We're all living through a surreal time right now, and many of us are wondering — what's next?
So far, the majority of U.S. renters are paying their rent despite the job losses brought about by the coronavirus pandemic. According to the National Family Housing Council's Rent Payment Tracker, 95.9 percent of apartment households have made a full or partial rent payment for June — just a 0.1 percent decrease year-over-year.
Expanded unemployment benefits, stimulus checks and efforts made by apartment owners and management companies have been a boon for many American households. According to the U.S. Bureau of Economic Analysis, the country's personal savings rate surged to a record high of 32 percent in April and remained strong at 23 percent in May.
However, with relief efforts related to eviction, utilities and credit card payments coming to an end, now is the time to be thinking about what's next.
We recently spoke with personal finance expert Suze Orman — author of the new book “The Ultimate Retirement Guide for 50+" and host of the well-known financial podcast Women & Money — about the advantages of renting, especially right now. We also discussed the process of planning a home purchase, how to best manage our money right now and what she hopes we've all learned from this pandemic.
Here are excerpts from our conversation.
In your new book, you emphasize that if you own a home, you should aim to pay it off by the time you retire. If that goal isn't going to be within reach for a renter who's thinking about buying a home, would you say they should focus on renting the most affordable home possible and put their full efforts toward eliminating debt and adding savings?
Homeownership is not the lock and key to financial freedom. I know some seriously wealthy people who have never owned a home in their lives. Because with homeownership also comes tremendous costs of replacement — roof, windows, air conditioning, plumbing, refrigerators, dryers and all of these things. And plus you have the risk of devastation from a natural disaster — from hurricanes, to tornadoes, to floods, to earthquakes, to mudslides and so on.
So there's a lot of downside to homeownership, along with upside. The true financial dream isn't about owning a home; it's about being secure with whatever you're doing with the money that you have. A lot of people find it fabulous to just simply rent a condo or an apartment, or something — if there was ever a time to be a renter, it's right now. And the reason is if you look at the statistics on it, rents are going down by 11-15 percent in many cities across the United States. Because when the virus hit, a lot of people just got up and they walked out — and they moved in with a friend, which left a lot of places available to be rented. So it's important that you understand — if you can't afford to buy a home, that's ok, there's nothing wrong with that — as long as if you're renting, you're also using any money you possibly can to do what? To invest. To make it grow. You can live in a home, or your money can live in investments.
I know you're under the theory that “Well, I'm just paying somebody else's mortgage. That's why I want to own a home." It's not that simple. You're not just paying their mortgage, because most landlords are running at a break-even point, if not a loss — because they had to make a down payment to buy the piece of property that isn't making money, and all the other things I just said. So I don't think that anybody should ever say, I can't buy a house so, therefore, I'm never going to be ok. If you want to rent, and you want to rent for the rest of your life, I personally do not have a problem with that on any level.
So, if a renter doesn't see a way to own a home and have it paid off by retirement, you would say no harm done, just keep your rental smart and invest your money?
Yes, invest your money.
A lot of you are under the fallacy that if you're paying, let's just say, $2,000 a month for rent, then you could afford a $2,000 mortgage — and that isn't how it works. It's not just the mortgage payment; it's the property tax, it's the property insurance and it's maintenance. Plus, it's the loss of growth on the 20 percent down payment that most of you should make if you're buying a piece of property. Therefore, it's usually at least 40 percent more than your mortgage payment, is what it typically costs you to own a home.
So if your mortgage payment is $2,000, then really when it's all said and done, you're looking at about $2,800 a month to really own that home because you have to put a few hundred dollars a month away in a maintenance fund, and then you have upkeep. So if you think you can afford a $2,000 mortgage payment, equal to your rent, you must have at least an additional $800 free that you would pay to own a home. That $800 should go into a savings account every single month. If you have an eight-month emergency fund, then that $800 should go into Roth IRAs and investment accounts.
You just have to be smart with the money that you're making, and you can't look at it so simplistically — well, I'm paying $1,200 a month, and I'm paying my landlord's mortgage payment. Let's say you own a home, you lose your job — now you can't make your mortgage payment, now what are you going to do? You are in real danger of possibly losing your 20 percent down payment as well.
And think back to 2007 and 2008, when there were people feeling happy that they didn't own homes. Don't think something like that can't happen again — it absolutely can. So don't look at what you want to have; look at what you do have. And if what you have is a rental apartment and you like living there, then stay there — but take the extra money that it would cost you to buy something and invest it.
One longtime standard about the cost of housing is that consumers should keep rent or mortgage payments at no more than 30 percent of their gross income. Do you think that guidance needs to change, given the financial stress that many people find themselves in right now during the coronavirus pandemic?
I think anybody who makes it that simplistic doesn't understand finance on any level. Because what if you're somebody who makes money, but yet you leased a car for $600-$700 a month? You have a child who has autism and maybe needs certain educators — which is more expensive than having a child who doesn't need that. What if you're not healthy? What if you are responsible for taking care of your parents, financially speaking? What if in your area, the price of real estate is just so over-the-top but yet your income isn't anywhere near what it needed to be for that? And so you may have to spend 60 percent of your income just to buy a property.
So it's not just 30 percent of your income should go to buy a property. All of you need to do what I call “play house." For six months, if you're renting and your rent is $2,000 a month, and I said it might be $800 more for property taxes, insurance, maintenance and other things, then for six months, I would pay my rent and then put that extra $800 away in a savings account so I knew if I could easily afford to own a home that was going to cost me $2,800 a month. If I paid that on time at the first of every month, if I didn't feel like I was house rich and cash poor — then after six months you have an additional $4,800 to put toward closing costs or whatever it may be. If you find that it was a struggle and that you were late on making that payment, you didn't like the fact that you couldn't go out to eat because of it, then you were about to buy a house that you can't afford. So play house, and you'll know how much of a home you can afford.
I think there's a lot of uncertainty right now about whether to prioritize getting rid of debt or building up a cash cushion. I know you advocate for eight months of cushion.
Without a shadow of a doubt, you best prioritize your eight-month emergency fund. And the reason is this — we're at the end of the 90-day moratorium during which many credit card companies have allowed people to go without paying their credit cards. Now you have thousands of people calling up these credit card companies, and the credit card companies are not extending them to a further 90 days. So you're going to have thousands of credit card companies not getting paid, and that's going to hurt them tremendously. And then what happens is that they're going to get afraid and possibly going to do again what they did in 2007 and 2008 — they closed down people's credit limits and they also closed down their credit cards.
So the last thing you want to do is to use your money to pay off your credit card and then all of the sudden the credit card companies get scared again because nobody's paying their bills, and they close down anybody's credit cards that have an available credit limit on it. Now you don't have any cash, you don't have the ability to use credit cards, and now you're screwed. And so you need an eight-month emergency fund — so above all else, put as much cash as you can away from unemployment, the stimulus check, whatever it is, and build up an eight-month emergency fund. Keep building it and pay the minimum amount due on your credit card. If you're still working, then you should absolutely try to do a balance transfer to a 0 percent interest rate on a credit card. And you should put all of your charges on a credit card and pay the minimum payment due right now. As time goes on, if the virus subsides, if they come up with a vaccine, if everything becomes normal again — and now you have an eight-month emergency fund or even more — if you want to take some of the money out at that time and pay off your credit card debt, if you are at a high interest rate, ok, no problem. But until things calm down, you better have an eight-month emergency fund or be building your way to it.
For people who have money to invest, how do you feel about making investments right now?
Fabulous. I think that by February of next year, you'll see a pretty solid stock market. You're going to see ups and downs between now and then but if you just dollar cost average every single month into the stock market — and if you don't know what to buy, simply buy the Vanguard Total Market Index Fund, symbol VTI — buy it at a discount brokerage firm such as Charles Schwab, or TD Ameritrade or Fidelity, where you can buy that ETF free of commission, especially if you buy it online. I would absolutely be doing that if I were you. The market will have rough days and good days, but over the long run, you'll be fine. Every time there's a down day, and certain stocks I want to own, I buy more. I'm not afraid of this market at all.
Certain stocks are on highs — and maybe they hold, maybe they don't, but what else are you going to do with money? Are you going to put it in a bank with half a percent interest, maybe one-and-a-half percent in a high-yield checking account online? So as long as you have at least five, 10, or 15 years until you need this money, then you should absolutely be dollar-cost averaging monthly into the stock market. If however, you need money within a year or so, then that is money that does not belong in the stock market — it never has, and it never will.
With that said, if you are scared to death, and investing makes you afraid, don't do it because the goal of money is for you to be secure. And if investing is going to make you insecure, just don't do it because once you're afraid, you buy at the wrong time, you sell at the wrong time and you'll blow it.
Your new book focuses on people age 50 and older — but what advice would you give to people right now, across generations?
I think that all of us, regardless of the generation that you happen to be in, the main thing is, the goal of money is for you to be secure. The way to be secure no matter what happens is to have at least an eight-month emergency fund. As you get older and you enter retirement, you want a three-year cash cushion, not an eight-month one.
Beyond that, here's what I would say to everybody — I hope we've all learned, over the past three months, the real importance of getting pleasure out of saving vs. getting pleasure out of spending. I think that it's been obvious how much money you've been able to save over these past three months. And what are you doing to do with that now?
Did you just learn that rather than spending $3,000 to go on vacation when you didn't have an eight-month emergency fund — if you could turn back the hands of time, don't you wish that instead of having gone on that vacation every year for five years, which is $15,000, that you'd put that into an emergency fund? Don't you wish, rather than eating out every single night and going to bars and doing things on weekends, that you would have taken that money and put it in an emergency fund?
Hopefully, you've learned the lesson that just because you make money, doesn't mean you should spend it. The more money you make, the more money you should save. So I hope you've learned that lesson about what you wish you hadn't done, and what you wish you had done.
You better start doing those things right now — because if you think this is the last time that something like this is going to happen, I have a bridge to sell you.
In turbulent times like these, understanding what you can influence is a powerful way to cope. Suze Orman's question — now that we're saving more, what will we do with that money? — is an invitation to think about the elements of our financial lives that we can have a say in right now.
Whether you negotiate better lease terms with your landlord or property manager, “play house" to see if you can afford that home you want to buy or find ways to save more and invest that money, Suze's guidance is to think about the ways that you can leave this pandemic better than you entered into it.