Money Management

Give yourself the best possible chance to succeed. 

Owning a home is something many people aspire to, and with good reason. If you’re used to renting and having to follow someone else’s house rules, which change as you move around to escape climbing rents or accommodate your work situation, the thought of taking out a mortgage loan to buy a home is an appealing prospect.

But while you’re organizing your finances and improving your credit to get the best possible deal on that mortgage, and starting to look at real estate listings, take a moment to truly contemplate all the costs you’ll be faced with when you own a home. Homeowners insurance, property taxes, and maintenance will all soon be yours to pay for.

If you’re looking to buy an older home in particular, that last cost should really give you pause. There’s no way to know for sure how much you’ll have to pay for maintenance and home repairs that pop up along the way, especially in your first few years of owning that home. Here’s why going into homeownership with a robust home maintenance fund is a good idea.

A cautionary tale

I have friends who purchased their home in 2019. The house was built 150 years ago, which might be very old indeed in some parts of the country, but we have a lot of Victorian-era homes in our area. Some of them have been bought, improved, and resold by house flippers, which was the case for this home. Some of the fixes and upgrades made to the house are quite nice (especially the new windows), but unfortunately, the flippers neglected to put money into some of the vital systems that keep the home running.

My friends have now been forced to go into debt on a few major repairs to their home, including a $3,000 plumbing fix just a few months after moving in, and more recently, $800 for a part for their furnace (which is coming to the end of its useful life and will need to be replaced altogether before next winter). The furnace died on them over the Christmas weekend, which was also the coldest part of this winter, so far. They were in another part of the state for the holiday and came home to a cold house — and a need for several space heaters. A bill like that is not a Christmas gift anyone wants.

How a home maintenance fund could’ve helped

While there’s often no way to tell in advance what kind of repairs an older home will need (I’ll note that neither of the problems my friends have encountered came up during their home inspection), having a pot of money set aside for emergency maintenance costs is a really good idea if you can swing it.

If you’re purchasing new construction, you can certainly breathe a little easier when it comes to worrying about components of your home breaking soon after you move in. You’ll be receiving a home with all new appliances and systems like plumbing and HVAC, and some of them may even come with a warranty from either the manufacturer or your builder.

You won’t get this benefit when you purchase existing construction, and the possibility of expensive repairs increases if you’re purchasing a home that’s a century old (or older). You won’t know how well cared for the home has been in the past. While a home inspection ahead of closing on your mortgage can give you some clues about what might need to be replaced sooner rather than later, you might end up in the dark about some potential problems.

How much should you save?

In general, it’s a good idea to plan on spending 1% of your home’s cost per year for maintenance and repairs, but you could end up spending much more if you’re buying an older home. Aim to save at least that 1% going into a home purchase, and more if you can manage. You can keep it in a dedicated “bucket” in your high-yield savings account, so it’s ready for you when you need it.

I’m hoping to buy a home in this city of older houses in the near future, and the lesson I’ve taken from hearing about my friends’ experiences is that I need to have money saved to address anything that could come up in my first few years of homeownership. In fact, being ready for repair costs is one reason why it’s a bad idea to pay cash for a home, as you’ll often be locking up all your available money in the purchase itself.

If a home purchase is in your future, don’t forget to plan for potential maintenance and repair costs — and save up money to help cover them, so you can avoid going into debt.

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It’s a move you may want to make as well. 

Some people with money in a brokerage account check their balances and positions on a weekly basis. But I’m not a fan of doing that — not in general, and especially not during a turbulent market.

For the past year, the stock market has been extremely volatile. And like many investors, I’ve lost money in my brokerage account, at least on screen. I’ve also lost money in my IRA, though to be fair, that’s money I can’t even access without penalty for many years, so it’s less of a concern.

Now, usually what I like to do is perform a quarterly brokerage account review, where I take a look at not just my account balance, but also the different investments I have. So far this year, I’ve put off that review because frankly, I know I’m not going to like the number I see on the screen, and I don’t want to get upset. (I write all the time about how a down portfolio is nothing to panic over, but it’s still upsetting to see big losses, even if they’re only temporary).

But I have pledged to review my brokerage account before the end of January. And when I do, this is the first move I plan to make.

Diversification is key

Over time, the value of the stocks and assets you own can shift. And that can lead to a situation where your investment portfolio isn’t as diversified as you’d like it to be.

In fact, a big reason I’ve been seeing so many losses in my brokerage account is that I was heavily invested in the tech sector, which took a massive beating in 2022. But I never intended to go so heavy on tech stocks. What happened was that in 2020 and 2021, the value of the stocks I held in that sector soared so that as of early 2022, I had a stronger concentration of tech stocks than I should’ve had.

I tried to slowly but surely correct for that by shifting assets around. But then the stock market started to decline, and selling off tech stocks to replace them with other stocks became less feasible.

The point, however, is that even though I didn’t actively go out and buy more shares of tech stocks, I wound up with a larger concentration of them than I wanted over time. So now, when I check my brokerage account in January, I plan to see how diversified I am. And if I don’t like what I see, I plan to make some changes to ensure that I’m not overly invested in a single market sector. That could mean dabbling in new sectors, or even branching out into new asset classes (for example, buying more I bonds).

An important move to make

A diversified portfolio can not only help you gain wealth over time, but also minimize losses during periods of market turbulence. That’s why I plan to focus on diversification at the start of 2023. And if you have a brokerage account, you may want to do the same.

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There’s relief for consumers — but only from sky-high prices. 

Inflation was a major problem for consumers in 2022. In June of that year, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, rose 9.1% on an annual level.

But thankfully, the pace of inflation has slowed steadily since then. And in December of 2022, the CPI came in at just 6.5%. Now that’s still a high reading on a historical basis, but it’s considerably lower than 9.1%.

Now clearly, cooling inflation is a good thing. If it costs less for people to function and cover basic living costs, they’re apt to start struggling less and racking up less credit card debt. But will easing inflation take stimulus checks off the table for 2023?

Inflation isn’t all that relevant

It’s a big misconception that inflation is what dictates whether stimulus checks hit Americans’ bank accounts or not. Rather, stimulus aid hinges on the state of the economy — namely, unemployment and consumer spending.

When jobless levels are high and consumer spending starts to decline, lawmakers can use stimulus checks as a way to pump money into the economy to give it a lift as needed. When unemployment levels are low and consumer spending holds steady, there’s generally no need for stimulus checks — why would there be?

That’s why cooling inflation levels won’t necessarily take stimulus aid off the table for 2023. But to be clear, inflation has little to do with stimulus checks, so whether it’s high or low is almost irrelevant.

That said, the fact that inflation is easing is definitely good news for consumers. Case in point: An item purchased in 2020 for $40 would’ve cost more than $45 in 2022 based on inflation. That’s a massive jump.

It’s too soon to apply similar numbers to 2023 because, well, we’ve only just started off the year and we don’t have fresh inflation data just yet. January’s data, for example, won’t come out until February. But either way, slowing inflation is a good thing. And anyone who’s bummed out about not getting a stimulus check should realize that relief from soaring living costs might go a lot further than a one-time payday.

So are 2023 stimulus checks definitely a no?

Not necessarily. There’s always the possibility of a recession — something nobody wants. Financial experts have been warning of one for months, so we can’t write off the idea of economic conditions worsening to a notable degree.

In that case, a stimulus check could come into play if jobless levels skyrocket. But that’s obviously not something anyone should want.

That said, cooling inflation may be a sign that we’re going to be able to avoid a recession. If the pace of inflation continues to slow, the Federal Reserve might pump the brakes on its aggressive interest rate hikes. That could make it so consumers aren’t forced to slash their spending drastically. And if spending holds steady, we can probably avoid an economic slowdown.

So all told, easing inflation is very much a good thing — even if it doesn’t lead to a specific sum of money in individuals’ bank accounts.

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What’s good for investors may be very bad for renters. 

Airbnb, a publicly traded company based in San Francisco, is a giant in the world of short-term rentals. It may also be one of the reasons the U.S. finds itself in a housing crisis. While Airbnb staunchly denies it’s part of the problem, a growing number of cities worldwide are working to limit the damage short-term rentals are inflicting on their housing supply. Here’s how Airbnb is contributing to the housing crisis.

1. The industry is growing at a faster pace than local governments can keep up with

Many factors went into creating the housing crisis, including the COVID-19 pandemic and builders’ inability to secure the building supplies needed to build more structures. However, it’s difficult to deny the role Airbnb — and, to a lesser extent, its smaller competitors — played.

We know that Airbnb offers more than 6 million rental listings in more than 100,000 cities around the globe. We also know that property owners, referred to as “hosts” by Airbnb, can make far more money renting their property to out-of-towners on a short-term basis than they would collect in monthly rent from a traditional renter.

That may help explain why the sale of vacation homes surged by 44% in 2020 over the previous year. Many people purchased property to use as short-term rentals. And it’s not just individuals who want to join the ranks of Airbnb hosts. Real estate investment firms have gobbled up as much property as possible in an effort to cash in on the Airbnb craze.

According to the watchdog group Inside Airbnb, real estate investment firms have contributed dramatically to the growth of Airbnb. In fact, about one-quarter of hosts on the Airbnb platform own nearly two-thirds of the listings. The return on investment is just that good.

2. Airbnbs limit the number of rental units available to locals

Airbnb hosts snapping up property as soon as it hits the market diminishes the housing supply available to everyday families. Renters have been hit especially hard as rental costs have soared.

For example, the average rent nationwide rose by 15% between 2021 and 2022, with some cities impacted more than others. Seattle, Cincinnati, and Austin have experienced rent spikes of more than 30%. New York, Los Angeles, and Nashville have been clobbered even harder. For renters without enough money in their bank account to cover the monthly increase, options are limited.

There’s nothing inherently wrong with short-term rentals. The problem is that local governments have a tough time reining in the number of short-term rentals operating in their cities. The overwhelming number of Airbnbs makes it difficult to provide enough housing for permanent area residents.

With listings in more than 100,000 cities worldwide, Airbnb is everywhere, from tiny hamlets to huge cities. Here’s a partial list of cities that have imposed restrictions to minimize the number of parties that open an Airbnb:

New York CityBarcelonaBerlinParisAmsterdamLondonMiamiSan FranciscoSanta MonicaCharleston, South CarolinaJersey City, New JerseyBangkok, ThailandReykjavik, Iceland

3. Restrictions may not work

Strict restrictions appear to be working in Santa Monica, California, but it remains to be seen if other cities can throw enough obstacles in the way of Airbnb hosts to slow the growth of the industry.

In New York City, where there may now be more Airbnb listings than available rentals, a new measure goes into effect this month. The measure will require Airbnb hosts to register their property with the city and provide proof that they themselves live there. Failure to do so could lead to fines of $1,000 to $5,000. The city hopes to reduce the number of Airbnbs in New York City by at least 10,000.

4. There’s no clear picture of whether Airbnbs can be reined in

Because the proliferation of short-term rentals is a new problem, it’s yet to be determined how local governments will balance the needs of the community with the rights of the investors. It may be that they will set a strict limit on the number of Airbnbs allowed in their cities. They may also impose a high enough tax on short-term rental operations to discourage hosts from settling in their city.

As municipalities work to find a solution to address the issue, local renters continue to struggle to find an affordable place to call home.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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Make sure you’re listening to the right financial advice this year. 

Dave Ramsey is a well-known financial expert and he’s given some great advice, including his suggestions on which retirement account to invest in and why you should steer clear of borrowing for a new car.

But, Ramsey has also given some very bad advice. And if you’re considering how to manage your finances during the upcoming year, here are four Ramsey suggestions you should absolutely stop listening to ASAP.

1. Don’t worry about your credit score

Ramsey has repeatedly said you shouldn’t care about your credit score. Essentially, he believes that only people who have a lot of debt have good credit and that you’re better off just steering clear of borrowing.

There’s a few problems with this advice. First, you’re probably going to have to borrow money some time — such as to buy a house. And while Ramsey said lenders will do “traditional underwriting” and look beyond your credit, this isn’t always the case.

Your credit score also matters for other things, like renting an apartment or getting affordable insurance. You need to care about it, and if you’re listening to Ramsey and not paying attention to whether your credit score is good or not, you should stop following this advice right now and start working on earning a score that opens doors for you.

2. Avoid credit cards

Ramsey also says you should never use credit cards, opting for a debit card or cash instead. This is also a bad move.

Credit cards help you build credit. They can also give you the chance to be rewarded for spending you’d have to do no matter what. If you pay off your balance in full, you can earn hundreds or even thousands of dollars a year in extra credit card rewards.

It’s also easier to rent a car or hotel with a credit card than a debit card since you aren’t forced to tie up actual money when you make a deposit. Unless you have proven in the past to be completely irresponsible with using credit and you don’t trust yourself not to run up a huge balance you won’t be able to repay, you should have a credit card.

3. Pay off your mortgage early

Ramsey has advised paying cash for your home if possible, or taking a 15-year mortgage if you can’t do that. He’s also suggested it makes sense to pay off your home loan early.

This is bad advice. A mortgage is one of the most affordable loans out there, and interest on it can be tax deductible if you itemize. You should get a 30-year mortgage and not pay off even $1 extra on it. Instead, you should invest the extra money you’d otherwise be using to pay off a loan that has an interest rate below what you can likely earn investing in a safe S&P 500 index fund.

4. Invest in mutual funds

Finally, Ramsey said you should opt for mutual funds over ETFs. And he advises actively managed funds.

This doesn’t make sense. You’ll pay higher fees and have more restrictions and, in many cases, fewer options. ETFs that track market indexes are usually the best bet for most investors.

You should stop following all of this advice in 2023, as doing so can help put you in a better financial position in the long run.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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