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Last updated – August 31, 2022

I’ve shared a lot of great tips to help your kids learn spending vs. saving and even about credit and debit. There is of course, more that they need to know.

The principles are the same as with creating any budget at all.  The difference is in the amount of money the make and the types of expenses they will have. These differ as your child grows.

When your teenager is first creating a budget, that may be a term that is difficult for them to really fully understand.  You might call it a Spending Plan instead.  By calling it something other than a budget, it can make it take a positive stand.  Now, your teen knows how they get to spend their money instead of a piece of paper telling them what to do.  Spending Plan is much more positive than budget.

WHY THEY NEED A BUDGET

There are lot of principles your teen needs to learn when it comes to finances.  Their budget, or spending plan, helps set them up for success.

  1. The budget is their roadmap to financial health.  Just like they see a doctor and dentist to make sure that they are physically healthy, their budget does the same for their finances.
  2. Help them plan for the unexpected.  What will they do if their car breaks down?  They need to learn how to be prepared for the curve balls life will certainly throw their way.
  3. How to spend wisely.  When spending is documented, it gives teens a better view of where they spend money.  They can easily identify the areas where they are spending too much money.  A budget allows them to see if they are spending more than they are making and then make adjustments according.y.
  4. Plan ahead.  There are expenses which come up only once or twice a year.  For example, college books are purchased only a couple of times a year.  Paying for these needs to be budgeted all year long.  This way, when it is time to buy them, the money is set aside.
  5. Develop a healthy relationship with money.  If you look your own views of money, there may be things you do not want your children to do.  You might be obsessed with it or fear it.  Whatever your views, you want to make sure your teen has a healthy relationship with his or her money.

HOW TO GET STARTED

Making a budget or spending plan is relatively straight forward.  Their budget will be a projection of the income they will receive and the expenses they will have.  They will be able to use this budget to plan ahead and know which expenses they need to cover each and every month.

To being, you can use a paper and pencil.  You can also download our free Teen Budget Worksheet if you would like. You might even want to use a spreadsheet. Any way will work, as long as it is something your teen feel comfortable using.

Have him or her look back at the past 2 – 3 months of income.  This will help them determine how much income to include on the budget.   The amount to put on the form will be the monthly average.

For example, if payday happens every 2 weeks, total up 6 – 7 paychecks and divide it by 3.  That will provide you with the average income every month.   This will be recorded on the budget as income.

Make sure all sources of income are included in this total.  Some to consider include:

  • Allowance
  • Wages
  • Gifts
  • Interest/Dividends
  • Tips
  • Bonus

Next, have your teen look over the past 3 months of spending.  Add up all of the various amounts paid and divide by 3.  This will be the average amount for each expense.

CATEGORIES FOR THE BUDGET

A teen’s budget will look much differently than one for an adult.  The categories will be different than those you have on your own, as expenses change as you take on more responsibilities.  If you are using our free teen budget worksheet, then you will see many categories are already included for you.

If you wish to make your own budget, you can do so, make sure that

Source: pennypinchinmom.com

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Are you interested in creating a budget?

68% of households in the U.S. do not prepare a budget. Here are my tips on how to make a budget, so that you can start creating a budget that works.

68% of households in the U.S. do not prepare a budget. Here are my tips on how to make a budget, so that you can start creating a budget that works.The average family carries a lot of financial stress. Most people have student loans, credit card debt, a mortgage, car loans, and sometimes even other forms of debt.

However, not many people have a budget.

According to a survey done by Gallup, 68% of households in the U.S. do not prepare a budget.

I believe budgets are extremely important and nearly everyone should have one. Rich, poor, middle-class, whatever you are, a budget will likely help improve your financial situation.

Some people think budgets are only for people living paycheck to paycheck, or those with no money.

WRONG!

Budgets are for everyone.

Yes, that means no matter how much money you make, you should probably have a budget. I recently read something that said couples who make $50,000 a month, on average, only save 4% of their income. FOUR PERCENT on a $50,000 monthly income? The majority of that monthly income went towards clothing, food, cars, and homes. I can’t even imagine how someone could blow through so much money each month.

This just proves my point, more people need a budget.

Budgeting may not be the most fun thing in the world, but it needs to be done. Budgeting can help you take control of your financial life, which can help reduce stress and let you reach your dreams.

Other budgeting-related articles you need to read:

Below are my tips on how to make a budget and creating a budget.

The positives of creating a budget.

Budgets help people manage their money better. It’s that simple.

Budgets are great, because they keep you mindful of your income and expenses. With a monthly budget, you will know exactly how much you can spend in a category each month, how much you have to work with, what spending areas need to be evaluated, among other things.

Budgets have helped people reach their goals, pay off debt, make more money, retire, and more.

Should a budget be electronic or on a piece of paper?

Everyone has a preference, so this depends on what will work best for you.

Pencil and paper can be great, but an electronic version (such as a spreadsheet, Mint, or Personal Capital) can help you easily make changes.

I suggest choosing whatever you are most comfortable with. It doesn’t matter how you keep your budget; it’s just important that you stick to it.

Side note: I recommend you check out Personal Capital. Personal Capital is similar to Mint.com, but much better. Personal Capital allows you to aggregate your financial accounts to easily see your financial situation. You can connect accounts; such as, your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more. And it’s FREE.

You MUST track your income and spending.

What you want is to create a realistic budget. To show you where your money is coming from and where it is going, you need to gather all of your receipts, bank and credit card transactions, and so on.

Or, you could even take it a step further by tracking everything for the next month or two, this way you know you’re not missing any expenses. This means recording every single transaction with a note that tells you exactly what you bought (if a receipt is not itemized). Then, at the end of the month, you can evaluate your spending.

After one month of closely tracking your spending, I’m sure you’ll be shocked by your results. This is the best way to create a realistic budget, as you will truly see where your money is going, and this will help show you how much should be dedicated towards each category in your budget.

Plus, the shock from seeing exactly where your money is going will encourage you to be wiser with your spending.

Budget category: Income.

For the income part of your budget, it can be from varying sources. You can include income from your day job, rental properties, side jobs, passive income sources, and so on.

One common mistake is that many don’t realize their income can drastically fluctuate from month to month, even when you work the same hours every month or if you are paid salary. Due to this, you will want to be mindful of whether you are paid twice a month, every two weeks, once a week, etc. The difference of when you are paid can change the amount you make each month. Budgeting with a fluctuating income can be difficult, and in a future blog post I will go over it in more detail.

Also, I don’t think bonuses should be included in a person’s budget. Including them in your budget is not usually the best thing to do unless you are 100% certain you are receiving the bonus. I have heard of far too many people who have counted on bonuses only to be let down when it was less than anticipated. Your budget should be realistic, not a fairytale.

Related:

Budget category: Expenses.

Have you ever truly totaled your expenses?

When making a budget, many people only estimate their expenses. However, you actually should be taking your realistic expenses and putting them in your budget as your estimations may be way off.

Here are expenses you may include when creating a budget:

  • Home – House payment, rent, maintenance, utilities, insurance, property taxes, etc.
  • Car – This includes all car expenses such as your monthly car payment, gas, maintenance, insurance, license plate fees, and so on.
  • Television, cable, Netflix, Hulu, etc.
  • Cell phone.
  • Internet.
  • Food – This includes all groceries, eating out, snacks, etc. Seriously, sit down one day and add up your food expenses for the month before.
  • Clothing.
  • Entertainment – Entertainment can include many things, such as going to the movies, going out for drinks, concert tickets, sports, and so on.
  • Charity – If you regularly donate to charity, then this should be an area you budget for.
  • Savings funds – This can be for your retirement fund, wedding, travel, etc.
  • Taxes – If you are self-employed, then taxes will make up a  large part of your budget.
  • Health insurance.
  • Miscellaneous – Pet expenses, fees, childcare, school, gifts, etc.

Related posts on creating a budget:

Keep your loved ones involved when creating a budget.

Even if only one person manages the family’s finances, the other person in the relationship should, at least, have somewhat of a clue. Conducting regular family money meetings is crucial to having a successful budget and meeting financial goals.

A budget doesn’t work if the other person doesn’t even know it exists!

Make changes when/if needed when creating a budget.

I recommend going over your budget on a regular basis. This may mean once a week, once a month, or something else. Do what feels right for you and what you think your situation calls for.

Many things can change in your budget. Your income may change, your expenses may change, or your goals may change. When something changes, you should adjust your budget to reflect that.

You may have noticed a recurring theme in this budget post, that you should be realistic about everything. Be realistic about what you make, what you spend, and if things need to be changed.

Do you believe in the power of creating a budget? Why or why not?

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Source: makingsenseofcents.com

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Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.

Have you ever gone over your budget only to find you’ve overspent on food? With food being the third-highest household expense behind housing and transportation, our food choices have a huge impact on our budget.

Learning how to budget groceries can help you save more to put toward your financial goals. Here are 28 ways to help you learn how to budget groceries.

1. Track current spending

Before you figure out what you should be spending on food, it’s important to figure out what you are spending on food. Keep grocery store receipts to get a realistic picture of your current spending habits. It might help to break down spending by category (via a spreadsheet or on paper), including beverages, produce, etc. Once you’ve done this, you can get an idea of where you need to trim down your grocery bill.

2. Allocate a percentage of your income

How much each household spends on food varies based on income and how many people need to be fed. Consider using our budget calculator if you’re not sure where to start. Try allocating 10% of your income to food as a starting point and then you can increase from there.

3. Avoid eating out

Recent data from the Bureau of Labor Statistics shows a 13% increase in food spending in the U.S. — a jump driven by rising purchases on dining out. Avoiding eating out where possible can help reduce your overall food spending. If you’re actively dating or enjoy restaurants with friends, be sure to factor eating away from home into your food budget — and stick to your limit.

4. Plan your meals

It’s much easier to stick to a budget when you have a plan. Plus, having a purpose for each grocery item you buy may help ensure nothing goes to waste or just sits in your pantry unused. Don’t be afraid of simple salads or meatless Mondays — not every meal has to be a gourmet experience.

5. Keep a fridge grocery list

Keep a magnetized grocery list on your fridge so that you can replace items as needed. This can help you buy food you know you’ll eat. Sticking to a list in the grocery store may help you stay accountable and not spend money on processed or pricey items.

6. Eat before you go to the store

If your mother gave you this advice growing up, she was onto something: according to studies, shoppers spend more when hungry. Eating before going to the grocery store may help you avoid tantalizing foods that can cause you to go overbudget.

7. Be careful with coupons

Getting 50% off ketchup is a great deal — unless you don’t need ketchup. Beware of coupons for items you don’t need. If the item isn’t on your list, you’re not saving at all, but rather spending on something you don’t truly need.

8. Embrace the bulk section

The bulk section of your grocery store may help you find inexpensive staples, discover new foods and bring variety into your diet. Take the time to compare the price of prepackaged goods versus bulk — bulk is likely cheaper.

9. Bring lunch to work

Picture this: you’re trying to stick to a food budget, and one day at work you realize it’s lunchtime but you forgot to pack a lunch. All the meal planning and smart shopping in the world won’t help if you don’t have food when you need it.

10. Love your leftovers

Instead of throwing your leftovers away, try to eat them to avoid wasting money. To keep things interesting, look for ways to repurpose foods — yesterday’s leftover taco meat can become today’s shepherd’s pie.

11. Keep an inventory

Keeping a list on your fridge of what you have on hand can help you avoid food waste and get creative when meal planning. And it’s a great way to get the most use out of grocery items that are sold larger quantities than you need for a single recipe. Not sure what to do with that giant bunch of celery or box of spinach you have left over from another recipe? Try out some online recipe blogs or sites that offer recipe ideas based off a few ingredients you input.

12. Freeze foods that are going bad

Another way to avoid wasting food is to freeze things that look like they’re about to go bad. Fruit that’s past its prime can be frozen and used in smoothies. Make double batches of soups, sauces and baked goods so you’ll have an alternative to ordering takeout when you don’t feel like cooking.

13. Use curbside pickup

About 29% of shoppers admitted that seeing an item that looked too good to pass up led to impulse purchases. Using curbside pickup can help prevent you from purchasing unplanned items.

14. Check the top and bottom shelves

Wise grocery stores know that eye level is where the most sales happen. In fact, consumers select about 80% more products at eye level than at the bottom shelf. So next time you’re out shopping, take a quick look up and down — you may find a better deal hidden out of sight.

Additional grocery saving tips

Need more ideas on how to save on your food bill? Here are some additional tips that can help.

  • Choose generic — One survey found that 50% of people said opting for generic products over name brand helped them save on groceries.
  • Drink more water — Recent data found that 17% of consumers cut back on purchasing beverages at the store due to rising inflation. Drinking more water may help you save what you would’ve otherwise spent on beverages.  
  • Pay with cash — Try going to the grocery store with cash — and only what you’ve budgeted for. Leave your credit or debit card at home. After all, you can’t spend what you can’t pay for.
  • Buy what’s in season — Food prices can vary depending on whether they are in season or not. When foods are out of season, they may be scarce — and therefore more expensive. Try to stick to buying foods that are in season.
  • Grow your own herbs — Herbs at your local grocery store might sometimes be expensive. Growing your own is one way to cut back on your grocery bill. 
  • Plan a meatless meal — Beef prices increased for three years straight from 2020 to 2022, and the USDA predicts other meat categories will rise in price in 2023. By planning a meatless meal every so often, you may be able to save some money on your grocery bill.
  • Buy cheaper cuts of meat — Not all cuts of meat cost the same. You may be able to save money by choosing chicken thighs over chicken breasts, ground chuck over sirloin and pork loin over pork chops.
  • Ask for a discount — This won’t always work, but if you notice your food is close to expiring, ask the cashier for a discount. You may be able to save yourself a few dollars. 
  • Learn how to preserve food — If you have some fruit that’s going bad in your home, you may be able to preserve it by making and canning jam. Hopefully the more food you can save in your home, the less you’ll need to buy at the store.
  • Keep a running tally while you shop — Jotting down the prices of items you put in your cart or quickly crunching the numbers in your phone’s calculator can help you stay more aware of how much you’re spending.
  • Buy canned food — Canned food is often less expensive than fresh foods, so buying canned could stretch your food budget.
  • Shop sales — If you notice a food you often eat goes on sale, stock up if you have room in your budget. While you may spend more than you normally would up front, you’ll save yourself from having to purchase the item at full price in the future.  
  • Use rebate apps — Some apps provide cash back on certain purchases. Check to see if the items you need to buy at your next shopping trip may qualify.
  • Sign up for your store’s loyalty program — Some grocery stores have points or loyalty programs that can provide you with extra discounts when you shop.

Bottom line

Sticking to a food budget can take planning and discipline. However, learning how to budget groceries by being resourceful and cooking healthily is a skill that can benefit you for years to come.

Earn cash back on select debit purchases with Credit Karma Money™ Spend.

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Source: mint.intuit.com

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By Mike Piper 8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 10, 2014.

People often ask me to point them to a decent online retirement planning calculator. I never do.

You see, I don’t trust such calculators.

It’s not that their math is wrong. (At least, not usually.) The problem is that their calculations are often based on shoddy assumptions and unknowable variables.

You Know What They Say about Assuming…

For example, what rate of return does the calculator assume for your portfolio? Is it reasonable? Or, perhaps, was the calculator programmed to assume that future returns will equal past returns (thereby ignoring the possibility that the U.S. economy won’t have the same explosive growth over the next century that it did over the last)?

And what assumptions does the calculator make about future tax rates? From what I’ve seen, most calculators assume that either:

  1. All income will be taxed at a flat rate (usually 25% or 28%), or
  2. Tax brackets will continue to look the same as the 2013 tax brackets all the way into the future.

While I certainly don’t know what tax rates will look like three decades from now, I doubt that either of one of those assumptions will turn out to be correct.

And does the calculator account for sequence of returns risk? A portfolio averaging a 5% annual return is very different from earning a 5% return every year. If the calculator doesn’t account for that fact, it’s going to significantly underestimate the amount of money you’ll need to retire safely.

What’s Better than an Online Calculator?

If you’ve taken the time to educate yourself about investing, then you probably don’t need an online calculator. A simple excel spreadsheet will function at least as well. (And you get to choose your own assumptions!)

Alternatively, if you haven’t taken the time to learn about investing, there’s no way for you to judge whether the assumptions that went into the calculator’s projections are reasonable.

In other words, there are two routes you can take:

  1. If you want to be a do-it-yourself investor, super. But rather than rely on online calculators, you’ll need a deeper level of understanding if you want to be successful.
  2. If you don’t want to go it alone, that’s fine too. But in that case, an online calculator isn’t what you need. What you need is a qualified financial advisor.

In my opinion, such calculators are only useful for young investors who are so far away from retirement that none of the relevant variables are known yet. In other words, a completely blind guess from a calculator is almost as good as one from an advisor.

About the Author: Mike Piper writes at Oblivious Investor, where he provides plain-English explanations of topics like Roth IRA rules and 401k rollovers.

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Source: biblemoneymatters.com

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About the series…

When most people talk about money management, they discuss tactics. Occasionally, you’ll encounter someone who elevates the discussion to strategy, rather than simply scattershot tactics.

But what’s missing from both conversations — both tactics and strategy — is a wider-lens look at how to become a better thinker; how to become a crisp, clear decision-maker.

How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.

This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.

[Quick recap] If you read the first issue of this series, you know I’m hyped about rethinking the FIRE philosophy into four pillars:

Financial psychology — This is the foundation of everything.

Investing — Let’s be honest: technically, you don’t need the “RE.” You can stop at “FI.” If you master your inner psychology and invest in your 401k, IRA and other brokerage accounts, you can live a wealthy and wonderful life. The “FI” is mandatory for everyone; the “RE” is optional.

Real estate — It’s a hybrid between owning an investment and running a business, so the “R” fits perfectly between “I” and “E.” Did someone say “mashup?”

Entrepreneurship — The last on the list because it’s the toughest, but this is where near-infinite potential lives. You’ll want to focus on F, I, and mayyyybe R first, before you tackle this tough cookie.

Financial Psychology

We recently re-ran one of my favorite episodes on the podcast: an interview with behavioral economist Kristen Berman, who states – among other things – that habits are overrated.

Wait … what? Habits are overrated? But … but … aren’t habits the cornerstone of, like, everything?

Nope, according to Berman. Habits are an excellent second choice.

Automation is more powerful than habits. The best upfront use of your time is to set up systems — e.g. automatic transfers and deposits. Habits are a fallback option for anything that can’t be automated.

Systems are likely to stick longer. Your automations don’t crack when you take a two-week beach vacation. Your habits, by contrast, might take the holidays off.

Systems rely on software. Habits depend on humans.

And in the end, the robots always win.

Investing

Successful investors tend to fall into two camps: those who are great at making returns, and those who are great at keeping their returns.

Those who are great at making huge returns are the ones who risk it all; they bet big on a handful of individual stocks, or they bought crypto in huge quantities during the early days, and their speculation paid off.

Our collective sense of survivorship bias applauds them.

But their risky behavior doesn’t stop. They double down again and again, until eventually they lose much of their returns.

Easy come, easy go.

By contrast, the investors who are great at keeping their returns often invest with a methodical, long-term, wide-lens approach.

It takes them decades, rather than mere years, to build their wealth. But once built, they tend to be more adept at keeping it.

SPOTLIGHT ON…

What tools are kick-ass at financial automation?

One of my favorites is Acorns, which automatically rounds up your purchases and invests the difference.

If you spend $1.73 on a coffee (wait, can you still get coffee for $1.73?? okay fine, if you spend $1.73 on … um … a bag of peanut M&M’s?), the tiny robots will round your purchase up to $2 and invest the difference, $0.27, into your Acorns account.

You can choose your favorite investing style (aggressive, moderate, conservative), or double the round-ups if you’re feeling spicy.

My personal tally? Welp, here it is:

So if I’m spending too much, or too often … at least I’m investing, too.

Check out Acorns here (you’ll also get a $5 bonus).

Real Estate

Many people have some variation of the following question:

“I’d like to buy an investment property. And I’d like to _____ [insert personal use here] _____ when it’s not rented out.”

For example, “I’d like to …”:

  • … use it as a summer/winter home.
  • … use it for a month or two every year.
  • … have my aging grandparents or parents live there.
  • … turn it into a home office temporarily or seasonally, like during the summers.
  • … let my kids live there after they move out.
  • … provide a home to my brother or sister while they’re getting back on their feet.

That’s fantastic. But that’s not an investment property.

There’s a difference between buying an investment property vs. monetizing a property while it’s not in use.

The former requires cold, hard math. Your personal preferences don’t enter the picture. You make spreadsheet-based decisions with Spock-like reason.

The latter’s existence is based on your personal preferences. Every decision, from location to layout to square footage, is influenced by your homeownership ideals.

On the surface you’re performing the same act. You’re purchasing a property, and then renting out said property. You’re advertising the vacancy, collecting rent checks, performing routine maintenance and repairs, and paying taxes as a landlord.

But there’s a huuuuge difference between the decisions you make when you’re selecting each type of property.

Many homebuyers get smacked upside the head with problems when they don’t understand which set of objectives they’re chasing.

They take their cues from the wrong group. They use the wrong formulas. They play the wrong game, follow the wrong rules, track the wrong scoreboard.

The home they purchase ends up being the wrong candidate for the job.

And that’s a six-figure mistake.

In our course, Your First Rental Property, we teach our students how to clarify exactly what they want in an ideal property, so that they never take cues from the wrong voices.

Entrepreneurship

Let’s keep this simple:

  • “Do I need business cards?”
  • No.
  • “Do I need a business plan?”
  • Meh. Maybe something that’s simple enough to scrawl on a napkin.
  • “Do I need a suit?”
  • Why, are you a funeral director?

Stop playing business. You’re not a little kid on a playground; starting a business by printing business cards is a grown-up version of make believe.

No matter what type of business you’re running — whether you’re dog-walking for extra income or freelance coding for the local university — you need two things:

  • Either a product or service
  • Someone who thinks your product or service is valuable enough to purchase

That’s it. Forget the business cards. Focus on (1) figuring out what product or service you can offer the world, and (2) telling the world* about it.

*You’ll want to narrow down “the world” into something more targeted. Like, tell Bob. Especially if Bob has a dog that needs walking, or if Bob hires freelance coders for the local university.

Wahoo!! You’ve finished reading Issue #2 of the First Principles series!

I hope this series inspires you to think, learn and take massive action.

Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.

See you soon!

Source: affordanything.com

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How to take a good rental property listing photo

“Invest during a pandemic? Are you crazy?”

That’s a reasonable question. Why would anyone want to invest in a volatile market and in the midst of economic uncertainty?

But recessions create opportunities. Yes, it’s terrible that millions have lost jobs and suffered huge portfolio losses, but the unfortunate reality is recessions happen. Like it or not, this is our current situation. By looking at the market and asking “what opportunities can I find?,” we contribute to the recovery.

We contribute to the recovery in all types of investments: stocks, real estate, side hustles.

When we buy stocks, we infuse capital into companies that we believe in and/or into the market as a whole.

When we buy, renovate and rent properties, we create jobs for contractors, agents and property managers and we offer our tenants a safe, comfortable and well-maintained home.

When we start a side hustle, we build products or services that thrill our clients and create jobs for our team.

When we invest, we participate in the recovery. Recessions are an unfortunate fact of life, but they carry a silver lining. And for newbie investors in particular, recessions can open the door.

Unfortunately, during times of uncertainty, many people surrender to their fear of investing. They sit in cash until it’s too late.

To be clear, I’m not talking about people who don’t have the capital to invest. If someone is financially unstable — if they lack an adequate emergency fund, for example, or if they’re buried in high-interest credit card debt — then they should be applauded for focusing on the fundamentals first. Build the foundation; everything else rests on that.

But many financially stable people will sit on excess piles of cash.

I get it. Investing is scary during a recession.

It’s normal to feel scared of buying index funds, only to watch them drop the next day. It’s natural to feel scared to start a side hustle, when you know this is a tough time for small businesses. It’s normal to feel scared about buying a rental property; what if your tenants lose their jobs?

But by sitting on too much cash, you miss the opportunity to pick up undervalued deals.

You also miss the chance to start building momentum, so that when the economy starts rebounding, you’re already established. You’ve started the side hustle. You own the rental property. You’re not scrambling to get started after the recovery is underway; your projects are in place.

You might not have enough cash to buy cheap assets at this moment. That’s okay. Focus on the fundamentals (like building an emergency fund) and don’t worry.

If you’re fortunate enough to be able to invest, though, don’t sit out this opportunity due to fear.

We discussed stocks at length in this podcast episode, and we talked broadly about how to finish 2020 financially stronger than you started in this episode.

In this article, we’ll focus on real estate.

Should you invest in rentals during a pandemic? Might we see another housing crash, 2008-style? Is this a good time to buy? To sell? Let’s explore.

“Is the real estate market going to crash again?”

Have you heard of the availability heuristic?

It’s defined as “the tendency to overestimate the likelihood of events with greater ‘availability’ in memory.”

We overvalue examples that can easily come to mind, while we undervalue examples that are harder to imagine or recall.

If something happened recently or if something is emotionally charged, then it’ll easily come to mind. And if it easily comes to mind, we overestimate the likelihood that it’ll happen again.

Prior to the pandemic, the 2008 housing crash was the most recent recession. It comes to mind quickly: it was recent and suuuuper emotionally charged.

And so it’s natural — it’s logically flawed, but natural — to assume that this current recession will resemble the last one, to overestimate the likelihood of another housing crash.

But the factors that led to the 2008 recession (subprime lending, speculative building, shady credit-default swaps) are nothing like the factors that led to the 2020 economic collapse (a deadly virus).

The Great Recession was created by weakness in the housing market. The chain of events in 2008 wasn’t: “a recession struck, therefore home prices collapsed.” It was the opposite: “home prices collapsed, therefore recession struck.”

If you started investing before the 2002 dot-com burst, or if you were already an adult during the 1987 market crash, you’ve experienced bear markets that didn’t coincide with a housing crash. But if you’re under 40, the Great Recession was the first major recession in your adult life.

If that’s your situation, then it’s especially tempting to associate recessions with real estate crashes. After all, as a millennial, 100 percent of the recessions of your adult life — 1 out of 1!! — have been tied to a massive real estate crash.

But that was a dozen years ago. The underlying economic factors are different today.

There may or may not be a temporary slight dip in housing prices. (I doubt it, but it’s possible.) If that happens, clickbait headlines will refer to this minor dip as a “crash,” because that’s eminently more clickable. Don’t be fooled by the phrasing.

Study the housing market. Read the price-per-square-foot declines. Look at the average days-on-market of homes for sale. Scan for the number of new mortgage loan originations. This data will tell you far more than any screaming headline.

“What if my tenants can’t pay rent?”

Let’s look at statistics:

In a normal market, around 20 percent of tenants are late in paying their rent, according to data from the National Multifamily Housing Council, which tracks 11.5 million apartment units nationwide.

In April 2020, that number increased from 20 percent to 31 percent. That’s not as bad as many landlords feared.

  • In normal conditions, 80 percent of tenants pay rent on time, and 20 percent are late.
  • In pandemic conditions, 69 percent of tenants pay rent on time, and 31 percent are late.

But wait! It gets better.

The NMHC surveyed apartment managers again one week later. They found a huge improvement: 84 percent of apartment households paid rent by April 12th.

Tenants might not be able to pay rent on the 1st of the month. But the overwhelming majority — 84 percent — were able to pay after a delay of less than two weeks.

As far as the data shows so far, worries that tenants won’t be able to pay rent have largely not come to pass. Most tenants are still able to pay rent; they just need extra time.

(The NMHC noted that a huge number of apartment managers volunteered to waive late fees or offer flexible payment plans.)

That said, millions of people have been helped by a combination of stimulus checks, enhanced unemployment benefits (which currently provides an extra $600 per week in addition to normal state unemployment benefits), or payroll protection if either they or their employer qualifies for Paycheck Protection Program funds. Will these programs get renewed or extended? What will happen if they don’t? There are many lingering questions, and the future remains to be seen.

The simple truth is that nobody can accurately predict the future. We can look at data about our current situation, and as of now, we know that 84 percent of tenants (out of 11.5 million household units) paid rent within two weeks of its due date. But we do not know if or how that number will change in the future. Variables that cannot be predicted — such as the speed of recovery, the level of government intervention — will play a major role in shaping these answers. We don’t know how those variables will take shape.

The greatest risk is assuming that we know the future. Beware of certainty. Those who pretend to know the future are clinging to security at the expense of honesty and accuracy. Don’t listen to any economic or market projections that are expressed with too much confidence. We don’t have a crystal ball. Nobody knows what the future holds. The wise ones recognize this and accept it.

We cannot state what will happen. We can only state what IS happening. And from that, we make preparations for what is and what might be.

“What risks should I be wary of?”

Of course, there are serious risks ahead. We do not know:

  1. … how long the pandemic and global shutdown will continue.
  2. … how long such a large portion of the population will remain unemployed.
  3. … how many employees have had their hours reduced or accepted a temporary paycut, and how this will reverberate throughout the economy.
  4. … how long the recovery will take.
  5. … whether or not there will be a tragic second wave, or third wave, which triggers an unavoidable second or third shutdown.

How can you approach smart real estate investing in this context?

Here are a few Do’s and Don’ts:

Don’t avoid investing. The people who made that mistake during the Great Recession — those who avoided making new investments from 2009-2012 — missed out on massive, opportunity-of-a-lifetime recovery gains.

Do thoroughly analyze any new rental investment that you’re eyeing. Run a variety of “what if” scenarios on a spreadsheet, crunching the numbers with different assumptions.

What if occupancy rates fell by an additional 10 percent? What if you reduced the rent by 20 percent for the next six months? How would this affect your returns?

In our course, Your First Rental Property, we provide robust, detailed spreadsheets for heavy number-crunching.

We teach our students that the cliché thrown around by other investors — who tell you to “calculate the return” — is too simplistic.

You’re not calculating “the” return; you’re calculating a range of possible returns.

You’re not stubbornly insisting that a given rental property will have an 8 percent cap rate. You’re calculating a range of cap rates in best-case, worst-case and middle-case scenarios.

Unfortunately, there are sellers who will advertise properties as having an “X” cap rate, and there are investors who take that information as a fixed number. That’s baloney.

Properties don’t have a single fixed cap rate; they have a range of cap rates, and we teach our students how to assess this range before they commit to a six-figure investment.

Don’t over-leverage. You don’t need to borrow every penny you qualify to receive.

Ignore the real estate investors who are fixated on cash-on-cash return, a popular formula that inherently rewards overleveraging.

Instead, focus on an investing strategy that prioritizes the property’s cap rate (essentially its dividend stream). This is the investment philosophy and strategy that we teach in our course.

Do maintain strong cash reserves. We teach our students to keep a minimum of three months’ gross rent, which translates to six months of operating expenses.

Don’t jump in without a specific, carefully-thought-out written plan. Before you start investing in rental properties, write your personal investor statement.

Your written investment statement should articulate how many properties you want to purchase, the speed or rate of acquisition, the type of financing you want to use, your ideal debt-to-equity ratio or leverage maximum, the type of neighborhood you want to target, the age and condition of properties you want to purchase, and more.

We provide a fill-in-the-blank template to guide you through this exercise in our course.

Do prepare a variety of ways that you can accommodate tenants who are financially struggling. Here are some examples:

Offer an incentive: 
Offer your tenants one month of free rent — which they can use immediately — if they extend their lease by an additional year.

This is a win-win scenario. You’re spared from the costs of a turnover and vacancy. You pass these savings directly to your tenant.

Waive late fees: 
If your tenant is waiting on unemployment benefits, they may not be able to pay rent on the 1st of the month. That’s fine; they’ll have the money once their benefits arrive.

Offer to waive late fees, under the condition that they stay communicative.

You want to avoid a tenant ‘ghosting’ you, screening and dodging calls from you or your property manager.

You can avert this situation by (1) letting them know you’re flexible and accommodating, and (2) telling them you’ll waive late fees as long as they send you frequent updates about their situation, like a quick text message or email, every two to three days.

Set specific and measurable communication criteria, such as: “Please text me with an update at least once every three days, even if your text is as simple as ‘hey I’m still waiting on my benefits to start’.”

Spread the payments:
Another option? If your tenant is waiting for their unemployment benefits to arrive, offer to spread next months’ payment across the rest of their lease.

Let’s say their rent is $800 per month, and they have 9 more months remaining on their lease. In this example, they would pay $0 next month, and their rent would rise by $100 per month for the remaining 8 months.

The Bottom Line: Recessions are tragic, but they also carry the hope and promise of a recovery. If you have money to invest, don’t let fear hold you back. Invest in the market, start a side hustle, or invest in rental properties. Don’t let another year or two slip by, and then scramble to get a foothold after the recovery is well underway.

Our flagship course, Your First Rental Property, opens for enrollment again on Monday, November 30th.

Learn about the course in this video below, or check out this page for FAQs, testimonials, and your chance to join our VIP waitlist. When you join, you get a free 7-day crash course on the fundamentals of residential real estate investing.

If you’re interested in investing in rental properties and want an A-to-Z guide of everything you need to know, learn all the details here.

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Source: affordanything.com