Owning a home builds equity, but sometimes sticking with a rental is a better deal. Those questions and more in this week's mailbag.?
By Trent Hamm,?Guest blogger / May 11, 2013
A for rent sign is seen on the front door of a home in Riverhead, New York. According to Hamm, the equity built through home ownership isn't worthwhile if it buries you in debt you can't afford.
Shannon Stapleton/Reuters/File
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What?s inside? Here are the questions answered in today?s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
?1. Catch-22 with home loan
?2. Haircut value
?3. Quality of school matters?
?4. Making quadruple batches
?5. The value of commute length
?6. Uses for vegetable remains
?7. Cash for emergency fund
?8. Professional dress
?9. Returning to the workforce
?10. Move first?
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Trent Hamm The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds ? we just want simple ways to manage our finances and save a little money.
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I?ve had the privilege this week of eating lunch with a different lunch companion every single day.
This simple act has led to the formulation of a lot of great ideas, a lot of laughs, and a lot of stronger relationships.
Eating lunch with a friend or a person you want to know better doesn?t have to be expensive. Most of my lunches have been leftovers or peanut butter and jelly in a brown paper bag.
Even if it had been expensive, it would have been worth every penny for the great lunchtime conversations.
Q1: Catch-22 with home loan
?I?m in a catch-22 position and I can?t figure out what to do. I am due with our first child this summer. Currently, my husband and I both work but I will stop receiving paychecks in August. I?m a teacher, and my ultimate plan is to start an in-home daycare/prechool to supplement our income while I stay home. The problem is, we live in a small apartment and I cannot do the daycare situation there. We need to have a house with space to do this.
Problem is, how to qualify to get the house with one income? We live in a very high cost of living area (DC) so I?m worried about qualifying for a loan. We have great credit scores and no debt at all, and about $20,000 in the bank, but my husband only makes about $46K which means we?ll have a hard enough time finding a house much less getting a loan for it. Once I?m not longer making my salary, we will be able to cover all our current bills but will not be able to save any money every month until I?m making some type of income as well. We?re fortunately in good shape besides this (great retirement savings, we live very cheaply and have no debt. We each own a car in good condition and have been saving 2/3 of our income every month for the last 2 years) but soon with half the income, that security will disappear.
If we can?t get a house, we can continue renting, which is basically throwing money away considering how expensive it is around here, and it would keep me from my potential income source. I?m confident that if we have a house (even a small one) with a decent space for this daycare, that I would be able to make at least as much as my current salary. I?m a trained teacher with a master?s in education, and there is a lot of demand in my area for childcare. I think within a year I could work up to making a decent supplemental salary, and we?d have no problem affording a house but it?s the initial qualifying process I worry about.
Any suggestions? Should we go ahead and start looking for loans/talking to a realtor and trying to buy a house, or are we unlikely to qualify? And if it turns out we cannot get a house, do you have any other suggestions for making it over time? My husband is already looking for better paying work, but not having a lot of luck. We really can?t swing moving to a lower cost of living area without any job security, connections, etc. Continuing my current job is not an option, though I could do some smaller-scale babysitting. I feel like the daycare is all I want to do, and it?s our only good option for making it financially, but I am so worried we won?t be able to get a house. I?m not that familiar with the entire home-buying process and don?t know how to move forward with it.
Any advice would be greatly appreciated. Is there something I?m missing here??
?- Jenna
First of all, renting isn?t ?throwing away money? in a lot of situations. Let?s say you?re buying a home for $300,000. With a reasonable thirty year loan, you?re paying almost $1,000 a month in interest. What about property taxes and homeowners insurance? That money just vanishes into thin air ? $1,500 a month, at least. If you can rent for less than that, that?s what you should be doing. In fact, if it?s even close, you?re better off renting because then you don?t have to deal with the cost of maintenance and repairs.
?But I?m building equity!? If you?re spending more on interest, property taxes, homeowner?s insurance, maintenance, and repairs for your home each month than you?re spending on rent, you?re not building equity ? you?re losing it. The only reason you?re not building equity in the apartment in this situation is that you?re not investing that money you?re saving over the costs of home ownership.
I can?t assess what your likelihood of being able to earn signficant money with an in-home daycare actually is. To figure that out, market research would be in order. You can?t simply assume you can put out a shingle and people will beat a path to your door. Is there a competitive market for daycare providers? Are the ones near you all full to the brim or are there spots available at them?
If it is clear that you have a genuine business opportunity in the area after the market research, then I would simply find any kind of work until you get the home loan secured, then reassess what you want to do. However, I don?t think switching to the home situation is the financial no-brainer that you?re making it out to be, though.
Q2: Haircut value
?What is the value of a good haircut? The barbershop I always use does a great job, but it costs $24 per cut. A new shop across town charges only $11 per cut. I get my hair cut twice a month, so that adds up to serious coinage.
?- Ryan
There?s no harm in trying the other place. If you?re not happy with the cut, you can return to your regular barber in two or three weeks to get it fixed.
Very few places produce genuinely bad haircuts. Some might produce cuts that aren?t exactly what you want, but they?re rarely disastrous, particularly on men.
I have found that a barber that can repeatedly produce exactly the cut you want is a valuable thing to have. However, for me, I am that barber. I can get the cut I want with a pair of clippers pretty efficiently.
Q3: Quality of school matters?
?I?ve decided that I want to pursue my MBA. Is there a caliber of business school (maybe the ?sweet 16? or a top 10 institution) for which you would be willing to quit your job to attend fulltime? Most elite programs don?t have part-time degrees anyway. Is the degree worth the cost (including opportunity cost of not working for 2 years)? Would you pass on a top 10 school and go for a part-time in order to keep your current job?
?- Evan
It really depends on what your current job is and your financial state before you make that leap.
If you?re debt free but you?re working at McDonalds, then going to business school is a no-brainer. If you?re making $100,000 a year as a software engineer and you?re carrying a $200,000 mortgage, then there?s probably no business school out there that makes sense.
The question you need to ask yourself is whether you can make ends meet while going to business school. Can you pay your monthly bills? If you can pull it off, then a good school is probably worth it.
Q4: Making quadruple batches
?I?ve read many books and articles and stories where it is suggested that people make quadruple batches of meals and store the left overs. Whenever I do this I usually wind up with some freezer burnt food that has to be thrown out. It seems wasteful to me.
?- Jill
Most people that I know that make double (or more) batches of meals have a schedule where they eat those double batches quickly.
For example, let?s say I make a quadruple batch of lasagna on Saturday the 1st and a quadruple batch of stew on Sunday the 2nd. I would probably pencil in lasagna on Monday the 8th and every other Monday after that, and I?d pencil in stew on Wednesday the 10th and every other Wednesday after that until the food was gone. (On Tuesday, we?d eat leftover lasagna.)
If you?re making quadruple batches of food you don?t want to have that often, then you shouldn?t be making quadruple batches of that particular meal.
Q5: The value of commute length
?you make good points in the financial decisions and quality of life regarding the location of your home. however, a huge deterrent to a good quality of life is the length of a commute. in the area of st louis MO, mass transit is almost nonexistent. we have lived here for many years and our kids live here, so we will not relocate. even before i married, if my job changed, i moved close to it because i couldn?t stand a commute of more than about 15 minutes. now, i see the terrible price many of our children pay by having their parents? arrival home after work delayed by long commutes or worse still, younger kids who are picked up from latchkey programs, get a drive thru McD dinner during their one hour evening commute, and have almost no family time. riding in the car with mom or dad just doesn?t qualify as quality time in my book. further, i believe there is a positive correlation between the length and time of a commute and the terrible divorce rate in this country. people are buying humongous houses in which they seldom get to do much since they are working full time or more and commuting long distances.
?- Jimmy
I agree with you to some extent. It really depends on the commute, though.
When I was first working out of college, I had a 25 minute commute to work, but it was entirely on a mass transit system. On that commute, I would read and get caught up on emails. My commute was either part of my productive day or a bit of pleasurable reading time. I didn?t really mind this time at all. I didn?t have the cost of a vehicle, for one, and I could spend that time actually doing something I wanted to do.
On the other hand, if I had to drive for forty five minutes through a crowded metro area, I would consider that a big negative. When I did drive for a commute, I considered the time on the way home to be a mild relaxation from work, but I was still focused on driving (and on the questionable driving behavior of those around me).
There?s also the family considerations. If you?re commuting for 45 minutes, there?s an hour and a half each day that you?re not spending with your family (or engaged in something personally fulfilling if you?re single).
Q6: Uses for vegetable remains
?What do you do with, say, half a carrot that?s left over from making soup? Most of the time for me it just sits in the fridge and gets brown and I throw it out which seems like a big waste.
?- Mal
I save all of that stuff in a bag in the freezer. I just mix all of those spare vegetables together.
When I have a gallon freezer bag full of those scraps, I get out a big pot and toss all of the vegetables into it with a few gallons of water, a dash of salt, and some ground black pepper. I then boil that mix for hours and strain what?s left, saving the liquid.
That liquid is vegetable stock, and it is a fantastic starter for any soup that you want to make. Store it in quart containers in the freezer and pull one or two out whenever you want to make soup (or other dishes that use stock as a base).
Q7: Cash for emergency fund
?Is cash the right way to go for an emergency fund? An emergency fund is supposed to be money that is easily available to you in an emergency which in my mind means that it should be cash. I know that you do not earn interest on cash that is just lying around but having easy access to money is more important in an emergency than the little bit you make in interest. The only thing that worries me is the risk of having money just lying around somewhere in my house. Perhaps half in an account and half in cash is also an option. What do you think?
?- Roger
I think there?s a balance. I keep a few hundred in cash in a hidden spot in my home, but the rest remains in a savings account earning interest.
There are rarely times where I would need to immediately have more than a few hundred in cash in my hand in an absolute emergency. Virtually everything I can think of could wait until I could visit my bank or an ATM at least.
The only scenarios where that isn?t enough are scenarios where having thousands of dollars in cash probably wouldn?t be enough, either. Given that, I?m fine with most of my emergency fund in a savings account.
Q8: Professional dress
?Recently, I got a great new job that pays more than double what I?m currently making. When I talked to the HR person about it she told me that professional dress is expected. I am a software engineer and I?m not sure entirely what that means. What should I be expecting to spend on a wardrobe?
?- Dan
I?d call your office and find out exactly what?s expected in terms of attire. You need to know what people wear during their day-to-day work.
Most jobs like this do have a startup cost where people get their wardrobes into gear, unfortunately. It?s part of the hidden cost of having a higher-paying job.
The change in wardrobe might not be a perfectly comfortable one for you, but it?s a change you?ll get used to.
Q9: Returning to the workforce
?I have been a stay-at-home mom for about 12 years and I am trying to reenter the workforce with no success. I am in a rocky marriage with no way of getting out without going to live with my elderly parents,who live in an area that does not have an jobs (if I could find one) that would pay me enough to ever live alone. I do not want to be a burden on them, but I am at a lost for how I go about getting someone to give me an opportunity.
I do not have a college education (1-1/2 years at a community college studying business). My last job was as an Administrative Assistant for a pesticide company. I do not know how much longer I will be able to stay in my marriage. Can you give me any advise on what I could do to increase my skills and to make myself marketable again?
?- Mindy
First, if you are in an abusive relationship, there are resources you can use that will help you get out of your situation safely. I don?t know what?s going on with your relationship exactly, but it sounds like you really want out of the situation and that it might be an abusive one. If it is, you need to leave now, not later. Abuse should not be tolerated.
Having said that, if it?s just an incompatibility problem or something else, I?d try to pursue work in an area that directly follows your previous employment. Start quietly applying for administrative assistant positions anywhere that you can find them. If you manage to get one, then that?s your chance to change things at home.
Do you have any single (or even married) friends that you could live with for a while? If you have someone that knows what you?re going through, they may be willing to help you more than you expect.
Q10: Move first?
?My family is about to move to another state and we need to sell our home. Is it a better move to try to start selling it now before we move out or should we wait until we?re gone?
?- Angela
Generally, a house looks better and is easier to sell if no one is living there. It?s much more available for people to visit, appears to have much more open space, and is devoid of other people?s personal property and clutter.
If you have a financial need to sell before you move, then that choice is pretty much made for you. It sounds like both options are available to you, though.
If that?s the case, I?d get out of the house and make sure it was ship-shape for selling before putting it on the market.
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Editor?s Note: Nir Eyal writes about the intersection of psychology, technology, and business at?NirAndFar.com. Follow him?@nireyal. How do products tempt us? What makes them so alluring? It is easy to assume we crave delicious food or impulsively check email because we find pleasure in the activity. But pleasure is just half the story. Temptation is more than just the promise of reward. Recent advances in neuroscience allow us to peer into the brain, providing a greater understanding of what makes us want. In 2011, Sriram Chellappan, an?assistant professor of computer science at Missouri University of Science and Technology, gained unheard of access to sensitive information about they way undergraduates were using the Internet. His study tracked students on campus as they browsed the web. Chellappan was looking for patterns, which not only revealed what students were doing online, but provided clues about who they were. ?We believe that your pattern of Internet use says something about you,” Chellappan wrote in the New York Times. “Specifically, our research suggests it can offer clues to your mental well-being.? Chellappan concluded that there was, in fact, predictive power in the data. He found students with early signs of clinical depression used the Internet differently and he could identify students most likely to face mental health issues simply by looking at how they clicked. ?We identified several features of Internet usage that correlated with depression,? wrote Chellappan. ?For example, participants with depressive symptoms tended to engage in very high e-mail usage.” Chellappan developed the technology in hopes of creating an early-warning system to identify struggling students. But his study raised another question, why do people with depression check email more? Alleviating Pain The answer may provide clues about why all of us use the products and services we do in our everyday lives. Psychologists believe people with depression feel negative emotions, like anxiety, more frequently than other people do. There is evidence that the depressed students in Chellappan’s study were using the Internet more because they experience negative mental states more often. To try and feel better, they turned to the web to boost their mood. Finding ways to make ourselves feel better is not something only depressives do. We all seek relief from feeling bad and the brain is primed to help us learn where we can find escape. Just as we might take a Tylenol to relieve a headache, we turn to