Money Management

Is it impossible — or a waste of money — for renters to pay $20,000 per month? Read on for Ramit Sethi’s take on a hot Twitter debate. 

At the end of 2022, the median rent price rose to roughly $2,305, according to data from the national real estate brokerage HouseCanary. That represented a 4.8% increase from the end of 2021, when the median rent was $1,855.

For many renters, that’s a lot of money. If you took out a mortgage loan on a $320,000 home, your monthly payment would be $2,305. (This is with an 11% down payment and a mortgage rate of 5.75%.) But believe it or not, some renters are paying 767% more per month to rent an apartment.

Some time ago, Ramit Sethi, author of I Will Teach You To Be Rich, came across a Twitter conversation about a New York City apartment renting out for roughly $20,000 per month. The thread’s participants were trying to figure out who would pay roughly $240,000 per year to live in an apartment when the average home price is $428,700 — or less than two years of this apartment’s rent.

What a $20k monthly rent says, according to Ramit Sethi

Being the kind of person who doesn’t accept things at face value, Sethi took a step back to think about who would rent an apartment this expensive. Here’s his response:

“One of the reasons I also write about people with high incomes is I want you to know…

There are jobs that pay enough for people to rent a $20k/month NYC apartmentThere are very good reasons to rent that place — instead of buyWith this knowledge, you can decide if a high income is a goal for you & what it would take

We should shine a light on money!”

What Sethi is trying to say is that ordinary people — that is, non-celebrities or beneficiaries of immense generational wealth — can afford to pay $20,000 in rent if their careers allow it. Secondly, for certain workers, it’s worth it to pay $20,000 per month to live in an apartment in New York City. And finally, if you want to wake up every morning in that apartment, you need to identify the careers that will allow you to afford the monthly payment.

But really — who can afford $20k a month in rent?

Let’s start with Sethi’s first point.

Fundamentally, your rent payment should be no more than 30% of your take-home pay. For $20,000 to be under 30%, you need to earn around $66,700 per month or $800,000 per year.

Already, I can hear the objections. Who earns $800,000 per year? Admittedly, very few jobs pay an average salary of $800,000. But top performers in already high-paying jobs can realistically net between $500,000 and $10 million in annual income. In fact, Sethi and his team list several of these high-income paying jobs on his website. Here are just a few:

Moving to Sethi’s third point, if you’re an average person and you want to live like Don Draper in the middle of downtown New York, these careers could put you on the right track.

It’s not an easy track. Top annual earners often start out earning small amounts because they’re inexperienced and haven’t achieved their own personal economy of scale. Through dedication to their careers and continued education, these top earners can reach a point where they can finish more work in less time or take on more complicated projects that pay higher amounts.

It’s tough to achieve. But, returning to Sethi’s advice, it’s not impossible. An excellent place to start is with your own expectations.

Part of the reason Sethi responded to this tweet was to correct false assumptions about wealth. If you think wealth is for other people, then you might subconsciously limit how much you can earn. By adjusting your perception slightly and including yourself among the candidates of high-income earners, you might find the motivation to actually do it.

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Dave Ramsey thinks you should invest 5% in a Roth TSP, then invest the rest in a Roth IRA. But is he right to say every federal employee should invest this way? 

Dave Ramsey’s teachings touch on nearly every aspect of personal finances. So it’s no surprise he has something to say about Thrift Savings Plans (TSP), the government’s version of a 401(k).

In a nutshell, Ramsey advises federal employees to invest at least 5% in a Roth TSP, then invest the rest in a Roth IRA. He also recommends investing in a handful of TSP funds — funds C,S, and I — with a higher percent in the C Fund (at least 60 to 80%).

Much like his teachings on credit cards and investing, Ramsey has a “one-size-fits-all” approach to TSPs. His reasons are sound and logical but, in the real world, his advice won’t apply to everyone.

Let’s first look at Ramsey’s advice on TSPs, then offer some counter advice for federal employees who are earning high incomes.

Roth vs. traditional TSP

Ramsey wants you to choose a Roth TSP over a traditional one. Basically, he thinks it’s better to pay taxes now rather than wait until retirement, since the federal government could increase tax rates between now and then.

If your head is spinning, here’s the difference between the two accounts:

Roth TSP: You pay taxes on contributions before they enter your account. Your taxes are calculated using your marginal tax rate.Traditional TSP: You don’t pay taxes on contributions. Instead, you pay taxes on withdrawals. Your taxes will be calculated using your marginal tax rate at the time of withdrawal.

How much should you invest in a TSP?

Ramsey recommends investing at least 15% of your take-home pay for retirement. But he doesn’t recommend investing the full amount in a TSP. Instead, here’s what he would do:

1. Invest 5% in your TSP

Most federal employees will get a dollar-for-dollar match on 3% of their take-home pay, then $0.50 for every $1 on the next 2%.

That’s an excellent deal, which is why Ramsey doesn’t want you to leave the 5% match on the table.

For example, if you earn $70,000 annually, he would advise you to invest at least 5% in your TSP, or $3,500. At the same rate, your agency or service will gradually add its match — $2,800 — for a total of $6,300.

2. Max out a Roth IRA

Once you invest 5% in a TSP, Ramsey advises you to switch to a Roth IRA. His reason here is simple: A Roth IRA has more investment choices than a TSP.

Ramsey recommends investing the remaining 10% of your income in a Roth IRA. But he knows this isn’t possible for everyone. Roth IRAs have annual contribution limits, which can cap you at an amount lower than 10%. For 2023, that limit is $6,500, or $7,500 if you’re 50 or older.

So, let’s return to our example from above. Assuming you’re younger than 50, you can max out your Roth IRA with $6,500.

If we add that to your TSP contribution ($3,500), then you’ve invested $10,000 for retirement. That’s short of 15% of your income ($70,000 x 15% = $10,500). So if you follow Ramsey’s advice and invest 15% for retirement, you’ll need to invest the remainder outside your Roth IRA.

3. Invest the rest in your TSP

After maxing out your Roth IRA, Ramsey recommends investing the remainder of your 15% back in your TSP. Again, using our example from above, that means investing at least $500 into your TSP.

Should you listen to Dave Ramsey?

Ramsey’s advice might work for some people. But it doesn’t apply to every situation.

For example, if you earn a higher income, you might save more on taxes over your lifetime if you invest in a traditional TSP, rather than a Roth. Why is this?

For one, because contributions are taken pre-tax from your paycheck, they’ll lower your taxable income. This could potentially put you in a lower tax bracket and help cut your tax bill.

Secondly, the tax deferral on a traditional TSP can work in your favor if your current marginal tax rate is high. If you think your tax rate will be lower in retirement — which, if you’re not earning as much income, it should be — you’ll save more money by waiting to pay taxes on withdrawals.

Either way, if you’re a high-income earner, it’s a good idea to sit down with a tax or investment professional to understand which choice is better for you. While investing in a Roth TSP means you don’t have to pay taxes in retirement, you may save on lifetime taxes if you defer them until your tax rate is lower.

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Homeowners insurance covers tornadoes, but it may not provide as much protection as policyholders expect. Here’s what homeowners need to know. 

Devastating tornadoes have already begun pummeling the Midwest, and we can only expect that to get worse in the coming months. Peak tornado season for the upper Midwest is June through July. But southern states typically see the most tornadoes in May or June, according to the National Oceanic & Atmospheric Administration (NOAA).

This makes now a great time for homeowners to review their coverage so they aren’t caught off guard if they need to file an insurance claim for tornado damage in the next few months. Here are three things too many homeowners don’t realize until it’s too late.

1. You may have to pay a separate wind/hail deductible

Most people know that homeowners insurance has a deductible, which is the amount you must pay out of pocket when you file a claim before the insurer will pay anything. But not everyone realizes they could face a separate wind/hail deductible in the event of tornado damage.

These storms can be costly for insurers, so many now require homeowners to pay a higher deductible when filing claims for wind or hail damage. This could be a flat dollar amount or a percentage of the home’s value.

Going with a larger deductible generally reduces the policy’s premiums, but it can also lead to bigger out-of-pocket costs in the event of a claim. That’s why it’s important to make sure to save for this in an emergency fund so you’re prepared.

2. Actual cash value policies may not help you replace all your damaged or destroyed items

When it comes to protection for personal items, most homeowners insurance policies give policyholders a choice between actual cash value coverage and replacement cost coverage. Actual cash value means the insurer will pay the actual value of the item at the time of the loss. But this can include depreciation. So if the item is no longer worth as much as it was when you first bought it, the insurer will only pay its current, lower value. That could leave you without the money you need to replace all your belongings if they’re damaged in a tornado.

Replacement cost coverage, on the other hand, pays whatever is necessary to replace damaged or destroyed items with new versions that are comparable in quality. This provides better protection, but it can also make homeowners insurance more expensive.

It’s ultimately up to each homeowner to decide which type of coverage is best for them. But it’s a good idea to familiarize yourself with what coverages you have already if you’re not sure. Then, you can make changes if you don’t think you’re adequately protected.

3. Flood damage might not be covered

Not all tornadoes are accompanied by floods, but when this happens, it could create an even bigger nightmare for homeowners. Floods are some of the costliest homeowners insurance claims there are, and as a result, typical homeowners insurance policies don’t cover them. If a home is hit by a tornado and a flood, the insurer may pay for the wind damage, but not any damage caused by flooding.

In order to be fully protected, homeowners need to purchase a separate flood insurance policy. These are underwritten by the National Flood Insurance Program. They have their own premiums and deductibles, but they’ll reimburse you for flood damage, including damaged personal property. Some lenders actually require homeowners to carry this coverage if they live in an area at high risk for flooding.

Homeowners who have questions about what their policy does and doesn’t cover should review their policy terms or reach out to their insurer with questions. It’s best to do this before you need to file a claim, rather than afterward. That way, should the worst happen, you’ll know exactly what to expect.

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