My world is on fire.
As you may have heard, much of Oregon is burning right now. Thanks to a "once in a lifetime" combination of weather and climate variables -- a long, dry summer leading to high temps and low humidity, then a freak windstorm from the east -- much of the state turned to tinder earlier this week. And then the tinder ignited.
At this very moment, our neighborhood is cloaked in smoke.
Hello! My name is Wendy Mays, and I'm super happy to share a bit of my story. In the past couple of years, my husband and I have taken several big steps to change our financial future.
From the outside looking in, it appeared we had it all: a perfect family in a beautiful, Pinterest-worthy home in sunny San Diego, California. We'd reached the pinnacle. We were living the American Dream.
When people talk about saving money, DIY is one of the first things that comes to mind.
- Learn how to fix things around the house!
- Change the oil in your Prius!
- Make your own cleaning supplies!
Do all of this (and more) and you could save hundreds of dollars a year.
And that’s great. I know lots of folks that enjoy growing a lush garden resulting in delicious produce (that can be canned or frozen) in due season. There are people in my life that find doing laundry calming, and others that will happily take on any domestic project that comes their way. Personally, I enjoy doing the dishes.
While I’m happy spending time on the things that I like, there are certain things that I hate doing — and that I will happily outsource to others.
Am I perfectly capable of cleaning my home and mowing the lawn? Sure. But why should I spend the time doing these things when I can pay someone else to do them? Here are some reasons I spend money to outsource parts of my life.
I Can Make More Money
The number-one reasons I outsource tasks I could do myself is that by doing so, I make more money. Wait, what?
When I talk about spending $200 a month on lawn care or $20 an hour on house cleaning services, many people are surprised to find that I make money by outsourcing these mundane chores.
I’m a freelance writer, so any time I free up can be used to write an article, interview a source, or work on edits. Rather than spending two hours cleaning the house, I can pay someone $40 to do it instead — and make $500. That’s a net gain of $460 each week, or about $1,840 per month.
There have been times that I take my laptop with me to get the oil changed. Jiffy Lube takes care of it for $65 and I can do work amounting to about $200 in the time I’m sitting there. That’s a net gain of $135.
In the past, I’ve used services like Blue Apron and HelloFresh to plan my meals and deliver the ingredients. That saves me the time and hassle of meal planning and grocery shopping, and allowed me to focus on other things. However, with my travel schedule, these types of services haven’t been meeting my needs.
Instead, with Instacart now available in my area, I’ve switched to getting someone else to do the shopping, while I use a service like $5 Meal Plan to plan my meals and provide me with an ingredient list.
No matter how I do it, though, the cost of these services is much less than what I can make doing a little extra work. Whether you want more time to work on a side gig, or take action to grow your business, the investment you make in outsourcing can yield dividends later.
I grew up in the country. My family always had a vegetable garden. For us, gardening meant a large plot, plowed and raked, then planted with long, widely-space rows of vegetables. It also meant weeding and hoeing, weeding and hoeing. Lots and lots of weeding and hoeing.
Gardening was a chore.
When my ex-wife and I bought our first home, we both wanted a vegetable garden, but we didn't want the drudgery that came with it. Besides, we didn't have a big space in the country — we had an average city lot. Fortunately, we discovered Mel Bartholomew's Square-Foot Gardening.
Bartholomew's method allowed us to enjoy reasonable crop production in a small space. With his technique, almost any homeowner can grow her own food.
How Square-Foot Gardening Works
The square-foot gardening concept is simple: Build a raised bed. Divide the space into sections of one square-foot each. Lastly, plant vegetables (and/or flowers) in just the amount of space they need.
The advantages of this system include reduced workload, less watering, easy weeding (and not much of it), and easy access to your crops. This is a great way to learn to grow some of your own food.
Back in the 1990s, Kris and I had raised beds similar to these (from Flickr user johnyaya).
We built our square-foot garden one Saturday in mid-April. I spent the morning constructing three raised beds out of two-by-sixes. Each bed was twelve feet long, four feet wide, and twelve inches tall. At the time, I most certainly was not a handyman, yet I was able to build these in just a few hours. It was fun.
Digging was less fun.
I spent the afternoon double-digging three patches in our lawn. We maneuvered the frames into place, leveled them, and then filled them with rich soil (purchased from a nearby nursery-supply center). Finally, we created a grid over each bed using tacks and twine. When we were finished, our raised beds looked like orderly grids.
After we built the raised beds and outlined the growing space, we followed the guidelines in Bartholomew's book.
"Oh good," Kim said when I rolled out of bed yesterday morning. "I’m glad you’re up." She gets up at 5:30 for work most days, but I tend to sleep in. Especially during allergy season.
"Huh?" I grunted. It was 6:10 and I was very groggy. My evening allergy meds kick my butt. Plus, I hadn't had my coffee yet.
"Something’s wrong with the bathroom sink," she said. "Look. It’s leaking. The floor is soaked." She wasn't kidding. The bathmat was drenched. When I looked under the vanity, I was greeted by a small lake.
"Ugh," I grunted. This wasn't how I wanted to start my day.
Kim kissed me goodbye and hurried off to work. I pulled on a pair of pants, poured some coffee, pulled out the vanity drawers, and got to work.
I was worried that I might have caused the leak when I replaced the sink's pop-up assembly last month, but no. The problem was obvious: The hot water line to the bidet (which I installed in October) had worked itself loose. (By the way, I love my bidet. Too much information, perhaps, but it's some of the best sixty bucks I've ever spent.)
Fortunately, the fix was simple. I reattached everything, then added a light layer of tape to prevent similar problems in the future.
Note: As a safety measure -- to make sure I wasn't missing anything -- I took photos of the issue and made a trip to the hardware store to ask their advice. They told me everything should be fine.
This might seem like a small thing to some folks but it’s a big deal in my world. You see, I’ve never really been a DIY type of guy. I used to get overwhelmed by home improvement. I felt unprepared, incompetent.
More and more, though, I’m learning that I can do it myself. It just takes patience and perseverance. And the more projects I complete, the more confidence I gain.
My friend Amy recently wrote with an interesting dilemma. "Should I pay off my mortgage early?" she wonders.
Amy has a high-paying job and has managed to save enough that she could be completely debt-free if she wanted to. And she kind of wants to! But is this the best choice? She's aware that this is a nice problem to have — but it's still a bit of a muddle. She'd like some guidance.
Here's an abridged version of her email:
I'm wondering if you have any advice for me related to paying off a mortgage vs. keeping it for tax purposes.
Here’s the basic rundown: I have 22 years and $103,000 left on a 30-year fixed-rate mortgage at 3.95%. My monthly payment is $668 per month. I will pay about $48000 in interest this year. I pay both my taxes and insurance out of pocket annually.
The past two years, I've made close to a quarter of a million dollars each year, and this year I will likely exceed that amount. This is a wonderful place to be. With no other debt, I'm contemplating whether I should completely pay off my mortgage in one swoop come November when I get my bonus.
I have advice coming from both sides. My accountant warns me against it, as I would have no other write-offs to offset my high income. However the freedom of being DEBT FREE sounds amazing, even if it comes with a high tax bill.
I would love your advice (or the advice of your readers, if this offers an opportunity to share with them).
My stock answer to this question -- which I get a lot -- has always been: This is a no-lose situation. Deciding whether you should pay off your house is a case where either option is awesome.
Mathematically (and financially), the best choice is almost always to carry the mortgage. However, many people receive a huge psychological boost from not having a mortgage. In other words, this is one of those situations where the smart financial decision and the smart psychological decision aren't necessarily the same.
Although Amy is asking specifically about the tax implications, let's start by examining the Big Picture.
The Pros and Cons to Paying Off Your Mortgage
Just so everyone is on the same page, here's a quick look at the pros and cons to paying off your mortgage. There are advantages and disadvantages to both choices. Are certain advantages more important than others? You make the call.
Note: This is a substantial re-write of an article I first published more than twelve years ago. (Yikes, I'm old!) I've opted to keep some of the older comments if they had good suggestions.
Earlier this week, I wrote about my quest for quality pajamas. I recently paid $80 to purchase a pair from Filson, a company I trust for well-made goods. It's my hope that these will be the last pair of pajamas that I ever purchase. My goal was to "buy it for life".
This experience reminded me of two other companies that I love for their top-notch stuff.
- The first is a company called Best Made, which aims to make and sell "the finest, most beautiful and useful products made by any company anywhere". And they do. Best Made offers an esoteric collection of clothing and household items, all of which offer quality reminiscent of your grandmother's era. The catch? The quality comes at a higher cost.
- Or there's the Portland-based Schoolhouse company (formerly Schoolhouse Electric), which makes and sells a variety of lighting, hardware, and furniture for the home. I've purchased a few things from Schoolhouse over the years, and I've been blown away by the quality. The items were expensive up front and I was hesitant to purchase them, but my reservations have vanished with time and usage. The blanket covering my feet at this very moment, for example, cost $250 (I think) but will last the rest of my life.
Here's something I've learned over the past fifteen years: One way to practice financial prudence while living the good life is to buy quality products, products that are a pleasure to use, products that will last a lifetime (or at least a decade).
Today, let's talk a little about choosing quality over price. Let's talk about the "buy it for life" philosophy.
How to Find the Good Stuff
The first challenge is to figure out how to find the good stuff. When you're ready to make a purchase, how can you know which items are quality and which are run of the mill?
Sometimes you'll know which company offers a high-quality version of whatever it is you need to buy, either from personal experience or from paying attention to friends and family. Or, if you don't know off the top of your head, you know whom to ask for more information. If I wanted to buy audio gear, for instance, I'd ask my brother. He's an audiophile and could steer me in the right direction.
Most of the time, however, you'll have to do some research.
Over the past three months, I've written a lot about buying and owning a home. Much of what I've written could be construed as anti-homeownership. Hear are some of the articles I've published recently:
- A brief history of U.S. homeownership.
- The high cost of homeownership.
- Does the American Dream require a big American home? (Spoiler alert: No.)
- Is your home a better investment than the stock market? (Spoiler alert: No.)
- Is it better to rent or to buy? (Spoiler alert: It depends.)
Last week, a GRS reader named Carmine left this comment:
I appreciate this and other recent posts on the perils and difficulties of home ownership, but they’re sort of piling up into a major downer as I read them!...Can’t you write something talking about the payoffs that home ownership can bring?
I can understand how Carmine might view all of this as a downer. And I can see how anyone might think I'm anti-homeownership. But here's the thing: I'm not. After all, I own my home, and I like it.
Today, let's take a look at some of the advantages of homeownership.
I'll admit it: There are times that I think everything that needs to be said about personal finance has been said already, that all of the information is out there just waiting for people to find it. The problem is solved.
Perhaps this is technically true, but now and then -- as this morning -- I'm reminded that teaching people about money is a never-ending process. There aren't a lot of new topics to write about, that's true (this is something that even famous professional financial journalists grouse about in private), but there are tons of new people to reach, people who have never been exposed to these ideas. And, more importantly, there's a constant stream of new misinformation polluting the pool of smart advice. (Sometimes this misinformation is well-meaning; sometimes it's not.)
Here's an example. This morning, I read a piece at Slate by Felix Salmon called "The Millionaire's Mortgage". Salmon's argument is simple: "Paying off your house is saving for retirement."
Now, I don't necessarily disagree with this basic premise. I too believe that money you pay toward your mortgage principle is, in effect, money you've saved, just as if you'd put it in the bank or invested in a mutual fund. Many financial advisers say the same thing: Money you put toward debt reduction is the same as money you've invested. (Obviously, they're not exactly the same but they're close enough.)
So, yes, paying off your home is saving for retirement. Or, more precisely, it's building your net worth.
But aside from a sound basic premise, the rest of Salmon's article boils down to bullshit.
"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.
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):
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.