Mood of the Market
Mood of the Market
After reviewing hundreds of reader e-mails and working in a number of roles in the real estate and personal finance realm, it occurred to me that all the action checklists in the world would do nothing to help Americans seize control of their own money matters and make the lasting changes needed to recover and thrive in the wake of this recession without a much deeper money mindset reset -- some wholesale power-tweaks to the way we approach money.
So, for the last seven weeks, I've challenged you (and myself!) to make some shifts in how we think and act when it comes to our finances.
We've explored what it takes -- and what it would look like -- to flip off our money autopilot switches, ditch the herd mentality and create a written version of our own individual life vision to direct our money matters. We've talked through why and how to develop a conscious relationship with money and how to move out of money immaturity.
I've issued a call for us all to let go of the pattern of seeking instant gratification when it comes to purchases small and large, and another call to avoid getting stuck in planning -- rather, to create a rough-and-dirty vision and immediately begin acting in your financial best interests.
On this, the last week of this series, I want to articulate less of a challenge, and more of a tool -- a set of criteria by which we can measure our money decisions -- especially the big ones, such as buying a house -- going forward. Some of the most frequently asked questions I receive have to do with timing (i.e., when should I buy? is now the right time to buy?) and what scale of home and mortgage commitments are sensible and wise (how much house can I afford? I'd like to move to a bigger, better house -- should I?).
While the uber-financially conservative among us would say smaller is better, for many, many years this was against the smart real estate dollar; when homes were appreciating astronomically and mortgage money was cheap and free-flowing, the standard advice was to "buy as much house as you can, as soon as you can" -- in part, to get the effortless bump in equity from rampant value increases; and in part to ensure you didn't get priced out of buying the home with the space and features your family really needed.
How times have changed. From both economic and ecological perspectives, our entire culture and consciousness has taken a massive evolutionary step. I personally moved down 1,000 square feet and, in the process, realized that I had been paying to own, heat, cool and tax more than a couple of rooms I hadn't even entered -- in months or years.
After a series of personal and professional epiphanies, I've arrived at this four-step rubric I use at the beginning and end of my major financial decisions -- particularly the ones that would involve taking on new financial obligations.
Think of your prospective new money commitments as if they were a beautiful plate of whole food -- no deep-fried Twinkies here. That visual should make the first three steps extremely easy to remember; your major money commitments should be:
1. Organic. Don't force things, or make massive leaps in the scale of your financial obligations. Unless you've been living significantly below your means for many years, going from a $900 monthly housing obligation to a $4,000 one -- without a corresponding leap in your income -- might signal an inorganic growth that will be difficult to sustain (see No. 3 below) over time.
Clearly, humans have a tendency to spend more as they make more income, which can be OK, but try to keep your increased financial commitments organic, meaning that they evolve at a similar -- or slower -- growth rate as your income and life. You've heard of slow food? Slow money works, too.
Buy a larger home when you can see that your family will really need the space -- plan for five to seven years out, not much further than that. Doubling your mortgage balance because there's a new loan out there that will let you is not generally a wise thing to do. In fact, many homeowners have lost homes they owned free and clear by taking inorganic masses of cash out of their homes during the subprime era.
2. Holistic. The financial commitments you make are inextricably intertwined with the rest of your life. They can have extreme impacts on your work and family life -- for better or for worse.
For example, people who get big promotions and/or raises often start taking on new bills before they realize they hate the new position, then feel financially trapped and unable to go back to where they were happy. Many a child would rather live in a smaller home and see their workaholic parents more than they currently do.
Even when you can "afford" a particular purchase or obligation from a sheer dollars-and-cents perspective, consider the non-monetary impacts of your money moves before you make them.
3. Sustainable. Last week, I cautioned against falling into the paralysis of analysis syndrome, where you get very stuck in planning mode, to the detriment of the action you could be taking to improve your finances. However, some planning is necessary -- when you take on major financial obligations, from homes to cars to kids, it's extremely important that you consider how sustainable the commitment will be over time -- taking into account the whole picture of your life, including the nonfinancial components.
Wikipedia elegantly defines sustainability as "the capacity to endure." Get a high comfort level that you will be able to see through your financial commitments to their ends before you make them. Under this test, the one-year adjustable-rate mortgages of yesteryear fail.
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