This Week in Your Wallet: Struggles in Wealth Building
On Friday of last week, I went on Morning Joe to talk about a new, disturbing trend: young Americans are not building wealth as quickly as their parents did at the same age. The research, conducted by the Urban Institute and recently reported in the New York Times, revealed that while the average wealth of Americans has doubled over the last quarter-century, the wealth of adults in their 30’s and 40’s has not kept up.
As I told Joe and Mika, there are myriad reasons for this lag: this is the generation that got hit by the housing crisis, they’re looking at lower wages, and they have mountains of student debt. Housing is a particular problem for this group, because they are delaying the purchase of a house. Yet, in doing this — say, buying at age 40 instead of age 30 — they can face a real loss of equity later down the line. (According to the Urban Institute, that loss could be as great as $42,000 by age 60.)
However, because I don’t want to be a complete Debby Downer, I wanted to share this article with you, courtesy of mortgage resource HSH.com. It talks about how to buy a house even if you’re still paying down the last of your student loans. Whether you have student loans or your adult children have student loans, it’s worth a read. Some people might be tempted to wait until every last cent of their loans are paid off, but as the article points out, your remaining loan balance isn’t nearly as important as your debt-to-income ratio; that is, your monthly debt payments relative to your income. Ideally, you want your DTI to be 31 or less before you take on a mortgage — which means if you’re down to one loan payment of $120 per month and you make $2,000 per month (and have no credit card debt), you’re looking at a DTI of 6. This is a more than acceptable rate to begin house hunting, and as long as you’ve saved for a down payment and are careful not to borrow too much, I say go ahead and start cruising Zillow.
For more tips on buying a home while still managing student loan debt, I recommend reading the full HSH piece, linked above. And now, here are the other headlines for the week:
Are your kids spoiled?
While we’re on the subject of wealth building amongst younger generations, I wanted to share an article about our youngest generation — the kids who are still living under our roofs. One of the things I talked about during my Morning Joe segment is that we need to teach our kids about the value of money, and there’s no better way to do that than to have them work during high school and college. However, in addition to making sure they work, there are also things we can do that, as USA Today points out, can prevent them from being spoiled (which is just as important as learning the value of money!). My favorite tip in the article? Don’t assume they’ll outgrow expensive taste. A high-end toddler wardrobe could mean a high-end teenage wardrobe (which we all know is MUCH bigger and MUCH more expensive).
What payroll tax hike?
This is interesting — according to new research from Bankrate, 48% of Americans haven’t noticed the higher payroll taxes that took effect on January 1. I found this really surprising, considering the average hit a household will take (2% less in take-home pay, which is roughly $30 less per week). What’s more, Bankrate found that households in the lowest-income bracket are among the least likely to have cut spending to cope with the 2% drop. In a statement, Bankrate’s senior financial analyst Greg McBride noted that “these results contradict the widely-held assumption that lower-income households would feel the biggest squeeze from the payroll tax cut expiring.”
What this tells me is that we could all save a little more. If you don’t notice a 2% bite from your take home, why not take another 2% and divert it into savings. Perhaps you won’t notice that either.
For all the super-procrastinators out there…
I know doing your taxes isn’t fun, and I know that it can be tempting to put off the pain for as long as possible. That being said, I really hope the article I’m about to share doesn’t apply to any of you: April 15 marks your last chance to claim your 2009 refund. Yes, you read that right — 2009. And apparently, nearly one million tax payers still haven’t gotten around to filing their returns from that year. One million! Ladies and gentlemen, either one million of our fellow Americans have been on a four-year cruise, or are the modern incarnations of Rip Van Winkle. (But seriously, folks: do get your taxes in on time, or file for an extension if you know you won’t.)
Have a great week!
Jean
