67 stories
·
0 followers

The Modern Wealth Index

1 Comment

Charles Schwab has released its 2018 Modern Wealth Index, a survey of the saving and investing habits of 1000 Americans. Here’s how the company describes its methodology:

The Modern Wealth Index…is based on Schwab’s Investing Principles and composed of over 50 financial behaviors and attitudes. Each behavior or attitude is assigned a varying amount of points depending on its importance, out of a total of 100 possible points…Quotas were set so that the sample is as demographically representative as possible.

This survey divides respondents into two categories: those with a written financial plan and those without a written financial plan. About 25% of people are “Planners”; the rest are “Non-Planners”.

Unsurprisingly, the survey found that Planners are more likely to be in control of their finances. For instance, 75% of Planners pay their bill and still manage to save each month. Only 33% of Non-Planners are able to do this. Almost two-thirds of Planners have an emergency fund; less than one-quarter of Non-Planners have set money aside for a rainy day.

And the higher a person’s score in Schwab’s Modern Wealth Index, the more likely they are to have a written plan!

If having a written financial plan is so strongly correlated with desirable monetary outcomes, then why don’t more people do it? For most folks, it’s because they don’t think they have enough money to warrant one.

Roadblocks to financial planning

Personally, I’ve never had a written financial plan, although I do see their value. If I were to start again as an adult today, I’d probably create one.

I thought that the most interesting part of the Schwab survey was how participants viewed wealth. One question asked participants about their personal definition of wealth. What is wealth? Two of the top three answers weren’t about money at all:

What does wealth mean to you?

Related to yesterday’s article about the relationship between time, money, and happiness, Americans say the things that make them feel wealthiest in their day-to-day lives are having personal free time and spending time with family. (When asked to focus on the numbers, respondents said they needed $1.4 million on average to be “comfortable”, or $2.4 million to really be wealthy.)

Want to see where you fit on Schwab’s Modern Wealth Index? You can take a 16-question quiz at their website. But note that some questions aren’t really applicable to folks who have already retired or achieved Financial Independence. Also note that you’ll have to enter your contact info in order to actually see your results. (I took the quiz, but didn’t see my results because I hate giving out personal info.)

Update! I just received an email from the Schwab PR team. As Rita noted in the comments below, it is possible to see your score without supplying contact info. When the contact info form appears on the screen, just leave everything blank and click the button below to move on to the numbers. I scored an 83. I think that’s largely because I didn’t know how to answer the income questions since I don’t really have an income anymore.

Wealth Index Score

The post The Modern Wealth Index appeared first on Get Rich Slowly.

Read the whole story
amijangos
6 days ago
reply
My Score was 87!
Columbus, Indiana
Share this story
Delete

Managing Money With Your Partner When You Earn More

1 Comment
Read the whole story
amijangos
6 days ago
reply
Really interesting the concept of the three accounts.
Columbus, Indiana
Share this story
Delete

Is it better to rent or buy? How to know when renting a home makes sense

1 Comment

I’ve been a homeowner for 24 of the last 25 years. Based on this, you might think I’m an advocate of homeownership over renting. That’s not the case. The older I get, the more I appreciate there’s no correct answer in the perennial “is it better to rent or buy?” debate. Sometimes buying a home makes the most sense. Sometimes renting is the smarter choice.

In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” I agree.

Today, let’s look at a handful of ways to evaluate the rent versus buy decision from a financial perspective.

The Price-to-Rent Ratio

One way to tell whether it’s better to rent or buy is by calculating the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio is simple. All you need to do is:

  1. Find two similar houses (or condos or apartments), one for sale and one for rent.
  2. Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7. But what does this number mean?

Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.” That’s a little opaque, I know. Leonhardt is saying that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

The normal P/R ratio range nationwide is between 10 and 14 (meaning it would cost between $1200 and $1600 to rent a $200,000 house). During the 1990s, just before the housing bubble, the national P/R ratio was usually between 14 and 15 (about $1100 to $1200 to rent a $200,000 house). During last decade’s housing bubble, national price-to-rent ratios rose to 22.73 (in 2005) then to 24.50 (in 2007) before the market collapsed. As most folks were rushing to buy homes, the numbers said they ought to be renting.

Based on this info, I’d argue that:

  • When price-to-rent ratios are under 12, it’s generally better to buy than to rent.
  • When price-to-rent ratios are between 12 and 15, the financial decision is murky.
  • When price-to-rent ratios climb above 15, you’re probably better off renting.

Nationwide numbers don’t tell the full story, of course. While the national price-to-rent ratio might be around 20, the actual numbers in your city could be very different.

Price-to-Rent Ratios for U.S. Cities

In the past, I’ve struggled to find current price-to-rent ration figures. Recently, however, I learned that Zillow has a dedicated page for researching housing data. From here, you can download tons of different tables related to home sales and rental prices, including monthly price-to-rent info from October 2010 until today. If you’re looking to relocate, this is a fantastic resource for finding where your housing dollars will go farthest!

For kicks, I wasted ninety minutes playing with price-to-rent ratios using Zillow data. (What can I say? I’m a nerd!) I downloaded their list of median home prices and median monthly rents, then calculated the P/R ratio for 48 major metro areas. (For a variety of reasons, this is a somewhat arbitrary selection of cities.) Here’s my list of price-to-rent ratios in the United States as of January 2018.

Current Price-to-Rent Ratios

If you’re moving to Scranton for your new job at Dunder Mifflin Paper Company, it’s likely you’ll want to purchase a home. But if you’re headed to the Bay Area, your best bet is going to be to rent.

I’m somewhat skeptical that these numbers are accurate — they do come from a site eager to create homebuyers, after all — but it’s tough to find better info. As far as I’m aware, there’s no reliable source that generates these stats on a regular basis. (I personally believe numbers from articles like this are more accurate. However, that article is also eighteen months out of date and doesn’t explain its methodology.)

Please note that city-wide price-to-rent ratios only really matter if you’re moving from another town. Otherwise, what actually matters are price-to-rent ratios for the specific properties you’re thinking of buying or renting.

Home Price vs. Household Income

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford a $200,000 house.)

According to the most recent numbers from the U.S. Census Bureau, the median household income in the United States was $57,617 at the end of 2016. (Average household income is greater — $73,207 — but that number is skewed by high earners, which is why I prefer to use the median.)

Median Household Income

Using the current U.S. median home price of $232,700, we can see that home prices are currently running at about 4.04 times the typical household income. This ratio isn’t quite as high as it was during the housing bubble, but it’s still pretty steep.

My Favorite “Rent or Buy?” Calculator

Finally, I want to share what might be my favorite way to compare the costs of renting against the costs of buying.

The New York Times has a great rent vs. buy calculator that can help you decide which is best for you. Just plug in the numbers for your situation, and the calculator tells you how long it would take you to break even if you bought a house. This calculator is an amazing tool. Although it lives behind a soft paywall (which can be circumvented using incognito mode in your browser), it’s well worth using if you’re trying to make a decision about whether to rent or buy.

For fun, I ran the numbers for my own situation. Last summer, Kim and I purchased our current home for $442,000. When you figure all of the remodeling we’ve done, our actual cost will be closer to $600,000. (Holy cats!) Based on our situation, the NY Times calculator says that we’d be better off renting if we could find a similar property for less than $2767 per month.

Better to Rent or Buy?

Scanning current listings, there are three nearby rental homes similar to ours (more than 1200 square feet, more than an acre of land). They’re fetching $2900 to $3000 per month. So, it sounds like buying or renting a property like ours in Portland is a toss-up at the moment. (If I run the numbers using our home’s actual purchase price — $442,000 — I’d have to be able to rent for less than $2100 for that to be the smarter option.)

The Bottom Line

Deciding whether to rent or to buy is a complicated financial and emotional decision. I believe it’s a shame when folks who are unprepared get driven into the housing market due to misplaced notions of imagined benefits. Homeownership is not a panacea. Renting is not universal folly.

Part of the problem is the vast Real-Estate Industrial Complex, each piece of which has a vested interest in convincing consumers that bigger is better. (As I mentioned in my recent article on the history of homeownership in the U.S., the real estate industry is a relatively recent invention, barely 100 years old. But in that hundred years, it’s grown into a powerful force in our economy.)

The housing industry does its best to propagate certain myths about homeownership, myths like:

  • If you rent, you’re throwing your money away. (This is false. As with all financial choices, there are opportunity costs whether you choose to rent or choose to buy.)
  • Owning a home is a forced savings plan. (Also false. Yes, it’s possible to build equity in a home if you buy it in the right place at the right time and/or you stay put for a while. Most folks don’t stay put, however, so they end up paying a whole lot toward interest and very little toward building equity before buying a bigger, “better” place.)
  • You should buy as much home as you can afford. (Complete and utter bullshit. You should spend as little as you possibly can. Instead of pushing the upper bounds of your housing budget, as happens in most cases, you should instead be aiming as low as you can go.)

Now, let me be clear. There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability (you’re not at the mercy of a landlord) and freedom (you can do what you want with the place). Heck, last year I chose to buy an eighty-year-old “country cottage” on the outskirts of Portland, so I completely understand the non-monetary reasons for wanting to own.

But there are also advantages to renting.

For one, you have flexibility; you can move at a moment’s notice. For another, you’re not responsible when things go wrong. If the shower starts leaking before you leave for your vacation in Duluth, you don’t have to worry about it — you call in the landlord.

If you decide to buy a home, do it for the right reasons: because it fits your goals and will make you happy. Don’t do it because you think it’s a good investment. A mortgage is not a retirement plan — it won’t make you rich. Instead, think of it as purchasing a way of life.

If homeownership is a lifestyle you want and can afford, then buy. If not, rent.

The post Is it better to rent or buy? How to know when renting a home makes sense appeared first on Get Rich Slowly.

Read the whole story
amijangos
11 days ago
reply
These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford a $200,000 house.)
Columbus, Indiana
Share this story
Delete

20 Quick & Easy Dinner Recipes For People Who Hate Cooking

1 Comment

My mom used to tell me never to use the word “hate.” “You don’t hate it, Sarah, you just dislike it.” Thanks for the advice mom, but no. I’m allowed to hate things. And anyone who reads my blog knows that I hate cooking. I’m terrible at it, and the only part I enjoy is the […]

The post 20 Quick & Easy Dinner Recipes For People Who Hate Cooking appeared first on The Financial Diet.

Read the whole story
amijangos
15 days ago
reply
I need to do this next year.
Columbus, Indiana
Share this story
Delete

What It’s Like To Have Your Parents Go Bankrupt To Give You The Life You Want

1 Share

“I’m sorry we can’t come down and visit you like we planned,” she said. “Things have been harder than usual around here, and the 300-mile journey is just gonna cost too much…And you know, since your dad and I filed for bankruptcy in September, we have a lot on our plate.” Bankruptcy? I thought this […]

The post What It’s Like To Have Your Parents Go Bankrupt To Give You The Life You Want appeared first on The Financial Diet.

Read the whole story
amijangos
15 days ago
reply
Columbus, Indiana
Share this story
Delete

Progress Report April ’18

1 Comment

Four months into 2018, and I suppose I can just about spare a few moments from playing God of War (which is magnificent) to tell you lot where I’ve got to. With my book, that is. Not God of War.

You can get more details of my current project in earlier progress reports, if you are among the pitiful damned who do not hang upon my every post. Essentially I’m writing a new trilogy in the First Law world, but writing it all in one go before I revise and refine each book for publication. Each one of these three books is in three parts, and I am currently writing the NINTH AND FINAL PART. Indeed I’m about 20,000 words into it, so some 40,000 words to go until a super-rough draft of the entire thing is FINISHED and I can begin the lengthy process of taking stock of where the whole thing is and polishing this unwieldy mass into a diamond.

Getting towards the end of such a massive project is a lovely feeling, I must say. I mean, there’s a huge amount of work in the editing and revision, but a lot less than the drafting, and generally I find that the fun part. Probably the work is getting sloppier and sloppier but the whole point is just to bosh it all down as quickly and roughly as possible so I can take stock of the shape, see what I need to change and refine, and begin to make it lovely (or as lovely as I can).  I’ve always felt this approach would prove worthwhile for a hefty series, but writing the final chapters I feel it’s really starting to pay off.  Being sure of how things end for a character really helps to crystallise what their story is about, and therefore where they need to start and what they need to be, the nature of their relationships with the secondary characters, their thoughts, feelings, concerns.

So it goes pretty well, in short, in spite of various real life distractions (not to mention God of War).  I very much hope that by early June I will be tapping out the final words and starting to take stock of the almighty task of revision and alteration. Though I’ll probably need to do a reread of all the other First Law books first, just to make sure there are no opportunities missed or history I’ve forgotten or messed up on.  Publication of Book 1, A Little Hatred, still looks good for late summer ’19.  But I, of course, make no promises…

Sharing is Caring:

Facebooktwittergoogle_plusredditpinterestlinkedinmail
Read the whole story
amijangos
15 days ago
reply
Good thing there are other things to read along the way, but my heart is now set for more of the bloody nine in summer of 2019.
Columbus, Indiana
Share this story
Delete
Next Page of Stories