House Hacking

House Hacking

If you are looking to buy a home and want to really grow your wealth, consider house hacking. Our ability to save, invest, and grow real wealth begins with a very simple premise. You have to spend less than you make. It couldn’t be more simple, but that doesn’t make it easy.

For most people, your three biggest expenses are housing, taxes, and cars. If we manage those three expenses well, you may be able to save a significant amount of your income. The more you save, the faster you grow, and the sooner you might reach your goals. Read more: Five Wealth Building Habits

The problem is that most Americans are doing the opposite and creating a lifestyle which consumes 100% of their income. And then there is nothing, zero, left to invest.

House Hacking gives you an incredible opportunity to reduce your biggest expense, in some cases, down to zero. Here’s how. Instead of buying a single family home, you buy a duplex, triplex, or four-plex. You live in one unit and rent out the rest. Your tenants will cover much or even all of your mortgage. You can live there with little or no monthly expenses.

With a house hack, you are freeing up your income so you can save and invest. You can pay off your credit cards. Maximize your 401(k) and Roth IRAs. Start saving for college in a 529. And it’s all because you were willing to live in a multi-family home rather than spending thousands every month on a single family home.

The Details

Sure, house hacking isn’t going to be for everyone. But maybe you want to ask how this might work, if you were to consider it. Although you are buying a multi-family building, you are going to use the house as your primary residence and live there. That means you can still use an FHA mortgage and not have to get a more expensive mortgage for a rental or investment property. With an FHA mortgage, you can put as little as 3.5% down with a FICO score of just 580.

Of course, if you have 20% to put down, you could also do a conventional mortgage as a primary residence. Or, if you’re a veteran, you might be eligible for a VA loan with zero down.

Once you have the property, you can split costs between the area where you live and the area which you rent. This means you can also enjoy some of the tax benefits of being a landlord. Let’s say for example, that your building is 3,000 square feet and you live in 1,200 feet and rent out the rest. You occupy 40% and have 60% as a rental.

Then you can look at your costs, such as insurance, utilities, repairs, taxes, etc. For your bills on the whole house, you can allocate 60% of those costs against your rental income on Schedule E. For the 40% where you live, you can also qualify for the Section 121 capital gains exclusion, when you sell.

Living with other people in the same building might not be your dream situation, but if you can make it work, there could be great benefits for you financially. When you manage your biggest expenses, it becomes easy to have money left over to save and invest. Put your savings on autopilot. Maximize your 401(k). Put $500 month into your Roth IRA to get to the $6,000 annual limit.

Who Can Do a House Hack

House hacking certainly makes sense for a first time home buyer, a single person, or a young couple. That’s probably the typical situation. But it could also work well for older investors who want to turbo charge their savings while they are still working. And if you could reduce your monthly housing cost from $2,000 to $200 or $0 a month, would that change when you will be able to retire? Probably. A house hack might enable you to retire at 55 versus 65. Under the 4% rule, reducing your expenses by $2,000 a month means you now need $600,000 less in your nest egg to retire.

Most of us will resist making a sacrifice to be able to save. Still, if you have an open mind, a house hack might be a brilliant way to save and invest. While your friends and colleagues are barely saving anything, you might be able to put away 50% of your income while your tenants are paying down your mortgage. If you can invest $2,000 a month for 10 years, at a 7% return, you could have $344,000. That might be worth a small sacrifice.

Housing is an expense. Your house should go up in value over time, but the expenses of interest, taxes, insurance, and upkeep are not building your wealth. What if you get someone else to pay for your house? When you reduce those expenses, you are giving yourself a tremendous opportunity to save and invest in appreciating assets. If that is important to you, look for creative ways to cut your biggest expenses!

Have you done a house hack? I’d love to hear from you about your experiences. Send me a note!

When Can You Splurge

When Can You Splurge?

We all have things we enjoy, and the question of when can you splurge has unique financial planning considerations. We probably think about these choices, consciously or subconsciously, every day. And while I don’t think there can be a hard and fast rule, there are some things to consider. Once we start peeling back the proverbial onion, there are many psychological layers to this question. We all have a relationship with money. It is based on our experiences, upbringing, and innate preferences. The question isn’t just When can you splurge? It is How can you have a better, more effective relationship with your money?

“Money makes a terrible master but an excellent servant”

P.T. Barnum

First, let’s define what we mean by splurge. Clearly, your normal living expenses should not count as a splurge. But, even this is problematic. There are many Americans who have adopted a lifestyle which they cannot afford. Their choice of housing, cars, vacations, clothes, etc. consumes all of their income. And then when an emergency does occur, it has to go on the credit card. They end up in debt and there is no way to pay off those debts with their current consumption. They don’t see that they are splurging already, and spending in an out of control manner. Read more: Machiavelli and Happiness in an Age of Materialism.

A definition of splurge as “to spend money freely or extravagantly, especially on something special as a way to make yourself feel good.” Most definitions imply wastefulness and vanity. But I also think that occasionally being able to spend money on things which you enjoy is a great freedom. We all may have interests which make no sense to others. Perhaps it is cars, or watches, or shoes, or a boat. To us, it is the realization of a dream. To someone else, it would be a waste of money. That’s okay. The blue car pictured above is my splurge from this March. Maybe that doesn’t do anything for you. For me, a lightweight sports car with a manual transmission is a joy.

When Not to Splurge

Let’s begin by laying down a few prerequisites for a splurge. Perhaps it is easiest to think of these as a checklist:

  1. Can you pay in Cash? Or would this splurge be funded by credit card debt? If you don’t have the cash to purchase an item, maybe you should hold off until you can afford it.
  2. Do you have an emergency fund with at least 3-6 months of living expenses?
  3. Are you funding accounts for your long-term goals? For example, a 401(k) or IRA for retirement, a savings account for a house down payment, or a 529 plan for your kid’s college.

If you can pass these three prerequisites, then the splurge is not going to hurt you. After all, we don’t want to look back on our splurges with regret and be angry that we made a mistake. Number one, credit cards, also suggests that if you presently have a lot of credit card debt, you should not splurge. You should prioritize paying off your cards, first. How much should you save for number three? If you are in your 20’s and are currently saving at least 12% towards your 401(k), I think you are off to a good start. If you got a late start, you may need to save more than 12% to be prepared for retirement. Read more: What percentage should you save?

Start with a Plan

My purpose as a Financial Planner is to help you be smart with your money. Our ultimate goal is to make sure you achieve your financial goals. With that in mind, we are always looking to design long-term diversified investment strategies built within a planning process. We are always looking for the most cost-efficient, high-value ways to manage your money.

The beauty of the plan is that it creates awareness and a process for change. For some individuals, that may mean establishing automatic savings programs to fulfill your needs for retirement, debt management, house goals, college savings, etc. We can break down each goal into a monthly target and set it on auto-pilot. Read more: Do You Hate Saving Money?

For others, a plan can show them that they are on track. Because many people are afraid to splurge. And I am writing for them, too. Yes, there are people who need to splurge less. But there are also people who need to splurge more.

If your relationship to money is centered on fear, anxiety, and regret, you are carrying a terrible amount of stress with you at all times. This is a scarcity mentality, which is psychologically harmful. It impacts your behavior and hurts your satisfaction. In one study, adults who had a positive attitude about aging lived 7.5 years longer than those with a negative mindset. Your thoughts matter! Read more: 5 Ways to Go From A Scarcity to Abundance Mindset.

Your plan will let you know how much you can splurge and give you the confidence that you aren’t doing anything to hurt your future self. Maturity is often defined as the ability to delay gratification. We all need to save for the future. Still, splurging doesn’t require that we have already accomplished all our goals! Only that we are presently taking the steps necessary to get us there. If you want to feel more confident about your splurge, start with your financial plan. Otherwise, how do you know?

But Should You Splurge?

Still not sure if a splurge is a good idea? Afraid you will regret a big purchase? A few last thoughts.

  1. Avoid impulse buys. Shopping as therapy for stress, boredom, or other problems is only a band-aid. Find a better solution. Talk to a friend, go for a walk, do something that makes you feel better and actually addresses the emotional need.
  2. Could this be easily reversed? Some items hold their value. If you buy an item for $3,000 and could resell it in a couple of years for $3,000, it’s a fairly low risk proposition. And if it brings you joy, then why not.
  3. Have you shopped around and done your research? Can you buy used or find an alternative? A splurge doesn’t have to be reckless; see if you can find a great deal.
  4. Do you have a bucket list of experiences that you’d like to do and and see? A splurge can also be a trip or event, and it is healthy to spend on creating memories and not simply buying more things. We only get so many trips around the sun. Our time here will go quickly and it is finite. 10 years from now, you may still smile when you think about that epic vacation to Machu Picchu. You probably aren’t going to be thinking about what it cost because in the long run, it didn’t matter.
  5. An itch needs to be scratched. Sometimes, an idea takes hold and we simply need to do something. If it doesn’t go away, maybe we will be richer as a person for having allowed ourselves to live a little more freely. What is the worst that will happen if you do this one splurge?

Intention, Choice, and Balance

Money is a great tool to lead a satisfying and interesting life. We all know that more things can’t bring you happiness. And we all know someone who spends too much and rationalizes it as “self-care”. How can you find a balance? At the one extreme, many Americans are not saving anything and are two paychecks away from being broke. At the other extreme, there are hoarders who are paralyzed with fear of spending and losing their money. I’m a frugal person, but this can be taken too far.

Choose what is truly important to your life. Don’t let others decide for you what is a good use of your money. But be smart. Start with a plan and cover your bases. When you have your savings plan established, be intentional with your spending so your choices align with your goals. By that I mean, don’t just spend blindly, splurge in ways that are meaningful to you. Maybe bonding on a family vacation is more important than upgrading your car this year. Maybe keeping your housing costs reasonable will allow you to spend on other priorities. The balance is deciding where to splurge and where to not spend your money. The right balance is to splurge neither too much, nor too little. Never splurge to keep up with the Joneses.

When can you splurge? I’m not going to show you the compound interest on a daily cup of Starbucks. I’m not interested in slapping people on the wrist to make them feel bad about how they spend their money. I believe you can align the head and the heart on your spending. When you have invested time and energy into your financial plan, you will have earned the confidence to know when you can splurge. Then, giving yourself permission to splurge will not be from weakness, but to help you live the life you truly want.

Invest $5,466 a month

Where to Invest $5,466 a Month

Why should you invest $5,466 a month? Why that very odd number? Well, at an 8% hypothetical return, investing $5,466 a month will get you to $1 million in 10 years. That’s what we are going to explore today and it is very possible for many professional couples to save this much.

Last week, we looked at where to invest $1,000 a month. That’s a reasonable goal for many people, a 10% savings rate for a couple making $120,000 or 15% for an individual making $80,000. And while saving $1,000 a month may be okay, it will take decades to amass enough for retirement. If you want to accelerate the process or aim for a higher goal, you have to save more.

Saving $5,466 a month is $65,592 a year. For a couple making $200,000, that represents saving 33% of your income. That’s challenging, but not impossible. After all, there are many families who get by with making less than $134,000.

There are many different ways you could invest $5,466 a month, but I’m going to focus on adding tax benefits both in the present and future. Let’s get right to it!

Retirement Accounts

  1. Maximize 401(k), $1,625 a month each. That will get you to the 401(k) annual contribution limit of $19,500. It is surprising to me how many people don’t do this. For a couple, that is $3,250, more than half our goal to invest $5,466 a month.
  2. Company match, $416 a month each. Many companies match 5% of your salary to your 401(k). For an employee making $100,000 a year, that equals $416 a month. I am assuming this couple each makes $100,000. For two, that’s $832 a month. Added to your 401(k) contributions and we are now at $4,082 a month.
  3. Backdoor Roth, $500 a month each. At $200,000 for a couple, you make too much to contribute to a Roth IRA. However, you may still be able to make Backdoor Contributions to a Roth IRA, for $6,000 a year or $500 a month each. Added to 1 and 2 above and your monthly total is $5,082. We only need to find another $384 to invest a month to reach the goal of $5,466.

Additional Places to Invest

  1. Health Savings Account (HSA), $600 a month. If you’re a participant in an eligible family plan, you can contribute $7,200 a year to an HSA. That could be up to $600 a month, and that is a pre-tax contribution!
  2. 529 Plan, $1,250 a month. If you are saving for a child’s future college expenses, you could contribute to a 529 College Savings Plan. A 529 Plan grows tax-free for qualified higher education expenses. Most parents choose to stay under the gift-tax exclusion of $15,000 a year per child, which is $1,250/month.
  3. Taxable Account, $ unlimited. You can also contribute to a taxable account. And while you will have to pay taxes on capital gains, dividends, and interest, we can make these accounts relatively tax efficient.

Other Notes

  1. Tax Savings. While trying to invest $5,466 a month is a lot, you will be helped by the tax savings. A couple making $200,000 a year (gross) will have just entered the 24% Federal tax bracket after the Standard Deduction of $25,100 (2021). Some of your tax deductible contributions will be at 24%, but most will be at 22%. Using just 22%, your joint $39,000 in 401(k) contributions will save you $8,580 in taxes. That is $715 a month back in your pocket. Add in $7,200 to an HSA and save another $1,584 in taxes ($132 a month).
  2. Catch-up Contributions. If you are over age 50, you can contribute more to your 401(k) and Roth IRA accounts. There are also catch-up contributions for an HSA if age 55 or older.

I wish more people had the goal of becoming a Millionaire in 10 Years. We cannot control the market, but we can do our part and do the savings. At an 8% hypothetical return, starting to invest $5,466 a month can put you on track to $1 million in a decade. And if you already have $1 million, saving $5,466 for another 10 years would get you to $3.2 million.

For couples making over $200,000, can you afford to invest $5,466 a month? Can you afford not to? Planning is the process of establishing goals and then creating the roadmap to get you there. If you’re ready to create your own roadmap, give me a call.

How to Save More Money

How to Save More Money

Growing your net worth is the product of saving and investing. Sometimes, we assume this means we have to slash our spending to be able to save more. Sure, you want to have awareness and planning regarding your spending. But it’s not much fun to give up coffee or never take a vacation. There has to be a balance between sensible spending and your saving goals.

Luckily, there is another way to increase your savings rate: earn more. Especially for younger investors, as your income grows you will find that you can easily save more. This may take a number of years. But, as your career takes off, your income may increase at a double digit rate during your twenties and thirties.

So, don’t despair if you cannot save as much as you would like today! Focus on growing your career and increasing your income. Saving will get easier.

Hold Your Spending Steady

As you get promotions and raises, avoid the temptation to keep up with the Joneses. You will see friends and classmates who are buying fancy cars and huge houses. Good for them! But what you might not see is how much debt they have, how little they save, or their net worth. You won’t know how stressed they are about their finances. They may be two paychecks away from being broke.

Hopefully, your current lifestyle is enjoyable and you find happiness in your relationships and the things you do. Getting more expensive things is not likely to create lasting satisfaction. The temporary, but fleeting, pleasure from consumption is known as The Hedonic Treadmill. If your priority is becoming financially independent, using a raise or bonus to save more is a better choice than spending it.

Put Your Savings On Autopilot

As your income grows, save your raises. Establish recurring deposits to your retirement plans and other accounts, and increase them annually. If take this step when you receive a raise, you will not miss the extra money. Skip increasing your monthly savings, and you probably aren’t going to have extra money leftover at the end of the year. If it’s in your checking account, you will spend it!

For couples, a joint income is a tremendous opportunity. If you can live off of one salary and save the second salary, you will grow your wealth at an amazing rate. In some cases, this could literally be saving one of your paychecks. Or, it may make more sense to participate in both of your 401(k) plans, and save the equivalent of one salary.

Multiple Sources of Income

Given the economic fallout from Coronavirus, many people aren’t getting a raise this year. A lot of us are seeing that our 2020 income will be lower than 2019. Hopefully, this will be temporary, but there are lessons to be learned. It is a risk to have all your eggs in one basket with one job. If you lose that job, you’re really in trouble.

As an entrepreneur, I have always had multiple sources of income. My financial planning business is diversified across a number of clients. I also sell insurance. I make music in a couple of orchestras and teach a few lessons on the side. Some of it is small, but having multiple sources of income gives me flexibility and safety.

Have you considered finding a side hustle, second income, part-time business, or online gig? Find something you enjoy and make it into a business. Find something people need and provide that service. You never know where that part-time work might take you. Maybe someday it will allow you to retire early or be your own boss! In the mean time, use your additional income to save more and build up your investment portfolio. Don’t give up your time just for the sake of buying more things.

How and Where to Save More

How much should you save? If you are saving 15% of your income, you’re doing way better than most people in America. Start at a young age, and a 15% savings rate will likely put you in a very comfortable position by retirement age. For those who are more ambitious, or just impatient like me, aim to save more than 15%. You could be putting $19,500 into your 401(k) each year ($26,000 if over age 50).

And you might be eligible for an IRA, too, depending on your income. Or, consider a taxable account, Health Savings Account (HSA), or 529 College Savings Plan. There are lots of places you could be saving! Put your savings on autopilot with recurring deposits to your retirement plans and other accounts. If take this step when you receive a raise, you will not miss the extra money, but you will be growing your wealth faster.

Do you need a reason to save more? The sooner you save, the faster you can achieve financial freedom. Even if you enjoy your work, it’s great to have the means to not have to worry about your job.

You can save more by spending less. That’s true, but you can only eliminate an expense once. Most people will have some tolerance for cutting costs, but austerity is no fun. Focus on increasing your income, hold your expenses steady, and increase your monthly savings. Put your energy into building your career, and aim for a high income. Couples have a great ability to save, if they can aim to live off one income. Look for creating a second or third income stream. A lot of the wealthy people I know have an entrepreneurial mindset. They have multiple income streams.

As your earnings grow, you will be able to save more and invest more. Most of my newsletters deal with investing, tax, or planning questions. But those benefits only accrue after you’ve done the first step of saving that money. It’s not how much you make that matters, but how much you keep!

Extend Your Car Warranty for Free

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth. 

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill. 

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself. 

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can. 

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan. 

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience. 

I am aware that other fluid makers offer warranties, including Mobil 1Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received.  Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.