Is Renting A House Throwing Away Money? How Should I Save For A Down Payment While Renting?

 * I recently answered these questions for a young friend in the military and thought others may find the information useful. 

 ”Do you have any tips on saving for a house while paying for an apartment? Or is it better to go straight to a house? I feel like I’m throwing money away renting.”

Answer:

This will be a bit long but I want to give you a solid answer because many people are in the same place.

 

First I don’t think rent is throwing money away depending on your situation. If I remember correctly you’re not in CA anymore but here, 100k of household income can still qualify you for low-income subsidies.

 

With the cost of housing being so high many people are taking housing payments up to 45% of their income. In this case, I definitely don’t think it’s a good idea. Housing should be no more than 35% of your after-tax income and I would love to see under 25%. 45% will make you house poor.

 

Renting can be great if you’re low on cash savings or simply don’t want to deal with the hassle. Buying can have big benefits as well but there are also higher costs. You have to pay for all repairs, taxes, and there are no guarantees it will go up in value. In fact, most home values barely keep up with inflation. You also need cash savings in case something breaks.

 

But long-term, owning typically wins.

 

The other challenge with buying is that if you’re young and have the potential to move a lot, the fees to sell and buy another house can add up and seriously hurt any gains you’ve made. And no you shouldn’t move out of state and keep the rental. 🤣

 

To answer your question about saving for a house while renting, if your goal is to own, this is how I would recommend approaching it.

 

Take your household income (for both spouses if married) after taxes, but not including any retirement contributions and figure out what about 25% of that number is. Then use this calculator

 

It will tell you the mortgage amount you can afford based on that payment.

 

Once you know that, if you can buy in your area then that’s great. Keep in mind you’ll need money for a down payment and also closing costs. There are many down payment assistance programs as well. But you will still need something saved because they usually make you pay some fees and/or have reserves.

 

So how do you save?

 

1. Create monthly budget.

2. See how much is left over.

3. Estimate how long you need to save to at least have 5% down of the property you want.

4. If it will take too long, get the cheapest rental you can stand and lower your costs short term until you can hit your goal.

5. If it will still take too long start a side business/get another higher paying job.

6. Also look for down payment assistance programs for first time buyers to help you hit your goal. There are many.

 

If you ever need more help I’m always here. For younger folks I’m happy to do one off coaching sessions to help you get started and get a basic plan in place.

-Jason 

 *hopefully if you stumble on this blog post while browsing the inter webs, it helps you out. 

Public Service Loan Forgiveness Application is LIVE!!

This is a big time in student loan land. This week the official application for Public Service Loan Forgiveness (PSLF) is out! You can find the application here.

“I have big student loans I want to be forgiven, what does this mean for me?”

Well, if you entered the PSLF program right when it opened up in October 2007, and have been on a qualifying repayment plan (PAYE, REPAYE, IBR, ICR) there’s a chance you could be making your 120th qualifying payment soon and are ready to submit for the forgiveness of the remaining balance.

However, for most people, this is not likely. Most people have entered the program later on and may still have some time until they are ready to submit for forgiveness.

Here’s the good news…

In all honesty, we didn’t even know if any of this would be happening. Until now, there was never even an application. Just stated requirements.

It's been a 10-year window of hope until you can get your loans forgiven and has had a lot of people taking big risks and potentially lower paying jobs in the public service sector banking on this all coming through.

It still remains to be seen how long the processing time will be until all balances say $0.

But, even though no one’s loans have been ‘officially’ forgiven from PSLF yet, the application and defined requirements bring a big breath of relief to many hopefully borrowers.

What if you don’t work in public service? Can I still get my loans forgiven?

Sure, you can. You will just be on a 20 or 25-year forgiveness timeframe. Today may be that halfway point.

The big difference between the two programs is that with PSLF, the complete remaining balance is forgiven TAX-FREE.

If you choose the longer term forgiveness programs, as of now, the balance forgiven will be taxable income.

Does that sound scary?

It could be, but it is also expected that by the time the second round of student loan forgiveness comes in, that Congress will enact something to help current borrowers.

With 44 million borrowers currently and $1.4 trillion of outstanding education loans, this could be a huge impact on the economy.

There is also talk of President Trump implementing a new forgiveness plan so we will see how that goes.

The big question for many borrowers is if they should pursue forgiveness or simply sacrifice for a few years and pay off the debt.

A general rule of thumb is that if you can pay off the debt in less than 5 years, it may make sense to do so. But, if you’re in a situation where it doesn’t seem like the math on paying off will ever make sense, then maybe the best idea is to go after the most forgiveness possible and take what money you can to invest in your current situation.

If you should need help figuring this whole thing out, what direction to take, what student loan forgiveness program to pursue, how to save for an emergency fund, house or even a vacation next year, set up a free consultation with me personally at kisplanning.com/apply.

 

Special Announcement: KIS Financial Planning Now Offers Socially Responsible Investing (SRI)

What is Socially Responsible Investing (SRI) and why does it matter?

Socially responsible investing, also known as ‘responsible’ investing, is important to people that want to invest according to their values. In the past, investors either had to pay much higher fees or simply look past companies in their portfolio that may participate in non-socially responsible activities.

In general, socially responsible investors encourage companies to include social good in their practices like environmental stewardship, diversity, human rights and consumer protection.

These investors also prefer to avoid companies that promote negative products and services like alcohol, pornography, gambling, weapons, tobacco, contraception/abortion, and fossil fuel production.

The areas of concern for Socially Responsible Investing can be summarized under the heading of ESG issues: environmental, social justice, and corporate governance.

The history of SRI may date back to 1758 when the Quakers prohibited participating in the slave trade -- buying and selling of humans.

The modern era of socially responsible investing started in the 1960’s in the U.S. when socially concerned investors sought to address the equality for women, civil rights, and labor issues.

You may also remember a photo from 1972 of a 9 year old girl during the Vietnam war. She was naked and running toward the photographer with her back burning from napalm. This incited outrage and protests against Dow Chemical, the manufacturer of the napalm and also many other companies profiting from the Vietnam war.

Using ESG Factors to Define an SRI Approach

A significant and obvious aspect of improving a portfolio’s ESG score is reducing exposure to companies that engage in undesirable activities in your investment portfolio. Companies can be undesirable because their businesses do not align with specific values—e.g. selling tobacco, military weapons, or civilian firearms.

Other companies may be undesirable because they have been involved in recent and ongoing ESG controversies and have yet to make amends in a meaningful way.

ESG controversies include:

  • Environmental controversies related to energy and climate change, land use, biodiversity, toxic spills and releases, water stress, and/or operational waste. A recent example is the BP (Deepwater Horizon) oil spill from 2010.

  • Corporate governance controversies involving fraud, bribery, and controversial investments. A recent example is Wells Fargo’s recent controversy where the company may have created as many as 3.5 million fraudulent accounts in the last 15 years.

  • Labor controversies like discrimination and other violations of International Labor Organization standards. For example, Sterling Jewelers is embroiled in a class action lawsuit alleging gender discrimination and sexual harassment within the company.

  • Customer controversies involving anti-competitive practices, privacy, and data security, and product safety. Remember the  where 500 million user accounts were hacked?

But SRI is about more than just adjusting your portfolio to minimize companies with a poor social impact. Based on the framework of MSCI, a leading provider of ESG data and analytics, a socially responsible investment approach also emphasizes the inclusion of companies that have a high overall ESG score, which represents an aggregation of scores for multiple thematic issues across E, S and G pillars as shown in Table 1 below.

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If you consider yourself to be a socially responsible investor and would like to learn more, you can contact us here. Or, utilize our automated account opening process and get started by opening your account here.