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So I'm in the middle of planning for my future. I want to save as much as possible, but I have some competing goals. My wife wants a "decent" house. I pull out my spreadsheet and figure that by the time I'm finished paying the mortgage, I'll have spent 2x what the house initially cost. I look at the stock market and figure I'd probably do better there except for the fact that I don't know beans about how to spread out my money and I know even less about what to expect from the individual stocks or other such options I might go for.

But on the other hand, if I pay rent, is that money down the drain? Obviously none of the rent goes toward actual property ownership on my behalf. But if rent costs 1/2 as much as a mortage, would the extra money I save do more for me in the long run from stock? What about property tax and upkeep fees that homeowners have which renters do not? What about figuring in the happiness of my wife?

asbestosman wrote:So I'm in the middle of planning for my future. I want to save as much as possible, but I have some competing goals. My wife wants a "decent" house. I pull out my spreadsheet and figure that by the time I'm finished paying the mortgage, I'll have spent 2x what the house initially cost. I look at the stock market and figure I'd probably do better there except for the fact that I don't know beans about how to spread out my money and I know even less about what to expect from the individual stocks or other such options I might go for.

But on the other hand, if I pay rent, is that money down the drain? Obviously none of the rent goes toward actual property ownership on my behalf. But if rent costs 1/2 as much as a mortage, would the extra money I save do more for me in the long run from stock? What about property tax and upkeep fees that homeowners have which renters do not? What about figuring in the happiness of my wife?

May I ask how old ya'll are?

Here are some ideas I have about your situation.

First, you've got to get some money in the stock market. Do you have a 401(k) with an employeer match? If so, you've got to put in as much as you can to maximize the match. If you can invest money beyond the match, do it in a Roth IRA rather than a 401(k). So as a minimum here, I'm thinking 5%.

Regarding home ownership, real estate is a decent investment if you are collecting rent on it and are good at property management (e.g. good at doing repairs yourself, good at keeping the house filled with high-quality tenants, and good at kicking them out when they don't pay). For your own home, it might be worth it from the perspective of being able to lock-in your housing costs for a while, and having a higher standard of living with regards to not having to move every couple of years, etc. Assuming you don't keep taking out second mortgages, you'll build some equity, and the percentage of your salary needed for the house will go down.

Generally, houses are pretty expensive now, and if you didn't mind living in a mid-grade apartment, I would rent and then save 15%-20% in the stock market. But if your wife is really craving her own place, I'd buy it for her, assuming I could swing the mortgage and keep contributing 5% to a retirement fund. Just be careful about what you do with the house after you buy it--don't borrow money for repairs, upgrades, furniture, decorations, etc.

Analytics wrote:May I ask how old ya'll are?

28

First, you've got to get some money in the stock market. Do you have a 401(k) with an employeer match? If so, you've got to put in as much as you can to maximize the match. If you can invest money beyond the match, do it in a Roth IRA rather than a 401(k). So as a minimum here, I'm thinking 5%.

So far I've been putting about 10% in to the 401K even though my employer match only works for the first 6% (at half my rate). I guess I'll have to educate myself about Roth IRAs as I don't see any obvious advantage. So far I've been trying to contribute the maximum amount that the IRS will allow me to write off.

Generally, houses are pretty expensive now, and if you didn't mind living in a mid-grade apartment, I would rent and then save 15%-20% in the stock market. But if your wife is really craving her own place, I'd buy it for her, assuming I could swing the mortgage and keep contributing 5% to a retirement fund. Just be careful about what you do with the house after you buy it--don't borrow money for repairs, upgrades, furniture, decorations, etc.

That's also good to know. My wife recently suggested that I cut down on the 401K in order to afford a house. I really don't want to (I'd rather cut down on junkfood / fancy food, and entertainment).

The advantage of my wife is that she is probably about as good at math as I am. The disadvantage of my wife is that the value she places on a certain type of house probably can't be expressed in a spreadsheet.

For me, the biggest advantage of an IRA is that it allows you more freedom to choose your own investments. My company offers about 10 mutual funds in the 401(k). In the 401(k) I must invest in one of those funds. But in my IRA, I can invest in about a zillion different things. I’m audacious enough to believe that with that freedom, I can beat the mutual funds that my employer offers.

The other big advantage is that in your 401(k), as soon as you’re about 70, they start requiring you to withdraw money, and they tax you when you do so. Do you think your tax rates will be higher then or now? Maybe you’ll be in a lower tax bracket, but I wouldn’t bet on it. I’d rather pay the taxes now, and then have a pool of money growing tax free that I can leave to grow as long as I’d like. This adds flexibility and diversification (i.e. it diversifies the risk of changing tax rates).

If I were you, I’d probably cut back on everything and lower the 401(k) contributions to 6% and would buy the house. Now in the long run, I would bet that from the perspective of ultimate net worth you’d be better to just rent and invest like crazy. But investing in the house is a form of diversification, in addition to being something that will satisfy asbestoswoman’s nesting instincts.

asbestosman wrote:So I'm in the middle of planning for my future. I want to save as much as possible, but I have some competing goals. My wife wants a "decent" house. I pull out my spreadsheet and figure that by the time I'm finished paying the mortgage, I'll have spent 2x what the house initially cost. I look at the stock market and figure I'd probably do better there except for the fact that I don't know beans about how to spread out my money and I know even less about what to expect from the individual stocks or other such options I might go for.

But on the other hand, if I pay rent, is that money down the drain? Obviously none of the rent goes toward actual property ownership on my behalf. But if rent costs 1/2 as much as a mortage, would the extra money I save do more for me in the long run from stock? What about property tax and upkeep fees that homeowners have which renters do not? What about figuring in the happiness of my wife?

Hi asbestosman,

Thanks for starting this thread.

Analytics has said some good things here.

I would add a few things.

There are many advisors who would suggest that before any serious investing is done, that you have a house first. This may be a good idea. However, I knew one accountant who went the renting route and swore that he was better off doing it that way. But, if your partner "needs" a house, then all the number crunching as to which way to go is really all for naught. The first principle in investing is that both partners have to be on the same page or there is too much hell inside the relationship.

I had many clients in that position. My wisest clients were the ones in the end who treated their investments separately because they had different goals and different risk aversion levels.

First, find out your risk aversion level. Find out your partner's risk aversion level. Do they match? Many investment advisors have questionnaires (and I am sure there must be some online) that will help you with that. I think this is a very important factor to get straight before you get in too deep.

Once you find out your risk aversion levels, then you can begin to start looking at various types of investments that can match your risk aversion level. Maybe, that is a good family home evening activity for the both of you. Let me know what you think about that. I think you should start there.

Of course, anything that can be invested in within a tax protected structure is going to be the right way to go as analytics has pointed out. But, how much risk can you handle? Can you sleep at night when the stock market is crumbling? When the real estate market is crumbling? Better yet, when you are 62 and about ready to retire and you watch your nest egg start tanking, can you handle that? Can your partner handle that? This assessment will help you then move to the next step, which is allocation of funds into various investments.

Markets self-correct over time, but....Consider the Japanese market, just for one of the worst case scenarios. Tell a Japanese that was about to retire in 1990-1991 that stocks were the best investment to be in, while he watches his investment tank over 60% and still not recover 15 years later. Were stocks really the best investment for that person? When he has to go home and tell his dear wife that all those gains in the stock market are now gone and there is no time to make it up? and no chance to retire and travel the world? when their house dropped 50% in value and they can't sell it anymore without taking a huge loss?

Find out your risk aversion level for both you and your partner. Lucky, you are still young enough to figure all this out before you don't have time to let time work for you.

Good idea?

While doing that research, keep this in mind:

http://advisers.wrenresearch.com.au/factsheets/060413/index-c.htm

Very important! Especially, the risk tolerance vs. risk capacity problem.

I would go to a library or bookstore and research this. Also, I would talk to several different advisor firms and request their questionnaires. You will get a lot of different advice depending on whether you are talking to financial planners, for example, American Express, or brokers, for example, your local Piper, Jaffray broker.

Still sounds like a great family home evening project to me!

Just now saw this thread.

Regarding renting vs. buying vs. investing in stock market, etc.

You just have to lay the numbers out in a spreadsheet, and basically guess at what the rates of return will be - and go with whatever gives you the highest number in the end.

In the late 90's, you were probably better off renting and throwing all your money in the stock market. (stock market returns were higher than real estate returns).

In the early 2000's, you were better off taking all your money and throwing it into a huge home. (real estate returns were higher than stock market returns).

Now it's reversed again, and things are equalling out.

Though of course, no one can guess with any certainty which will outperform the other into the future. But historically, the stock market has provided the best returns.

My only advice, would be to find a happy medium. Find a way to stash away 10% into retirement (whether it's 401ks, iras, etc. isn't going to make a huge difference). Sounds like you can do this by contributing 7% to your 401k + the 3% company match. Then you'll have some extra money to buy a house.

This way, everyone's happy.

Of course, 5 or 10 years from now you'll look back and say 'dang, if only i had put more into the house than my 401k' or 'if only i had put more into my 401k and kept renting' (depending on where future rates of return go for the stock market and real estate markets). But that'll happen no matter what - since no one knows the future.

Oh, and the way it usually goes, the more you make, the more you spend. So my philosophy is each time i get a raise, i put about 25% of it towards 401k. For example, if you get a 4% raise, bump up your 401k contribution by 1%. You could also bump up your house payment by 25% as well (but that isn't something i've done yet, but should do).

Just buy a house you can afford right now while still contributing 10% to retirement. Get a fixed 30 year loan. And live in the house till it's paid off. And bump up your 401k contributions and house payments each time you get a raise.

That's just my 'keep it simple' strategy. Take it for what it's worth.

Oh, and one last thing:

STOP WASTING YOUR MONEY ON TITHING!

;)

Who Knows wrote:Oh, and one last thing:

STOP WASTING YOUR MONEY ON TITHING!

;)

I don't waste MY money on tithing.

;)

asbestosman wrote:

Who Knows wrote:Oh, and one last thing:

STOP WASTING YOUR MONEY ON TITHING!

;)

I don't waste MY money on tithing.

;)

Ok then. STOP WASTING THE SPAGHETTI MONSTER'S MONEY ON TITHING!