Get Rich Slowly

personal finance that makes cents

Home    About    Archives         

Summer Vacation 2018

posted by on 14 Comments

Ah, can you feel that? The end of June is approaching, which means it’s time for the summer weather pattern to descend on Portland. There are clear skies and plenty of sun sun sun in the forecast. Feels like the perfect time to play hooky, no?

I’m taking this week off to enjoy the sunshine and to prepare for my upcoming presentation at WDS.

Financial Freedom Workshop Next Week!

As I did in 2016, I’m co-hosting a workshop on Financial Freedom. This year, my co-host is the amazing Douglas Tsoi, founder of Portland Underground Graduate School. We’ll host our three-hour session on money and meaning from nine to noon on Thursday, January 28th, in downtown Portland.

For more info (or to register), you should go here. (Please note: Although there’s a nominal fee to attend this presentation, Douglas and I don’t get paid a dime. This isn’t a scammy, sales-y event. It’s just two guys trying to share what they know about financial independence.)

Best Money Expert!

In other news, the folks at GoBankingRates have nominated me as a vote for me here. I’m nominated in the “Retirement Planning” category.

Questions and Suggestions

Finally, now’s a great time for questions and suggestions. I intend to spend the next few weeks writing about banking and credit cards. Anything in particular you’d like me to cover? And what about once we’re finished with that topic — what subjects would you like to see me dive into around here?

Any other feedback about the site or the email list? Now’s the time to drop a line. Just leave a comment below.

Now it’s time for me to take the dog for a long walk. I hope the weather is beautiful where you are, too. I’ll see you next week.

more about...

Spare change: Awesome articles from elsewhere

How does your family of origin affect your financial habits?

Consumer Reports warns readers about cell-phone account fraud

Thoughts on financial freedom inspired by ten weeks of travel

How criminals steal $37 billion a year from America's elderly

53% of millennials expect to become millionaires

10 banknotes from around the world and their security features

How people from 70 different countries count money

Eight tips for buying a used car

The best time to buy a car

Comparison is the thief of joy

Find an archive of all past spare change links on Pinboard.

HelloFresh review: Is a meal delivery service worth it?

posted by on 51 Comments

“Hey,” Kim said one day last week as she was leaving for work. “There’s a package coming today from one of the doctors I work with. To thank all of his hygienists, he’s sending us a trial of HelloFresh.”

“What’s HelloFresh?” I asked.

“It’s a meal delivery service,” Kim said. “Anyhow, it’d be great if you could bring in the package and put the food in the fridge. And it’d be even greater if you made one of the meals for dinner!”

I kissed her good-bye, then promptly forgot what she had told me. (This is par for the course.)

How Does HelloFresh Work?

That afternoon when I returned from walking the dog, a package from HelloFresh was waiting on the porch. I took it inside to open it. The box contained three brown paper sacks, each with a different meal from HelloFresh.

“Oh yeah,” I thought. “I’m supposed to make dinner from one of these. I wonder what they are.”

I opened the bag labeled Pineapple Poblano Beef Tacos. Inside was an illustrated recipe card and a set of pre-measured ingredients. “Seems simple enough,” I said to the dog. Tahleuqah just looked at me as if I were supposed to feed her. That dog is always ready for food.

HelloFresh Recipe Card

When Kim got home from work, I made the tacos. They were amazing. I’m not joking. They were delicious. (The dog agrees.) “You know, I should have taken photos along the way,” I told Kim. “I should write about this at Get Rich Slowly.

“Well, you could always make dinner for us again tomorrow night,” she said. So I did. And this time, I did take pictures.

For round two, the dog and I prepared Sweet-as-Honey Chicken. Here’s the bag and recipe card:

HelloFresh Sack and Card

Here are the ingredients from inside the bag and the other side of the recipe card (with actual instructions):

HelloFresh Recipe and Ingredients

Here’s some of my meal prep:

HelloFresh Meal Prep

HelloFresh Skillet

And here’s the final product:

HelloFresh Finished Meal

“You know what my favorite part of this is?” Kim asked as I served her dinner. “It’s that you can use the paper sack to dispose of your trash while you prep the meal.” (I’m kind of messy in the kitchen.) The dog look hurt. She’s always happy to help us dispose of kitchen trash.

While not quite as delicious as the tacos, the chicken was still very good. And simple. (The HelloFresh recipe cards estimate 20-30 minutes of prep time; for me, that was more like 30-45 minutes. But then I’m always slow in the kitchen.)

How Much Does HelloFresh Cost?

“How much did this cost?” I asked.

“I’m not sure,” she said. “The doctor paid for it. But I think it’s something like $20 per meal. So, since he sent us three meals, that’s about $60 for the week.”

“That seems expensive,” I said. “I should research the numbers.” So, like a good money nerd, that’s exactly what I did. [Read more…]

The four-percent rule for safe withdrawals during retirement: Theory versus reality

posted by on 31 Comments

Last week, I wrote about the problem with retirement spending: How much should you spend during retirement? If you spend too much, you run the risk of depleting your savings. But if you spend too little, you’re sacrificing the opportunity to make the most of your money, to “drink life to the lees”.

One of the guiding principles in retirement planning is that there’s a “safe withdrawal rate”, a pace at which you can access your investments so that your nest egg will last for thirty years (or longer).

For simplicity’s sake, a lot of folks talk about the “four-percent rule”: Generally speaking, it’s safe to withdraw 4% from your investment portfolio every year without risk of running out of money. (This “rule” manifests itself here at Get Rich Slowly when I say that you’ve reached Financial Independence once you’ve saved 25x your annual spending — 33x your annual spending if you want to be cautious.)

Today, I want to take a closer look at the four-percent rule for safe withdrawals — then explore why the theory behind it doesn’t always mesh well with the reality of our daily lives.

The original four-percent rule article

The Four-Percent Rule Defined

Last August, William Bengen (who first proposed the 4% rule in a 1994 article), participated in an “ask me anything” discussion at the financial independence subreddit.

Here’s the top question and answer from that thread (with additional formatting for readability):

Question
Is the 4% rule still relevant in today’s economy? What safe withdrawal rate would you recommend for someone planning for longer than 30 years of retirement?

Answer
The “4% rule” is actually the “4.5% rule” — I modified it some years ago on the basis of new research.

The 4.5% is the percentage you could “safely” withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you “throw away” the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year’s inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950.

Now, on to your specific question. I find that the state of the “economy” had little bearing on safe withdrawal rates. Two things count:

  • If you encounter a major bear market early in retirement, and/or
  • If you experience high inflation during retirement.

Both factors drive the safe withdrawal rate down.

My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%!

However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970’s, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things.

In my opinion, inflation is the retiree’s worst enemy. As your “time horizon” increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006…

If you plan to live forever, 4% should do it.

That’s some helpful information, and it comes directly from a man who has been researching this subject for 25 years. Obviously, it’s no guarantee that a four-percent withdrawal rate will hold up in the future, but it’s enough for me to continue suggesting that you’re financially independent once your savings reaches 25 times your annual spending.

But here’s the catch — and the reason I’m writing this article: From my experience, spending in early retirement is not a level thing. It fluctuates from year to year. Sometimes it fluctuates wildly. [Read more…]

The death of Anthony Bourdain: Thoughts on productivity, pleasure, and depression

posted by on 54 Comments

Warning: This is a rare GRS post that contains salty language. If you don’t like salty language, don’t read this article.

Anthony Bourdain killed himself Friday morning.

“So what?” you might be thinking. “He’s just another fucking celebrity who didn’t know how good he had it.” Maybe you’re right. But his death has weighed heavy on me all weekend.

On Friday morning, as I wrote the weekly Get Rich Slowly email, I thought about Anthony Bourdain. On Friday afternoon, as Kim and I worked in the yard, I thought about Anthony Bourdain. On Friday evening, as we soaked in our new hot tub with a friend, I thought about Anthony Bourdain. Yesterday, I thought about Anthony Bourdain. Today, I thought about Anthony Bourdain.

Now I’m writing this article as an act of catharsis. Maybe it’ll help me to stop thinking about Anthony Bourdain.

The Depression Trap

I believe Anthony Bourdain’s death touched me deeply for a couple of reasons.

  • I was a huge fan. Since listening him read the audio version of Kitchen Confidential a decade ago, I’ve loved his work. Parts Unknown was probably my favorite travel show: raw and real — and filled with food. Bourdain connected with everyone he met. His joy for life was contagious and his mind was sharp.
  • Like Bourdain did, I struggle with depression. All my life, I’ve experienced periodic descents into darkness. The first time this happened, I missed five weeks of sixth grade. In the nearly forty years since then, I’ve developed a variety of coping mechanisms but they don’t always work. In recent months — since the middle of March — the darkness has deepened and I don’t know why. (And just as I missed five weeks of school back then, I’ve been unable to get my work done in the present.)

Let me make it clear that I am not suicidal. Right now, the biggest symptom of my depression is my inability to get shit done. But whereas suicide seems strange and senseless to most everyone else, depressives understand the appeal — even if we’d never consider it personally.

One of the many stupid things about depression is that the condition doesn’t care how awesome your life is. It doesn’t care how successful you are. It doesn’t care how much money you have. Depression is not rational. If it were, it’d be easy to think your way out of it.

Paula Froelich, one of Bourdain’s ex-girlfriends, put it like this:

Tweet about Anthony Bourdain's suicide

Bourdain’s death didn’t just make me introspective. It also led to a couple of interesting conversations about pleasure and productivity — and about what really matters in life. [Read more…]

How much should you spend in retirement?

posted by on 29 Comments

The grasshopper and the antsI spend a lot of time talking with people who have retired early or are otherwise financially independent. From a purely anecdotal point of view, I’d say most of these folks are well-adjusted. They work to maintain balance in life, and especially with their personal finances.

That said, I’ve noticed that a lot of retirees — early retired or otherwise — struggle to know how much they should spend. I believe this dilemma exists for a couple of reasons:

  • First is the life expectancy problem. You don’t know how long you’re going to live. If you did know the precise date of your death (or even the year of your death), retirement planning would be much easier. You’d be able to say, “Okay, I have ten years left and $300,000 in the bank. Based on that, I should be able to spend $30,000 per year.” But you don’t know when you’re going to die, so a lot of retirement planning becomes guesswork.
  • Second is the question of what your money is for? Do you want to leave a legacy for your children (or somebody else)? Do you want to maintain a chunk of change for possible end-of-life medical issues? Or do you want to use your wealth to live life to the fullest while you can? In my case, my ideal would be to die broke. If I could spend my very last penny on the last day of my life, that’d be perfect.

The general response to these two problems is to follow what has been dubbed the four-percent rule. Generally speaking, it’s safe to withdraw 4% from your portfolio every year without risk of running out of money. (There are a lot of caveats to this guideline. To learn more, follow that link to my Money Boss article — or wait for that story to migrate to Get Rich Slowly in a few days!)

The AAII Journal — the monthly magazine from the American Association of Individual Investors — has published two articles in recent months about the problem of spending in retirement. Let’s look at what they have to say. [Read more…]

Money story: Small acts of kindness create social capital

posted by on 11 Comments

This guest post from Christine Hughey is part of the “money stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all stages of financial maturity.

I met Christine in January when I attended Camp FI in Florida. Christine is starting a new Nashville food tour company, so when I spent a week there in April, naturally I let her show me around. It was awesome! In this article, she shares how small acts of kindness have proven to be worth more than she ever imagined.

I’m about to share something that completely changed my life — yet it’s something that I didn’t know much about until a few years ago. It’s a concept called social capital, and I believe that it can change your life too (and make you wealthier in the process).

Now, if you’ve been reading Get Rich Slowly for a long time, you might have seen J.D. write about social capital in the past. He too is a big believer in its power. But many of you have probably never heard of the idea. What is social capital?

How Small Acts of Kindness Create Social Capital

According to Wikipedia:

Social capital is a form of economic and cultural capital in which social networks are central; transactions are marked by reciprocity, trust, and cooperation; and market agents produce goods and services not mainly for themselves, but for a common good.

[…]

Social capital has been used to explain the improved performance of diverse groups, the growth of entrepreneurial firms, superior managerial performance, enhanced supply chain relations, the value derived from strategic alliances, and the evolution of communities.

There’s a lot of jargon in that definition, but what it really comes down to is this: Social capital is all about networking (in a non-slimy way) and about giving without the expectation of return. Although it’s not tangible, social capital is very real and very powerful. It’s also very valuable.

That said, I don’t see social capital discussed much on personal finance and financial independence blogs. I imagine that’s because it’s hard to assign an actual dollar value to it. How do you assign a dollar value to helping somebody move? How do you quantify the savings when your neighbor mows your lawn for you all summer? What’s the price tag on growing flower, fruits, or vegetables, then giving them to your friends and family?

In the world of personal finance, we tend to look at numbers first. Social capital doesn’t work in that way. Social capital is about creating value and creating a positive impact among your social network, whether that value and network are small (like on a neighborhood level) or large (like volunteering time for a larger project).

Social Capital in Real Life

Social capital might make more sense (and seem less abstract) if we look at a real-life example.

My husband was the one that really taught me about social capital. Jack and I came from drastically different backgrounds, and we did very different things for work. While I worked a full-time salary engineering job, he worked as a gig-style “man for hire” entrepreneur.

When we first started dating, I noticed that he was often doing strange favors for people. He owned a truck so he would get calls to help everyone and their friends move. I’ll never forget the time that he got a call from his best friend Robert asking if he could help Robert’s co-worker move a washer and dryer.

Sure enough, early on a Saturday morning Jack was off moving some woman’s washer and dryer to a temporary home. A week later, he got another call to move the washer and dryer into the woman’s new “permanent” home. I consider myself a very nice person, but I couldn’t believe how much time, effort, and gas Jack spent moving the same washer and dryer to multiple locations for someone he didn’t even know.

But as a result, that “random” woman is now one of our very good friends, and Jack will be DJing her wedding this fall.

Other great things have come from Jack’s act of kindness. Robert hired Jack to manage the audio for some of the numerous music festivals that he puts on here in town. Amberly, (the random woman) helped support and promote a new DJ gig that Jack started in 2015. She’s one of his biggest supporters to date.

What now seems like a super small gesture led to over a thousand dollars worth of income for us when we really needed it. [Read more…]

Using the Priority Pass for airport perks

posted by on 6 Comments

This guest post from Marla Taner is an example of the things money nerds do when they get together. I first met Marla five years ago. Since then, she’s become a good friend. Plus, she’s my “travel hacking” mentor. (Travel hacking, for the uninitiated, is the practice of using credit card points and various loyalty programs to get free or discounted flights and hotel stays.) Marla was in town earlier this week, so she took the opportunity to teach me about the Priority Pass.

I met J.D. in 2013 at the first-ever money chautauqua in Ecuador. We see each other just once or twice a year. When we do, we have a lot of fun.

Part of the fun for me is teasing J.D. about his seeming inability to master the basics of travel hacking. Let me give you an example. J.D. first learned about travel hacking in 2011 when some of his friends urged him to sign up for a Chase credit card in order to get 100,000 British Airways miles. (He even wrote about the experience for Get Rich Slowly!)

That was seven years ago and he still hasn’t used the 100,000 Avios he earned as his sign-up bonus. (British Airways calls their airmiles Avios.)

My Travel Miles Balance

What started out as good-nature teasing has turned in this: public shaming. (Sorry, my friend.)

Note from J.D.: The funny thing to me is that one of the GRS readers who saw that article was Brad Barrett. He signed up for the card and got hooked on travel hacking. He now runs the enormously successful Travel Miles 101 website. He’s used his 100,000 Avios. I haven’t.

I’ve come to realize that the only way to teach J.D. about travel hacking — and to convince him to use those Avios — is to show him how it works in real life.

Eighteen months ago, I convinced him to sign up for the Chase Sapphire Reserve card in order to get the 100,000 mile sign-up bonus. Earlier this year, another friend and I showed him how to hack a three-day hotel stay in Clearwater, Florida. And this week, I decided to show him how awesome his home-town airport is.

Money Nerds Unite!

After a great weekend at Camp Mustache in Seattle, Miss Mazuma and I hopped in a car with Emma Pattee and her hubby to make the four-hour drive to J.D.’s house. He and Kim grilled us dinner on their new deck and let us soak in their brand-new hot tub. (We also got to meet their death squad: three cats and a dog who are born killers. I’ll spare you the photo of the dead snake and squirrel.)

I was planning to fly home to Vancouver, B.C. the next afternoon (using just 7500 credit card points for a $220 flight — a 3x redemption value!). I realized this was also a chance to rope my buddies into trying the famous (in travel hacking circles) PDX Priority Pass hat trick.

Priority PassA Priority Pass membership allows you and your guest(s) access to a variety of airport lounges around the world. Most lounges offer perks like comfy seating, light snacks and beverages (often alcoholic), sometimes showers, sleeping areas, etc. The Portland airport is unique in that Priority Pass has partnered with three different food and beverage outlets to offer members incredible value while waiting for your next flight.

J.D. and I had each scored a Priority Pass membership when signing up for our Chase Sapphire Reserve cards. (If you’re a frequent traveler, the Chase Sapphire Reserve offers other great features such as TSA Pre-Check or Global Entry, no foreign transaction fee, and more. The card is expensive — $450 each year — but includes a $300 annual travel credit, which reduces the net cost to $150 per year.)

What sets the Priority Pass offer for Portland apart is that you can visit all three participating establishments on the same day. You simply show your Priority Pass membership card and your boarding pass at each location, then you can enjoy the rewards!

With flights booked out of Portland, the four of us headed to the airport to enjoy an adventure.

The Priority Pass in Action

Our first stop was Capers Market on Concourse D. This cute little shop sells to-go food along with local Oregon products, such as Olympia Provisions charcuterie, local cheeses, coffee, chocolate, and more. Capers Market also has a wide variety of local wine. The Priority Pass allows the carholder and guests to each spend $28 on products in the store. (But not on to-go alcohol.)

The four of us loaded up on loot. Together, we left with $112 of great stuff. It was fun to watch J.D. try to figure all of this out. But once he realized that tons of people do this every day, that it’s part of what his Chase Sapphire Reserve annual fee goes toward, he relaxed and enjoyed the ride. Look at his concentration in this photo!

Using the Priority Pass in a shop

Our next stop was the Capers Cafe, a short walk away on Concourse C. This large restaurant had plenty of seating and an inviting bar area with an extensive menu. We told our server we were Priority Pass members, and in turn he explained that the program was popular with his guests. “Probably half the folks who eat here use the Priority Pass,” he told us.

Once again, we had $112 ($28 each) to work with. Because food and drink at Capers Cafe are reasonably priced — the Portland airport has rules against exorbitant price mark-ups — and because we’re money nerds, we stretched our budget to include a nice bottle of wine, an appetizer platter, four lunches, and a shared dessert.

Using the Priority Pass at a restaurant

The food and service were great. We tipped generously and left stuffed — but not too stuffed. We still had to complete our Priority Pass hat trick!

Our final stop was the House Spirits Distillery, also on Concourse C. (This is the world’s only airport spirits tasting room.) By this point, we were openly giggling at our bounty. It seemed to good to be true.

Again, we were welcomed by a friendly staff member who was very familiar with the Priority Pass. She explained our options. Our $28 allotment could buy us each a cocktail sampler (seven mini-cocktails) or we could choose other more modest options like the five-glass whiskey or cocktail flights. (You can’t use the Priority Pass for bottle or merchandise purchases, but J.D. ended up paying cash for a bottle of whisky and a branded mug.)

Using the Priority Pass at a bar

It’s important to note that while the Priority Pass is always awesome because it allows you access to airport lounges, it’s only in Portland that you can enjoy this sort of adventure with the program. And even the deal there is subject to change at any time.

So, there you have it: The Priority Pass granted us $336 of value and one afternoon of debauchery. It was fun catching up with great friends before heading out in different directions. Thanks to J.D., Miss Mazuma, and Emma for making my PDX Priority Pass hat trick dream come true. And thanks to Chase and Priority Pass for the excellent value!

Best of all, I think I may have finally sold somebody on the benefits of travel rewards. Right, J.D.?

Marla doesn’t have a blog but she’s a familiar face at various blogging and money meet-ups, where she frequently gives presentations on travel hacking. She’s also been on a couple of podcast recently: Mad Fientist and Choose FI.

“How much house can I afford?”

posted by on 25 Comments

“How much house can I afford?” Answering this question correctly is one of the keys to building a happy, wealthy life. Unfortunately, there’s a vast housing industry in the U.S. that’s geared toward providing the wrong answer.

You see, housing is by far the largest expense in most people’s budgets. According to the U.S. government’s 2016 Consumer Expenditure Survey, the average American family spends $1573.83 on housing and related expenses every month. That’s more than they spend on food, clothing, healthcare, and entertainment put together!

Too many folks struggling to make ends meet focus their attention on fine-tuning their budget. They try to save big bucks by clipping coupons, growing their own food, and/or making their own clothes. While there’s nothing wrong with frugal habits — I applaud everyday thriftiness! — all of these actions combined won’t (and can’t) have the same impact on your budget as keeping your housing payments affordable.

Part of the problem is what I call the Real-Estate Industrial Complex, each piece of which has a vested interest in convincing consumers that bigger, more expensive homes are better. Real-estate agents, mortgage brokers, home-shopping shows, and glossy magazines all encourage folks to buy at the top end of their budget. But buying at the top end of your housing budget is dangerous.

Buying a home is a huge decision, financially and otherwise. If you’re going to purchase a place, it’s important to know how much house you can truly afford.

How much house can you afford?

Debt-to-Income Ratio

Economists have used decades of financial stats to create computer models to predict how much people can afford to spend on housing and debt. Banks use these models to figure out how much they think you can afford to spend on housing.

Traditionally, lenders use what’s called a debt-to-income ratio (or DTI ratio) — a measure of how much of your income goes toward debt every month — to estimate how much you can afford to pay for a home without risk of defaulting. This might sound complicated, but it’s not.

To find this ratio, divide your monthly debt payments by your gross (pre-tax) income. So, for example, if you pay $400 toward debt every month and you have an income of $4000, then your DTI ratio is 10%. If you pay $800 toward debt on a $4000 income, your DTI ratio is 20%. The lower your debt-to-income ratio, the better.

Banks and mortgage brokers look at two numbers when deciding how much to loan:

  • The front-end DTI ratio (sometimes called the housing expense ratio), which includes only your housing expenses: mortgage principle, interest, taxes, and insurance.
  • The back-end DTI ratio (also known as the total expense ratio), which include all of the above plus other debt payments like auto loans, student loans, and credit cards.

The key thing to understand about debt-to-income ratios is that they’re used to estimate the lender’s risk, not yours. That is, your mortgage company uses them to check whether they think you’ll be able to make the payments — not whether you can comfortably make the payments.

If you want room in your budget for fun, you should opt for a lower debt-to-income ratio than your real-estate agent and mortgage broker say you can use.

If you’re a money nerd, you can read more about debt-to-income ratios at Fannie Mae’s website.

How Much House Can You Afford?

During the 1970s (before credit-card debt was common), DTI wasn’t split between front-end and back-end. There was only one ratio, and it was 25%. If your mortgage, taxes, and insurance costs were less than 25% of your income, people assumed you could make the payment.

This is still an excellent rule of thumb: Spend no more than 25% of your budget on housing. (In fact, this is the number that money guru Dave Ramsey advocates.)

That said, debt-to-income guidelines have relaxed over the years.

  • When my ex-wife and I bought our first home in 1993, our mortgage broker told us that our front-end DTI ratio had to be 28% or lower, meaning we couldn’t pay any more than 28% of our gross income toward housing. The back-end DTI ratio was capped at 36%, which meant that our housing expenses and other debt payments combined couldn’t be more than 36% of our income.
  • When my ex-wife and I bought a new home in 2004, the accepted DTI ratios had grown by 5%. “That 28% figure is outdated,” we were told. “Most people can go as high as 33%.” The back-end ratio had been raised to 38%.
  • According to the Fannie Mae website, in 2018 maximum back-end DTI ratios are up to 45% (and sometimes even 50%). These numbers are insane. Nobody should be spending half of their gross income on debt — not even mortgage debt! That’s a recipe for financial disaster.

Here’s a little table I whipped up to show what sort of housing payment you’d be looking at based on your pre-tax income (the left-hand column) and various debt-to-income ratios (the header row):

Debt to Income Ratios for various levels of income

A 5% increase in your debt-to-income ratio might not seem like a big deal. But when you’re talking about a house payment, it’s huge.

In 2016, the average American household earned $74,664 before taxes. Using this, a 5% change would be $3733.20 per year or $311.10 per month. Many folks lost their homes during the housing crisis because they took on mortgage payments that were just $300 more than they could afford each month. [Read more…]

The proactive homeowner: How to stay on top of home improvement

posted by on 28 Comments

Yesterday was an exciting day at the Rothwards household! After three weeks of demolition and construction, we installed our new hot tub.

It took six men an hour of maneuvering before we managed to set the spa into place…but we did it. And we didn’t break anything. Now it’s a matter of completing the decking and roofing, then Kim and I will be able to enjoy our remodeled outdoor oasis!

Installing our hot tub

We’re eager for construction to be over. Since buying our “English cottage” last summer, we’ve poured tons of money and time into a variety of renovations. It’s been a non-stop construction zone.

You see, during the seventeen years the previous owners lived here, they performed very little maintenance and upkeep on the home and property. When we had the place inspected before purchase, the inspector raised a lot of concerns:

Warning from inspection report

The inspection report was so dire that Kim and I almost passed on the purchase.

After we did decide to buy the place, I vowed that I’d be a proactive homeowner. Instead of allowing things to fall into a state of disrepair, I wanted to fix everything that was broken and then stay on top of home improvement in the years to come.

Today I want to share four specific actions I’ve taken to try to be a proactive homeowner. [Read more…]

Does the American Dream require a big American home?

posted by on 90 Comments

This is a guest post from Steve Adcock, who writes at Think Save Retire, a blog about early retirement and Financial Independence. Steve and his wife retired in their mid-thirties to travel full time in an Airstream trailer. For more info, check out their YouTube channel.

One of the most deeply-embedded pieces of the “American Dream” is the desire for a large, spacious home with lots of sitting rooms, corners, nooks, and crannies. Large dining rooms and other entertainment spaces! Wrap-around porches! Two- or three-stall garages and one heck of a master suite!

To many of us, a large home is a mark of success. A big house indicate status, and the more space we’re able to call our own, the more successful we look and feel.

But, what if I told you that most of us don’t use even a fraction of that space? That’s not just me talking. A research team affiliated with the University of California studied American families and where they hung out the most inside their homes, how (and where) clutter builds, and the general stress level associated with living big.

The findings were overwhelming: The majority of the space in our homes is wasted.

How We Use Our Homes

As J.D. shared on Saturday, researchers at UCLA conducted a detailed study of 32 dual-income families living in the Los Angeles area, one of the first studies to document so vividly how we interact with the things for which we’ve paid good money. The findings were not pretty. In fact, they helped prove how little we use our big homes for things other than clutter or objects that hold little intrinsic value.

From the press release:

The researchers doggedly videotaped the activities of family members, tracked their every move with position-locating devices and documented their homes, yards and activities with reams and reams of photographs. They asked family members to narrate videotaped tours of their homes and took measurements at regular intervals of stress hormones via saliva samples.

When I originally wrote about the study, I took special note of where families spent the large majority of their time. In the following UCLA-published diagram of one family that was studied, we can easily observe a truth that’s probably common among so many of us: We tend to congregate around two primary areas of the home: food preparation/eating and television.

Time spent in the home

While this diagram only represents a single family, the results of the study suggest that this family is very typical of most of those studied, and the majority of traditional homes. [Read more…]