The Personal Finance Podcast - If You Can't Afford a House It's Not Your Fault (Here's Why!)

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, we're going to talk about if you can't afford a house, it is not your fault. And I'm going to explain exactly why. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of Master Money.com. And today on the Personal Finance Podcast, we're going to be talking about how if you cannot afford a house, why it's not your fault. And if you guys have any questions, make sure to hit us up on the socials, Instagram. TikTok, Twitter, at MasterMoney Co, and follow us on Spotify, Apple Podcasts, or whatever podcast player

Starting point is 00:01:51 you love listening to this podcast on it. If you want to help out the show, leave a five-star rating and review on your favorite podcast player. And if you want to watch this show, you can watch us on the Andrew Jenkola YouTube channel as well. Now, today, we're going to be diving into, if you can't afford a house, I'm going to show you exactly why you can't afford a house. Really excited to go through that. But in addition, we're going to answer two other questions today. So the first question is if you struggle with budgeting and you cannot keep a budget month in and month out, what should you do?

Starting point is 00:02:22 I'm going to give you an exact system of exactly what you can do if you struggle with this. And we're also going to talk about AGI and why it's important. What is AGI is adjusted gross income? And it's really important come tax time. It's really important in figuring out exactly which retirement accounts you should be prioritizing. So there's a number of different things that you definitely want to do. So we're going to talk through AGI and we're going to explain it in a very, very simple terms. you have a better understanding and can make better financial decisions going forward.

Starting point is 00:02:49 So if that's something you're into, let's get into it. All right. So one of the biggest news stories right now is how millennials and most people who are out there looking to buy either their first house, their second house, or just find their forever home, cannot buy a house because housing affordability is so low right now. It is one of the biggest problems that most of you, the listeners, are struggling with. All of you wealth builders out there are sending me messages on how you are really having a hard time finding a house. Well, I'm going to explain to you today because a lot of people are beating themselves up saying, hey, I can't find a house that I can afford. You know, I'm trying to find a house that will only

Starting point is 00:03:27 be 30% of my income. I cannot find that. I don't want to be house poor. I don't know what to do anymore. And so today I'm going to show you exactly why this is happening and why it's not your fault and why you have to stop beating yourself up about this. So this is something where I want you to have a more positive attitude about this because I'm going to show you. you the numbers. And we're going to dive into a couple different scenarios of historic home prices. We're going to look at income levels and education expenses. All these different things are going to parlay into why housing affordability is one of the most difficult, difficult things to overcome right now. So obviously, the cost of housing right now is astronomical. But what happened over the last four years

Starting point is 00:04:06 is the real problem. And I'm going to go through this with you and show you why it is the real problem. So if you can't afford a house, it is not your fault. Let me show you. So let's go back and take a time machine back to 1995. In 1995, the average house was worth $130,000 in the U.S. Now, you may be saying, well, real estate is really location dependent. And so doing the average house across the U.S. is not really going to matter. This is going to matter once you see the income levels and how this actually link up together. So on this $130,000 house in 1995, if you put 20% down, that's $26,000. And interest rates were just above $7,000. So principle and interest on this house would be $735 per month.

Starting point is 00:04:50 Okay? So remember that number, $735 per month. Now we move up to 2019 because I'm going to show you these last four years are truly what the problem has begun. So in 2019, the average house costs $260,000. A $260,000 house based on the average incomes at that time was very affordable for a lot of people. So a 20% down would be about $52,000. $9,000. Obviously, you don't have to put 20% down, but we're just using that for these examples.

Starting point is 00:05:18 And at a 4% interest rate is what the interest rates were in 2019. So principle and interest would have been $993 per month. So here's where the jump happens. And this is where it starts to get crazy, is when we jump to 2,023. The average home jumped to 419,000 in 2020. So in 2019, the average home was $260,000. In 2003, the average home jumped to $419,000. But here's the numbers on this. If you put 20% down on a house that costs $419,000, that means you'd be putting $84,000 down. So saving up $84,000 is a very difficult thing to do. And if you put less than that, you'd be paying PMI and additional insurance that you otherwise would not have to pay if you put that 20% down. And we're looking at a 7 plus percent interest.

Starting point is 00:06:09 rate. They just raise interest rates again, so those are going to go up even higher. So, principal and interest would be $2,283 per month. So this is absolutely insane. Think about this for a second. This is a $1,290 jump in just four years on principal and interest payments. Whereas between 1995 to 2019, the jump was only $258. So in four years, the jump was $1,290, but over the course of well over 20 years, it was just $258. So the housing market over that time frame was pacing normally from 95 to 2019. Then from 2019, we are having this wacky event going on based on COVID-19 on number of other factors. Now we have supply issues.

Starting point is 00:06:58 People are not selling their houses because where are they going to go? and when you have a supply problem and really high demand, prices are going to go up. When you don't have the supply and you have really high demand, prices go up. You can think of this in the COVID-19 toilet paper issue, for example, where all of a sudden people were just buying toilet paper like crazy, and they were listing toilet paper for like $50 a roll,

Starting point is 00:07:19 and people were paying it because demand was so high. This is what's happening in the car market. This is what's happening in a number of other factors as well, but it is not affordable for anybody because of these interest rates. Now, let's dive a little deeper here. Let's look at average income throughout these years because this is where it gets really, really sticky. So in 1995, the average income was $29,000. In 2019, the average income was $56,000.

Starting point is 00:07:43 In 2023, the average income is still $56,000. And so this is what leads to the percentage of your income that would actually be used for housing. So in 1995, 31% of your income in that situation would be used for housing if you made the average income throughout the U.S. 31% is really on the line. We'd like it to be below there. So obviously, since it's the average, some people are skewing that number higher. Most people they could find affordable homes in that range. In 2019, it's even better. 21% of your income would be spent on that average housing price. That is fantastic. And that's how you truly build wealth, which is why at the beginning of this podcast, we said, you know, try to spend 30% or less your income.

Starting point is 00:08:26 But if you can get below 20%, that'd be amazing because we started this podcast. in 2020 and that was still doable at that time. Then in 2023, guess what percentage of your income would be utilized for housing based on these average housing prices? 49% of your income. If you spent 49% of your income on housing, you would be house poor. And this is when millennials started complaining was in the last four years and for good reason. This is not your fault. That prices of housing is way too high based on what the income is right now. This is where the problem lies. because everything was pacing fine, then all of a sudden the last four years, we had this crazy increase in prices. And you'd have to use 49% of your income. That means you would become house poor.

Starting point is 00:09:10 But let me give you another example of this, because I don't think a lot of people are grasping how impactful this can actually be. Let's take a look at the 1980s, for example. So personal finance club, Jeremy from Personal Finance Club, who has been on this podcast, had a great graphic here. We can show it on the screen as well if you're watching on YouTube. With this great graphic. It basically said millennials are financially worse off than their parents. And so what is happening here? So they went back to 1983 and looked at the numbers in 1983 and then came up to today and looked at the numbers today, which are even more recent than some of the numbers I was looking at in 2003. So home prices have increased even more since then. So you can look at the home price in

Starting point is 00:09:46 1983. The average home price is $56,420. Today, the average home price at the time recording this is $436,800. College tuition in 1983 costs $1,3,21 a year. College tuition today is $12,016 per year. The average salary was $21,380 in 1983. Today, the average salary is $58,260 across the U.S. based on this data here. And during this time, home prices rose 8x and college tuition rose 9x,

Starting point is 00:10:26 but salaries only went up 2.7x. This is why affordability is so difficult for you right now. So you're beating yourself up. I can tell you with certainty this is not your fault. This is something that's happening economically, which I don't know what's going to happen in the future. You know me, I do not like to predict anything that's going to happen in the future. So we're going to have to see and let this play out.

Starting point is 00:10:50 What can you do? What can you do about this, though? So it depends on your location, obviously. The real estate is very, very location specific. One of the things you can do is keep renting until rates go up. And I'm going to explain why renting is not a bad thing in a second night. In fact, for a lot of situations, renting is a good thing and you should not beat yourself up for renting.

Starting point is 00:11:07 It does not mean you're financially less than someone else. In fact, a lot of people who overspin on their housing are going to be way worse off financially than you will be by just continuing to rent. Number two is you can consider something like house hacking, but it's not convenient to house hack where you live in one unit. You buy a duplex, triplex, triplex, quadplex. you live in one unit and you rent out the other three units, which is going to subsidize your housing costs and or you may even be able to live for

Starting point is 00:11:30 free if you have enough rent coming in. And they can also qualify you for more house because of that. You can buy a house at a more expensive price because they can qualify the other units as income coming to you. Or you can consider something like a live and flip where every two years you are living in the house, fixing it up and then flipping it. We have episodes on exactly how to do both of those things, house hacking and live and flips.

Starting point is 00:11:53 We can link them up down the show. notes below. But none of these are convenient. There truly are no good answers. And so if you don't want a house hack, if you don't want to do a live and flip, then continuing to rent may be your answer. And let me show you why it's okay to rent, because home prices have appreciated about 3.5% annually on average. And during shorter periods of time, there may be some big variations like we had over the course of the last 15 years or so, where house prices have just skyrocketed. But it's been 3.5 to 5% annually on average. But what people don't do, is on those annual averages, they don't factor in additional costs, where a lot of times your home

Starting point is 00:12:29 is not that great of an asset. There's a lot of reasons to buy a home ever since I left college. I bought my first house and I've owned a home for that time period. But I'm the first to admit, as a homeowner, a home is not a good financial investment. And you should not be buying a home because it's a better financial investment than would be to rent. So initially, there's a bunch of different costs that will bake into this. So initially, your initial cost, for example, that none of these factor into renting. You got the down payment. So you have to save up for a down payment. You got opportunity costs of that money that you're losing out on. You have closing costs. You have your home inspection that you have to pay for. You have survey fees that you have to pay for.

Starting point is 00:13:05 You have appraisal fees that you have credit report fees. Closing costs, all of this different stuff is going to be factoring into you just purchasing a home. And all of that stuff up front that you put into purchasing a home outside of the down payment is just money you're throwing out the window because it goes to folks who are helping you facilitate that transaction. Okay. So the initial purchase cost, that's one section of cost that you're going to have in a house. Then you're going to have recurring costs in a house. What are the recurring costs? These are things like mortgage payments, property taxes where you can argue if you're renting, you're still paying the property taxes because you are. If you are renting a unit, the landlord is just baking the property taxes

Starting point is 00:13:44 into your rent. Homeowners insurance, mortgage insurance, HOA fees are baked into this. Utility. So you have to pay the utilities. If you don't pay, utilities with renting. Most people do pay utilities with renting, but utilities are there, and it's way more than an apartment would be if you have a house. Internet and cable TV, landline, all that stuff is recurring stuff. And if it's baked into your rent, then it's additional cost that's going to follow to your bottom line. This is the big one, though, is maintenance and repairs. A lot of people don't think about how much maintenance and repairs are until they get a house if you never factored this in. Routine maintenance, lawn care, pest control, landscaping,

Starting point is 00:14:18 all of those things alone cost you thousands of dollars per year, what I just said right there. Even if you do your own landscaping, if you do your own lawn care, it's still going to cost you thousands of dollars per year. Repairs. So roof replacement, plumbing issues, electrical issues, renovations and upgrades. So if you want to renovate your house to make sure it looks good to make sure it's updated so that your resale value is higher later on down the line, then you're going to have to pay a lot of money for that. Where your landlord would just replace it if you were renting a house. So this is dishwashers, refrigerators, washers and dryers. All of this is going to break and you're going to have to replace it. Home warranty. If you have a home warranty, you got to pay for that kind of stuff, although I don't love most home warranties. We're going to talk about another episode. Other potential costs. Flood insurance. If you live in somewhere like Florida, for example, you have flood insurance all over the place. If you live on the coastline, there's flood insurance all over the place.

Starting point is 00:15:06 Earthquake insurance, if you're somewhere on the West Coast. Septic system maintenance if your house is on a septic system. There's snow removal, tree removal, window cleaning, security systems. The list goes on and on and on with how many costs are associated. with owning a house. And this isn't even talking about like emergency costs that come up. There's so many different things that come up where if you rent, you're paying your rent, maybe your utilities, maybe your cable, and you know what your fixed costs are going to be every single month. When you own a house, you have no idea. Stuff just comes up left and right. So you have to think through these costs. And we are actually going to put together a spreadsheet. I am working on it with our team here. We're going to put together a spreadsheet on how to run the numbers when you're buying a house. Because I'm all for you owning a house. There's a

Starting point is 00:15:51 of other reasons why you should buy a house and they should all be lifestyle reasons. But as a financial reason, sure, over time, your house is going to be worth more than when you bought it for if you live in that house for 30 years. That is true. But at the same time, the rate of return is not going to be high because most people don't factor in these costs. And so I just want you to have that knowledge. Sure, you will most likely come out ahead on that 3% gain every single year. You will most likely come out ahead. But it's not throwing money away to be renting. There is nothing wrong with renting. And I want you to know that if you are out there renting because you can't afford a house right now. I want you to know it is okay to rent financially.

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Starting point is 00:18:24 Just go to indeed.com slash personal finance right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance. Terms and conditions apply. Hiring, Indeed is all you need. Let's talk groceries, specifically your groceries. With Instacart, you want your groceries just the way you like them, right? Well, the Instacart app lets you do just that. They have a new preference picker that lets you pick how ripe or unripe you want your bananas. Shoppers can see your preferences up front, helping guide their choices. Instacard, get groceries just how you like. Amazon Presents, Jeff versus Taco Truck Salsa, whether it's Verde, Roja, or the orange one.

Starting point is 00:19:09 For Jeff, trying any salsa is like playing Russian roulette with a flamethrower. Luckily, Jeff saved with Amazon and stocked up on antacids, ginger tea, and milk. Habaniero? More like Habinier, yes. Save the everyday with Amazon. All right, question number one is I struggle to keep a budget. What should I do? So this is one of my favorite things to talk about for people who have never heard of this,

Starting point is 00:19:39 because what we talk about is there's two ways to budget here. There's one which is a line by line item budget, which is what you think of like the traditional spreadsheets, where people are in their spreadsheets all the time. The spreadsheet nerds are learning how to optimize their finances and do this all day long. There's also a second way to budget for people who just really cannot stick to a budget. Like if you were the type of person who hates budgeting, you think budget sounds like a cuss word, and you do not want anything to do with spreadsheets and or you don't even want to use something like mint

Starting point is 00:20:05 or you don't want to use Tiller or you don't want to use Wynab. You want nothing to do with budgets. You are out on budgets and all you want to do is find a way where you can manage your money without budgets. Well, boy, oh boy, does your boy got something for you? So we call this the reverse budget. The reverse budget has actually been around a long time. Warren Buffett has always talked about pay yourself first, then spend what is left over. And that is what the reverse budget is actually established upon is paying yourself first. So here's exactly how this works, is you figure out what you want your savings rate to be, and then you save that off the top every single time you get paid,

Starting point is 00:20:42 and then you spend what is left over. Now, obviously, you need to be. You need to be. You need to be a lot. You and leave enough money for what your bills are and all those different things. But you spend what is left over. So you get paid. Boom. You take your 20% off the top to save for your emergency fund and your investments. And then you spend what is left over. And the beautiful thing about this is this allows you to budget without having to think about it anymore. Now, is it the most optimized way? No. But if you want to be the most optimal person, then that's a different way to budget. But you're probably not that person if you struggle to budget. So for you, you just want to want to be able to retire comfortably build wealth, reverse budget is amazing for this. And so most

Starting point is 00:21:22 people are going to love what the reverse budget allows you to do. First of all, it makes savings a priority because when you reverse budget, you're automatically saving so your money's going into your emergency fund. You can automate this very easily where it goes right into your high yield savings account. The money goes automatically into your investment accounts every month, to your Roth IRA, to your HSA, to your 401K. All of this stuff happens automatically because you set it up that way. Number two, simplicity. You don't have to be tracking things in a spreadsheet every single month and looking for the most optimal way to save on groceries.

Starting point is 00:21:52 Instead, you know you got 600 bucks a month for groceries per person, and that's what you're spending on groceries. I'm just making up a number. I know that sounds high for some of you. Maybe it's low for some of you. I don't know how much you spend. But you have that amount every single month for groceries, and you are going to go out there and spend that amount of money.

Starting point is 00:22:06 It promotes discipline because you're still saving off the top. You just don't have to think about it. It allows for automatic growth of your accounts. because automating it, boom, goes in the account. That's still going to grow over time. It allows flexibility. So you don't have to worry about this stuff all the time. And it gives you peace of mind because you're still doing what you're supposed to be doing with your finances.

Starting point is 00:22:25 But you don't have to spend so much time and feel guilty all the time. This removes guilt for a lot of people. What I've noticed is when we implement the reverse budget for folks, they really feel way less guilty than they did before. They felt so guilty that they did not have a budget or maybe a cash envelope system or whatever other types of budgets are out there. And so they knew they needed to do something. And the reverse budget is the way to fully automate this system. And it helps you do goal setting and all this different stuff. So this is really, really effective.

Starting point is 00:22:51 The key, though, is you got to figure out what your bills are every single month. So you can go back to your bank statements, for example, for the last three months. You only got to do this one time and figure out, hey, how much am I actually spending in my money? And then you can save off the top and allocate those dollars towards your emergency fund and towards your investment accounts. And then you just spend the remaining amount in your checking account. because all you want to do is money to flow into your checking account and then it's going to flow out of your checking account. That's what the check account is there for. It's just a transaction zone essentially where your money flows in, flows out.

Starting point is 00:23:21 Flows in, flows out. You don't want a stacked checking account. You want your money working for you. So either put in a high yield savings account at 5% or you throw it into something else like your investment. And that is how your checking account is just going to flow money through there. And so you can budget this really, really easy without having to lift a finger. Once you have these automated things set up, you don't ever have to lift a finger. So if that is you, love the reverse budget. It is my favorite way to go for most people who cannot budget. And for most people, they have said how amazing this has been in their lives so they don't

Starting point is 00:23:52 have to worry about it anymore. So for me, for example, there are seasons where I get super, super busy. And so I let my line by line and a budget fall behind. And when that happens, I'm reverse budgeting automatically because everything I have set up is completely automated. So every time I get paid, boom, money is going into my IRA, then my 401K, then it's going into my savings for investment properties and it's going into my emergency fund. All of these different things are happening automatically because I set it up that way. And it's so beautiful when this

Starting point is 00:24:20 happens because you spend so much less time on your money. Now when I'm not as crazy busy, then or if I feel like we're falling behind in some place, then I'll start budgeting line by line again just to optimize everything. So I actually do a hybrid approach myself even when I'm budgeting where there are seasons where I am just so incredibly busy. Maybe we have. have a newborn and there's other things going on where I'm busy. And so I'm reverse budgeting. And so you can do the same exact thing too where you reverse budget and then you use some automated system. If you do reverse budget, I like to use something like Rocket Money, for example, add that in because it allows you to at least track your subscriptions. It'll alert you if weird

Starting point is 00:24:57 spinning happens. But you at least want to do that and then you just want to review all your credit card transactions every month. Make sure there's nothing fishy in there. But outside of that, that is the way that you can reverse budget and really make an impact on your finances. It will build up over time without you even having to think about it. So love the reverse budget for this. Hopefully that is super, super helpful for you. If you got questions about that, make sure you reach out to me. It is a really easy system. And we're thinking about doing a full automation course to show you how to just fully automate your money. So you don't even have to think about it anymore. So that's something coming down the pipeline. Make sure you stay tuned for that as well.

Starting point is 00:25:31 Let's get to the next one. So the third one is I've heard you in a number of your episodes talk about AGI. What is AGI and why is it important? Okay, so AGI, a lot of times we will talk about when you're trying to think about if you want to contribute money into your Roth IRA or your 401K, and I just want you to understand what your AGI is. So let me show you kind of what AGI is and I'll tell you why it's important. So AGI stands for adjusted gross income and it is a measure of income calculated from your gross income and it is used for tax purposes. So it includes things like your wages, interest, dividends, and other income, but it is adjusted by subtracting your deducting your deductions. So that's like the simplest way to put it. Now, here's a general breakdown of how

Starting point is 00:26:10 it's determined. So you start with your gross income, meaning income before taxes are taken out. So this is your wages, your salaries, your bonuses, interest, dividends from stocks, for example, business income, capital gains, and a bunch of other sources of income. So all of your income all combined together. If you have seven streams of income, all of that is combined as your gross income. And then you subtract adjustments to your income. So these are very specific deductions allowed by the IRS. So you can look at this on IRS.gov. We can link it up down below.

Starting point is 00:26:42 But some of these things are like educator expenses. So if teachers go out and buy supplies for their classroom, this can be deducted. Student loan interest. You can look at contributions to your IRA. That's what we like contributing to our IRA, that were not deducted from your paycheck. So if you had a 401K, where it was sent automatically into your 401K, that was already deducted from your paycheck. But if you contribute after the fact to an IRA, that can be deducted.

Starting point is 00:27:03 Certain other contributions, like your HSA contributions, if you contribute to an HSA because you have a high deductible health plan or self-employed retirement plans or self-employed health insurance premium. So for me, for example, I'm self-employed. So my 401k is through my companies. And so that's deducted on the back in, which is really, really cool. Alimony paid is another one. And there's just several others. So you can check out the list on the IRS website that we will link up down below. Now, why does this matter? Because why is AGI important? So number one, it determines your tax bracket. So your AGI is going to determine which tax bracket you fall into. And with the U.S. federal income tax system, since it's progressive,

Starting point is 00:27:39 that means that higher levels of income are taxed at higher rates. But it's a progressive system. If you don't know what that is, reach out to me and I'll explain that to you. It also is important because it tells you if you're eligible for specific deductions and credits. So many tax deductions have AGI thresholds or phase out ranges based on your AGI. So if your AGI is too high, you might not be eligible for certain deductions and credits. Eligibility for contributions. So, for example, to contribute directly to your Roth IRA, as we all know, you cannot make more than a certain amount of income. So you have to do a backdoor Roth IRA if your AGI is too high.

Starting point is 00:28:13 Then this also matters because your taxable Social Security benefits. So when you get into retirement, it becomes a game to try to figure out how you can lower your taxable income so you can get more of your Social Security benefits because your Social Security will be taxed based on your income. So you've got to make sure that combined with some other forms of income. will be factoring into how much taxes you're paying in college or in retirement. Financial aid is also, if your family member is applying for financial aid for college, AGI is a crucial component to that.

Starting point is 00:28:43 It matters for state taxes. It matters for stimulus checks. So you can remember during COVID-19 times where people would get their stimulus checks, and then some people didn't if you made too much. So they factor in AGI to make sure that they understand all that stuff. So all of this really, really matters for a number of different things. So it is good to use something like an online AGI calculator to kind of get a rough estimate or have your accountant do this for you if you use an accountant another great reason to have an accountant

Starting point is 00:29:06 but have them give you what your AGI is currently and they can run this number for you pretty quickly most of them should know what it is in their file if they're good and have that available for you so making sure you know what that number is is something that's going to be helpful for you in determining a number of different factors when you make financial decisions but i wanted you guys to know because we do talk about a lot on this episode so if you've never heard of that before then that's a great thing to know and if you want to learn more about it i would check with your local CPA if you use one because they can really, really show it based on your personal situation. And that's really helpful.

Starting point is 00:29:36 The first time I learned about it when I was really, really young, I remember talking to a CPA about this and then they just took my own situation and kind of showed it to me. Boom, completely made sense. So one of those things where it's really helpful, especially if you're a visual learner, to kind of see some of the impacts based on your personal situation. So love that as well. Listen, hope you guys learned a ton in this episode. If you guys have any questions, make sure to reach out to me.

Starting point is 00:29:58 We cannot thank you guys enough for investing in yourself. That's what you were doing when you listen to this podcast, is investing in yourself. I truly appreciate each and every single one of you listening, and we will see you on the next episode. Frozen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play.

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