Tuesday, November 7, 2017

5 Financial Decisions That Matter More Than Buying A House

Purchasing a home is a symbol of middle class success.  If you're over 30-years-old and married, and you tell someone you rent, you may get some interesting reactions.  A look of concern for you is the most common reaction you'll get from the person you're talking with.  They may then ask you, "How much are you paying in rent?"  You answer them and this begets the next question: "Why not put all that rent money on a home of your own?"  To avoid a financial debate, you might say, "We're working on it."  I'm pretty sure many of you who rent (because you're not interested in buying a home) are tired of being perceived as financially foolish or worse, sub-middle class, for not being a homeowner.  Today you get some vindication.

For starters, the Republican Tax plan, if passed, will take away for most people the biggest benefit of owning a home, a deduction on mortgage interest.  You'd have to owe more than $500K on a home to be allowed to deduct.  I've written on this blog that people are fooled (by the RE industry) into thinking that the benefit of mortgage interest deduction is substantial, when it really isn't.  Only homeowners with bran spankin' new whopper mortgages reap the benefit of the current tax code.

Beyond this, there are so many reasons why owning a home is a bad investment.  Check out: The True Cost of Owning a Home.  Your first home should be an investment property that you rent and collect monthly cash flow on.  But let's not get into this today.  Instead, let me tell you what I think are 5 financial decisions that are way more important than buying a home.

1.  Going to college.  Huge, huge, decision.  Way more important than deciding to finance a new home.  Some college majors will literally cost you as much as a home mortgage in some parts of the U.S.  Whereas you can walk away from a home, as many people with upside down mortgages did during the Great Recession, only acts of government can reduce or eliminate your school loans.

Yes, not paying on your mortgage ruins your credit, but the bank takes back the property and you're off the hook from having to make any future home payments once you're foreclosed on.  These days going to college is only worth it if, A) You can find an affordable way of doing it, B) You have a clear plan for success as a student, C) You can calculate how you'll handle student loans after graduation, and D) You know exactly what kind of work you can get with your degree.

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2.  Getting Married.  In many unfortunate cases, marriage makes once highly successful people the total opposite.  The person they married is not a compatible financial or inspirational match.  The sex, boring.  The day-to-day living, blah.  If your partner doesn't inspire you to continue growing as a person, or to stay ambitious, then you've married wrong!  Let me put it like this...when you go to the gym and workout, would you rather have a partner that is just there going through the motions with you, or someone who pushes you to get that extra rep in because he/she knows you have it in you?  Exactly, I rest my case.

But let's not forget how costly weddings are.  According to Costofwedding.com, the average cost of a wedding in 2017 is $26,720!  So, a stifling marriage reduces your potential to earn a lot more in income or from investments for every year you stay with your spouse PLUS what you paid initially to get married (this amount could've been put to work as an investment earning compound interest) and you're looking at thousands of dollars going up in flames.  Buying a house is so not as important on deciding WHO and IF you should get married.

3.  Getting a divorce.  This is the worst of all financial decisions to be made.  Perhaps if you got a prenup getting a divorce won't be as financially bad for you.  There's not a lot of reliable data on the number of Americans who get prenups.  People without assets, usually young people, have no need for a prenup unless they want to spell out who's on the hook for school loan payments (liabilities) if their marriage should end.  If you marry later in life, a prenup should be a point of discussion between you and your partner.  Otherwise...

You'll be cursing the day you ever got married.  I've been divorced once before and I was sooooo lucky that my ex-wife was very amicable about our parting ways.  No children together made it even easier to divide things like cars, furniture, and who kept the home (it was me!).  Yesterday I was at the gym and I overheard a convo between two African-American cats talkin' about divorces.  The younger guy was telling his older friend that he's been going to divorce court for more than 1.5 years!  He has to pay child support which is subject to revision every year.  His wife is still suing him for the house and other assets.  So yeah, divorces suck.

Solution:  Can you work it out?  Is there any way you can recover the love and respect the two of you had for each other?  If the divorce is as described in number two above, or if you're in a dangerous domestic situation with your spouse, then by all means bite the bullet and get a divorce.  But let's not fool ourselves, deciding on getting a divorce is so much more important financially than deciding to buy a home.

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4)  Having children.  Please don't procreate if you're extremely poor today.  Get out of poverty first.  See my post from Sunday for ideas on how to do this.  Would you like to know the difference between animals and humans (yes, I know we're animals too) when it comes to reproduction?  Under unfavorable environmental conditions, e.g., a lack of food or survival resources, some animals will not reproduce.  It takes a lot of calories to make a healthy baby animal!  Not us humans, we make babies even when the only thing in the fridge is a box of baking soda.

Kids are expensive!  My two children will literally eat all day.  Our grocery bill is almost $1K a month.  Maybe it is more right now with the growth spurts happening at home.  By the way, it now costs upward of $200K for a middle-income family with a child born in 2015 to raise a child through the age of 17.  And it's only going to go up, of course.  One child = $200K+, Two children = $400K+...get the picture?  So, having children is a financial decision you obviously need to prioritize over buying a starter home.

5.  Saving and investing for retirement with a "number" in mind.  You can save and invest for retirement a la stupid, meaning, simply putting in a little money here and there to a retirement account.  Or you can calculate how much you will need to live a comfortable life.  There's a retirement crisis in America partly because 81% of Americans (Merryl Lynch study) don't have the slightest clue as to how much they should have saved come retirement time.  So what can you do?  Start by estimating your living expenses in retirement.  Factor in healthcare too!

This is how I came up with my retirement number.  It's a very lofty goal but one I'm working hard to make happen.  Get busy funding your retirement and don't stop until you surpass your number.  If you don't get there, well, hey...at least you tried.  Change your retirement plans around so you can still have a sweet retirement.

Okie, dokie.  I've laid out some serious wisdom here for you today.  If you're not able to buy a home right now for financial reasons, bad credit, no down payment, whatever, consider it a blessing in disguise.  There are at least five more important financial decisions than buying a house and you should think through each one before acting.  Thanks for reading! If you liked this post and want to receive more like them in your inbox, please subscribe before you leave.
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