My lovely bride and I have been putting away money so we can finish our new home – cabinets, trims and floor coverings and we’ve got it made. Now we have been saving for what, five years? At this rate, I will be dead for about forty years before I’ll have saved enough to enjoy it.
And here is why….
I’m not an accountant or a financial advisor (this is a disclaimer), but I can do research and the math and some things make a lot of sense to me when it comes to buying a new building. Pole building financing has become the way to go for many of our customers.
It just feels like my money does not go as far as it used to. The U.S. Government’s consumer price index, just does not feel like it matches my pocketbook or checking account. www.shadowstats.com calculates inflation using the same methods in place as in 1980. According to them, the annualized rate of inflation in September 2011 was 10.5%! The thousand dollars I set aside in 2006 towards finishing the house has only about $600 of today’s buying power.
Let’s take a look at what would happen if you opted for pole building financing. We will use lots of big, round numbers, because the math is easy.
Borrowing $20,000 at 12% interest over 15 years (yes, I know the rate is high, but it is easy to calculate). Payments are about $240 a month. In the first year you will pay roughly $2300 in interest, over the life of the loan, total interest paid will be about $23,200.
If you are in the middle class tax bracket, your federal tax rate is about 25%. Under current tax law, interest paid upon your primary residence (or improvements to your primary residence) may very well be tax deductible. If so, you have garnered about a $5,800 tax savings over the full life of the loan.
Muddling this all together, without the use of any high powered computer programs….assuming the interest rate above, current actual inflation rate and tax savings – the cost in today’s buying power is….drum roll please…..roughly $20,000!!
Now the option is, I could put $240 a month into a savings account, and in 15 years it will have grown to about $46,000. Good news, right? Nope, because the buying power in today’s dollars of the $46,000….is about $9,000. You would have spent 15 years saving to buy but 45% of the building you could have been using. Just think of all the years you can use what your are investing in!
As much as I hate to borrow….sometimes it does make economic sense.