We can sweat the small stuff — like Netflix subscriptions or gym memberships or daily lattes. But sweating the big stuff — like housing and car purchases — is most important for your financial health. See how these big-ticket items can affect your finances — and what to do about it.
In today’s episode, you’ll find out:
- How buying too much house leads to financial train wrecks
- Why having too many cars isn’t a good financial decision
- Why buying a latte every day doesn’t have much of an impact
- How not budgeting for compounded expenses leads to problems
- How much to set aside for housing expenses
- How price-to-rent ratio works
- Price-to-rent ratios in major U.S. cities
- How life changes affect whether to rent or buy a house
- How dumping high-expense items alleviates financial stress
- Possible ways to reduce big child-care expenses
- How family support expenses can get out of control
- Other big-ticket items to examine
- How to approach big-ticket purchases
- SmartAsset: “Where to Buy: Price-to-Rent Ratio in 84 U.S. Cities”
- Leave us a voicemail: StudentLoanPlanner.com/Voicemail
- Apply for an SLP scholarship: StudentLoanPlanner.com/Scholarship
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Episode 37 Transcript
Travis Hornsby [00:00:01]Welcome to another episode of the Student Loan Planner Podcast. Today, we are going to be talking about not sweating the small stuff because it’s the big stuff that you should sweat. This is a really interesting topic because a lot of times, I hear people that have budget problems, right? And they come to me, and they’re like, “OK, I want to get rid of my Netflix or my Hulu or my Spotify or whatever it is.” Goodness sakes, that does so little to fix the problem.
Travis [00:00:25] Folks, we’re going to go into why. We’re going to have a lot of details here. We’re going to show you the reasons why your budget is failing and how it can get fixed if it’s failing. I’m really excited. This is going to be a great show.
Travis [00:00:37] Before we get into the details, I want you to know about something very important. We have the ability for the first time ever for you now to ask questions to me. So, if you want to be in the show, if you want your story featured, you can now leave a voicemail with our link that I’m going to give you. And you can tell me — just tell me your name. Tell me what your question is, maybe what debt you have. Like, what’s going on. Or it can be about your budget. It can be about investing questions. It could be about anything.
Travis [00:01:03] So to do that, go to StudentLoanPlanner.com slash voicemail. Again, that’s StudentLoanPlanner.com slash voicemail. Just go on there. Studentloanplanner.com slash voicemail. And you can leave up to a three-minute message just detailing the questions that you have about your finances. And if you do that, I might just feature you in one of our shows coming up.
Travis [00:01:24] So, please take advantage of the SpeakPipe and leave us a voicemail because I want to make this show interactive so we can provide maximum value to you.
How buying too much house leads to financial train wrecks
Travis [00:01:34] I also want to talk about things that you might not be thinking about, and that’s why we’re going to talk about the “sweating the big stuff” on today’s episode. Just as an example, I would say that of the 1,500 plans that I’ve made for people for their student loans, I will tell you that housing and car purchase decisions are by far the two biggest train wrecks that I see people deal with.
Travis [00:01:57] Let me give you an example. One of the clients that I had several months ago had a house in a major metro area in California. The house, predictably, was like a 1,500- to 2,000-square foot place. It was really nice, but somewhat on the small side, you know, compared to the average American family home size. And the house is, like, a million bucks.
Travis [00:02:16] Dual-professional income. They’re making really good money, but holy cow, all their money was going to their mortgage. And they had, like, huge credit card debt — like, five figures of credit card debt. And they had car loans, and they weren’t funding retirement. They’re living paycheck to paycheck.
Travis [00:02:30] I just asked them the question. I said, “How important is this house to you and your life?” They’re like, “Well, like, honestly, like, we just bought it because that’s what we thought you were supposed to do as an adult. You’re supposed to go and buy a house, and that’s just what people do.” And I said, “OK, I’m going to give you a crazy idea. What if you just sold your house completely?”
Travis [00:02:47] And the reason I told them that is because I asked them what their mortgage was. I asked them what they thought the house was worth based on the market. And there was significant positive equity in that home. Probably, you know, maybe even a couple hundred thousand dollars of equity.
Travis [00:03:00] And when you’ve lived in a home for at least two of the past five years, you can actually sell and get — I think it’s up to $500,000 in capital gains for a married couple. But you can get quite a bit of capital gains tax-free out of your home when you sell it if you’ve lived in it for a couple of years.
Travis [00:03:15] They had this money that they were sitting on, but the only way to access it without selling the house would be to do a home equity loan. And when you do a home equity loan, you go further into debt. So, to access your money, you’d have to take out an additional loan and have an additional monthly payment, which is like getting another hole in the head.
Travis [00:03:32] So, when you’re thinking about whether or not to do this, also remember the housing crisis. What got so many people into so much trouble is that they were treating their homes like piggy banks. Whenever they had an increase in the property value, they would just pull the dollars out of their home until they had, you know, a certain percentage — like, 20% equity. They’d pull — You know, as soon as the house price went up, they’d pull money out down to 20% equity, and they’d go to Disney World.
Travis [00:03:55] I mean, I’m joking, but that’s kind of what happened in the housing crisis. That’s how things just blew up because people had absolutely no significant equity cushion at all. And when the markets crashed, they were all upside down.
Travis [00:04:06] What did they decide to do? You’ve got a million-dollar house — and all of these different things that you could get rid of and make your finances way more secure if you sold that house. And I told them that if I was them, I would sell the house. And you know, people don’t always take my advice. A lot of times people do. But you know, something this intense — people probably wouldn’t necessarily want to take that advice.
Travis [00:04:28] But then I got an email from them a few months later, and they said, “Sold the house.” And I was like, “What? Are you kidding? You sold this house? That’s such a big deal.” And the reason I suggested that is because they could rent a house — like, a decent, similar kind of house — for a lot less than the monthly mortgage that they were paying.
Travis [00:04:45] And then what they did with that equity is they paid off all their credit card debt. They got an emergency fund. They also had no more car payments because they paid all those off, and then they had money set aside to start a business. Are they better off having no house in that situation? Yeah, they’re way better off.
Travis [00:05:01] And their problem was not that they bought a house. That wasn’t the problem. The problem was that they bought a freaking expensive house that was way more than two times their joint income.
Why having too many cars isn’t a good financial decision
Travis [00:05:12] So, let me give me another example. This is a car example. I had a client with four cars as a family. Payments were about $1,500 to $2,000 a month. You know, you can imagine there was a lot of trucks. There was some kind of — I think at least one nice sports car. That’s not the record, though. I think I’ve had a client with Teslas and trucks or something, and it was like — they were spending like $5,000 a month on cars. It’s like holy cow.
Travis [00:05:37] But $1,500 a month is kind of like a typical middle-income professional kind of car spending figure. And you can actually get to $1,500 a month in car payments just by owning two — two trucks or two SUVs. It’s actually really simple to do that, to get to that number.
Travis [00:05:52] So, if you include insurance and maintenance for these cars, you’re looking at $2,000, $2,500 total. You know, you throw in another $500 to $1,000 bucks for a couple cars, for insurance and maintenance and all those kinds of things.
Travis [00:06:03] So, if you’re spending that much on cars, it’s $25,000 a year, let’s say. Give or take. You know, an average number there. And $25,000 — if you split that in two, you can go onto Craigslist almost anywhere in the country in any major metro area and find a really nice, probably 2012 to 2014 Toyota or Honda with reasonable mileage for $12,000 to $14,000. And that car will be very reliable. It will be very safe, compared to most vehicles that all have good crash ratings. It will drive well. It will have $100,000 to $150,000 miles left on the engine, probably.
Travis [00:06:42] You could buy two cars for that price of one year’s worth of car payments in that situation. So that means that person, since most car loans are seven years now — They used to be shorter, but they’re extending so people can afford to buy more expensive cars. Think about that — $25,000 a year for seven years. That’s six figures right there. That’s a lot of money.
Why buying a latte every day doesn’t have much of an impact
Travis [00:07:04] Now, I want to contrast that with a Starbucks latte. So, a lot of people like to pick on lattes in the personal finance world, you know? They like to say, “Aw, if you just cut out your latte habit, you’d save way more money, you foolish person.” People really like to hit on lattes. I think there’s this book that’s called, like, “The Latte Factor.” I think the guy who wrote it – think his name is David Bach. It’s — He’s a really smart guy, and I think it’s great advice in general. The impact is to show how much saving $5 bucks a day could matter.
Travis [00:07:31] But, to play devil’s advocate here a little bit — OK, so if you go get a venti, like, coffee or specialty latte at Starbucks for like $5 bucks. Say you have one of those every single day for the entire year. OK, if you do that, that’s about $1,825 — 365 times a year. $1,825 — that’s a lot of money, but it’s also one month less than one month of car payments in that earlier example.
Travis [00:08:00] And if you’re drinking a latte a day, I mean, holy cow. Like, if you even had an abusive latte factor — Let’s say you were a latte — latte-holic. Is that a word? Latte-holic? Latte-holic? You could be a latte-holic, and your liver would fail before you’d be able to spend a significant amount of your money on coffee every year.
Travis [00:08:18] Obviously, if you’re making minimum wage, then, yeah, lattes could be a significant percentage of your budget. But most of you out there that are listening to this, you’re probably not making a minimum wage. You’re probably making a decent income. Which means that lattes would be a very small percentage of your budget.
Travis [00:08:31] Now, Netflix — that’s even cheaper. Netflix is like $16 a month. Like, everybody talks about how, you know, when they get serious about their finances, it’s, like, the last straw. Right? The most amazing, desperate act ever — to cancel your Netflix if you’re struggling financially.
Travis [00:08:46] I just canceled my Netflix account. That’s how serious I am about getting rid of my credit card debt. I hate to be mean or burst anybody’s bubble out there, but big whoop. OK? Netflix is $16 a month. That’s $192 a year. You probably — Most people spend 200 hours a year watching Netflix at least.
Travis [00:09:05] So, that means the real issue with Netflix is not the cost. It’s the fact that, you know, if you value your time more than a dollar an hour, you could be spending those hours making a lot of money instead. In fact, if you think about — Even my own thoughts, like, when I watch Netflix — In reality, like, if I could have spent that money doing a student loan plan, like, wow, that cost me, like, a few hundred bucks.
Travis [00:09:26] I mean, obviously, you know, you want to have some leisure time, and you can’t really think about life like that. But I’m just showing you that the main cost is with Netflix is absolutely not the price. It’s the time. You know, the time spent.
Travis [00:09:38] So we’ve seen now — comparing, you know, housing to lattes. Like, OK, housing costs can easily be $3,000 or $4,000 or $5,000 a month, which is double the yearly price of getting a latte every single day, which you’re not going to do. The same thing with the cars. You know, the client with a bunch of cars spends, like, 10 times as much in one month as the yearly price of Netflix.
How not budgeting for compounded expenses leads to problems
Travis [00:10:00] So, to talk about why these really high-ticket, big-ticket items — the big stuff, housing and cars, and there’s a couple more that I’ll mention later in the show. But to talk about why they’re such a problem is because there’s also compounded expenses that people don’t budget for.
Travis [00:10:14] So, I’ll give an example of this. Housing costs a lot more than people think it does. Rob, one of our consultants at Student Loan Planner, told me a reason why. So, he recently sent me a message, and he’s like, “Whelp, the furnace just went. So I got my bill for my furnace, and it’s $6,000.”
Travis [00:10:31] Most families don’t even have $5,000 in the bank. I think, like, over 60% of families don’t have $5,000 grand in the bank. So, when you lose your furnace or your roof has a problem, whatever, you have this huge outlay that you have to make, and you don’t have an emergency fund to pay for it.
Travis [00:10:47] And that’s something that you weren’t planning for in your budget. So that’s an extra expense. If you wanted to turn that into a monthly figure, you could just divide it by 12. But something generally happens every year or every other year or every three years — right? — that’s a big expensive thing.
Travis [00:11:00] One of my best buddies from college texted me recently. He’s like, “Hey, man. What do you think of roofing loans?” I’m like, “Roofing loans. What? Like, if you don’t pay, they repo your roof or something?” You know, again, like, his roof failed, and he needed a new roof. And the roof was like a specialty kind of thing, and it was like $10,000 (or) $15,000 grand. And they were offering him, like, credit card-level interest rates because he didn’t have the money saved up.
How much to set aside for housing expenses
Travis [00:11:24] So, that’s just another example of how these expenses for the big-ticket items are always more than you think [they’re] going to be. Whatever your housing price is, you need to set aside 1% to 3% of the price of the house for maintenance expenses.
Travis [00:11:37] So, as a general rule, like, you can think of 2% being a good rule of thumb. So just say 2% to kind of pick a middle-of-the-road number. So, if you have 2% of the housing purchase price set aside for maintenance expenses, that means a $500,000 house is going to cost you about $10,000 grand a year and maintenance expenses. And that’s something that most people don’t plan for because when you’re renting, the landlord has got to take care of that.
Travis [00:11:59] So, as an example, like, my fridge — the door got busted, and the freezer was icing over. Basically, the fridge wasn’t covered under warranty anymore, and so my landlord had to replace the fridge at the cost of a couple thousand bucks. So, that’s just one example of something that the landlord has got to pay for when it’s not working, and it’s not set up according to the contract. That’s just an example of something that you’re not planning for when you buy that house, you know, and that’s a big problem.
Travis [00:12:25] So that, you know, 2% maintenance expense — it’s more than just that, too. If you buy a bigger home, everything’s compounded. Right? If you’re paying for people to do your lawn, that’s more expensive. You have higher property taxes. You have higher homeowners’ insurance. Higher other things I’m not even thinking about — like, utility expenses, painting the house, repairing the roof. Like, there’s all these things that are more expensive the more expensive house that you get.
Travis [00:12:47] Also, like, property taxes — let’s talk about that for a second. In New Jersey, property taxes are like 3% of the value in a lot of cases. So, the price of housing long term goes up with approximately inflation on a long, long-term basis. You can look at a lot of data; that’s what the data says, is that housing on a national basis of the very long term goes up at the level of inflation.
Travis [00:13:09] So, if your house price is increasing at 3% but you’re paying 3% in property taxes every year to someplace like New Jersey, you’re actually losing money on a real basis because you’re giving away all of your inflation return to the government, basically. So, your house price in real terms is actually declining in value because of the fact that you have to spend 3% a year to even own it.
Travis [00:13:31] So, imagine if you had a mutual fund with a 3% expense ratio. Nobody would want to own that. Of course, you also have to include the value of the dividend of what your rent would have to be on the house. So you do have to include that in the return. But in a lot of these places and big metro areas, the rent is actually lower than you would think it is, you know, because the rent is really not all that high.
Travis [00:13:57] So, let’s say that, you know, you have a 3% expected price return for the house, and you give that up because of your property taxes — or you give up most of it. The potential way to get back to an inflation-level return of 3% is, is your mortgage less than the rent that you’d have to pay, basically, right?
How price-to-rent ratio works
Travis [00:14:13] So, the difference between that rent and the mortgage payment might be the positive kind of return that you’re getting on the house. But in reality, like I said, a lot of these places with really high property prices actually have a terrible what’s called price-to-rent ratio.
Travis [00:14:27] I’m going to talk about this a little bit more. I think this will make some more sense when I put it in these terms. Here is just, like, an example: The price-to-rent ratio is something that’s very important. Price-to-rent ratio is an indicator for how overbought or how expensive a local market is.
Travis [00:14:49] As an example, you might have heard of price earnings ratio. Price earnings ratio is simply the price of the stock market divided by its earnings. And so that gives you kind of a proxy for understanding, compared to historical norms, how expensive is the stock market at the current time.
Travis [00:15:05] You can’t really make hardcore decisions on this. It’s just, like, an indicator. For example, the long-term price-to-earnings ratio might be 15-to-20. Right? And say it’s 30 right now; well, the stock market seems like it’s highly valued. We don’t know if it’s going to fall. But it’s certainly trading at a high multiple to earnings.
Travis [00:15:24] So similarly, price-to-rent ratio looks at the price of a home, and then it divides by the annualized rental cost. And it comes up with the ratio. And that tells you if the local market is maybe overbought or gives a suggestion as to whether or not it’s overbought.
Price-to-rent ratios in major U.S. cities
Travis [00:15:41] So, I’m going to use this this guide that I found that we’ll put in the show notes — in StudentLoanPlanner.com slash 37. It’s from SmartAsset.com, and it goes over the price-to-rent ratio for a lot of the major metro areas in the country. This is really quite fascinating. So, what they do is they tell you what the price of a home is per thousand dollars of rental cost.
Travis [00:16:04] So, the typical long-term price-to-rent ratio for markets across the country is about 15. So, before the housing crisis, the price-to-rent ratio was about 15, meaning that the price of a home divided by the annual rent would give you a ratio of about 15. So, for example, a house that rented for $10,000 a year, you would expect it to be selling for $150,000. Right? Does that make sense? So that’s a typical example of a long-term kind of price to rent ratio.
Travis [00:16:45] Here’s the issue: The price-to-rent ratio for San Francisco, California, instead of 15, is 50. So, for $1,000-a-month apartment or home, basically, you would expect that home price to be $601,000. In other words, a $3,000-a-month rental would be expected to be $1.8 million.
Travis [00:17:10] Now, I don’t know if that figure is at all skewed because of rent controls, but that seems kind of on par to me from some of the things that I’ve seen and heard about in San Francisco. For example, if you’re going to rent a place, you could probably spend $4,000 a month in rent, or you could spend over $2 million dollars to buy. And a price-to-rent ratio of 50 means that everybody is gambling that the price for San Francisco real estate is going to increase because it has already increased a ton, which is why the price-to-rent ratio is so high now in the first place.
Travis [00:17:47] So, 50 price-to-rent ratio: Basically, that’s telling you that there’s almost no argument to owning a house in San Francisco ever, unless you are a gambler that just believes that the tech market is going to continue to improve — and then therefore the prices and the price-to-rent ratio of San Francisco is going to continue to increase.
Travis [00:18:08] So, what happens is when you buy that million-dollar ho use, your monthly mortgage expense is so high that it’s so much more impactful than anything else you can think of — because when you’re going to go out to that nice Thai restaurant in the Mission District, it’s probably going to cost $12 to $15 bucks. OK, you do that every single day, you know, you’re maybe talking about $3,000 to $5,000 a year for going out to eat. That’s not that big of a deal compared to a $4,000- or $5,000-a-month mortgage payment.
Travis [00:18:38] So, you might feel frugal because you’ve cut out a lot of your, you know, expenses on your going out to eat. But in reality, if you had roommates or if you house hacked or if you bought a cheaper place, that would have an impact that would be five to 10 times as much as cutting out all the going out to eat ever. And that probably would have a bigger impact on your happiness if you completely cut out going out to eat completely, if you enjoy that.
Travis [00:19:00] So, a couple other places in the country that have really bad price-to-rent ratios: Los Angeles, California — price-to-rent ratio of 38.5. New York: 36. You’ve got Seattle at 36. Washington, D.C. at 33. San Diego: 30. You know, a lot of these places that a lot of you with professional degrees are going to be living in.
Travis [00:19:24] Now, on the other end of the scale, if you’re looking at where should you probably be buying a house rather than renting — or at least where is it reasonable to buy a house rather than rent based off of the numbers — here’s a couple places, you know, kind of detailing that. You know, Indianapolis: price-to-rent ratio (is) 13. El Paso, Texas: ratio is 12.7. Milwaukee, Wisconsin: 12.4. Pittsburgh: 11.1. [Buffalo, New York]: 10.6. Cleveland: 8.3. Detroit: 5.3.
Travis [00:20:00] Now, obviously, Detroit — if you look at the price-to-rent ratio outside of the city, it’s probably going to be different. Probably in the suburbs is probably a much higher ratio because the housing is a lot more desirable. And you can make an argument that if you’re going to buy a house in Detroit, you should buy it in a place where the value is probably not going to collapse or that it’s a safe neighborhood, etc. Right?
Travis [00:20:19] So, there is always a little bit of noise in these price-to-rent ratios. But what I’m saying is, is if you’re in one of these more out-of-the-way places, a little bit less super-expensive city vibe going on, then yeah, it kind of makes sense to buy a house. I’ll say that it still matters what the purchase price is.
Travis [00:20:38] You know, just as an example, too, you can even have way different ratios in a city. For example, in New York, the price-to-rent ratio Manhattan is 50.8, and then the price-to-rent ratio in the Bronx is 28.4. In Queens, it’s 30.3.
Travis [00:20:52] So, that’s saying if you really wanted to buy a home, to buy a home in Manhattan is basically a luxury status symbol. It is not an investment. It’s a foolish decision, probably, from a financial perspective. You buy a home in Manhattan because you’re stinking rich, and you have the money. You do not buy a home in Manhattan because you think you’re a brilliant investor.
Travis [00:21:11] If you do that, you’re just gambling that the price is going to continue to go up, and you’re going to make a big return in the price. Whereas, if you’re going to buy a home, it’s a lot more defendable to buy a home in Queens, in terms of the price-to-rent ratio, in terms of how affordable it is, than to buy a home in a place like Manhattan, where it’s a status symbol.
Travis [00:21:29] What if you’re living for somewhere for 20 years? OK, yeah, probably buying is better. The problem is, is people usually have issues — and I’m focusing so much on housing, by the way. You might be thinking, like, “Is this the housing episode?” No, this is the sweating-the-big-stuff episode. I want you to sweat the big stuff and ignore the little stuff in your life and enjoy yourself.
Travis [00:21:48] So, if you have things that cost under $20 each time you do it, just freaking do it — and do it as much as you want. It’s not going to make that big of a difference. I used to not believe that. I used to think that frugality across the board was super important. But I changed my mind after seeing so many hundreds and even thousands of people come through our business and just seeing what the stats actually say versus kind of what my biases were. So, it’s just very clear to me that the super-expensive things in your budget are the things that matter.
How life changes affect whether to rent or buy a house
Travis [00:22:19] So anyhow, let’s talk some more about this big-ticket item of housing. If you’re living for somewhere for 20 years, the problem is [that] many different things happen while you’re there. Initially, you might be single, right? And then you meet somebody, and then you want to move in together. And maybe you get married, right? And then you have one kid. OK, well, you need a little bit more space. And then maybe you have two kids, and now you need more space. Or maybe you have three, and you need even more space.
Travis [00:22:44] And then suddenly — Before you [were] living in the downtown area with a really bad school district because you’re single, young, trying to meet people. And then you meet somebody, and it’s super fun. And you’re in your 20s and 30s, and you’re enjoying life. And then you have kids, and you’re like, “Oh my gosh, the rating for this school district is a big fat F, so we got to go somewhere where, — you know, we got to move.” And so then you go out to a place of the better school district.
Travis [00:23:06] Let’s say that you change jobs because you find a better opportunity somewhere else, and you’re going to sell your house. And then let’s say you eventually now downsize because one of your kids goes to college, and now you need less space.
Travis [00:23:23] So, what a lot of people do is they — They either buy a house kind of like right away because they think — They were trained that’s what you’re supposed to do. Or you just wait until you have your first or second kid, and then you just buy a house. And a lot of people will change houses every five to 10 years. And if you’re changing houses every five or 10 years, you know, it’s kind of a wash. Really doesn’t matter that much if you rent or buy, for most people.
Travis [00:23:43] But if you’re doing — buying in these really expensive markets, you know, there’s a good chance that it’s not going to work out very well because every time you sell a house, you’re going to incur probably around 10% in transaction fees.
Travis [00:23:54] So, here’s an example of what I would do if I lived in California. Let’s say I’m in San Francisco. What I would do is optimize my living situation to where I was at in life. So, for example, if I was single, I’d be living in a studio, or I’d be living in a big place with a lot of roommates. And then if I was in a relationship, I’d be living in a one-bedroom apartment with my significant other. And then let’s say we had kids. Well, then I would just move from that rental apartment to a bigger one, and then I would spend that extra money.
Travis [00:24:25] Now, let’s say that there is an elementary school district that we really want to be in. So, I would rent a place in that elementary school district to make sure that my kid went to that particular one. Now, let’s say that my job changed. I took a job at a place across town, and now I my commute is longer because I switched jobs. But I’m staying in the same city. Well, now if I’m renting, I can get out of that rental by just literally leaving. I don’t have any big financial commitment.
Travis [00:24:52] Now, let’s say that the kids are middle school. We want them to be in the best middle school in town, which is different from the elementary school district. So then we can literally move without losing that 10% transaction cost. And when we’re talking about a million-dollar house, you could lose up to $100,000 grand every time you’re selling. With property taxes and everything, that’s going to wipe out or could very easily wipe out any positive return that you have.
Travis [00:25:15] And let’s say the market in San Francisco crashes — well, then you’re really screwed. You can’t even leave, and you’re stuck. You probably have to declare bankruptcy or do a short sale on your house.
Travis [00:25:23] And that’s one thing that a lot of people are really unaware of, is a lot of the people in places like San Francisco, like, they’re very tied to the tech industry with their jobs, and they also own a house that has the highest price-to-rent ratio in the nation. And so they’re super exposed to tech because tech is propping up the value of real estate. So, if tech crashed, they’d lose their job, and they’d lose all of their life savings in their house.
Travis [00:25:46] The triple exposure is when you also have a bunch of stock options, and you have your money in a lot of tech stocks. So, a lot of these people at the tech market crashes will be absolutely broke. You can protect against that by diversifying more.
How reducing high-expense items alleviates financial stress
Travis [00:25:58] So anyhow, the problem with housing is people let the house run them instead of letting it happen the other way around. So, your house should not be running you. You should be using your house to enjoy life. So that’s why 2-to-1, that’s your debt-to-income — or that’s your purchase-price ratio to generally try to follow for housing.
Travis [00:26:18] So, if you buy a house less than two times your combined income, you’re not going to be too stressed. Even if it’s a, you know, you could rent one for way less, it’s still fine. Like, if you want to buy a house, buy house. It’s a lifestyle decision. It’s not an investment. It’s just a consumption decision.
Travis [00:26:35] Also, if you have a lot of cars, you don’t have to have that be something that lasts either. I have a friend who is actually now an early retiree, and at his peak, he had about eight cars. He was into racing. He had a trailer. He really was into just having so many vehicles. So he sold a whole bunch of them. He’s got two of them now, and they’re paid off. This allowed him to retire early because he does not have this massive expense of all these cars anymore that he’s dealing with.
Travis [00:27:03] So, you really can get rid of your financial stress by fixing your top three most expensive items in your budget. That’s what I’ve really found. And monthly payments are the biggest stressor really on your finances. Having a required, high monthly payment is the stuff that really can stretch you out.
Travis [00:27:20] The variable stuff — you can turn that off. Like, if the economy goes in the tank, you know, you can stop going out to eat, and that’s fine. That — You could make that change overnight. And that’s not a big risk. The big risk is that big monthly payment you’re committed to.
Travis [00:27:33] So, full disclosure. Right? Student Loan Planner here — we don’t always have successful consults. Sometimes people get mad because we give them advice they don’t want to hear, and I’ve definitely had this happen sometimes.
Travis [00:27:45] And what’s funny is usually the people that get the maddest are some people who really do not like hearing that we think that their purchase decision needs to be reversed on a big-ticket item like housing. So, we’ve had people with $1-2 million farmhouse, you know, with horses running around. We’ve had people that have been furious at me for saying they shouldn’t be buying the $3 million beach house.
Travis [00:28:10] Listen, if you want to do that, that’s your decision. You know, it’s your call. But just realize that I’m just trying to help you out. That’s the whole point of this business, is trying to help people out. I don’t make money if you don’t buy the $3 million beach house. You know?
Travis [00:28:26] In fact, you know, it just — it just, this — I don’t make a big return on that. I’m just telling you to do that because I think you’re going to be really stressed, and I think you’re going to really regret it in five years. You know, it feels great right now. It’s a dopamine hit. It’s the most insane dopamine hit you can ever get — buying the dream house that you’ve always wanted.
Travis [00:28:41] And then two to five years into it, once the newness factor is already [worn] away, you’re going to be looking at the monthly amount coming out of your bank account. You’re going to be thinking, “Oh crap, what did I do?” And then if the economy takes a crash, then you’re going to be really stressed, and you’re going to be, like, calling your bank and saying, “All right, what are my options? Like, can you just take the house? Please take it.” That’s what’s going to happen, and the economy crashes with a lot of these people buying all this house.
Travis [00:29:05] So remember, banks will say yes to you for, like, 3.5 times your income in a lot of cases. And a lot of people just buy whatever the bank says they can borrow. That’s just a really bad decision. So, if you’re buying a house — 15- versus 30-year mortgage, which one would you want to do?
Travis [00:29:21] I would tell you to go with the 30-year if you’re going to pay down your student loans or do other more important things, like maximizing retirement, getting your tax bomb account and brokerage account started. And then once you have all that set up or you could easily afford to pay more on your house, then you could consider doing a 15-year refinance to getting a 15-year mortgage on your house that way.
Travis [00:29:42] Another thing is, your down payment on your home doesn’t matter that much. It’s literally just the purchase price. Like I’ve been saying: two times your joint income. All the down payment does is reduce your required monthly payment. That’s why it’s maybe helpful. And also when you go to sell it, you know, you hopefully will have a little bit of that 20% equity that you can use to pay the real estate agent where you’re not having to literally dig into your pocket for money to get out of the house that you bought.
Travis [00:30:06] So really, if you want to do a doctor’s mortgage, I think that’s fine. If you want to put down almost nothing for your home, I think that’s fine. It’s not a problem. Didn’t bother me. The main thing that bothers me is when you buy way more house than you can easily afford.
Possible ways to reduce big child-care expenses
Travis [00:30:20] What are some other really big expenses that I’ve seen, besides, you know, housing and cars? One big one is child care, and child care obviously is usually temporary, unless you’re just having kid after kid after kid. But it’s really expensive. It’s like $2,000 to $3,000 a month for a lot of people.
Travis [00:30:35] I’ll give you some stories about child care that I’ve kind of seen. Sometimes it might make sense to have a live-in nanny. I mean, I had one person that they didn’t want to sell their house, but they had an extra room. And they were spending $2,000 to $3,000 per kid on day care.
Travis [00:30:50] And I said, “Honestly, for what you’re paying, you know, if you” — And this was, you know, an area that probably had a lot of nannies available, I think. And I was basically thinking, you know, like, in other words, like an LA, New York kind of place versus, like, you know, an Omaha, Nebraska kind of place. You know, my thought process was, well, rent is really expensive there. So, if you gave a nanny free rent to live with you and plus paid, you know, a decent $2,000 (to) $3,000 a month wage, like, that’s a pretty good deal for somebody who’s kind of a lower-income person. And then you could save, like, $3,000 to $5,000 a month on day-care expenses.
Travis [00:31:24] So, that’s just one kind of creative way to think. Another kind of example of this would be if you have kids that you’ve got in day care and you have any support system at all, why are you living where you’re living? Now, there’s obvious — The obvious reason is if you just enjoy it, then fine. That’s fine. You know, you can live there. There’s nothing wrong with that.
Travis [00:31:43] But if you don’t really mind having your parents closer or your brothers or cousins or whatever, like, having some sort of family nearby when you have kids is a great idea. I’ve heard from a lot of people that’s a life saver, is having a support system close by.
Travis [00:31:57] So, if you have a really big child-care expenses, you might want to consider either having maybe a support system, like parents or something, move to where you are or moving to where they are. You probably will have to move to where they are, more likely than not. But still, it’s something to consider if you’re spending a lot of money on child care because those big child-care expenses will absolutely prevent you from doing a lot of other things that, you know, you’re going to want to do.
How family support expenses can get out of control
Travis [00:32:20] Another big example of super-expensive stuff that I’ve seen? Family support. Paying for your family members. That is really expensive. I see this all the time with second-generation people — second-generation kids. When you’re dealing with a situation where you have maybe a parent that you’re supporting — you’re paying their mortgage; you’re paying them a little extra just for living expenses.
Travis [00:32:40] This happens a whole lot for folks like, you know, like I said, second generation. So like, you know, Indian American, Pakistani American, Asian American, Chinese American. Like, my wife is Canadian-born Chinese, so I get that kind of immigrant mentality that you’re supposed to take care of your parents and pay them back for all the sacrifices they made for you. So I get the thought process behind it.
Travis [00:33:01] But, you know, in one case, I think we had somebody living, like, 2,000 miles away from her daughter because she wanted to be in a place where there was a community of people that were like her. And it’s like, well, you know, if you’re paying $2,000 or $3,000 a month to support your mom, you need to have a harder conversation about trying to make that make sense.
Travis [00:33:24] So, if you’re economically supporting people, I don’t think it’s wise to be living thousands of miles apart. I think that if you’re going to economically support somebody, the best way to do it is to try to combine households or to try to have them close by so they can help you with child care. It does not make sense to pay for child care and pay for your family member to also live thousands of miles away.
Travis [00:33:45] But I see that all the time. And really, when people are supporting family, there’s nothing wrong with that. But when you support family and spend money on that, that’s, by definition, making a tradeoff. And when you put it in terms of making a tradeoff, then people realize it’s way more intense than they thought.
Travis [00:33:59] So for this person, I calculated the amount of money that she was paying to cover her mom’s expenses for probably 20 years. It was going to cause her to have a required working career 10 years longer than it would have been if she had been putting that money into retirement instead.
Travis [00:34:13] And when she realized that she was going to be working for a decade longer just because of her decision to support her mom, it made a lot more sense to consider, since they already had a decent-sized house, to have that harder conversation of, “Hey, maybe you need to just come live with us if you’re having trouble paying your rent.”
Other big-ticket items to examine
Travis [00:34:27] So, other big things that have come up. I mean, vacations, maybe — you know, if you, like, ski from jumping out of helicopters or something. Like, vacations usually aren’t that expensive. If you think about international trips, they’re usually like $5,000 to $10,000 each. I mean, that’s not cheap. But cars are going to cost you a lot more than that. If you take, you know, a couple (of) international vacations every year, that’s going to be probably cheaper than cars. It’ll definitely be cheaper than buying too much house.
Travis [00:34:56] So, we do occasionally see people spending tons of money on things like that, but it’s a lot more rare. It’s almost always some form of family kind of things — like child care, family support and then cars and housing purchases. So, great news for your streaming services. Your Netflix, your Spotify, Hulu, HBO — all these things. Your gym membership. It really doesn’t matter that much.
Travis [00:35:20] So, if you do not have an emergency fund, you probably should cancel or share those accounts — the ones that I mentioned. But in reality, it’s just really not something that you want to worry about.
How to approach big-ticket purchases
Travis [00:35:30] So that’s why I wanted to call this episode “sweating the big stuff and not the small stuff.” So, go out with your spouse tonight. Go spend some money on playing golf or something. Go play a basketball game and buy a day pass to some fancy gym or spa you want to go to. Like, that’s totally fine. OK? The thing that I want you to protect yourself against is being stupid when it comes to your housing, your cars and other big expenses because that is what will wreck your budget.
Travis [00:35:57] And obviously, student loans are important to figure out, too. That can mess you up pretty bad as well, especially if you’re paying a lot extra when you shouldn’t be — either towards interest if you should be refinancing or, you know, paying it towards loans that are going to be forgiven. That’s also not good.
Travis [00:36:11] So, those are some pretty big things, I would say. Not just in a self-interested basis, but I think, you know, I would say student loans are important. But even if you have the perfect student loan plan but you screwed up all those other things — you know, your housing, car expenses — then that’s going to be way more impactful. It’s going to hurt you even worse.
Travis [00:36:28] So, just want to encourage you there. You know, if you have a good emergency fund and you’re not taking on a car payment — you can afford to buy that Tesla in cash — go for it. That’s great.
Travis [00:36:38] I don’t believe in getting a loan for a car, even if it’s a 1% loan. It just it’s not worth it because it’s going to encourage you to buy more than you should. And then also, if you’re going to buy a Tesla, don’t buy a brand-new one unless you’re just, like, literally freaking rich. Go buy, like, a two- or three-year-old one for 40% off depreciation. All right? Do that.
Travis [00:36:57] For a house, if you live in, like, a San Francisco or LA or New York, unless you’re rich, don’t buy a house. It’s kind of dumb. You know, you should just rent unless you’re positive you’ll be in the same neighborhood for 20 years. But probably just rent. And then, if you live in Indianapolis or Waco, Texas — that’s why they show that HBO thing, you know, the Gaineses, Chip and Joanna show. That’s why they show their hometown because the price-to-rent ratio is so low, so people are always able to afford these houses. And they’re always able to afford to do so much to the interior because the price is so low.
Travis [00:37:33] So it’s, like, a decent way to spend a reasonable amount of money and get a lot of a lot out of it. So it makes people really excited to watch. Makes them think they can buy their own house. But yeah, like, if you’re in one of those random places do that. But if you’re in one of these really expensive metro areas watch out. OK?
Travis [00:37:48] Same thing for cars. Like, you’re probably not in a big metro area. Probably not even driving your car that much, so you probably don’t need one. You should probably do a car share or sign up for like Enterprise CarShare or something like that.
Travis [00:38:00] So, the last thing I want to remind you of: Remember that SpeakPipe — the SpeakPipe that you can ask questions about your student loans, finances, whatever, and we’ll feature you on the podcast. So, go to StudentLoanPlanner.com slash voicemail for that.
Travis [00:38:13] And then also know that you can also apply for our scholarship. Now, our scholarship applications are open until September the 30th. So, go to StudenLoanPlanner.com slash scholarship. We have a specific category for almost every major profession out there that has student debt. So if you want to get $500 bucks and a lot of other prizes and potentially a free consult, too, you should go apply for that scholarship. And it’s a quick essay. It’s, like, (an) 800-word essay that you can write to apply for that. So it’s really, really easy.
Travis [00:38:45] And I expect that we’re not going to have a ton of applications for a lot of these different categories because some of these are ultra-specific. Like, I think we have a speech-language pathologists category or something. I don’t predict that we’re going to get more than 10 applications for something that specific. So, you know, you have a decent chance of winning if you apply.
Travis [00:39:03] StudentLoanPlanner.com slash scholarship for applying for that. And then ask us a question so we can have you on the show — StudentLoanPlanner.com slash voicemail. We’d love to get your questions.