Personal finance blogger Barry Choi and his wife recently bought a condo in Toronto and, as far as I call tell, they made a sound financial decision. But, wow, have they ever been judged by the people they know.
When you buy a home, everyone's a critic. Mr. Choi reports being told that he'd have saved money if he rented, that the condo is too small, that he paid too much and that the condo won't appreciate as much as a house. He says he bought a home that fits his lifestyle and his budget. In a live-and-let-live world, that would be good enough for all the critics.
But people are judgy these days, particularly when it comes to money matters. I addressed this in a recent column asking for a civil dialogue about personal finance. I think we're feeling vulnerable about our finances these days, and some of us lash out as a result. The U.S. personal finance expert Ramit Sethi has another take – he uses the phrase "annoying hypocrites" for people who judge their friends' money habits. His view is that focusing on what others are doing wrong makes us less likely to examine our own spending habits.
Subscribe to Carrick on Money
Click here to have my newsletter e-mailed to you twice weekly.
Four ways to boost retirement wealth
I look at dozens of articles on retirement to put this newsletter together and reject most because they're so obvious or generic. This one, however, makes some great points, notably that saving discipline trumps investing skill.
How parents exploit babysitters
Many parents fail to treat the babysitter as a serious service provider who deserves the courtesy of a conversation about rates. A young woman writes here about how she was too timid to talk to parents about how much she charged. Thus, they took advantage and underpaid her.
An investing guy's top money books
I'm including this list because the books were chosen for readability as well as the financial wisdom they offer.
Questions every renter should ask
A useful checklist for both novice and experienced renters.
DIY ways to turn your house into a smart home
A hands-free garage door opener, a door that recognizes your face and other tech upgrades for the home that you can do yourself.
Please control yourself
Smart tips not only on resisting the impulse to spend money, but also on re-organizing your life to limit spending opportunities.
Today's featured financial tool
Five baby boomers talk about why they're not ready to retire.
The question: "I'm in the fortunate position of not having any debt and have savings invested in a few exchange-traded funds. With interest rates being as low as they are, my spouse and I are wondering if we should take out a loan and invest in more ETFs. What are your thoughts?"
My reply: I'm not a fan of leverage, which is what investing people call borrowing to invest. True, you can deduct the interest on a loan used to buy investments that generate income. And with interest rates as low as they are, it's not hard to imagine investing returns that let you pay the interest you owe and have something left over. My objections to leverage are mainly about emotions. Many investors get freaked out when the assets they've bought with borrowed money fall hard in price. Often, they sell at a low and turn their borrowing into a wealth-destroying experience. If you are going to borrow to invest, the best time is after a correction.
Do you have a question for me? Send it my way. Questions and answers are edited for length.
Five boomers talk about why they're not ready for retirement.
Send us an e-mail to let us know what you think of my newsletter.
Want to subscribe? Click here to sign up.
Someone ought to explain the facts of life to the nation's bankers.
They're handing out mortgages to people without any apparent understanding that today's home-buying couple is tomorrow's family of three or four. A lot happens to one's ability to afford mortgage payments when kids come along, but you'd never know it by the way lenders qualify borrowers.
Never take a lender's word for it that you can afford a house. Instead, try a new tool I've created called the Real Life Ratio.
Download the Real Life Ratio interactive spreadsheet here.
It's designed to show how well you'll be able to handle the basic monthly costs of home ownership, plus real life expenses such as cars, daycare and long-term home maintenance. Prospective home buyers should try it, and so should existing homeowners who want to see how well they're handling their finances.
The Real Life Ratio is an expansion of a simple affordability measure I introduced last year called the Total Debt Service and Savings Ratio, or TDSS. The idea of creating something more comprehensive came to me after a Globe and Mail series on daycare was published last fall. We heard from many people about how hard it was to manage the cost of a mortgage in today's expensive housing market, on top of daycare and other costs.
Use the Real Life Ratio and you'll know what you're getting into before you buy a house. You may decide you need to save a bigger down payment, buy a smaller house, live in a cheaper location or not buy at all.
Here are a few important things to know about the ratio:
1. Household take-home pay is used here: Other ratios use gross income, which is less relevant for practical financial planning.
2. This is not a budget: Only fixed costs are included here; food, clothing and other costs aren't discretionary, but you decide how much to spend.
3. Costs for home maintenance and improvement are included: You won't face these costs every year, but on a long-term basis they might average about 1 per cent of your home's value annually; maybe less for brand new homes and more for older ones.
4. There's a slot to include condo fees: Be sure to add any monthly utility costs that are not included in your condo fees.
5. Your local real estate market plays a big role: A liveable Real Life Ratio may be harder to achieve in big cities with roaring real estate markets.
Guidelines on how to interpret the ratio are provided. For optimum results, make a list of your monthly spending on food, transportation, entertainment and everything else not included in the ratio. Then, see whether your lifestyle is affordable. If your Real Life Ratio is 80, could you get by on 20 per cent of your take-home pay?
Keep in mind that your ratio will change – for the worse if you have kids in daycare and have a couple of cars, and for the better once your kids are out of daycare and you move into your prime earning years.
To ensure the Real Life Ratio reflects real life, I consulted four financial planners. Thanks to Rona Birenbaum, Barbara Garbens, Kurt Rosentreter and Renée Verret for some useful suggestions based in part on spending patterns of their own clients.
Download the Real Life Ratio interactive spreadsheet here.
Follow me on Twitter: @rcarrick