How Americans Can Win With Money (Despite the Economy)

Transcript

So, we’re talking about why Americans are bad at saving money. We talked about, you know, retirement accounts being leaky. We try to keep up with the Joneses. Those are things that we can control, those are behavioral. But there are some factors that may be outside of our control, and one of those is the cost of certain goods and services. Specifically, over the past couple of years, they have absolutely skyrocketed. Yeah, it’s one of those things. When I saw this graph, I was like, “Whoa! That’s younger people.” I understand sometimes why you’re so mad when you see charts like this.

When you look at the rate of wage growth compared to what’s happened with the price of vehicles as well as the price of home ownership, holy cow! It does not seem like this is ideal because look at this. Since 2020, the cost of housing has gone up 42%—insane! Since 2020, the cost of cars and vehicles has gone up 21%. Meanwhile, wages are up 17%. There is a disconnect there. So, what are some things that you can do? How can you make sure, again, that you are keeping your life on track?

The first thing you can do is understand your financial guardrails. Understand when it comes to making big financial decisions, when it comes to buying homes, when it comes to buying cars, you’re getting the big decisions right. A lot of people think that we are not wealthy because of the small incremental five-dollar latte decisions. Oftentimes, it’s not the latte decisions, the Lambo does it. It’s the big decisions. So, make sure you follow those financial guardrails. A really easy one to think about is when it’s time to buy a home. Well, yeah, that’s why we went ahead and… this was so important because we have slides that seem like they keep coming up. We’re like, “Let’s just go ahead and strap the word ‘rule’ on a lot of these things because it’s going to help a lot of people.” When you buy a house, first of all, know how long you can be in this house. If you can’t be in there for five to seven years, you should be renting. You should not be thinking about buying a house if your timeline is less than five to seven years. Make sure, if it’s your first home, you can put down three to five percent. But if this is an upgrade house, you need to be putting down 20 percent. And then, this is also one of those things: look at your monthly expenditure. Take your gross income, multiply by 25. That is the idea of where we want to keep your housing at because we want you to have some life. We don’t want you to be house-rich, life-poor. We actually want to have a nice balance there. So, that’s a great guidance or a guardrail on buying a home.

What about the second largest purchase that most of us make? It’s our automobile. Well, you know we love that. When it comes to buying a car, we want you to follow 23/8. We want you to put 20% down on the automobile. You should never finance it for more than three years or 36 months. And the total value of all of your auto payments, not just each individual, but all of your auto payments, should not exceed eight percent of your monthly gross income. And as a caveat, if you’re buying a luxury brand, if you’re buying a nicer automobile, don’t do 20/3/8. You’ve got to have it paid off in one year. If you say, “Guys, that sounds aggressive. I can’t pay this car off in one year,” we would argue you’re buying too expensive of a car. You should be looking at something different. And we also want your monthly investments to exceed your car payment. But I do want to put a word of caution out there because I see people trying to find loopholes or really working against themselves. People know millionaires when you go read “Millionaire Next Door” and other things, you find out that a lot of millionaires love Toyotas. When we talk about buying a Toyota and using 2/3/8, we’re talking about something like a Camry or something that’s reliable transportation. We’re not talking about going and buying a Land Cruiser just because it’s a Toyota. That you can do 20/3/8. No, I don’t want you to shortchange yourself. When I’m talking about affordable, reliable transportation that you can actually finance, I want you to be thinking about what is the lowest price point that lets this happen. Is that $15,000? Is that $20,000? Do not use 20/3/8 on a $60,000 vehicle. You are working against yourself. You’re not finding a loophole that’s going to allow you to have the car of your dreams while it’s financed and think that the money.

One other thing I think that we would be remiss if we did not mention is that we talk about how much the cost of houses have gone up, we talk about how much the cost of automobiles have gone up, but another thing that is a very real issue in the world today is how much the cost of higher education has increased. So if we’re talking about these large expensive decisions that we make, student loans have to be one that we camp on. And we would argue that if you are a college-aged individual or if you’re going to have children who are going to be going off to college and you’re trying to provide them some advice or some counsel around how much student loan debt to take on, we think that if you want to keep your guardrail in place, to keep yourself protected, not be one of those folks with that crazy low savings rate, you need to aim to have your total student loan debt be less than what you expect your first-year salary to be. So if you’re going to start a new job and you’re going to make fifty thousand dollars a year when you start working, try not to have total student loan debt in excess of fifty thousand dollars. If you cannot do that, perhaps the university institution you’re looking at is not the institution you should be looking at, or perhaps the major you are pursuing might not be the major that justifies the education you’re going off to go get.

Yeah, I think the rules that we laid out are definitely going to be a great financial foundation. But I want to go beyond and also talk about, because remember we’re talking about the cost of goods have gone way up, so what are some other things that you can do to do this better? Is that you also, I want you to lean hard into your fine financial mutant skillset. And what I’m talking about there is be a contrarian. You know, a lot of people, you’ve heard Warren Buffett and his famous quote, he’s talking about being greedy when others are fearful, fearful when others are greedy. You really can hone in that contrarian mindset to understand when you look at housing, when you look at the auto industry, and you start seeing these bubble-type things filling, there’s nothing wrong with kind of being patient, waiting for the right opportunity. Reversion to the mean does happen, so use those financial mutant skills to actually know it’s okay to wait until things get more reasonable. Another financial mutant skill is, if you’re thinking about college, okay, do I need to go to a traditional four-year university? Or might there be some trade school or vocational school? Or can I get my core courses at a community college and then move to my major at a four-year university? Can I pay my way through school? Can I have a job working on campus to work towards tuition? There are outside-the-box ways that a financial mutant can approach making these financial decisions, but you have to make sure you’re flexing that skill so that you’re not following the same trap the majority of America does.

Well, I think education and investing in yourself is one of the most powerful things you can do, but you’ve got to make sure it doesn’t get disconnected from the value of what this is going to do for you in the long term. And that’s why I do like when people, if you’re looking at your major and you’re looking at what things cost, that’s why, if we can keep the student loans below the first year, but also there is nothing wrong, exactly what we just talked about, going to community college and then transitioning into a bigger school. Make sure you are focusing on what the total cost of the education is to what you’re expecting to get out of it. Value does matter when it comes to education.