Stacey Powell is a former financial auditor and founder of The Financial Gym, a small business which helps people get out of the cycle of living paycheck to paycheck. She believes that simply by spending more time focusing on finances, it’s possible to break free of this cycle.
She confesses that the idea for the project was born out of her own “financial disaster” when she found herself stuck in the debris of a financially devastating divorce. Although she had always considered herself an authority on finances, she felt ill prepared for this setback. The experience taught her about the psychology and emotional impact behind money issues and decisions, as money has different meanings for different individuals.
In her work advising small business owners and individuals on personal finance, she has noticed that people choose different paths concerning money. They are often influenced by their upbringing. She has noticed that those who were raised in poverty tend to continue on a path of being “super frugal” and setting aside a significant portion of their earnings. Those who were raised in a family that was more “well-to-do” may often be frugal as well if they have been educated about the importance and value of money, but those that haven’t often take money for granted. Our attitude towards money influences many of our life decisions.
She uses the example of a couple who wanted to leave their profession as attorneys, but were hindered because they were “locked into” an expensive home and neighborhood.
When Stacey herself fell into tough times, she said that for three years she blamed the event rather than focusing on changing behaviors. As a single mom, she felt that it was difficult to not have someone to talk to about money issues, to hold her accountable.
“We talk about money a lot,” says Stacey, “but it’s only in our heads.” We may be thinking about money (or the lack of it), but there is an absence of meaningful conversation with others. Stacey recommends that couples engage in a once-a-month “date night” with their money in which they get out of the house and actually spend time talking about their goals and impending decisions. By working together on small decisions, they will be better prepared to tackle larger ones, such as the purchase of a home.
Regarding budgeting, Stacey cautions against the common “head in the sand” attitude that people often have. She says even a simple, 10-line budget is better than none at all, and will help couples determine whether they can afford the costs of owning a home. She is quick to point out that these costs are by no means confined to the actual cost of the monthly mortgage. An older home will need repairs and renovations. A newer home will need appliances and furniture. There are a myriad of other costs, including landscaping, community dues or fees, and the need to save for those big-ticket unexpected costs which occur about once a year, such as needing to fix a roof or remove a fallen tree.
Before the housing crash, it was common for homeowners to use their home equity line to pay for needed repairs but this practice is no longer practical, because it extends the length of the mortgage. For this reason, it is crucial to set aside a certain amount of money every month to go towards these “hidden costs” of homeownership.
I asked Stacey her opinion on the best way to determine what you can afford when purchasing a home. She emphasizes that talking to a financial planner is the best way to prepare for that decision. Many mortgage brokers and realtors have been trained to get you into as much of a house as possible, but it’s important to remember that a house needs to suit your entire life needs.
Unfortunately, many home buyers find themselves in a tough situation when realtors show them homes that are outside their budget. They end up feeling disappointed when they must settle for a house that is not as nice as these more expensive homes are. That’s because they are in “home buying mode,” only thinking about the house and not about all the other aspects of their lives which will be affected by the purchase.
As a solution, Stacey proposes finding a realtor who is committed to only showing you houses within your price range. It’s especially important to be clear about how the purchase will affect your life. Journaling and conversing with your partner can help with this process.
Unfortunately, many home buyers fail to make these calculations and end up locked into a certain lifestyle because of their purchase. They may find themselves working too much to support the house and thus not able to spend enough time on other important areas of their lives. This situation can put pressure on marriages and fanily lives. The housing crash caused many marriages to fail.
Another aspect of homeownership which is often dismissed is the fact that it impacts your career. You will need to live in the same city for a number of years to make good on your investment. In general, real estate will always go up long-term, but not necessarily in the short term. It’s very cyclic, and it’s easy to get caught on the wrong side of that cycle. Sometimes it’s better to just walk away by short-selling, although if this happens, it will change the course of your financial future. Even now in 2016, house values are only 82% of their 2006 value in a local sample.
Stacey compares these fluctuations with the tide going in and out. These movements are inevitable, but if you build too close to the line, you will lose. We will see other events like the 2008 crash, but to a lesser extent.
I asked Stacey what she thinks of the 3.5% down payment commonly used in FHA loans to get people into a home sooner. Stacey says she thinks this is a good example of building “too close to the line” and can leave home buyers with no access to funds in case of needed repairs. But she also says that FHA loans may be a necessary part of poverty alleviation, because owning a home often makes the difference in getting out of poverty. She recommends that first-time home buyers put down at least 10-15%, in addition to setting money aside for unforeseen costs. She emphasizes that homeownership is a choice and that people need to be clear, intentional, and mindful about that choice.
What is an affordable choice for a homebuyer with a higher income?
Stacey recommends that someone with an income in the low six figures should not spend more than 25% of his/her income on a house, even though banks are willing to allow more debt than that. When you add in other costs of homeownership, this will come out to about 31% of your monthly gross income. She makes it very clear that homeownership means sacrificing other things. There was a myth which evolved from the tax policy decisions of the Great Depression that homeownership is the same thing as wealth, and realtors often perpetuate that myth.
But is there ever a time when a home can also be a long-term investment?
This is possible, Stacey says, but only if you continue to work and don’t extend your mortgage beyond your working years. If that happens, then when you retire you will be locked in a low shelter cost. However, most people don’t treat their home that way.
Lastly, I asked Stacey about her book The Finance Gym Action Plan for a Better Life with Money. The book lays out how to set up better systems for saving money and how to dig yourself out of debt. Most importantly, it’s about our relationship with money. She laughingly says that one of her friends describes it as “a money book for people who don’t like money books.”
To learn more about Stacey and The Finance Gym, you can check out her website, http://www.thefinancegym.com .