Buying vs. Renting

Buying vs. Renting

Owning a home used to be a virtual requirement in attaining the so-called American dream. But that was when people drove 2-ton cars, smoked on airplanes and watched live television. Buying is a smart choice for many people, but it isn’t always the best deal, depending on the market where you live and factors such as how long you plan to stay in your home and the size of the home you want to purchase compared to where you’re renting.

Before you commit to buying, factor in the following points:

  • There’s a big initial investment involved. You have to pony up a lot of money when you purchase your house, from the closing costs (roughly 3% of the home’s purchase price) to the down payment itself. Not everyone has that kind of cash to spare.
  • Can you handle the debt? Lenders often look at your debt-to-income ratio: how your mortgage payments and other debts would stack up against your pay. Conventional lenders often use the so-called 28/36 rule when determining whether to offer you a loan. Your house-related payments (mortgages, taxes, insurance) shouldn’t exceed 28% of your pretax income, and all other combined debts shouldn’t exceed 36% of your monthly pretax income. (Much more on this later.)
  • Buying is more expensive than you think. You can’t simply compare your monthly mortgage payment to your monthly rent — these are apples and oranges, particularly when you consider that the place you purchase won’t necessarily be the same size as the place you’re renting. Though you can deduct some of your home-ownership expenses, you’ll have to pay property taxes, homeowner’s insurance, HOA fees and probably mortgage insurance, as well as renovations, maintenance, utilities, and other fees typically covered by a landlord. (You can directly plug numbers into a handy rent-buy calculator from the New York Times.)
  • Buying decreases ease of mobility. In today’s ever-changing job market, very few people can say with certainty that they’ll have the same employer in five years. It’s much easier, and less expensive, to leave a yearlong lease than to sell a home.
  • How hot is your market? Real estate is local and cyclical, so consider whether your area is better suited to renting or buying. If you live in a larger metropolitan area, the Case-Shiller Index is a useful at-a-glance look at how current real estate values where you live compare to historic highs and lows.

Is a home an investment?

Some people would rather put their money toward equity in their property instead of giving it to a landlord. While that math makes sense for many — especially those who plan to stay long enough to pay off their mortgage entirely — nobody can predict whether home prices will rise or fall in a given time frame, so don’t count on your home to be a cash cow.

What to do before you act

If you’re thinking about buying, follow these steps before making your move.

  1. Calculate your current debts, including car loans, credit card payments, and student loans. Remember the 28/36 rule mentioned above.
  2. Consider how much available cash you have. You’ll want enough to at least cover your down payment and closing costs, and don’t forget to leave enough in your bank account to cover any emergencies that might arise.
  3. Make sure you can put enough money down. Traditionally, lenders have required down payments equal to 20% of the home’s purchase price, but special programs allowing down payments as low as 3% are available. (Putting 20% down on a $300,000 home would require $60,000 in the bank — plus an additional $9,000 or so for closing costs.)
  4. Get pre-approved for a loan. Contact a lender to get pre-approved for a mortgage. This doesn’t require you to accept the loan; it’s just a way of showing real estate agents and sellers that you’re serious. One of the first things a prospective agent will ask is whether you’ve been pre-approved, so check off this box early in the process.

Are you better off renting?

Deciding whether to rent or buy is a big decision that requires serious “Where am I now?” and “Where am I going?” sorts of questions. It might be best to keep renting if you want to maintain maximum flexibility for personal or professional reasons, or if jumping into more debt right now takes you out of your comfort zone. Maybe you’re just not ready to face the responsibilities of home-ownership: repairs, upgrades, maintenance, yard-work and all the rest. Even thinking about the difference between cleaning an 800-square-foot apartment and a 2,400-square-foot house can make you want to take a seat and a deep breath.

Your local housing market could be working against you, as well. If you live in a hot market with eager house hunters chasing too few properties, it might be best to bide your time until a better buying opportunity presents itself.

The Buckets

The Buckets

I’m continuing the theme of inanimate objects being used as parallels for your financial planning. I personally prefer the milestones method of savings, but the bucket method works just as well if it makes more sense to you!

Many people are familiar with using buckets as a method for retirement income planning. It’s a simple strategy for managing money over a multi-year period, and helps you to apply an appropriate asset allocation for money you will need in a few months, a few years, in 10 years or more. Here’s how it generally works:

  • Bucket 1: This bucket typically holds one to two years’ worth of living expenses, invested in traditionally more stable vehicles such as cash, certificates of deposit, money-market funds or short-term Treasury bonds. Putting money you plan to spend soon into liquid, generally low-volatility investments can help you avoid having to sell riskier investments, such as stock, in a down market to raise cash for living expenses. This bucket should be refilled annually.

 

  • Bucket 2: This typically holds money that you expect to need within three to 10 years, invested in intermediate-term assets with a focus on growth and capital preservation.

 

  • Bucket 3: This bucket typically holds money that you expect to need in 10 years or later, invested for growth and income.

 

There are lots of other ways to use buckets, depending on your life stage. If you’re in your 20s, consider one bucket for your emergency fund, another earmarked for a house down payment in a few years and a third invested for retirement. As you move through life, buckets can be used to save money for a child’s college tuition, a new car or a once-in-a-lifetime vacation.

Even retirement accounts can be invested in multiple ways. For example, some investors have opened separate IRAs—one for their personal use, invested based on their risk tolerance and investing timeframe, and the other for their children to inherit, which may be invested more aggressively to suit a longer timeframe and higher risk tolerance.

Which method do you use? Are you a milestones person or are you using the bucket strategy? Let me know!

The Milestones

The Milestones

I often get asked “Bench marking” questions. For instance – I’m 30.. what should I have saved by now?

 

So here’s a neat and simple break down:

First of all – every individual should have 3 months of their expenses in cash or cash-like equivalents. We call this the “emergency fund” and it is incredibly important for the general stability for your financial plan.

Second – As soon as you start working, you should contribute to your company’s available retirement plan and be saving about 15% of your income between retirement plan savings and your own personal savings.

And lastly – all of the number targets that will be listed below assume that you want to maintain your current lifestyle during retirement. Which also means that you are living within your current income. Or simply, you are not currently spending more than you earn.  

The Milestones:

Age 30 – The goal is to have 1x salary saved. (Gross). So if you make $100,000 you should have saved about $100,000 by now.

Age 35 – Have 2x salary saved

Age 40 – Have 3x salary saved

Age 50 – Have 6x salary saved

Age 60 – Have 8x salary saved

Age 67 (average retirement age in US currently) – Have 10x salary saved

 

Now, a few key assumptions play a role here:

  • This will work if you start saving 15% of your income every year starting at age 25
  • You invest a least 50% of your savings in stocks on average over your lifetime
  • You retire at age 67

If you retire later, you will need to have less money saved. The opposite is true if you plan to retire before age 67.

If this makes you feel a little down today, then i’m sorry that i’m not sorry. BUT I’m happy to work with you to get your sh*t together.

Why Should I Save Money?

Why Should I Save Money?

Building A Budget That Actually Works

It’s quite odd, but I get this question so often and I’m tired of stammering through an answer that quite honestly, seems self evident to me.. so here is my well thought through answer.

I’ll also add in some “tricks” for saving more for all of you that can’t commit to paying yourself first. Please refer to my earlier article titled “pay yourself first”. duh.

SOME Reasons to save money (in no particular order):

  • Retirement
    • There will DEFINITELY be a significantly lengthy period of time in your when you are not bringing home the cheddar. If you are earning $100K a year now, I assure you that there is no government program out there that will support your lifestyle. So unless you are literally ready to dramatically reduce your lifestyle when you’re 70 years old and want nothing more but to take year-long cruises because you can… you’ll want to start figuring that out now.
  • Home(s)
    • Renting is cute and all but honestly, part of the big American dream is to own a home. You don’t want to be 80 years old and fighting with your landlord or risking being evicted because they’re destroying the building you live in to build a condo. Seriously, this happens. You need to save money to have a down payment to buy a house.
  • Emergency Fund (probably #1 if I had to pick one)
    • Shit happens in life and you need to be able to pay for said shit. Sometimes literally, like when the toilet breaks and there’s shit coming out of your shower drain. I don’t know about you.. but I can’t (and really don’t want to) fix that. Not having an emergency fund is a huge reason why people get into debt in the first place.
    • Adding to this – everyone should have 3-6 months of expenses in cash… in case you lose your job or want the ability to change careers because your co-worker is a miserable old hag that you can no longer stand. (I promise this has no relevance to my own life, really.) You will need to pay the bills and sustain yourself and you don’t want to get into debt while dealing with an employment gap, and you also, likely, don’t want to live in a box under the bridge during that time.
  • Travel
    • This adds to the list of things you may want to do without getting into debt. For me, personally, this is number one. I believe travel makes us all richer.. unless it quite literally makes us bankrupt.
  • Debt
    • There is nothing sexy about carrying toxic credit debt. If you’re in it, GET OUT AS FAST AS YOU CAN. If you’re in it, you need to save anyway… because in the event that an emergency happens, you may want to be able to not get into deeper debt. Pay yourself first no matter what!
  • Financial Freedom (my ultimate goal)
    • If you woke up in the morning and time and money were not an obstacle for you.. what would you be doing? Unlimited time. Unlimited money. Whatever that is, figure out how much it would cost you to do it every day of your life and save towards that! What’s better than saving towards your dream life? I like to call this.. “Fuck you money”. As in, you can wake up any day and say FUCK YOU to wherever you’re supposed to be and whoever you’re supposed to see just because you CAN.

There are way more reasons.. I just listed out the ones that pop out most and I use as examples most often.

A few “tricks” for saving money:

  • Put aside each five dollar bull into a box every time you get one. Do not spend your fives. Deposit at the end of each year.
  • Set up an auto deposit from your paycheck to a bank that isn’t the bank where you have your checking account.. so you can’t see you have that money
  • Eat out one time a week less.
  • Don’t spend any money at Starbucks (it is most definitely the little things that add up)
  • Write out your budget and be honest. I promise when you see how much money you spend on certain things, you’ll know where you can cut back.

 

As always.. write me with questions!

Gotta Start Somewhere!

Gotta Start Somewhere!

I often get asked the question: “I’m completely lost with money, where do I begin?”. While many advisors would start by reviewing your statements, I like to start somewhere else.

Start with figuring out what you spend your money on. Show me your budget and I’ll tell you what your priorities are… and it’s probably not what you’d like your priorities to actually be.

Figuring out what you spend money on and being REAL about it is the first step towards creating a financial plan because then you can figure out how to reallocate your money towards the things that are your actual goals… my guess is that it has nothing to do with actively supporting Seamless!

Your budget is going to be a simple process but really take the time and energy to make it thoughtful.

Start with listing out all your fixed expenses. These are things you absolutely MUST pay for in order to live. If you lost your job, these expenses would not go away. Some common examples are:

  • Rent/Mortgage/HOA fees
  • Utilities
    • electric
    • gas
    • water
  • Telephones – home/cell phone
  • Insurance Premiums
    • Health
    • Auto
    • Homeowners
    • Life
    • Disability
  • Child care related expenses (if any)
    • medical care, food, a basic amount of clothing, diapers, etc.
  • Minimum payments on any loans or outstanding debt
  • Home repairs

Then, list out all your variable expenses. These are expenses that change with time and depend on your circumstances. If you lost your job, these would be the expenses you could eliminate or minimize to reduce the cost of your lifestyle. For this, you’ll want to make sure you have two columns. Label the first one “current” and the second one “goals”. For this exercise, really focus on the “current” column and figuring out exactly what you spend in each category. Be as honest and real as possible, even if the numbers on the page seem unrealistic. Some common variable expenses are:

  • Food expenses
    • Lunches
    • Breakfast
    • Snacks
    • Groceries
    • Dinners
  • Child care expenses
    • The cost you spend on a nanny or day care.
    • Allowances
  • Clothing
  • Laundry/ Dry Cleaning
  • Subscriptions
  • Memberships
  • Gifts
  • Donations/ Charity
  • Personal Care
    • Barber/Beauty Shop
    • Toiletries
    • Spa/Massage
  • Travel
  • Beer/Wine/Liquor
  • Entertainment
  • Pet Care/Supplies
  • Hobbies & Crafts

Once you’re done figuring out both your fixed and variable expenses, add the numbers together.

Now find your last few pay stubs or check the bank account your checks get auto-deposited into and figure out how much your net pay (the amount you get paid after taxes) each month is.

Subtract the number your got for all your expenses from the amount of pay you receive. There are 3 possible outcomes here: The number is positive, the number is negative, or the number is zero.

If the number is positive – this means you are SAVING money each month. Does the number you calculated match the dollar amount you save? If not, go back and figure out what you’re not counting.

If the number is negative – this means you are spending more than you earn. Take some time and re-evaluate your spending. Where can you cut back and NOW? Do you order out or go to nice dinners often? Maybe you’re too charitable. Maybe you can stay home a few more nights per week. You need to do the work to figure out how to live within the income you make OR find a way to make more income.

If the number is zero – this mean you currently live paycheck-to-paycheck. It is likely that you can cut back in a few places and get into the positive side to start saving.

If you’ve done all this – CONGRATULATIONS! You’re officially ahead of the 85% of people I’ve spoken to that have NO CLUE what they spend and how much their lifestyle costs!

We’ll get into next steps – next week!

Love, Life & Money,

Nika