Listen as we discuss the big question of whether to rent or buy housing and cars, tips for long-term expenses, and where does all my money go?
Hi I’m Michael Carlin president of Henry+Horne Wealth Management with your Manage the Funds podcast today. Right now we’re going to tackle expenses. We’re going to talk about how much should I spend. How much can I afford to spend and it is easily the most critical and very easily the most put off aspect of financial planning as you can imagine people in my profession don’t race to talk about expenses. Why most people that manage assets. It’s a sensitive issue and people don’t want to admit or own how much they spend.
And frankly most people don’t know. And if you don’t know how much you’re spending you’re unable to create a meaningful retirement plan for you and your family. You’re unable to understand how to fix and address things. So step one let’s figure out how much you’re spending let’s talk about expenses and let’s use the next 15 or 20 minutes to go through into dive into this very important and critical topic. In the United States. The average household income. There is a better way Consumer Expenditure Survey done by the U.S. Bureau of Labor Statistics.
That’s a disclosure that was done in the average household income with sixty three thousand six eighty four. That was done in 2013. It’s still relevant because I look at the percentages of of each of these expense items compared to the total income.
So for example the number one expense category is housing 16 percent. Number two transportation at 14 percent. I’m going to read all these out but I’m going to do a few taxes.
Twelve percent what’s interesting is that healthcare for some reason or another came up at 6 percent. Again that’s average household budget. I think part of that number has to do with the fact that employers are picking up a significant portion or certainly in 2013 there’s probably a larger percentage but a significant portion of health care costs in paying premiums. So let’s deal with some of these larger expense items like housing. Let’s deal with transportation today for taxes that’s a whole different subject about how to mitigate your taxes how to reduce it.
There’s a whole thing and by the way food came in at 10 percent of income on food. We could do a whole session on food but then I’d just spend the whole time eating. All right so let’s go ahead and go into renting a home or buying a home. I get asked this a lot and particularly with this millennial generation it’s happening more and more and more of these questions are coming in here saying I don’t know what should I do. This is very different. This is very different for decades it was all about home ownership.
It was all about owning a home and today millennials are making many ask what is truly better. Let’s unpack this a little bit and I’ll give you some of my opinions and information and what the data and research suggest.
The average annual cost to renting 2018 $9,477. Average annual homeowner’s costs which is inclusive of mortgage interest.
Home the mortgage interest property taxes maintenance repairs homeowners insurance the basics. $9552. Slightly more expensive to own a home and so you’d say well jeez I mean. Well there you have it right. It’s cheaper to rent. Now it’s not it’s not so easy because let’s not forget the mortgage that you’re paying part of that is principal meaning every time you’re making your mortgage payment it’s made up of interest that the bank is charging you and principal as well.
It’s both. And as you’re paying that principal down over time you own more of your house obviously we rent. You could be paying rent forever. You own no more of your place when 15 years from now as you do day one. Very different story. So if you look across the country about 64 percent of U.S. households own their home in more and more than half of homeowners have a mortgage. I look at it the other way half of homeowners don’t have a mortgage. But either way point is either half full or half empty.
The girl at the mortgage glass is something that you have to pay attention to. It puts things in favor a little bit of why you want to own a home. You want to build that equity up. You want to use the bank’s money for it. For many it used to be about well give me the tax deduction on the interest on my mortgage interest. I think what you’ll find with especially with the increased standardized deductions a lot of people aren’t going to be deducting their mortgages anymore. That’s something you’ll have to tackle with your CPA we could do it on another podcast for sure.
But when you’re looking at the whole thing cost aside you’ve got a little check on the side for for home you know for home ownership rather than renting. You also have some other costs you got you know certainly water sewer septic trash collection. You’ve got a different kind of maintenance that has to happen around the house which isn’t always the case for rental. Pest control and other things and things that really can break down and the average cost for those things in terms of things that write down as well is three thousand eight hundred and forty dollars a year.
Oh you went from kind of parity between what’s the cost of rent the cost for mortgage. Okay. I could see where owning a home would be better. Okay great. That makes sense. Michael thank you. But you’ve got to be prepared for the extras. So many people fall in love with the idea of buying a home. But they’re they don’t take it a step further in the step further is can I afford this home long term. When you buy a home understand that if you do nothing to your home between now and 20 years from now I mean nothing like no renovations no improvements you’re going to have a 20 year old home at some point.
That’s going to look extremely outdated. It cost a lot of money to own a home. So when you’re looking at those two expenses I’m all for you owning a home. I’m all for you buying a home. It makes sense it makes good financial sense. But make sure you can afford the extras. Make sure you can afford and you forecast for continuing improvements over time because things break you’re going to have to improve the home over time or else you’re going to lose value in your home. Let’s talk about the number two item on expenses it’s transportation.
Should I lease or buy a car. Oh my goodness. You know for a while you know my father’s generation the baby boomers. It was all about leases. Why not lease. I get a new car every three years. This is great. My monthly payments are way less on this new car leasing rather than buying it. Terrific. I don’t have to worry about when. You know once my lease term is done what do I do with my car. I just turn it in. It was terrific.
And the other reason lots people don’t think about which I do is that they have less strict lending standards for leasing. So if your credit isn’t as great it’s a little bit easier. Quite often to get a lease rather than to buy that car. So. Well geez I mean if it’s so much cheaper let’s lease. Well there are some cases when you want to be buying a car. If you’re looking at it over a 10 year period of time and you do it right you do it right. If you drive a car the same car for a long period of time that’s doing it right.
You’re going to pay less over the long term. Buying a car and driving in a long time you’re gone and that’s definitely going to be the way that you’re going to be paying less. You can always sell this car that you buy should you need to. I don’t know what you’re going to get for the car. You’ve got some risks there but you can always get out of it with a lease. It’s a lot harder to get out of a lease if you drive a ton. You’ve got to buy a car because you’ve got unlimited miles when you buy the car in a lease.
Gosh you know you have to worry about how many miles on my driving, am I going to go over if you get dings and dents and things like that and you own the car. You know get it fixed or don’t. Up to you own it lease you got to fix it. And when you’re buying a car rather than leasing it you can also buy a used car. Now you’re talking. So if you want to win this battle of transportation buy a used car. Again it’s up to you in terms of what you can afford and what kind of car you want to buy a used car.
Heaven forbid get those warranties. That’s what I would recommend and drive it as long as you can. Then you’re going to win the car game. That’s how you win it from an expense standpoint. So we’ll be going through the home expense we’re going through your transportation expense.
You got to figure out where all your money goes. Do you know in 2018 the Government’s been $4.11 trillion.
I know because I looked it up and you can go to there’s a Web site. I just go to it because it’s more fun than you think. I know I’m a nerd from this stuff but goodness.
It’s USA Spending dot gov USA spending that got it. You can see exactly where the government money went in so much more information. It is super cool. It is super cool. It’s something that you know it’s not going to make you cool at a cocktail parties. It won’t. You probably won’t tell anybody that you’ve been to the website but it’s awesome because the government’s tracking what they spend. So should you. You should be doing the same thing today in today’s world. You got to get software in order to wrap your arms around what you’re spending.
And I did a simple search from the Google Play store do the same thing for you know your Apple iPhone look for free expense tracking apps. There are tons of them so many it’s hard for me to recommend one but there are a lot of good ones out there you don’t have to pay for it in some cases you will it’s up to you in terms of whether or not you do that or not. But what you really want is software that’s going to be able to grab the information from your bank accounts from your credit card accounts and pull it all together and then categorize it for you say here’s how much you’re spending on housing here’s how much you’re spending on transportation and get your own percentages.
You want to find out where your money goes. We’re going to do a piece on teaching your kids how to spend. And recently I spoke with my son and he learned the lesson that that all adults learn over and over and over again and that is I don’t understand where my money goes Dad. He’s now working at a yogurt shop and he’s like I don’t understand because I made this money I couldn’t have possibly spent all of that. Is that what you did. So I set him up on our financial planning software so that he can track his own expenses.
He doesn’t ask anymore where it went. Now he can see it. Hopefully this is be something that over a long period of time works for him. For each of you you’ve been there you’ve thought to yourself there’s no way I spent all that money. There’s no what did I spend my money on.
I forgot you threw it all but that just happened one time. Yeah I get it. Track it. Get the software. Once you’ve tracked it then I want you to sort your expenses largest to smallest. And then I want you to ask yourself two questions as you go through them which purchases made me happy. Go through it filter through it. Answer that tough question ask yourself a second question. What purchases would I not do again.
Now you’re going to start to figure out the level of expenses where you say jeez. These are some things are going to want to cut out these are some things I’m going to want to do different. You know I just I just don’t want you to get to a point personally where you’re taking the financial advice that a lot of these loud mouth national you know big broadcasters say and they don’t want you spending anything that isn’t it.
That’s not that’s not the right advice.
The advice is live your life do it well spend wisely track what you’re doing improve what you’re doing and I want you to ultimately focus on your income because I want you to earn more. But you certainly can’t get too far without understanding your expenses because when you understand your expenses it’s going to do a few things. One it’s going to create financial awareness. You need to you need to be aware of what you’re spending. If you’re going to meet with a financial adviser and they’re going to say I’m going to help you with your plan they’re going to ask you one of the first few questions of well how much do you spend.
You got to be able to say here it is. You can’t say I don’t know and unfortunate I’m here to tell you. Most people say I don’t know but go ahead get that software figure it out.
You’re going to also when you’re tracking your expenses you’re going to be able to identify spending issues that you have.
Gosh these things don’t make me happy these things I wouldn’t have done again identify them modify the behavior you’re going to also figure out how much you can save each year the spending absolutely a great jobs you should be able to put money in money out taxes what’s leftover. Goodness gracious. Now we aren’t we’re aware of how much can save on an annual basis. It’s an important first place to start when you’re when you’re certainly trying to create your long-term plan. You may find for many that it’s a good time to spend as a couple.
Not often enough to people come into the office having spent time with their significant other. To have these kind of conversations. They choose our office as a great first place to talk about spending you can do it in the comfort of your own home and start to begin to work out your philosophies of money. How do you feel about money. How do you feel about spending as a child growing up. This is what I witnessed this is what I saw.
This is how it shaped my belief about spending. Do those things at home. Take the time to create a stronger bond with your significant other. In my understanding today you can plan better for tomorrow. Those are all the reasons why you want to understand your expenses. It’s key it’s critical. It’s the best first place to start. And frankly too often we see people don’t take the time to two to go through it take the time to really understand their expenses. Hopefully now you understand why it’s so critical. With that that’s our podcast today.
Thank you for listening and managed funds podcast. We talked to everything about expenses.
If you need more information feel free to reach out let us know. We’re happy to get back with you. That’s it for now. Take care. Have a great day.