We know that renters are facing all kinds of different scenarios right now while the world grapples with the coronavirus pandemic.
Our conversation with Chris Hogan was wide-ranging, covering the array of realities that renters find themselves in right now.
We talked about what we should all be paying for housing, how we should be thinking about debt and what financial lessons we should take from this pandemic. Here are a few excerpts from our conversation.
I think that emotions and realities are very mixed for renters right now — some are struggling to make payments, some are weighing the benefits vs. risks of renting, and others are looking at the housing market, thinking that now could be the right time to buy. Overall, what would you tell renters right now?
Renting is never a bad thing. Renting gives people an opportunity to be able to get out of debt, to be able to save up to buy a home so they can buy a home the right way. Let's be honest — the goal is not to buy a home, the goal is to own that bad boy. And so, too often, I think people will run, in a rush to buy because of interest rates or because of the market, or the housing market or the demand, and really it's about an individual being prepared to be able to buy a home the right way.
And so I advise people to get focused, get out of consumer debt and then save up an emergency fund of three to six months of expenses, then save for a down payment. I know it sounds like an awful lot of savings, but what we're doing is paving a foundation for people.
Traditionally, it has been said that you shouldn't spend more than 30 percent of your gross income on your housing payment. I haven't seen any updates on this number since the pandemic started, and I was wondering — is that the number that we should still be aiming for?
I tell people you want to stay more in the 25 percent range. And the reason why is that we tend to have more life that we have to live outside of that — but, you know, I want to wake people up and have them see the reality of their financial situation.
On average, people are spending $18K a year on non-essentials — like that's a lot of money to be throwing out, so I want to encourage people to be more engaged, be intentional, have a plan but let's follow the plan so you set yourself up for success.
In terms of building that cushion for yourself, so — I know a lot of people are saying, should I focus on getting out of debt, or should I focus on my cash cushion? What should be the priority right now?
If your income has not been impacted by this COVID-19 situation, which means you've not had hours reduced, you've not been furloughed, everything is stable for you — then I want you to continue to attack debt as you have been. Nothing has changed for you.
However, unfortunately, we've had 47 million people who lost jobs and so it's really important to be aware of that. So, if you've had hours cut back or you've lost a job or been laid off, well, you can't attack debt right now. Right now what you're doing is going into what I've been calling "conserve mode" — where you're setting aside every extra dime and being really intentional about taking care of the four walls.
And by four walls, I'm talking about you're taking care of your housing, your utilities, you're making sure that you have food on the table and gas in your car.
So, when we talk about debt, what is the right way for people to approach their debt right now? Should they be looking at debt consolidation, balance transfers or only consider things like balance transfers if they are still working? What is the best advice in terms of dealing directly with debt?
I would take it back to the two categories we talked about before. For people whose income hasn't been impacted at all, everything is kind of the same, I want them to attack debt with a vengeance. Meaning, I want them to attack it — we call it the debt snowball approach — that's where I'm going to list out debts smallest to biggest, I'm going to make minimum payments on everything except for the little one.
Now, with that little one, I'm doing every extra dollar toward it to get it out of my life. And when it's paid off, then I go down to the next one, in order. So, that's the debt snowball approach.
On the other hand, if you've got someone whose income has been reduced or cut back or even lost, what they're going to do right now is make minimum payments on the debt. That means they're not going to be able to pay more than that regular payment.
Or, some people may not be able to afford the minimum payment and in that case, I tell them if you can't afford to pay, you can pay attention. And that means pick up the phone, contact the creditor, talk about your situation, explain what's going on, explain about your situation personally, take notes on the call, on who you spoke to, the date and time and the context of that call.
For people who are carrying credit card debt right now, what would you consider to be a reasonable interest rate? How does a consumer evaluate their credit cards — what range do you think is acceptable in terms of interest rate if people are going to carry balances? And what kinds of offers are out there — anything in particular that you think people should be trying to take advantage of?
Well, here's the thing, you know — the thing with a balance transfer is that often times, you can use that and it might be 0 percent for a little while. But here's the reality — we don't want to play Three-Card Monte with credit card debt. We're not trying to move it around and play hide-and-seek.
The way to get it out of your life is by attacking it head-on. And so, you know, I know there's two types of interest. There's interest that I earn, in my investments, and then there's interest that I pay. And if I owe someone money, that money that I pay is called interest.
And so, you know, the variable interest rates right now on a credit card are around 16 percent, which is lower than average — but my gosh, we're still talking about 16 percent. So, I would tell people to be allergic to debt. There's not a reason to utilize credit card debt. Listen, it's like a frenemy. You think it's your friend but in reality, it's an enemy to your future because it's charging you month after month.
And get this, the credit card doesn't care if you get sick, it doesn't care if you get laid off, all it does is take. It takes and demands. And so I encourage people, once you get yourself out of debt, to not only cut up that credit card, but call and shut it down. And now you've got your three to six month emergency fund, you become your own cushion instead of the credit card.
Let's say somebody is aggressively working on their credit card debt and they're able to pay down their balance right now. Is there a chance that those credit lines could then shrink as defaults rise?
Oh, it has been happening. Wells Fargo, in fact, beginning about 45 days ago, started reducing and closing home equity lines of credit. So, it was reduced to where whatever you had out, that now became the max. So, without a shadow of a doubt, you're going to see companies restrict those credit lines more but you're also going to see interest rates climb even higher — the fees associated with it.
So, unfortunately what that's going to do is add handcuffs onto people who are already in a tight spot. And so, you know, again, I'm just trying to throw caution out to people — don't think that debt is your friend. I would much rather that you pick up the phone and contact your creditor. Let them know that your minimum payment might be $100 and what you can afford to send in is $20, and you're communicating with them and being real, as opposed to taking on more debt, it's just not a way to win, overall, financially.
Let's say that someone has a three to six-month cushion and they have enough money saved up to pay off their credit cards. Should they pay down or pay off their credit cards right now or is it better to hold onto that money for a while?
I'm just going to go back to, if your income is stable, I'm going to pay off the debt. I'm not counting on the credit line because I know it's not my friend. My income or job has been cut or reduced, then you may just have to make minimum payments right now until your income stabilizes.
And that's real, a lot of people are in that position right now. They're saving up all extra money and when they get a job or when their income stabilizes, then they go back to attacking debt.
For people who have money to invest right now, I know you're not big on individual stocks. Is it mutual funds or index funds that you're an advocate of?
Mutual funds — growth-stock mutual funds — yes, ma'am.
Single stocks, listen — stay away from them. It's like going to Vegas. And it's just going to create headaches and heartache for yourself. The markets right now, there's so much debate on what the economy is going to look like. Are we dealing with a V-shaped economy where it's going to bounce back quickly? Are we looking at a W shape where it's going to go down and up and down and up again? Are we looking at a flat U, where there's going to be a spike and then a long time to recover?
So, all of this conjecture, all of this debate, simply means that single stocks are likely to be more volatile than they ever have been — which means you're going to have good people losing good money because they were in a bad investment, so growth-stock mutual funds are the way to go.
What kinds of financial decisions should be off the table right now, in your opinion? Even if they're working, people may be inclined to pull back in this environment — for example, they may be tempted to shut down their 401K or cancel insurance policies. What would you say people should not do right now?
Well, I think first and foremost, the first thing not to do is give up on your dream. This COVID-19 situation has been a punch in the throat. It has caught a lot of people off-guard and it has caused some hardships. People have lost jobs, people are stressing about being able to feed their kids, people are worried about where their next meal is coming from. People are stressed out and having to make decisions about keeping the lights on vs. putting food on the table.
So, I would tell people, don't give up on your dreams. Do not allow debt to creep back into your life — don't think it's your friend because it's not. Those collection calls will start up as soon as you're able to make a payment. But then at the same time, don't feel that where we are right now is where you have to end up.
Things are going to get better — the sun will rise again. What we have to do is gain confidence in where we are and what we are, and more importantly in what we're moving toward.
What financial lessons do you hope people are taking away from this pandemic?
People are waking up and really understanding on a different level the power and the importance of an emergency fund. We've talked about it for years — have three to six months of a cushion. So, when a rainy day comes, you've got a cushion.
If you had three to six months of cushion tucked away when COVID-19 hit, then life hasn't changed much for you from a financial standpoint because you've had the cushion. Now, life has changed for a lot of us, with what we can do and can't do with the pandemic, don't get me wrong there — but it's different if you have that emergency fund.
So, my hope is that people start to see this, understand it on a different level, and it doesn't become optional — it's that people begin to see this and know, I'm moving forward, and we're always going to have three to six months of expenses, and when I do have an emergency, job one is to replace that money so I always have that cushion there. It helps people to relax on a whole other level.
Whether you're in a stable enough position to attack your debt snowball, save money or even invest, or whether you're in a more vulnerable position trying to keep your household's "four walls" needs to be met, there's a lot of comfort to be found in Chris Hogan's message. By keeping your end goal in mind and doing whatever you can do — even if that's just picking up the phone and talking to a creditor — you can retain your agency no matter what kind of circumstance you find yourself in.
Beyond that, Chris Hogan encourages all of us to envision a future in which we are our own fallback — leaving any dependency on credit lines behind us and taking pride in placing our savings cushion at the front of our line of financial priorities. Keep going until you get there, and never give up on yourself, no matter what comes your way.