For the past year or so, it’s occurred to me that people at the lowest income levels are usually getting screwed by most policies. Not only is there very little money left over after expenses for things like contributions to a 401(k), but the tax incentives are almost nil for that anyway.
Prices skew toward the average because higher incomes allow the demand to raise prices this high. In fact, I suspect prices skew slightly higher than average because the potential disposable income at the higher end of the spectrum allows for an even greater increase in demand and, therefore, prices.
And this leads me to housing. One of the worst things you can do is treat home ownership as something that everybody should participate in and this is because houses, even once a mortgage has been secured, are not free: they cost to own. They are typically larger than apartments and therefore cost more to heat and cool, and they also cost in maintenance, one of the sneaky but very expensive factors that contribute to the total cost of ownership.
Let’s look at this over 4 incomes levels:
- Lower Incomes
- People should not buy if they do not have the means to afford the maintenance on a house. If the cost of maintenance might cause the owner to become insolvent, then owning is probably a bad idea, and the other potential advantages of owning are rendered meaningless.
- Middle Incomes, No or Low Upward Mobility
- These jobs, if they have little potential for income growth, are very sensitive to increases in rent, which is why the appeal of owning at these levels is so great. As long as income can afford the maintenance on a house, it might make sense to own a house if the advantages of appreciation out-weigh the cost of maintenance. It also helps if you don’t plan to move very often, or at all.
- Middle Incomes, Upward Mobility
- These jobs are much less sensitive to increases in rent as they have a good or high potential for increases in pay. As these jobs generally allow for a high savings rate, those savings can often be applied to various reasonable investments. Pick which game you want to play. You could choose to own a house as part of a strategy in this case, but here is where many personal factors affect whether it really matters. Generally, it’s possible you are confusing your income with the quality of your investments, so you have to be careful.
- Higher Incomes
- From a strict income perspective, the cost of average houses or apartments are somewhat negligible. The danger of listening to investment advice from these people is that they are largely immune from the potential downsides of most common financial decisions and therefore are not necessarily good representatives of what you should be doing with your money.
It should be noted that “income” is probably best considered from a needs perspective over a raw earnings perspective. The more kids you have, for example, the less disposable income you have, generally.
[I suspect you could represent this algebraically. Some people spend way too much on their kids, but they generally still have some cost, so you might say kx, k being the number of kids and x being the cost per kid. So if disposable income is d, and i is your literal income, you could say d = i – kx, which, as a formula, is consistent across all income levels, but this is just my mind meandering; kids are just an example]
These four categories are simplifications, no doubt, but I find it useful to make these distinctions. Other factors to consider are commute distance, whether your income is a single point of failure or whether you are married and your spouse also works. It also matters whether you are only employable in one industry or if you are employable in multiple industries, or whether you have outside income. Generally, you should try to avoid single points of failure.
The real danger of a mortgage is the potential of default/bankruptcy, which means that when you a buy a house, your biggest concern becomes your ability to consistently make payments on it for the duration of the loan. If you can’t maintain this consistency, you could lose it all. The upside is that if you can maintain consistency, you can lock in a monthly payment that you might be greatly thanking yourself for 5-15 years later. The real danger of rent, on the other hand, is that it generally increases over time, and this erodes the purchasing potential of that segment of your budget, and generally costs more per square foot than owning. You also lose out on potential increases in value. The upside of rent is that your solvency is less paramount and your costs are generally smoothed out over time, since you don’t pay for maintenance. You also don’t experience potential decreases in value (though this is generally less common than increases).
Of course, a dozen or so factors affect whether it makes sense for you.
And while looking at income like this is useful for analyzing things, it, too, is dangerous. You might find yourself jumping from a job with no upward mobility into one with it. Or, as many people in the Great Recession found, sometimes it goes the other way. Think you’re immune? Better hope you’re right 😉
Poverty is a big subject and I’m not going to pretend to take it on. I have nothing against low-income jobs because I know some great people who don’t earn much but are doing good things for the world. So, sometimes I find myself wondering how these people can win financially without the same advantages that come with a higher income, and I don’t always know what that looks like. I keep thinking government policies could change to improve the situation, but I don’t know what that might look like, either. This is where Conservatives too often have nothing meaningful to suggest, but Liberals just call for Socialism or some such bullshit. I have deep suspicions that there really are good answers out there, but those answers aren’t coming from people I know, unfortunately. Seriously, I wish my left-leaning friends would speak up with reasonable propositions, or facts, or philosophy, or anything, to nudge the world toward thinking harder about things, but too often it’s just some lame meme that does nothing but complain. It’s legitimately disappointing. I’m guess I’m a positivist, believing people have something to contribute to the world, it’s just that whining isn’t helping anybody, and that’s the easy out so many people take.
I’d say that software development lands squarely in #3, but the longer I spend here, the less in touch I am with life back when I was in #2 range. It also doesn’t help that people think houses are free once you take out a mortgage. Shoveling those with the lowest incomes into a house is a great way to kill them, IMO. It’s not that straightforward, people have to let go of this idea that houses automatically mean prosperity. But I have some ideas on how to reduce the costs of a house in a post I’m still writing and mulling over. But it’s this whole consideration for the lower incomes which is precisely why I don’t write about investments as if everybody should do one thing or another: it’s absurd to think that way, and ignores whole swaths of population that are better off not doing what people in #3 and #4 think.
[One of the very interesting implications of all this is that somebody in #2 might actually be better off focusing on home ownership, since my strategy, which involves investing in the broader stock market and avoiding real estate, depends heavily on establishing a large quantity of investments before the proceeds can reflect higher returns. Being in #3, this is relatively easy, with a little strategy. With less disposable income, somebody in #2 might see a greater reward from simply shielding themselves from rent increases and owning an appreciating asset. This is only effective, IMO, if the individual makes smart decisions with the remaining money and establishes an adequate cushion that prevents disruption in mortgage payment, so as to avoid default. I think the weakness of my strategy in such a situations comes from the fact that the best returns are seen when the savings rate is high. A 10% return in a given year, on $100,000 investment, is a whopping $10k, but on $10k, the return is only $1k, not so whopping. How fast can you reach $100k invested? Well, that depends on your income. However, if you first secured a low monthly mortgage payment, you could potentially put the rest toward stocks and watch this build overtime. There are quite a number of ways of going about this]