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More about the personal finance course


Whether or not comparison of the costs of home ownership and renting are relevant to a course in personal finance is perhaps itself a subject for debate. There could very well be different opinions about that. Personally, I would urge that it is highly relevant. For people being taught about financial matters in a classroom situation, it would seem that one of the biggest financial concerns they will ever face should be part of the curriculum. And, as we have seen in recent years, a lot of them are in trouble because of poor decisions related to home ownership. The more knowledge novices are given about all the matters surrounding home-buying, mortgages, rentals, etc., the better off they will be, and possibly future financial meltdowns traceable to real estate lending practices will be less likely.
Reply to
Don
I agree its relevant.
Much of my approach is how to make decisions and evaluate options and alternatives... for example if only person you deal with is your insurance agent, you may only get one picture, or if only entity you visit is one bank, you may get a different picture.
Another example would be that your budget determines most things financial... you must live within that. If someone promises something, could you save more money not eating out 1-2X per month, cutting groceries by $50, or raising your car insurance deductible from $0 to $1000. Anything someone "offers" you should be compared against such simple changes to your own behavior.
Money is black and white on paper. Much of how it controls you (or you control it) is behavior, and behavior can be modified if you recognize it.
There is no way one course could change the world, but more importantly if 5-12 people take a course and make better decisions, then the community is a better place.
Reply to
jIM
Mathematically and practically speaking, one person making better decisions does change the world. This is no sentiment. It is reality.
I try to remember that what that one person learns on subjects like finance typically gets transmitted in part or full to others, in particular family.
Reply to
Elle
Those are excellent ideas. One possible approach is to ask: What are the financial decisions that most people are likely to face in the future, and which involve the most money? Perhaps extra attention should be paid to the ones which involve the big money. Another question that could be asked is: "What do these students already know, and what new information would be especially valuable for them?" For example, information on how to avoid scams that are not common knowledge could be important, because it is possible to lose A LOT of money if not aware of the pitfalls in investing in things and buying things, while many good financial decisions help a little and save a little money here and there, but not on the scale of what it is possible to lose in the big transactions if not cautious. Also, advice like starting early, keeping up an investment plan consistently, and not being put off by temporary economic and banking conditions, etc. is important.
Reply to
Don

I am of the opinion that renting can make you wealthier because the cost of shelter is lower. I calculated my own circumstances years ago and I'd save $600 000 in my local real estate market during the next 35 years by renting. You don't pay for housing depreciation and constant upgrades, property taxes, house insurance, emergency repairs, new laws that come into effect, did I say property taxes?
However most renters I know choose to live paycheque to paycheque and fritter their shelter savings. Yeah a lot of homeowners buy more house than they can afford but a great deal of homeowners are forced to save. Sure many homeowners live paycheque to paycheque too but they are also paying off principal in their shelter costs.
Homeowners tend to have a bigger picture mentality.
If a renter is going to become financially sound they will need more discipline because it is not forced on them by bearing the costs of owning and maintaining their shelter.
Reply to
The Henchman
That seems unlikely unless the landlord is consistently losing money, which most do not. For the same property the landlord incurs all of the costs of any other owner and recovers those costs plus a profit from the tenant. The only difference between owning for personal occupancy, owning as a landlord, and paying rent is the tax treatment of of the expenses which, in the U.S., favor ownership.
--
 .Bill.
Reply to
Bill
That is a good point. Paying off a mortgage is a kind of forced savings, because, come what may, you have to make that payment every month. By doing so, you build up equity and eventually end up with a paid-for house, whereas rent just goes on an on. Calculations showing that renting is cheaper look fine on paper, but they depend on the renter having the discipline to invest the difference. It usually doesn't work out that way in practice.
Reply to
Don
Don't landlords get to depreciate their rental property? Even if it has been depreciated by the former owner? They certainly get to deduct their interest expense.
Most people would never rent a more expensive house because the higher cost would be obvious.
-- Ron
Reply to
Ron Peterson
... > For the same property the landlord incurs all of the
Landlords do have tax advantages, and larger ones can afford a full time skilled maintenance staff (while a homeowner has to hope he gets a good Real Estate Agent, Home Inspector, Home Appraiser, Insurance Guy, then a good Plumber, Electrician, A/C Man, Insulation Specialist, Roofer, Window Man, Door and Lock Man, Alarm Guy, Gardener, Stove Guy, Refrigerator Guy, Dishwasher Guy, Floor Guy, Carpet Guy, Pool Guy, Solar Guy, Handyman, Masonry Guy, Siding Guy, Driveway Guy, Water Heater Guy, Bug Guy, Deck Guy ... then the Group Therapy, Personal Therapist, Homeowners' Anonymous, Anxiety Doctor, and Heaven Forbid, a Lawyer and Tax Guy).
Problems renting do exist: sale to a less scrupulous owner, condo conversion, thin walls and noisy neighbors, are a few I can think of. One large advantage often overlooked by renters is their freedom to give notice and leave - a homeowner has to sell before moving. Some smaller rental buildings I have seen, even though rare and hard to get a place in, are really stunning for the quality of construction, location, grounds, and pride of the owner in his building and in his personal ethics. Those tend to be Quite Expensive, but if one can afford it, well worth the money.
Some of the truly defining advantages of owning one's own home are undeniable, if highly personal. As long as you keep your taxes predictable and payment current, your home belongs to you. In an appreciating real estate market, this has substantial cost benefits, but the intangible aspect of it can be profound, and one's children feel it, too. Like voting, ownership is a hallmark of freedom - or as close as we've come to it in this social realm.
Reply to
dapperdobbs
... The more knowledge novices are given about all the
Don't forget the balance sheet. Purchase requires a down payment which means that money won't be earning a return someplace else. Likewise at the end, the house can be sold at, hopefully, a profit.
Frank
Reply to
FranksPlace2
That is quite true, but for purposes of a personal finance course for novices, it might be better to stress the fact that buying a 75K new car ties up money in the same way and to discourage that kind of spending.
Reply to
Don

I'm not sure about this at all. Most comparisons that come to this conclusion don't compare like properties. Shelter isn't just shelter, it's part of your life and leisure. Sure, living in a two-bedroom apartment with a small patio or balcony is cheaper than a three-bedroom house with a yard and two-car garage. But you're not getting as much either. When I compare what it takes to rent a comparable property to mine, it's not necessarily less at all. This is especially as time goes by. A fair chunk of home-ownership costs are fixed due to the mortgage (assuming a fixed rate). Taxes, insurance, and upkeep will be subject to inflation. Plus, you really have factor in paying off the mortgage and drastically dropping your costs of ownership.
In any nice area, the pool of available rentals of more upscale houses is pretty small, and is often a stop-gap for people who really are interested in selling and just couldn't get their price. So you're going to have to be ready to go each year. If you want to live in apartments or small houses, then things are a bit different.
Brian
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Day 597 of the "no grouchy usenet posts" project.
Reply to
Default User
This certainly looks bad when you list all these things together, but none of it would deter me from home ownership. One thing to remember is that these needs do not arise all at the same time, and some of them never happen. Most homeowners would not need an insulation specialist, floor guy, pool guy, masonry guy, siding guy, etc., except maybe once in ten years, and then not all of them in the same year. And sometimes renters, although not financially responsible for them, have to wait around for six months before the landlord sends somebody to do the repairs.
Reply to
Don
Yes. I was trying to add humor and that good property management companies have considerable real cost savings, not just expenses and depreciation. Cost per sf after tax effects might be the 'metric' to look at.
The usage of either rent or ownership is strongly influenced by personal taste and style. A self-styled lifetime renter would want to make it a priority to research the building and its managment.
The philosophy is, I believe, that whatever one's product, one does try to make it as good as one possibly can, and 'the money' is neither the primary nor ultimately the workable factor.
Reply to
dapperdobbs
Don - Sorry, you're comparing a $75K house down payment to the purchase of an expensive car? And you discourage the house down payment as though the two choices are equal?
The choice is far from that and rarely a simple "apples to apples" comparison. The ratio of buying a home to rental cost is not fixed either over time or by region. I'd suggest the recent housing crash combined with low rates puts buying in a much better light right now than either at the market peak or in a few years. Don't forget, during times of rising inflation, one's pay and one's rent are both going to go up. The buyer with a fixed rate sees his mortgage wiped out over time and only his variable costs rise.
But this thread is about a course. It should provide an overview of home ownership as one option, including the types of financing, but I see a deeper discussion such as the "versus renting" as a rathole which is tangential to a finance course. Joe
Reply to
JoeTaxpayer
Universities no doubt offer dozens of courses on real estate (as they do on how to make money in not-for-profit companies). Ginnie Mae and Freddie Mac sites give fairly in-depth insight into financing a home, and for a personal finance overview course, I think those links, together with suggestions for further reading, in a one-day summary is probably indicated. As you noted, branching off into any of many connecting avenues leads to too much depth, or too many canoes in a movng stream - I didn't want to kill an interesting thread. The NYTimes article I cited earlier gives the parameters for doing rent/ buy cost comparison.
For theoretical interest, wise selection of quarters can save big bucks over a lifetime. Maybe someone else has the mind and willingness to perform a comprehensive analysis, but most living space is dictated by income opportunity (urban v. country) and that would be a place to start, followed by regions, followed by job stability, then rent/buy, and locations and conditions of specififc properties. After that set specifying money, personal considerations come in. For analysis, the best that can be done is specifying known money considerations, but the state of the market is a principal determinant, and that is a study in and of itself, a circular reference to urban v. country, regions, etc and the personal considerations of greed and fear.
Reply to
dapperdobbs
Rent vs Buy
Rent when you will live in a location for a short time (less than 5-10 years) Rent when you have little savings (less risk in renting; too much risk to own) Rent when the cost of renting suits you (should be less short term than cost of owning)
Buy when you have a long time to live in a given location (school district, stable job or other) Buy when you have some savings you are willing to lock into a specific location (illiquid asset; more risk in rising rent prices, less risk to own) Buy when cost of owning (or eventually owning) saves you money in 15-30 years.
Reply to
jIM
I was not trying to compare the cost of the house down payment with the cost of the car. I was suggesting that the idea of "tying up money" that could otherwise be used for investments is similar in both cases and that the purchase of the car is something the students could readily understand and be taught to avoid.
Yes, I agree. My guess is that many students in the course would have already decided whether to rent or buy (at least in the near future) and that technical comparisons like that would not have much value for them. On the other hand, given a decision to buy, concerns like how to shop for mortgages, how banks set interest rates, the function of real estate agents, and so on, would be very relevant and could mean substantial savings. (And therefore more money to invest elsewhere!)
Reply to
Don
Yes, true. My guess is that maybe 1 out of 100 renters and buyers make detailed comparisons of the relative costs. The decision usually depends on factors apart from money comparisons. However, home ownership is an area where investment and personal lifestyle come together. Many people live in their houses for many years without thinking of finances and then at some point realize that they are sitting on a product with big capital gains. Of course, if they had mindlessly sunk money into stocks with the same regularity as paying the mortgage, the same thing could be true. But it is so much easier and more tempting to buy and sell stocks at the wrong time, as to buy and sell houses at the wrong time.
Reply to
Don

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