Why I don't take financial advice from my friends: Part 1

There are very few things I can definitively tell my friends “you should do that thing” when it comes to money, and vice versa them to me. I was recently asked by a two different friends: “Should I buy iBonds? 7-10% interest is really good!”. I started laying out all of the different questions I asked myself to determine if those iBonds are appropriate for my situation. I shared the thought process with my friends. When a friend says you should do something specific with your money, you don't directly know their circumstances that led to that decision being the right one for them. In many cases “7-10% interest is really good" was the only reason (and it's not a good enough reason for me). I will use this blog to walk through specific money decisions I might need to make, the questions I ask, how the answers map to a decision, and the opportunity costs of one option over another. If you've ever asked yourself “Should I....?” about a money decision, I hope this exercise gives you some more direction for your own situation.

Why Part 1?

I made a really long list of stuff. It's too much for one read. Heck this blog covers only 4 topics and it's already too long to read. Drop in the comments any questions you want added to the list.

This list will not be exhaustive. It will be based on my own experiences. The objective here is that it gives you a framework to build your own. Here is the list, and you can scroll down for the ones relevant to you. That means that this blog is literally not advice. I don't want you to make decisions based on how I made them. I do want you to understand my decision making process. I, and your friends, will have a different outlook / outcome than you. 

Should I...

• Buy or rent my housing?
• Buy a house now, or wait for the market to cool down?
• Buy US Treasury I Bonds?
• Buy whole / permanent life insurance?

But first...why do you have cash sitting around?
To setup some of the questions and their answers, you first have to evaluate your money needs in each of these buckets. If you have money sitting in your hands that you could be spending on something / buying you need to understand how you have funded these first. We will revisit this diagram throughout the discussion. 

When someone is going to make a financial decision that requires locking up a large chunk of cash, the first question I ask is "why did you have that cash sitting around in the first place and when are you going to need it again?". For example, if you have $5,000 to do something with but this is your emergency fund then it's accessibility and risk factor is much different than needing that $5,000 sometime 20 years from now. If someone has their emergency fund sorted and no planned expenses in the next 6 months (e.g. home renovation, etc) or 2-5 years (e.g. quitting a job, etc) then I fit it into "the future" bucket. The future bucket can withstand large swings in market volatility. Everything in the first 3 buckets cannot.

Should I ...​ Buy or rent my housing?

Here are some questions I ask myself:

• Do I believe real estate always goes up in value over time?
• Do I like the idea of home maintenance?
• Do I plan to live in my house for 10+ years?
• Am I deeply effected by an emotional / cultural / societal pressure or connection to owning the property that I live in? 
• Is the estimated mortgage payment 70% or less than the price of renting? 
• Do I actively invest my savings into ETFs (e.g. if I have a downpayment ready, and decide to keep renting, will I invest that money into the stock market)?
• ​Do I feel secure that I could keep paying the mortgage if I lost my job (e.g. I could easily get a new job paying a similar or better wage, I have a partner that makes a sufficient income to rely on, etc)?
• Do I understand the long term costs of owning of a home (e.g. personal tastes / styles change, most improvements have a useful life of maximum 15 years useful life except roof, the costs of a complete retrofit when you're older to make it safe to live on your own, etc)?

My personal assessment:
I do not believe that real estate always goes up. Real estate does have typical cycles though when compared to the stock market and has returned less when investing in the long run (obviously ignoring year-on-year cash flows which we won't get into because this is about the roof over our head and not investment properties).

I have no emotional attachment to owning the property I am living in and really hate the idea of maintenance and renovations. I've done renovations on homes before, and it sucks. Finding quality contractors, living in a mess, and on and on. No thank you. I also have come to accept that I'm a serial migrant. The chances of me living in a property longer than 10 years are incredibly low which means the huge upfront costs of buying never pay off for me (the first 10 years of a mortgage are mostly interest payments so I'm not actually building much equity in the property before that). If mortgage rates are really low (like my recent 1.65% mortgage) then I will consider buying a property, but otherwise I won't fall into the myth of "homeownership builds equity". Simple example: I bought a house in 2014, took on a mortgage of $239,000 and sold the house in 2022 with a mortgage payoff of $205,000. It's shocking how little of the mortgage was paid off. 

Most people ignore the cost of maintenance and renovation when running the numbers and the reality is most people will do some level of renovation when they move into a new home purchase so it can be exactly as they want it. So if I'm paying $1,500 a month in rent then I need to factor in a monthly payment that is 70%, or $1,050, to account for renovations and maintenance that I don't pay for as a renter. This is just back of the napkin (but I will do a case study another day on actual numbers) to find out my breakeven between renting and buying. Renters can save a lot of money compared to buyers because they aren't paying for major maintenance and renovations, but as a renter I need to invest that savings into ETFs (I love VTI) to come out better than the buyer.  

I used to think that homeownership gave me more freedom than renting because if I decided to move, I could simply put the property up for rent and have someone else pay the mortgage. With a lease as a renter, I could be locked in for many months. But then I realized this wasn't reality because being a property manager is stressful. There is nothing passive about it unless you get the world's best property manager. Even then, I stressed over having so much of my wealth tied up in a single property: what if tenants didn't treat it well? What if something happened to that neighborhood to reduce it's attractiveness? I could be better off financially by paying a penalty to end a lease early when compared to all of the cash I've invested in upkeep while keeping the house. Additionally, without a mortgage I have the freedom to quit my job and move in with friends or family temporarily, or even travel the world living in free accommodation (via Trusted House Sitters or Work Away). A mortgage is a debt that must be repaid and it removes freedom from my life.

The other freedom factor is building wealth and then living off of it once I retire early. But if I want to leave a primary residence and turn it into a rental property, I could only live off of the rental income streams and not the equity in the house. What if the property has grown to 50% of my net wealth? Now I'm in retirement and can't access that value unless I sell it. Now if I want to sell it then I have to do it in one go, and take the tax hit on capital gains. But if I had been investing in ETFs the whole time, then I can sell those stocks a small bit at a time and pay no taxes through controlling the gains I recognize (and keeping them in the 0% US tax bracket). ​
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I used to believe that buying a house was always a better financial decision than renting because "you build equity and renting is throwing your money away". I was also bought into the idea that "I'm not a fully formed adult unless I own the roof over my head". I educated myself, learned none of this is always true, and now I operate from a place of "rent unless there is a financially compelling reason to buy". And the only compelling reasons for me to buy are:

• an interest rate < 2%
• low / no up front costs to buy (which rules out most of the US buyers market)
• low maintenance (like an apartment / condo)
• move in ready suited to my style (I don't need to make any renovations)
• located in a hip neighborhood

Want to read my case study, with actual numbers, on buying vs renting? Subscribe at the bottom of this blog post to get notified when I publish it.

Should I ... ​Buy a house now, or wait for the market to cool down?

Here are some questions I ask myself:

• Is this house a roof over my head or an investment? 
• If this house is a roof over my head, do I need a new one now (like a growing family, or to move closer to work, etc)?
• At current prices, will the monthly payment be less than 30% of my net pay?
• If this house is an investment, do I believe that real estate always goes up in value over time?
• If this house is an investment, do I plan to live in it for 10+ years? 
• Do I feel secure that I could keep paying the mortgage if I lost my job (e.g. I could easily get a new job paying a similar or better wage, I have a partner that makes a sufficient income to rely on, etc)?
• Can I, or anyone I know, predict the future?
• Do I know anyone that has ever “waited for the market to cool down” before buying their house and indeed got a better price?

My personal assessment:
Preface: this would be an assessment I make only if I have already decided that buying is the better choice than renting. That question is covered previously.

This is a roof over my head. While real estate does not always go up, it is generally spending more time on the "increasing" activity and shorter amounts of time in the "decreasing" activity. Actual studies on real estate cycles show that it usually spends 14 years increasing and 4 years decreasing (totaling 18 year markets in much, but not all, of history). I cannot predict the future and I do not know a single person that has ever "waited for the market to cool down" and timed it perfectly to end up better off financially. If I find mortgage interest rates on offer to be reasonable (low cost of borrowing, 4% or less), the monthly payment is less than 30% of my net take home pay, I plan to stay in this home for 10+ years, and my job to be secure, then I am not going to wait: I will buy in a hot market. 

Example: I bought a house in Denver Colorado in 2014. People around me told me I was crazy and they were going to wait for the market to cool down. If they waited, they still wouldn't have a house. I sold that house in 2022 for more than double what I bought it for.

Example: Let's imagine I bought that house in July 2007 at the height of the market in Denver Colorado and then 2 years later the value was cut in half. If I was planning to stay living in that house for 10+ years then it wouldn't matter than I bought in a hot market, I had a roof over my head and a reliable job that doesn't fluctuate wildly with recessions. I could still pay the mortgage so the value of the home wasn't relevant during the recession. 

I used to get caught up in the "but the market has to cool down" when I had the concept of the roof over my head mixed up with the idea that real estate can be an investment. Once I disconnected the two, and no longer see the roof over my head as an investment, I could sleep better at night with my purchasing decisions.

If you do view the roof over your head as an investment, you might consider reading my recent blog post "Price cuts: should I sell my house during a recession or wait for recovery? A case study".

Should I ... ​Buy US Treasury I Bonds?

​Here are some questions I ask myself:

• When do I need the cash I'm sitting on?
• Am I in the "window of doubt"?
• What are the alternatives? Can I invest my money better somewhere else?

My personal assessment:
The window of doubt is this time where stock markets are down (like...right now) and it seems that everything else is a better place to store your money, like real estate, bonds, even cash. We can't predict the future to know how long this window will last. I view the window of doubt as this time when psychology will tell me "stock market = bad, other things = safe / good" when in reality, if I don't need the money in the next 2-5 years, I should do the complete opposite of psychology and invest in the stock market.

If I need the money in the next 2-5 years then bonds could be a good thing to choose, but if I have no need for that money in the next 2-5 years then I will lose out on huge market gains because buying stocks low (on sale!) is the best time to buy (though it's always a best time to buy). Keep in mind that many bond investments require you to lock up the funds for 1-2 years. So if I need the money in the next 6-12 months then I will simply put it in a 6 month bank CD (Certificate of Deposit) or a high yield savings account (basically cash) and call it a day.

I did a quick back test to 2008 and while US Treasury Bonds weren't paying 9% interest, they were still paying better than the stock market. I did two snapshots comparing a $10,000 investment in VTI in January 2008 with a $10,000 investment in a US Treasury Bond fund (so mimicking buying the bonds). If I needed the $10,000 4 years later, I would have $4K more in my hands having invested in the US Treasury Bonds and would have lost $500 investing in VTI.

But if I was that person sitting on $10,000 and thought "Hm US Treasury Bonds look like a safe place to put my money right now" I may have left it there not knowing the right time to pull it out (since timing the market never works well). Not needing it for anything, I likely "set it and forget it" and would have lost out on the huge gains (almost $23K more than having left it in the US Treasury Bonds). It's a big bumpy ride in VTI but if I don't need it now, then I will just dump it in and worry about it again when I come into that 5 year window before I'll need it again (and reassess).

Should I ... Buy whole life insurance?

Here are some questions I ask myself:

• ​Can I explain how it works in <3 sentences?
• Do I currently have any children, dependents, or elderly parents that would rely on my income in the case I died or became unable to work / earn income?
• If I do have someone that would rely on my income, would they continue relying on it beyond 20 years (e.g. are they expected to live longer than 20 years or will they become independent on their own income within 20 years)?
• Am I financially independent already and if I died would my assets fund those dependents for the time horizon needed?
• Is the insurance policy going to invest in the same things I would invest in on my own?
• Is the insurance policy going to invest in less desirable investments than I would invest in on my own?
• Am I going to be able to keep paying the premiums through the required time period (e.g. do I plan to quit my job, take a long leave of absence, etc)?
• What are the alternatives? Can I invest my money better somewhere else?

My personal assessment:
I bought a whole life insurance policy once. I was sold this policy by an agent of Northwestern Mutual who was putting together a financial plan for me. I knew he would get a commission on the policy. But I was also convinced by all the fancy and complicated paperwork that it was a good investment. I was wrong and had no business owning that thing because at a simple starting point: I have no dependents that rely on my income that would need it replaced in the case of my death.

Even though I'm an accountant myself, I simply couldn't explain how the product worked in less than 3 sentences. I would defend my choice by explaining to other people how I was using the life insurance policy as an investment vehicle. Once I hired an independent financial advisor (that wasn't selling me anything) he asked me "yea Ryan but if you took those premiums each month and just invested them in VTI you would have more money because you wouldn't be paying the high fees associated with this complex product". He was right. I hadn't really computed the "but could I invest my money better somewhere else?" because I simply didn't know any better. It's also difficult to find out what the whole life insurance policy is directly invested in but I can only assume it was not as great as VTI, plus all of the buried costs of the insurance company dragging down the long term returns. The whole life insurance policy also added a level of complexity and restriction on my investments that would have hindered my early retirement strategy. Buying VTI, I can do with it as I please and when I please.

IF I ever have dependents that rely on my income, I might consider a whole life insurance policy. But even then, if I have reached financial independence then the pure fact that my entire wealth will pass on to them may be enough to fund them and renders the policy moot (otherwise called "self insured"). 

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