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Here's why renters in America feel trapped
In a recent report by the FINRA Investor Education Foundation, researchers offer a sobering peek into the homes (and finance) of renters. It's not a prett...
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Presented as a public service.
Some financial Rules of Thumb that regular folks should know in order to negotiate their way through the Great Financial Crisis (GFC) or as it's more commonly referred to by those that want more control over you life, the greatest financial crisis since the Great Depression.
BTW: those folks fail to inform you that both events were brought to you by the same folks that we are told we have to turn to in order to get us out of the crisis ( The Federal Government and The Federal Reserve ). A paradox indeed.
If we had not jettisoned some of these "rules of thumb" as relics of a bygone era in the name of expediency (mostly politicial, combined with personal), heck we may not have had a Great Financial Crisis to begin with. WDIK? ¯\_( )_/¯
Some financial Rules of Thumb that regular folks should know in order to negotiate their way through the Great Financial Crisis (GFC) or as it's more commonly referred to by those that want more control over you life, the greatest financial crisis since the Great Depression.
BTW: those folks fail to inform you that both events were brought to you by the same folks that we are told we have to turn to in order to get us out of the crisis ( The Federal Government and The Federal Reserve ). A paradox indeed.
If we had not jettisoned some of these "rules of thumb" as relics of a bygone era in the name of expediency (mostly politicial, combined with personal), heck we may not have had a Great Financial Crisis to begin with. WDIK? ¯\_( )_/¯
As we have illustrated before: Education, Employment, Marriage lead to higher standard of living.
THE THREE "GET AND STAYS":
Get educated and stay educated.
Get employed and stay employed.
Get married and stay married
Very easy to see here in this report.
THE THREE "GET AND STAYS":
Get educated and stay educated.
Get employed and stay employed.
Get married and stay married
Very easy to see here in this report.
http://www.finra.org/web/groups/foundation/@foundation/documents/foundation/p601077.pdf
~;::::::;( )"> ¯\_( )_/¯
~;::::::;( )"> ¯\_( )_/¯
Things aren't looking great for aspiring homeowners in the U.S.
In a recent report by the FINRA Investor Education Foundation, researchers offer a sobering peek into the homes of renters. Nearly one-quarter of renters in a survey of 25,509 renters and homeowners combined say meeting their monthly financial commitments is "very difficult," and more than half say they wouldn't be able to come up with $2,000 to cover an emergency expense.
Homeowners, by comparison, feel much more stable. Half as many homeowners as renters say they find meeting their monthly bills "very difficult" and nearly half say they have no trouble meeting their monthly expenses, according to the report.
Because the cost of renting and buying varies so widely across the U.S., you have to take reports like these with a healthy dose of salt. In some metro areas, like San Antonio and Phoenix, it's actually much cheaper to buy a home than rent.
But the reality is that the cost of renting across the country is on the rise, straining the budgets of many renters. In the largest 25 metro areas in the U.S., rents increased by 5.5% in 2013, eating up more than 40% of the average renter's household income, according to Trulia. Most financial experts recommend spending less than one-third of income on housing.
"Once [rent] is over 30%, that's when you start getting into the danger zone financially," says Helen Stephens, a certified financial planner in Dallas. "And the problem when you're renting is that you may be in a lease for a year, and at the end of that year your landlord has the right to raise the rent on you."
In addition to rising rents, coming up with the cash for day-to-day expenses, let alone a down payment, can be tough for renters. Renters are more likely to be saddled with debt of all kinds than homeowners, according to FINRA. More the half of renters carry credit card debt vs. 47% of homeowners. And renters are nearly twice as likely to have medical debt than homeowners, owing to the fact that fewer renters have health insurance.
Not all renters are 20-somethings eating Cup Noodles and struggling to pay off student debt, either. The average age of renters today is 41, per FINRA, and nearly half of renters say they have dependents at home.
The road from rent to mortgage
For renters who aspire to own a home one day, the biggest hurdle they'll face is mastering cash flow — ensuring that the money coming in can not only cover their bills, but also leave them with wiggle room to save. Unfortunately, today's renters have a lot less capital to work with than existing homeowners. According to FINRA, 74% of renters earn less than $50,000 a year, vs. 60% of homeowners who earn more than $50,000.
Another challenge facing prospective homebuyers: the daunting down payment -- typically 20% of the home's purchase price. And Stephens advises her clients to build up an emergency maintenance fund of at least a few thousand dollars in case any unexpected repairs are needed once they've moved in.
As for the best place to save for a down payment, Stephens recommends a regular bank account. Banks are offering paltry interest rates on savings now, but it's a wiser option than investing it in the stock market, she says.
"I don't believe in investing money in the market that you're going to need for the short term," she says. "I know it may not earn much [interest] in a bank but it is secure and it's for a very targeted expense."
Preparing financially isn't the only step to homeownership. Buying a house is a complex, long-term endeavor that requires a lot of mental prep work. In a FINRA survey of more than 25,000 homeowners and renters, 40% of renters answered a basic question about 15-year and 30-year mortgages incorrectly, compared to just 19% of homeowners.
"No one should buy a home if they can't understand basic finance," says Ilyce Glink, author of "100 Questions Every First-time Home Buyer Should Ask". "The quick way to bankruptcy is to buy a house you can't afford, get locked into mortgage payments, real estate tax bills, and maintenance and upkeep expenses."
Glink has written dozens of articles available for free with tips for first-time homebuyers. But even she recognizes that homeownership isn't for everyone. Sometimes, renting just makes more sense.
"Choose renting if you don't know where you're going to want to live in five years, if your employment situation isn't stable, and if you can't currently set aside 20% of your after-tax income into a savings account," she says. "You might also choose renting if you're currently dating someone and hope to be in a long-term stable relationship that involves living together because otherwise you might buy a condo that's too small for your expanding family."
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Save at least three months of living expensed in an emergency fund.
So here are the "Personal Finance Rules of Thumb" that I could find, with my comments in brackets:
- You should spend no more than 2-3 times your household salary on a house. [I think your mortgage should be no more than 3 times your household salary as a maximum. Any equity/down payment you have should be taken into account in this Rule of Thumb]
- In order to retire comfortably at a normal age, your net worth should be your age times your salary, divided by ten. [I don't remember the footnotes that go with this Rule, but it is from The Millionaire Next Door. If your net worth is twice that number or more, then you are a Prodigious Accumulator of Wealth and you'll be very comfortable in an early retirement. Discuss.]
- Every dollar in your RRSP in your twenties corresponds to a dollar of yearly income after 65 (adjusted for inflation). Every $2 in your RRSP in your thirties corresponds to a dollar of yearly income after 65 (adjusted for inflation). Every $4 in your RRSP in your forties corresponds to a dollar of yearly income after 65 (adjusted for inflation). Every $8 in your RRSP in your fifties corresponds to a dollar of yearly income after 65 (adjusted for inflation). […Until at 65-ish, you should have around $25 in your RRSP for every dollar of income (equates to 4% withdrawal rate). I can't remember what the assumptions were. But not hard to figure out I guess…Using the rule of 72, it implies a real return of 7.2% in your RRSP. Perhaps a bit high, but not completely unreasonable.]
- Maximum mortgage payments should be no more than 28% of your gross monthly salary. [I think this is what the banks use.]
- Maximum for all debt payments should be no more than 36% of your gross monthly salary. [Again, I think this is from banks]
- If you negotiate a discount of prime, a variable rate mortgage will always be cheaper in the long run when compared to a fixed-rate mortgage. [I think this is true.]
- Pick a variable rate mortgage, but increase your payments so that they match the fixed rate payments. [This one is from Gordon Pape I think. Gives you a safety cushion if rates go up, and you're prepaying the mortgage if rates stay the same or go down.]
- In addition to maxing out your retirement plans, try to save at least 10 percent of your take-home pay for other goals, such as an emergency fund, college or a new home. [Makes sense, a lot of PF books have said the same thing]
- Generally speaking, if you've got young kids or teenagers, you'll need a life insurance policy that covers between 6 and 10 times family income and possibly more, depending on your family's expenses and how much your surviving spouse can earn. [I'm sure everyone will point out that it is not income that matters, but expenses.]
- To find the percentage of your portfolio that should be invested in stocks, Subtract your age from 120. This formula should help you maintain your living standard through your retirement years. [The rule used to be 100 minus your age, but people are living longer I guess!]
- Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school." [I don't know what the basis is for this rule. Should be doable in Canada, unless you take 12 years of university]
- Buy used and drive it for at least 10 years. [Sure, this will probably save a lot of money]
- If you must borrow to buy a car, follow the 20/4/10 rule." Which means: Make a 20% down payment, don't borrow for more than four years and don't agree to a monthly payment that's more than 10% of your income — or 8% if you plan to buy a home in the next few years. [I reckon no one here has heard of the 20/4/10 rule, but there you have it, plain as day. The 20/4/8 rule must be to keep your debt payments reasonable when including the mortgage payment]
- To compute and compare the real monthly cost to buy, insure and operate a car, double the price tag and divide by 60. [I think this rule is way off. Maybe it's more like 120. Of course, this doesn't take in to account the amount of mileage you put on the car every month]
- Insure yourself for catastrophic expenses, not the stuff you can cover out of pocket. [Absolutely. Why get extended insurance on a $110 bread maker? Insurance is to protect wealth, not create it]
- If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house. [Clearly an American Rule of Thumb. Wonder if it still applies using the standard Canadian 25-yr fixed. And is this based on the posted rate or the negotiated rate?]
- It will save you money if you buy the right size refrigerator-freezer for your family. You need a total of 8 cubic feet of space for two people, plus 1 foot for each additional family member. [That doesn't seem like a whole lot of space. I know family fridges are around 22 cu ft. So unless these families are meant to have 16 family members, something's amiss here. Mind you, I have a 22 cu.ft fridge and there's only a sprinkling of condiments inside. I'm sure a membership to Costco will remedy the situation.]
- As a rule, your collision deductible should equal one week's take-home pay. [If that's true, then I suspect most people have way too high of a collision deductible. Does anyone know how much you'd save by moving from $500 to $1000 deductible? I vaguely remember a rule of thumb about collision coverage where if you pay more in a year on collision coverage than your car is worth, pass on it. Or maybe it was 2 years. Either way, if the car is 2000 model year or newer it's going to cost $2500 minimum to fix anything.]
- When traveling, take twice the money and half the clothes you think you will need. [Yup]
- Each degree you lower your thermostat over the winter will lower your overall heating bill by three percent. [Certainly a rule of thumb as the amount of savings will vary as to the temperature difference between inside and out. Wonder if its Fahrenheit or Celsius??]
- The end of April is the best time to get your car serviced because it's the slowest time for auto mechanics. The mild weather makes people feel more confident about their cars, and many can't afford car repairs because they've just paid income taxes. [Hmmm, maybe…Anyone confirm this?]
- Always wash your car before taking it in for service. Mechanics are more likely to take advantage of you if your car looks like it needs "everything." [Find a good mechanic first and you can skip the car wash]
- Cars with four doors are cheaper to repair than cars with two doors, but two-door cars are stolen twice as often as four-door models. [This is probably due to a broad generalization since 2 door cars are more likely to be expensive sports cars]
- The highest price you should pay for a car you're buying with a car loan is one-half your annual gross income. [See the 20/4/10 rule in #6.]
- It pays to turn off your engine if it will be idling for more than one minute. [Definitely. And good for the environment too. I think with newer cars you can cut that time down to 10 seconds. I know in Germany, they are required by law to turn their cars off at red lights.]
- The best time to buy a new car is the last day of the month because the sales staff wants their monthly reports to look good and is more likely to bargain. You can increase your chances of getting a good deal by choosing the youngest salesperson on the floor. [Sounds logical. But when you combine this with the other car-themed Rules of thumb, buying a car seems VERY complicated.]
- The time it takes to clean off the windshield is the time it takes to warm up your engine. [Agreed. Even from -40C with no block heater, all the engine needs is 30 secs maximum. On a regular winter day, I give it about 10secs, assuming there's no snow to remove. The cab will heat up much faster if the engine is actually working, and it doesn't work too hard when sitting and idling.]
- When traveling under 50 mph, it is more efficient to drive with the windows open than with A/C on. Above 50mph, it is more efficient (and comfortable and quiet) to drive with the A/C on. The drag is much worse with the windows open at higher speeds. [I think this is true. Didn't Mythbusters do a show on this?]
- Ethanol stores about 2/3 the energy of gasoline. Therefore, a 15% ethanol blend will reduce your mileage by 5%. [I think it decreases the harmful NOx emissions, so maybe it's a wash? Probably not.]
- There is a good rule for what temperature to buy gasoline at (the pumps are calibrated at a given temperature, 15C usually). Buy it above that temperature and you'll get more for free, buy it below that temperature and you'll get less than the pump says (why you can sometimes fill a 60L tank with 62L). [I just made this one up. But I do recall this discussion from a course on Engineering Measurements. Something to do with the density change affecting the flow meter.]
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Save at least 10% of your income.
Save at least three months of living expensed in an emergency fund.
Get a life insurance policy worth at least 6 times your household income.
Use the 20/4/10 rule when buying a vehicle.
Save 20 times your gross income for a comfortable retirement.
The 4% rule says you start taking 4% out of your savings the year after you stop working. You then withdraw the same amount adjusted for inflation, which typically runs 3%, each year after that.
Put down 20% on a house and don't borrow more than two times your income.
Another general rule says your mortgage should be no more than two times your household income.
Subtract your age from 100 to determine what percentage of your portfolio should be in stocks.
Pay off highest interest rate debt first.
Max the match on your 401(k).
Don't take out more in student loans than you expect to make your first year on the job.
Taking out $120,000 in student loans to earn $35,000 per year could create a financial ball and chain that could weigh you down for more than a decade.
"Before you get your doctorate in philosophy, think about what you're going to do with it," says Adam. "It's a lot more fun to be able to pay your rent and your car note than to be living in mom's basement when you're 40."
Craig Guillot is a business and personal finance writer from New Orleans. He covers insurance, investing, real estate, retirement and debt. His work has appeared in such publications and web sites as Entrepreneur, CNNMoney.com, CNBC.com, Bankrate.com and Investor's Business Daily. He is the author of "Stuff About Money: No BS Financial Advice for Regular People."
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25 Useful Financial Rules of Thumb
Lately I’ve found myself using more and more financial rules of thumb. A rule of thumb is a general guideline, an easy way to approximate a value quickly. ...
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The standard rule of thumb is to save at least 10% of your income.
As a rule of thumb, I figure that inflation runs 3.5% per year.
As a rule of thumb, I figure that inflation runs 3.5% per year.
Invest no more than 10% of your total savings in your employer's stock.
Perhaps the granddaddy of all financial rules of thumb is the rule of 72.
To determine how long it will take an investment to double, divide 72 by the annual return.
To determine how long it will take an investment to double, divide 72 by the annual return.
As a rule of thumb,tackle big expenses before small expenses.
When getting a new mortgage, the balance should be less than 2x your family annual income.
Your housing costs should be less than 28% of your gross income, and your total monthly debt payments should be less than 36%.
Standard advice was to consider refinancing your home if interest rates dropped by 2%. Closing costs are lower today, and now it often makes sense to refinance your home when interest rates have dropped by 1% from your current mortgage.
One common rule of thumb when purchasing a car is to buy used, or to buy new and to drive it for ten years. Either one will save you big money.
The 20/4/10 rule of thumb for buying a car. You should pay at least 20% down, finance for no more that four years, and the payment should be less than 10% of your income. The first part of this rule prevents you from owing more than the car is worth, and the last two parts prevent you from buying more car than you can afford.
When getting a new mortgage, the balance should be less than 2x your family annual income.
Your housing costs should be less than 28% of your gross income, and your total monthly debt payments should be less than 36%.
Standard advice was to consider refinancing your home if interest rates dropped by 2%. Closing costs are lower today, and now it often makes sense to refinance your home when interest rates have dropped by 1% from your current mortgage.
One common rule of thumb when purchasing a car is to buy used, or to buy new and to drive it for ten years. Either one will save you big money.
The 20/4/10 rule of thumb for buying a car. You should pay at least 20% down, finance for no more that four years, and the payment should be less than 10% of your income. The first part of this rule prevents you from owing more than the car is worth, and the last two parts prevent you from buying more car than you can afford.
To approximate a new vehicle's five-year cost of ownership (in monthly terms), double the price tag and divide by 60.
It almost always makes more financial sense to repair your car than to buy a new one.
It almost always makes more financial sense to repair your car than to buy a new one.
Save for your own retirement before saving for your children's college education.
They can get loans for school. You can't get loans for retirement. When you're saving, remember the following:
They can get loans for school. You can't get loans for retirement. When you're saving, remember the following:
The standard advice is to aim to replace 80% of your pre-retirement income. I think this rule is lame because it focuses on income and not expenses. Income is irrelevant. It's what you spend that matters. Instead, I recommend a different rule of thumb:
Base your retirement needs on 100% of your pre-retirement expenses — plus 10%.
Base your retirement needs on 100% of your pre-retirement expenses — plus 10%.
Save about 20x your gross annual income to retire.
If you expect to withdraw from your portfolio for 40 years or more, you can probably safely withdraw and spend 4% of its value every year.
IF you get a windfall, use 1% to treat yourself. (Or maybe 2% tops.) Put the rest in a safe place and ignore it for six months. After you've had time to think about it, make your decisions.
Strictly speaking, rules of thumb deal with numbers. Still, there are a lot of non-numeric guidelines that I think are useful to know. Here are a few:
If you expect to withdraw from your portfolio for 40 years or more, you can probably safely withdraw and spend 4% of its value every year.
IF you get a windfall, use 1% to treat yourself. (Or maybe 2% tops.) Put the rest in a safe place and ignore it for six months. After you've had time to think about it, make your decisions.
Strictly speaking, rules of thumb deal with numbers. Still, there are a lot of non-numeric guidelines that I think are useful to know. Here are a few:
- Always take the employer match on the 401(k).
- Never touch your retirement savings — except for retirement.
- Never co-sign on a loan.
- Avoid paying interest on anything that loses value. (Note that under normal conditions, home values appreciate slowly, so they're not included in this guideline.)
- Don't mess with the IRS. When it comes to taxes, don't try to cheat. Pay what you owe. Claim all the deductions you deserve, but don't try to stretch things.
- In general, save an emergency fund first; pay off high-interest debt second; and begin investing (at the same time you pay down remaining debt) last.
- If you're not willing to pay cash for it, then it doesn't make sense to buy it on credit.
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