Wednesday, August 12, 1998

A Tale of Frugality and Independence
by David Schwalm([email protected])

By cutting out our major monthly expenses we can lead a life of fewer worries and financial security. What are the two major monthly expenses on which we seem to spend most of our money? Housing and car payments. Car payments are easy to get rid of; just pay cash for cars. Housing is more of a challenge. It is quite difficult to save up $100,000 if you are paying rent or a mortgage every month.

What I did may not suit everyone. It's a bit of work, but I found it well worth it. In 1994 I used my VA loan to buy a nice quadruplex, with no money down. They were nice town-home style apartments -- two bedrooms and two baths. Perfect for my wife and me. We lived in one unit and rented the other three out. We raised rents and soon had $1,500 a month coming in. Our monthly mortgage payment was $1,000. We had managed to cut out our major monthly expense-- rent. We also had the fortune of being in a great real estate market -- Colorado. When we sold our property almost three years later, we walked away with $45,000. We took that money to our new city -- Austin, Texas. We did a tax-free exchange and bought two more quadruplexes. We are again living completely free and we now also have income coming in from our second property.

Because we have been able to save rather quickly since we weren't paying rent, we were able to pay cash for both of our used cars. We carry one credit card and always pay it off. My wife and I both work; she's 29 and I just turned 30. I contribute 10% to my 401k and save one paycheck per month. My wife also puts away one paycheck per month. In other words, because we have no car payments and our rental income pays our mortgage, we're able to save 50% of our annual income.

We also put in at least $500 from our other rental property into our brokerage account. Since we don't have any major monthly bills, this is easier than it sounds. We just blow the rest on having a good time and the other basics -- food, clothes and utilities. Our short-term goal (two to three years) is to be able to pay cash for a house. We are also considering moving back to my wife's home -- Holland.

I can't stress enough how important it has been to us to live essentially for free. Though I tell all my friends that they should do this, few do. I feel so strongly about this that I have just finished a rough draft of a book to show how veterans can use their VA loans to purchase rental real estate. If you aren't a veteran, there are still some excellent loans available that will allow you to buy a rental property with as little as 3% down. It does take some work and effort, but it's well worth it. Now I have money to invest in the things I learn about at The Motley Fool! I feel that a balance of real estate, index funds, cash and soon-to-be stocks works best for us. Thanks for all the great information at your wonderful site. I hope this story can help others realize they can take control of their own finances and not be a slave to the system.

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