Budget Tuesday

The Great American Myth: Everyone Should Own a Home

One of the greatest myths in America is that everyone should own a house and if you don’t you are wasting money. There are times when owning a home makes financial sense, but there are also times when it does not. All to often people jump into purchasing a home because they think it is a good idea but they do not stop to consider the whole picture.

I can hear it now “But Cipher, didn’t you just say in your last post that you are looking to buy a home?” Yes, I did say that, however, what you need to know is I looked at the market and considered the costs before making the choice. In my last post I talked about some of the basic costs associated with the initial purchase of a home. Now it is time to dive in and talk about some of the costs associated with renting vs. owning a home.

Costs Associated with Renting

The cost of renting is often times straight forward. The renter pays an agreed upon sum that is dictated in the lease. The price is locked in by the lease, some places have laws about how much the landlord can raise the rent from year to year.  

 In many cases the maintenance of the property is the responsibility of the landlord. The renter of course takes care of small things like replacing light bulbs and the occasional Liquid Plumber, but in my experience, there are not a lot of maintenance costs.

Some common costs to rent are:

  • Rent
  • Deposit
  • Utilities (sometimes included)
  • Renters Insurance (optional but a good idea)
  • Parking Spot Fee
  • Pet Fee

The place I am currently renting actually has most of the costs rolled into one fee. I pay rent and insurance; the utilities and parking are included. I did have to put down one-month deposit at move in.

Depending on the landlord it can sometimes difficult to get your whole deposit back. Because my job requires a lot of moving, it made the most sense to rent from an economic and flexibility standpoint. My costs are predictable and I never had to worry about selling my home while trying to switch jobs.

Story time: My brother rented for several years and he kept hearing people say he was “throwing away his money” by renting. Interest rates were low and the mortgage payment would be a little less than his rent payment. Sounds good right. Well, not so much.  

Soap box time: You are not throwing away money; you are exchanging it for a roof over your head. There is value in this transaction.

The thing that my brother failed to consider when deciding to buy a home was everything he would have to do and pay for to keep the home in good shape. He purchased an older home so it should come as no surprise that there were maintenance issues. Yes, the mortgage was about $150 less per month than his rent, but when the roof started leaking the several thousand dollars needed for repairs was not so easy to come up with. Even without big ticket items like a roof, there were several sneaky expenses that more than made up for the $150 “savings.”

Read on and you will see some of the costs my brother failed to consider.

Costs Associated with Ownership

The cost of owning a home is not as straight forward. The mortgage is fairly easy to predict if you have a fixed interest rate. However, if the property value increases significantly that can have a huge impact on property taxes, which will increase the escrow portion of the monthly payment. In addition to these basic costs home owners need to consider maintenance fees and repair costs. Even in newer homes, if you don’t pay attention to preventative maintenance small issues will build into big issues eventually.  

Some common costs to own are:

  • Mortgage
  • Home Owners Insurance (required)
  • Home Owners Association Dues
  • Lawn Care
  • Maintenance Costs; preventative and repairs
  • Property Taxes
  • Interest Costs
  • Utilities

As you see some of the items are the same, but there is a difference in cost. Renters insurance is fairly inexpensive but homeowner’s insurance is usually more. No matter where you live one usually pays utilities but as my brother learned electricity for his apartment vs. house was noticeably more. In the apartment water and garbage were included but he paid these costs for the house.

Where I live home owners associations are very common. One friend pays about $95 a month, another pays $150, and on the extreme end a coworker pays $650 per month. In each price point there are amenities that come with the fee. Many people don’t think of this monthly cost when deciding if renting vs. owning is better. They think mortgage vs. rent.

Don’t even get me started on having to take care of a lawn. First you have to buy all the equipment, then you actually have to take care of the lawn. Or you end up paying someone to do it for you. In either case, you are still paying for upkeep that is included in many rental options.

Interest is another major expense. I have discussed this before from different perspectives. When someone asks you what you paid for something, we often give the sticker price. What we fail to consider is the amount we pay for the privilege of borrowing money.

Here is a little math for the average home price in America. Yes, I know the amount can vary greatly from state to state and even city to city.

Home Price: $266,700

Average Interest: 4.40%

Average Length of Loan: 30 Years

Interest Paid: $214,091

Estimated Mortgage Payment: $1335

Total Cost of Mortgage: $480,791

Did you really pay $266,000 for you home. NO. You paid so much more and unless the prices more than doubled most people don’t make money on houses. They are great to live in, especially long term. But a house is not a great investment. According to business insider, the average rate of return for a house is 1.3% compared to 3.375% on other investments.

Back to the soap box: you are not throwing away money when you rent.

Final Thoughts on Rent vs. Buy

Some additional things I considered when making the rent vs buy decision. Where I live a metro station is being built; the cost of homes are high but when the metro line goes in the prices are expected to jump about 20%.

I am tired of renting apartments, many of the townhomes or houses for rent are only available for a limited lease. Most people are holding onto their property so they can sell when the metro comes in. This means I will have to move again in a year or so, which is not ideal.

It does not make sense to rent now and buy after prices jump, I would probably be priced out of the market anyway. But the biggest factor is the area I now work in has a lot of jobs opportunities so I should be able to stay put for an extended amount of time. With all costs considered, now looks to be a good time to invest in a home vs. renting.

I am not saying people should not buy homes. If it makes financial sense within a well-developed budget, by all means purchase a home. For me, the timing, the budget, and the willingness to be responsible for a home has led me to make the choice to purchase.

Budgeting and the Tax Debate

Monday was officially the deadline to file taxes for 2018 so of course there were several conversations in the office regarding this topic. The main debate was on the topic of maximizing a refund vs. trying to break even by balancing withholdings from paychecks. At first blush this may not appear to be a budgeting topic, but trust me it is.

The goal of taxes from an IRS standpoint is to have the taxpayer be as close to paying the correct amount of taxes by the end of the year as possible. When I took taxes as part of my accounting degree the professor drilled this concept into our heads. He always said, “if you get a refund at the end of the year that means you just gave the government an interest free loan.”

Okay this is a fair point, especially from an academic standpoint. However, a classmate countered with “I know it is an interest free loan but I do not have the discipline to set aside money. I let them hold on to it and at the end of the year I get a little bonus to splurge on something, maybe a vacation.”  

From a budget perspective tax withholding can have a significant impact. On the one hand, if you keep as close to the actual amount owed as possible you can maximize the amount of money you control and this can help pay bills. Under these circumstances you have to budget the extra money and save it if you want to splurge, like my schoolmate.  I can hear her now “boring.” In my case I am usually within +- 100 of balanced. It is difficult to be exactly on target. The closest I ever got was owing $15.

On the other hand, if you like the feeling of a yearly bonus tax refund time is a favorite time of year. Saving a little each paycheck to finally add up to the amount it would take to go on a vacation does not give the same rush as getting a big sum all at once on a refund check. You still saved, you just tricked yourself into doing it.

The other benefit of having a higher withholding is you have a cushion when you unsure how much you will owe at the end of the year. It might be better to over withhold than to face a huge tax bill at the end of the year. Especially, if you don’t have the money when the bill comes due.  

I used to volunteer to do taxes for soldiers when I lived overseas. Some of the common reasons people would end up owing money without realizing why are:

  • You and your spouse have jobs, the pay is in a specific tax bracket. Add the income together at the end of the year and now you are in a new tax bracket.
  • Soldiers retire, get new jobs, earn retirement pay, and when all the income is added together at the end of the year, new tax bracket.
  • Forgetting to change deductions when kids leave home and they start claiming themselves on their own taxes.
  • Forgetting to change deductions when marital status changes.
  • Not realizing that you have to pay quarterly taxes on side jobs. This got the personal trainer I worked with.  Taxes for self-employed people are a bit complicated.  People don’t realize that their employer kicks in a certain amount. When you are self employed you pay both parts.

What school of thought are you from; Do you prefer to balance the taxes and keep your money throughout the year?  Or do you prefer to get the refund at the end of the year? The debate among my friends goes on 😊

The Pitfalls and Benefits of Credit Cards

When it comes to budgeting and being mindful of money, credit cards can have a huge impact on the bottom line. Many places don’t take checks any more and sometimes people look at you like you are crazy when you slow down the line by paying cash. I can hear them thinking “aw she is cute paying with her little pieces of paper.” Credit cards make paying for things simple and fast, but they can make us less aware (mindful) of our spending habits.  Let’s take a look at some of the pitfalls and some benefits of credit cards.

Points Programs

Every day we are bombarded with credit card adds that talk up the benefits of their points programs. If you use their card you will get cash back, airline points, hotel points, or member exclusive access to certain events. This all sounds wonderful but what are these benefits really costing you.

One popular program offers you 1.5% cash back on every purchase. Sounds great, free money! Maybe, maybe not. The company is counting on you not paying off the credit card every month so they can charge you interest, which is much higher than 1.5%, that is pennies to them.  I have seen interest rate ranging from 6% for people with the best credit scores, 14% on average, and up to 25%. If you carry a modest balance the cash back still does not put a dent on the low end 6% rate. 

One common mistake people are tricked into, especially with advertising, is putting things on their card just to earn rewards. Sure, you might earn a free plane ticket here and there but if you are paying interest on that purchase that “free” ticket is costing you more than if you just purchased the ticket outright.  If you are making a purchase just for the reward, maybe think twice…can you pay the balance before the next billing cycle. If the answer is no, ask yourself, would I make this purchase if no reward was involved?

I fully confess, I love my points programs. Particularly the program tied to the card I use for business travel. I know that when I put my hotel, car, plane ticket, and any other business costs on the card I will be reimbursed for those charges before the next payment cycle. Therefore, I do get free money.

Carrying a Balance

There are times when an unexpected expense comes up or we just need to make a large purchase. It is great to have a credit card to facilitate the process. Another reason a credit card is great is for online shopping. There are some great deals to be found or products you just can find locally but you need some form of digital payment. Many of the sites I use let me save my payment and all I have to do is click a button and my purchase is on its way. These are all reasons credit is great.

The danger is in carrying a balance. A few years ago, I was helping someone with a budget and they had maxed out their American Express card; these cards are not meant to carry a balance. He was being charged 25% interest on a balance that was over 20k. Think about the math on that for a minute.  That is $5,000 interest in one month. Each month that number grows and it becomes more difficult to get out of that hole.

But let’s take a more common example. Pretend you carry a $2,000 balance at the lower end of the interest scale, say 10%. This will cost you $200 interest; the minimum payment is 50.00. If you pay just the minimum next month you owe $2,150 with interest of $215. And so it goes until you buckle down and pay the balance off.

 I get it, sometimes the unexpected happens and you have to use your card, but I suggest you pay the balance as quick as you can.

Not Paying off Everyday Items

I put a lot of stuff on my card, from gas, groceries, cell phone bill, gym fees, to lunch when I don’t feel like packing my own. It is just easier to have all the charges go to one place and then I pay the balance every payday. This just simplifies my life, especially when I am on the go a lot. The biggest trap I see people fall into not paying off the everyday purchases.  

Even if you have to carry a balance for a large purchase, my advice is to make sure you keep track of the ordinary purchases and make sure you pay them off each month. This way the sneaky interest monster does not grab you and put a dent in your financial goals.

Speaking of everyday items and online shopping, when I lived overseas, I met a lot of people who did not have any credit cards. Where I lived, they were not that common and many local businesses did not accept cards. A friend of mine asked where I purchased the book I was reading; I told her Amazon. She was sad that she could not get the book. At first, I misunderstood and thought she meant they will not deliver to our location, so I quickly told her “no Amazon does deliver here.” The lady corrected me, she said “I do not have a credit card so I have no way to pay for this item.” Being an American from a consumer/credit culture this was new to me. Long story short, I bought the book for her and she just gave me cash.

As Americans, we do live in a credit culture, which can be a good and a bad thing. Having a credit card makes it so we have access to many things at the click of a button. The pitfall is that it is easy to spend beyond our means and the things we buy end up costing way more than we think. As always, there is no judgement, I am just advocating for mindful spending.

When Should We Begin Teaching Children About Money?

Recently the local news station was doing a segment about how game companies intentionally make children’s games addictive. The reporter gets a father and child on TV for an interview about how the child charged about $3,000 worth of game items to the father’s credit card. When the child is interviewed, he is gleefully telling the reporter how he just clicked the button every time the game gave him the choice to get another boost, coins, or extra lives. The news story got me to thinking, when should we begin teaching children about money?

The child on television is talking to the reporter in a way that made me think this the child still does not really understand that they did something wrong. The tone, body language, and words chosen all point to the kid thinking “I had fun with the game, my dad got mad for some reason, and now I get to talk about it on TV. Look at me on TV.”  If this is really the case and not some kind of dramatization or coaching off screen, someone has failed this child if they spent $3k on a game in one month and still does not understand there is a consequence for this action.  

It dawned on me that the reason I know so many adults who struggle with managing money is because they were not taught as children how to manage money. Therefore, I began talking to my friends and family to get their opinion about what age is a good age to start teaching kids about money. I got a wide range of interesting answers.

I will start with my own childhood. My parents have always been very secretive about money; it is very taboo…we just don’t talk about those things. I knew we did not have a lot and that after my step-dad was injured at work we needed help. I never knew how bad it was exactly but I did know I got free lunch at school because my parents qualified for some assistance.

When I was 17 a friend of mine was taking business economics as an elective and the class had a personal finance month. She began telling me all about the things she learned in class. I realized I did not know anything about managing my money.  I had a job, cashed my paycheck at the bank that issued the check, and gave my dad a little money for my car insurance.  At 17 maybe I should have known a bit more about how to manage money.

My coworker started having conversations with her child when the child was in elementary school. My coworker stated with small conversations like teaching her child one does not always get what they want when they want it. Things have a cost and sometimes we have to wait to purchase something and/or save for it. As the child got older my coworker gave her kid a prepaid debit card as a way to teach the daughter how to manage a small amount of money. As the child grew the complexity of the money lessons grew.

Another friend takes a middle ground on this issue. He thinks that you should not start money conversations when children are too young. Just let them be kids as long as they can before putting the pressure of the world on them. This friend is of the school of thought that all you need to teach a children responsibility is  give them chores and paying a small allowance. This way they learn you work for what you have. Then when the child is 14 or so you can teach them about money.  

That is all well and good in generations gone by. But today companies actively build marketing programs to target children. They are bombarded with input at a very young age so my opinion is we need to start teaching them small lessons at a young age. The child does not need to know every detail of the family budget.  But it is a good idea to teach a child that they cannot just click a button and get something anytime they want it.

This is a complex issue and can become emotionally charged. Most parents I know do the best they can by their children and work hard to provide their child with the things they need. However, I think we should consider that one of the things a child need is lessons and boundaries. Teaching a child about money is a life skill that can make a world of difference throughout their whole life.

Any opinions out there; what is a good age to start teaching a child about money?

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