!

  56. DOT says:

    I wouldn’t review your brokerage statement even if your broker hand delivered it on a silver platter.
    However, if you like I could recommend some legitimate brokers, for a fee of course.

  57. todo es bien says:

    No thanks, I will stick with Fidelity. A small upstart you will likely hear of some day as you build your knowledge base.

  58. Kevin says:

    @todo: I’m in Canada, so my mortgage is neither deductible nor non-recourse (apologies for the double-negative; our mortgages are all recourse, except in Alberta).

    And no, I actually DON’T know where else I can achieve a guaranteed, after-tax, risk-free 3.69% return. If you do, I’m all ears.

  59. Another Katie says:

    I disagree with Jonathon that this post is even motivational. In fact I think over time it would be the opposite of that. Since the post is so vague, the amount of money saved by this guy could vary widely going as low as the $20k Laura came up with up to the $60k Jonathon calculated. Plus the cost of the house can vary as well.

    So, I imagine someone beginning on the path to financial security reads this, finds it motivating and decides to start making similar cuts. He does this for many months, and the progress is slow. Plus, he doesn’t live in Iowa, so houses are much more expensive. He looks at the progress he’s made and the cost of houses in his area and discovers that it will take a lot more than a few years to save for a house in this manner. I know that where I live $60k would be a nice down payment (like %25) on a smallish house in an inexpensive area. When this guy realizes that he will not be able to purchase a house in any kind of reasonable time frame using these small steps, I think that this would turn from motivational to very discouraging. All that sacrifice and work for nothing! And, might even make that person feel that small, frugal steps aren’t really helpful.

    However, if this had been written with numbers like Jonathon came up with, at least this person would have a metric against which to compare what he might be able to do if he took similar small steps.

    I generally find examples with specific details more motivating.

  60. JH says:

    Details would make this article even more interesting.

  61. TheBudgeteer says:

    What is with all the negative comments? Of course you can buy a house if you spend wisely and have a good plan.

  62. Riki says:

    The idea of buying a house without a mortgage is an intriguing one for sure, but there are big opportunity costs that must be examined.

    – Cost of living while saving for the house. Paying rent + saving for the house might even cost more in the long run than paying interest on a mortgage, depending on how long you have to save, the value of the mortgage, and the cost of housing. This point definitely needs to be considered.

    – If cost of living while saving is very low (therefore allowing a lot of saving over a relatively short period of time), what are the living conditions? Tiny apartment? Living with parents? Sharing with lots of roommates? Is it really worth spending years in less-than-ideal living conditions? I want to live and be happy now AND in the future.

    – Can you save for a house AND save adequately for retirement? What about other life experiences like travel? Again, I wouldn’t want to put my life on hold for years and years just to avoid a mortgage.

    Other comments have very clearly described the huge geographic differences in housing costs. It’s obvious a situation like this works under only a very particular and narrow set of circumstances.

    Honestly? I have a mortgage but it doesn’t bother me. I bought a reasonable house for a fair price and the associated costs of owning a home are very comfortably within our means. I took care with the big purchase so I wouldn’t be mortgage poor and sure, I have that payment, but I also get to live my life in a house that I LOVE right now. And I get to live the rest of my life while paying for it. In the end, I am not going to lose sleep over my mortgage and the sacrifices necessary to save up cash for a house just don’t seem worth it to me.

  63. Riki says:

    * edit:

    I didn’t mean to imply that I would be paying for my house for the rest of my life. Rather, I’m able to live my life WHILE paying for the house. And eventually the house will be paid for (even ahead of schedule) but I’m doing quite well in the meantime.

  64. todo es bien says:

    Kevin, I lack sufficient knowledge of Canadian taxation & your personal financial situation/objectives to make a quality recommendation for you. Unfortunately, there is really no such thing as a “good investment” in a general sense, in that every potential investor has different risk tolerance, income, tax situations, etc. Also, when starting out, ETF indexes (and sometimes mutual fund ETF, depending on mgt fees) are the best way to get sufficient diversification. If I was to recommend ONE investment to cover all bases as a starting point, it would be an ETF called GTAA. It invests equally in commodities, us stocks, intl stocks, fixed income, and real estate. Thus, it is not the fastest way to build income, but it is extremely stable relative to virtually any other kind of investment. It is pretty new, but the manager is very well known within the industry, and highly respected. It is basically a hedge fund for the small person. Something to think about. Most of the kinds of stocks I invest in are fairly volatile, so I do not feel comfortable recommending them to you unless I knew a LOT more about your situation.
    I would add, when you put all of your discretionary income into your house you are the opposite of diversified. True diversification is another trait of wealth accumulation. Nothing wrong with paying off your house, but odds are you will get better returns AND you will certainly increase your safety via diversification.
    Good luck, and warm regards.

  65. slccom says:

    This reminds me of the song, “Little Tin Box” from Fiorello!

    “Mr. X, may we ask you a question?
    It’s amazing, is it not,
    That the city pays you slightly less than fifty bucks a week,
    Yet you’ve purchased a private yacht?”

    “I am positive your Honor must be joking!
    Any working man can do what I have done.
    For a month or two I simply gave up smoking,
    And I put my extra pennies one by one

    “Into a little tin box,
    A little tin box
    That a little tin key unlocks.
    There is nothing unorthodox
    About a little tin box.
    In a little tin box.
    A little tin box
    That a little tin key unlocks.
    There is honor and purity,
    Lots of security,
    In a little tin box.”

    “Mr. Y, we’ve been told you don’t feel well,
    And we know you’ve lost your voice,
    But we wonder how you managed on the salary you make
    To acquire a new Rolls-Royce.”

    “You’re implyin’ I’m a crook and I say no, sir!
    There is nothin’ in my past I care to hide.
    I been takin’ emply bottles to the grocer
    And each nickel that I got was put aside
    (That he got was put aside)

    “Into a little tin box,
    A little tin box
    That a little tin key unlocks.
    There is nothing unorthodox
    About a little tin box.
    In a little tin box,
    A little tin box
    There’s a cushion for life’s rude shocks.
    There is faith, hope and charity,
    Hard-won prosperity,
    In a little tin box.”

    “Mr. Z, you’re a junior official
    And your income’s rather low,
    Yet you’ve kept a dozen women in the very best hotels,
    Would you kindly explain how so?”

    “I can see your Honor doesn’t pull his punches,
    And it looks a trifle fishy, I’ll admit.
    But for one whole week I went without my lunches,
    And it mounted up, your Honor, bit by bit.
    (Up your Honor, bit by bit.)

    “It’s just a little tin box,
    A little tin box
    That a little tin key unlocks.
    There is nothing unorthodox
    About a little tin box.
    In a little tin box,
    A little tin box
    All a-glitter with blue-chip stocks.
    There is something delectable,
    Almost respectable,
    In a little tin box,
    In a little tin box.”

  66. maria says:

    Kevin asked you to recommend an investment that guarantes an after-tax, risk-free 3.69% return.
    You do not need knowledge of Canadian taxation or personal information to do this.
    I don’t think a fairly new ETF that invests equally in commodities, us stocks, intl stocks, fixed income, and real estate that you believe to be a hedge fund for the small person hardly qualifies as an answer to his question.
    Personally, I would like to know how you almost doubled your investment (45%) in a few years ( I would say it has been a few years since the “crash”) with ” no options and long only”???

  67. Jonathan says:

    @ maria (#66) – The easy answer is that he can’t recommend an investment that guarantees and after tax, risk-free 3.69% return.

  68. moom says:

    I’m an investor in GTAA…

  69. KED says:

    I can’t believe the negativity. Clearly it is a matter of examining your spending and priorities. In April of 2010 my husband and I enrolled in a Dave Ramsey class at our church. We were living paycheck to paycheck. One year later, we have $ 5,000.00 dollars in the bank, even after our yearly income was reduced by $ 2,000.00. So that would have been $ 7,000.00 if our income had remanined the same. We have an family entertainment budget, dining out budget, my hubby has a golf budget, I have a generous hairstyling budget and my girls have a dance budget, a charitable donation budget, plus more. It really boiled down to seeing where we were spending money and taking control of our earnings. We don’t have all the toys some of our friends and family have ( boats, motorcycles and jet ski’s.) We do have family movie nights, game nights, trips to the park, etc.

    Don’t tell me it can’t be done. We cut back on cable, got rid of our landline, quit going to the drycleaner. We also cook more, pack lunches and hang clothes on the line when the weather cooperates and even garden a little. We have also helped a family member that has been struggling financially. Taking hold of our finances and more importantly evaulating what is important to our family has been life altering.

    It doesn’t matter where you live, the people who are complaining about the high cost of homes are forgetting their incomes are also accordingly higher in urban areas than Trents more rural area.

  70. Bonnie says:

    Trent, this was a beautiful, inspiring story. Even if the end result (purchasing a home for cash) is completely unrealistic for those of us not living in rural Iowa, I completely agree that cutting out the little things can add up in the long run. For our family, those little things have helped us to pay off all credit cards, survive a pay cut, and start to pay down our car loans while saving for a down payment on a home. So, I still think this is valuable advice.

  71. Kai says:

    So after a year, you’ve saved $7000.
    After five years, you’re up to $35 000. That’s still not much to buy a house on.
    The ‘negativity’ is not people who can’t imagine saving. It’s people who are well aware of the benefits you can gain from cutting out the little things, yet are annoyed by the over-simplification that a few less luxuries can lead to a house in a few years.
    There’s a positive story, and then there’s an atypical extremely rare situation, and then there are pipe dreams.
    Anyone who can cut out some extras and end up with a house in a few years has been spending a ridiculous amount of money.

  72. Jonathan says:

    @Kai – #71 – You’re right, $35,000 isn’t much money to buy a house, but it isn’t impossible (or even a pipe dream). I know of a house for sale right now for $17,000 near where I live. My wife and I purchased a used mobile home for $8,000. It would be very easy in this area to find a plot of land and move a mobile home to it for less than $27,000, which is what would remain of the $35,000.

    Some people complain that this post is unreasonable because it only works in certain regions. The point they miss is that their complaint is only valid in certain regions, because there are areas (outside of rural Iowa) where it is very possible.

    No one has even talked about building your own house or utilizing one of the many low-cost housing solutions that exist.

  73. Kai says:

    I don’t think that when most people hear ‘my friend purchased a house’ they think ‘mobile home’.
    My problem isn’t with the concept. if it were an actual look at the numbers and what was saved and how, and how bit by bit you can save some $35000 or whatever, and that is enough to buy a place to live in some places, that’s a great story.
    But generally those parts of the country with cheap housing also have lower wages, and to save that kind of money in a few years, you’d need to be in an atypical line of work – or living the ultimate extreme having-nothing savings.
    I suspect KED above, if having a salary that lets them cut out some excesses to save $7000 in a year, do not live in a part of the country where houses are available for $35 000.

  74. Jonathan says:

    Why is that? I saved up $20,000 in a 12 month span a couple of years ago and I live in an area where you can buy a fixer-upper for $35,000 fairly easily.

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