Even people who like math can struggle with major financial decisions. “The problem is that many of us don’t have a simple mental framework for how to allocate our income, and absent it, we can’t tell if we’re going off the reservation,” says Manisha Thakor, director of wealth strategies for women at The BAM Alliance and co-author of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance. She recommends putting 50% of your paycheck toward needs, 30% toward wants and 20% toward savings—a plan first suggested over 20 years ago by now-Senator Elizabeth Warren. Here, Thakor’s just-as-easy-to-comprehend take on five big money questions.
Should you rent or buy a home?
“Home ownership is viewed as a big part of the American dream, but we’re more mobile now, and the calculation needs to be adjusted,” says Thakor. So the first question to ask yourself is, Will you live in the home for at least seven years? “I find that to be the break-even point,” Thakor says. “The costs of buying and selling can easily be 10% of the purchase price, so if you’ll live in the home for less than seven years, I would argue against buying.”
Second, in what part of the country do you live? “If you take into account that most people can comfortably afford a home that is three to four times their gross income, buying makes less sense on the coasts where house prices are super high and more sense in the Midwest where prices are more reasonable,” Thakor explains. For more help running the numbers including property tax and home price growth rate, try the New York Times’ “rent vs. buy” calculator.
Should you buy or lease a car?
“Hands down, leasing is a horrific idea unless you are part of the sliver of the population that can claim their car as a business expense on their taxes,” Thakor says. The draw of leasing is that you get more car for less money. “But the car dealer wouldn’t be in business if the economics weren’t in his favor,” Thakor adds. It’s true that a newly bought car depreciates an average 20% the second you drive it off the lot, so the smartest thing to do is either buy a used car that is one to three years old, has less than 10,000 miles per year and will be yours for at least seven years or buy a new car that you’ll keep for at least 10 years. Either way, the car should not cost more than one-third your gross pay—or the outlays related to owning it such as loan repayment, maintenance and gas will eat up your resources.
Should you save for retirement or your children’s college tuition?
Put your retirement savings first. “Your heart and soul will say, ‘Let me fund the 529 college savings plan first,’ but the average price of a college education is so out of whack with what students will eventually earn that you are setting your child on an unrealistic path,” Thakor says. “Too many people are graduating with huge debt and their parents unable to retire—that’s a lose-lose for everyone.” What’s more, as a result, “you may be shifting the burden of your retirement onto your kids,” Thakor adds. Instead, socking away the maximum allowed in your 401(k) or IRA should be the priority. Then if any extra funds remain, put them toward the college fund. “You’re going to have to sit down with your kids and discuss what you can offer and then help them figure out scholarships and other ways to make up the difference,” Thakor says. If your child will need to borrow more money than what she will make annually on average for the first 10 years after college, she should reconsider her school—or career—choice. Taking on more debt than this is not a decision to be made lightly. For more help, go to thecollegesolution.com and savingforcollege.com .
Should you pay off credit card debt or student loans first?
Depends on the interest rates. If you’ve got extra cash, “the debt with the highest rate is the one you want to pay down the fastest,” Thakor says.
Should you remodel the kitchen or invest in stocks?
You may tell yourself this is a question of investing a windfall in your home or in the stock market, “but really it’s a choice between spending and investing,” Thakor says, “because remodeling doesn’t necessarily add value—the next person may not like what you did.” So then Thakor would rephrase the question as: Do you enjoy today or prepare for tomorrow? “If you’re woefully behind in terms of your retirement goals, consider putting, say, 90 percent of the remodeling costs into stocks and bonds, and spending 10 percent on something smaller that will refresh the kitchen like new linens or plates,” Thakor says. But if you’re completely on track with your savings, go ahead and call the contractor!
Prior to joining The BAM Alliance team, Manisha ran her own independent registered investment advisory firm, MoneyZen Wealth Management. The cornerstone of her work is a concept she calls “MoneyZen,” a joy-based approach to personal finance honoring the core values of simplicity, freedom and abundance. Manisha earned her MBA from Harvard Business School and her BA from Wellesley College, and is a Chartered Financial Analyst. She is also on faculty at The Omega Institute where she works with the Women’s Leadership Center. Connect with her at MoneyZen.com.