Planning Your Emergency Fund with the 50 - 30 - 20 Rule

Transcription

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Kevin: It's very important, extremely important. If you don't have an emergency fund, I think they say you should have a three-month emergency fund for a single person. For a married couple, it's six months. It's necessary. It's important. Life happens, right? Sometimes, the unforeseeable happens. Your car breaks down, maybe, or you lose a job or whatever it is. There's this gap of income that you need to cover, whether that's your mortgage, car payment, kid's dentist appointment, or whatever it is that you're paying for. And if you don't have that emergency savings saved up, you're going to be in trouble.

Pete: Kevin, thanks for coming in. I really appreciate it.

Kevin: Yeah, absolutely. Thanks for having me.

Pete: Yeah. So, you are a financial planner. I'm going just to introduce you to our guests here. So we have Kevin Riley, and he works for LPL Financial. How long have you been a financial advisor?

Kevin: For about five years.

Pete: Five years. Awesome. And yeah, I wanted to have you on the show. For a lot of our listeners, the goal is to target first-time home buyers who have not purchased a home. And financial planning has a lot to do with buying a home or your first house. And so, thanks for coming on.

Kevin: Yeah, Pete, thanks for having me. I'm pretty excited about this, my first podcast, so hopefully, I don't jitter too much during it.

Pete: Oh, no, you're good, man. Yeah, you're good. I really appreciate it. And we've actually known each other for a long time. We've been friends for a long time—lots of good laughs.

Kevin: Lots of laughs, that's for sure. So, yeah.

Pete: All right. Well, I'm going to go ahead and just kind of get right into it. We have some questions, and hopefully, we can create good content for our listeners.

Kevin: Yeah, absolutely.

Pete: Cool. So the first question I have for you is, what advice do you have for families starting out and creating a budget to save for their homes? A down payment is a big part of buying a house.

Kevin: Yeah, absolutely. I think this is one of the hardest things that require really strong mental strength. There are four things. You need to see what your income is. Obviously, what you, and if you have a spouse, what your spouse. What's your income? How much do you guys make? The second thing you have to look at is expenses. I know that when I was looking for a house at one point, I had student debt, a truck payment, whatever it was. You need to look at those expenses and debts as well. In that same scenario is credit card debt, which adds up quickly. You know, you're paying 20% on credit cards. How are you going to budget and save money? This brings us to the last thing.

Pete: Savings.

Kevin: Savings, building a savings account, and just start putting money away.

Pete: Yeah. So I think it's hard to save a lot of families right now. It's tough—Do any good practices for finding out, like figuring out how to save every month. I talk. I have a lot of customers whose stories I hear, and I see what's happening, and it's very hard for them to save. And it's very easy to spend, you know, Starbucks, Netflix, Hulu, Spotify, all these things. So, any best practices that you have?

Kevin: Yeah, no, it takes mental strength in this. And you know, a lot of times when people save or say they're saving, they get their paycheck, and whatever's left, they put away into savings. We need to start switching around the mentality of saving and start saving first off that paycheck and then living off the rest.

Pete: And living off the rest. I love, love, love that. So what you're saying is when you get paid, let's say I'm getting paid every two weeks, the first thing I do is save part of that.

Kevin: Correct.

Pete: Before any bills get paid.

Kevin: Yep.

Pete: And what are some good practical ways of being able to do that?

Kevin: Yeah. So there's this common rule called the 50, 30, 20. And this rule is 50% is going to go to your needs, 30% to your wants, and then 20% to savings. They call it the 50, 30, 20, you know?

Pete: 50% to needs.

Kevin: 50% towards your needs.

Pete: Okay.

Kevin: 30 to your wants, and then 20 to your savings.

Pete: Got it.

Kevin: And, you know, honestly, realistically, I think a lot of people, oh, I live paycheck to paycheck. Well, when you do, it's not that you live paycheck to paycheck. It's when you get paid more you tend to spend more. So this mentality kind of gives you, hey, what should I put away for that?

Pete: I see.

Kevin: And then, you know, so this 50, 30, 20 rule that might work for you, for the next guy, it might have to be, oh, I have to do 70, 20, 10. But as long as you start to build out your budget.

Pete: Makes sense.

Kevin: Off of that rule and save first when your paycheck comes in, you're going to be able to budget that money.

Pete: No, I love that. So, let's say someone gets a raise. Well, it's 50% of the raise as well. So, as they're making more income, I think the statistic was last year nationally, wages went up about 8%. And so that 8% extra that they're saving, 50% of that is going to their needs, 30% to their wants, and 20%, and it goes up with, along with your income. I like that. I like that.

Kevin: Correct. So, a very popular rule.

Pete: Yeah. And is there any kind of? When they get the paycheck, I often tell customers to take auto pay. Personally, what I do is have a separate account. And they have. You can create multiple different types of accounts in the bank, but every time I get paid, I have a certain percentage that just sweeps right into the actual account. And I have multiple accounts, and I might create more accounts if I'm saving for something, I'll just have it swoop right over.

Kevin: Yeah. No, that's smart. And what's funny about that is, when you see your bank account, right, and you're like, oh, I get paid in three days, I have $100, I can't spend that. But if it comes out early, you're never going to see it. And that same mentality of, hey, I have $100, that just means I can't go to Starbucks, maybe.

Pete: I love that.

Kevin: I can't spend it on going to the movies. Hey guys, who's buying my drinks if we're going out for drinks? You know, kind of a thing.

Pete: Yeah, it's like what you said in the beginning, it's hard to do. It's mental.

Kevin: It's mental, yeah.

Pete: It's a mental discipline.

Kevin: Yes. Discipline. Yeah, absolutely. Mental discipline. I like that. I said mental strength and mental discipline are definitely what it is.

Pete: Okay. Awesome. So my next question is are there specific? Oh, we actually covered this. Are there specific strategies or tools you recommend for effectively budgeting and saving? So we talked about the 50, 30, 20 rule. Make cuts to things that aren't necessary: $5 coffee.

Kevin: Yeah. And I say it goes back to the mentality of save first, spend later, you know? Don't wait till. If you're waiting till the end to save what you got, you're going to save like 10 bucks, or you could save a thousand, depending on how you set it up.

Pete: Yeah. No, I like that. How important is having an emergency fund?

Kevin: Very good question. It's very important. Extremely important. If you don't have an emergency fund, I think they say you should have a three-month emergency fund for a single person. For a married couple, it's six months. It's necessary. It's important. Life happens, right? Sometimes, the unforeseeable happens. Your car breaks down, maybe, or you lose a job or whatever it is. There's this gap of income that you need to cover, whether that's your mortgage, car payment, kids' dentist appointment, or whatever it is that you're paying for. And if you don't have that emergency savings saved up, you're going to be in trouble. And so it's extremely important. And again, I know for single people, it's three months, but I say six months all around, even if it's like, hey, you are single, or you're a single parent, or even if you're a family, I still say, hey, do six months.

Pete: Yeah. And would you? Yeah, six months is good. Would you recommend anyone wanting to buy a house to purchase a home before they have this emergency fund?

Kevin: That's a good question. That's a tough one. I would say most people should have that set up right now. So even if they are a first-time buyer, a lot of times, you might see someone using that emergency cash as their down payment for a house. Now, if they can build up, like, let's say they have a 50, 30, 20 plan and they're doing that 50, 30, 20 plan, they can build out that savings account again. And I would say keep building at it, but I would always, you know, don't spend everything, have some savings, you know? Because, again, life happens.

Pete: Totally. Totally. And, you know you're a financial planner, and so your whole goal as a financial planner is to help people with long-term savings.

Kevin: Right, right.

Pete: And be able to have some money set aside for when they do retire, for when they are not working anymore.

Kevin: Correct.

Pete: And so you probably have seen trends with your database with people having those savings plans and having those set-aside. I guess what I'm getting at is that 20% is just super important. That 20%, starting at a young age, can help A, the discipline, and B by the time they do retire. Obviously, buying a home and having real estate also goes along with that. So what factors should families consider when determining the size of their emergency fund?

Kevin: This is a good one. Because, you know, you might be thinking, oh, hey, it's just my mortgage. But you might not think, oh, hey, I got car insurance. I have to pay my utilities. I like to say, hey, whatever your current expenses are now, don't minimize them. Keep them the same. If anything, inflate those because of cost.

Pete: Expenses, yeah.

Kevin: Expenses are going up, right? Inflation, we're going up. Things are costing more. So don't, I don't know if cheap is the right word, but don't cheat yourself out of what you should be saving because you're like, oh, I have to have my six months, and you're a little under your six months, you're going to be in trouble if you're not saving or prepping on gas or insurance. Or maybe it's, hey, it's back to school this week, and I have to buy backpacks, school supplies, whatever it might be.

Pete: I didn't have this a part of my questions, but I'm going to bring it up. So, it's kind of shooting from the cuff.

Kevin: Alright.

Pete: So with variable income, so, like, my income is variable. My income can be more or less depending on the month and how many loans I'm closing because I get paid per loan. Same for someone else or someone self-employed. So, what are some strategies that you've seen work for someone who has a variable income? So, income can go up, and income can come down. What's worked for me is just keeping my budget lower. You know, and when times are good, when at a younger age, I spent like crazy when I was making money. And then suddenly, when the market turned, I was like, oh man, this is not good.

Kevin: That's a good question. It goes back to that mental strength, that mental discipline is, yeah, it's nice when you get a big commission check, you're like, sweet, I'm buying everyone drinks or whatever it might be. But I think if you go back to that 50, 30, 20 rule, if you do 50% on your needs or whatever, maybe that month you can reverse it to where it's, hey, 20% is going towards my needs, 30% still going into my wants, and hey, 50% is going to go into my savings.

Pete: I see. Exactly, when you do have that bigger check than normal.

Kevin: Yeah, exactly. Exactly. Just adjust the numbers and play with it. And that's why I say the 50, 30, 20 rule for some people. It could be the 60, 20, 10, or whatever, that didn't even make up to 100, you know what I mean? It could be different than that.

Pete: Cool, no, I hear you. So regarding the mortgage, and when it comes to savings and planning for retirement, this could be a hard thing for buyers to navigate for their retirement, savings, mortgage, and housing expenses. So, what key considerations should first-time home buyers consider when selecting a mortgage loan?

Kevin: So this is going to fall probably more on yours, but we run into this often. And interest rates are one thing that pops up. Obviously oh, interest rates are up. I'm going to wait to buy it, you know? And that shouldn't necessarily be something that you base your answers on, but interest rates, you don't have any control over that. So if that did come up, I'd say, hey, talk to Pete. But the other thing is that a popular financial guy would say, hey, save 20%, save 20%, which is a great mark. But it's sometimes not attainable. So see what.

Pete: You're saying have 20% to put down.

Kevin: To put down, yeah.

Pete: Why 20%?

Kevin: That's just, again, that's just a common theme. It puts you, you get out of, and again, Pete, you'd know better than I. Was it PMI? Which is that?

Pete: Mortgage insurance.

Kevin: Mortgage insurance, which will save you, your payments will be lower. Even if you have high-interest rates, it's not going to seem like, hey, I'm paying an arm and a leg on this. So you avoid PMI, and then at least build some equity quicker in that you already have put in that 20%.

Pete: I love it. I love that kind of added strategy or recommendation. I do like it. There are a lot of buyers who still think they have to put the 20% down and save that 20%. And I fall on more of the affordability. In other words, if you don't have 20% down, I still think it's a great way to build wealth and get into your home as long as it fits within their budget.

Kevin: Correct.

Pete: And as long as they can afford it, because the mortgage insurance, I have a whole training on mortgage insurance of how that works, but I don't know, have I ever told you mortgage insurance how it was created?

Kevin: No.

Pete: So mortgage insurance when, before the 1920s, sorry, before the 1930s, the Great Depression, there was no such thing as a first-time home buyer. There's no such thing as 5% down. Anyone who bought a house had to put 20% down. The banks wouldn't lend to anyone unless you put 20% down. So, this is the way it was before the 1930s. So it's the same today. So, no bank will lend to you unless you put 20% down. The only difference that happened was after 1930, they said, hey, let's create a way to help homeowners be able to buy more homes because they wanted to help the economy. They wanted to help people get into homes. And so they said, let's create an insurance policy for the banks.

Kevin: Nice.

Pete: So the banks basically said, okay, we'll lend someone less than 20% down, even up to 100%. However, they pay an insurance policy in case they default.

Kevin: Wow.

Pete: So it allows a buyer to get into the home without having to put that 20% down. And I definitely think that it's smart to have 20, but I also think it's smart to buy still if you don't have the 20%. I mean, that's the most conservative. I think Dave Ramsey is a big proponent.

Kevin: Correct.

Pete: Have you heard of Dave Ramsey?

Kevin: I know the name. Like I refer to a big financial guy. Yeah.

Pete: So Dave Ramsey, he's a big proponent of putting 20% down, and I don't necessarily follow that narrative just because there are hundreds of stories of families that had bought, including myself, I mean, when I bought my first house, I bought my first house in 2021, 2022, and I did an FHA loan, and I had mortgage insurance. I didn't save 20%. But three years, four years later, I had about $100,000 of equity that had grown. And if I would've waited to save the 20%, that would've been great. But I would've missed out on jumping into the market then.

Kevin: Well, and think too on, to play alongside that is if let's say you do an FHA, which I think is three and a half, right, to go in is, it's kind of a cool thing if, like you've put three and a half in, look at what rent is today. You know, people are paying buku dollars to be renting. And if you can get a mortgage cheaper than your rent, even if you don't have the 20% down, that is a no-brainer.

Pete: Absolutely. Alright, so let's go here. So, the next question I have for you, Kevin, is, are there any common misconceptions about mortgages that you often come across in your financial planning practice, long-term financial planning?

Kevin: And it kind of plays into this last thing about the rent is they don't make enough to own a house. I remember the first time someone's like, why don't you buy a house? I'm like, I started laughing. I was like, I don't make enough. You know, I didn't realize what exactly I was diving into. And they're like, well, how do you know? And I was like, well, because I'm not a doctor, a lawyer, or an attorney. I can't. And the misconception is, you think I'm living that paycheck-to-paycheck life, or whatever it might be. And you don't realize that what you're paying in this rent, you could be paying on a mortgage. And so that's why seeing someone like a lender like Pete, like you, and talking with them, you totally could see what you qualify for. And by seeing what you qualify for, you might be able to afford a house. And the misconception again is, oh, I can't do that. And that's all. It goes back to even budgeting that mental discipline.

Pete: Discipline.

Kevin: Yeah, you just have to, it's a block. It puts a block in your head that you can't afford it. And that's not true.

Pete: It's interesting. So I follow Shasta County, our local market, which is pretty good on the demographics. So we have about 180,000 people in Shasta County. And out of the 180,000 people, about 62% of us are homeowners. So, 62% of the population owns a home. The other 38% are renters. Well, of the 38%, there's another percentage of that that make the money to buy that are paying higher rent, but don't understand, don't realize they can buy a home. So based on the average income in Shasta County, and based on the percentage of home ownership here, there are about 16,000 families that qualify to be able to buy, and the average purchase price, or average price of a home. And so they. A lot of it is like what you're saying. The common misconception is that I don't know that I can qualify. I don't know that I make enough money. And it's interesting. I guess I'm curious about why this is, you know?

Kevin: I don't know. Could it be a fear? Or I think a lot of it is just not knowing, a lot of not educated. It's like, hey, I have to buy a house, but no one knows how. And I think that's what we run into a lot.

Pete: No, that's good. So the next question is, how can families balance their short-term financial goals, like purchasing a home, with long-term financial planning for things like education and retirement?

Kevin: Oh, that's a good one. I like to think about building out your long-term goals, like going on a trip, right? When you go on a trip, you don't just get in the car and drive. You either put it in a GPS, or you map it out. If you just jump in the car, you might get there eventually, but you're going to make wrong turns. You're going to go left and right, so you get the GPS. When you're going on these trips, occasionally, what, roadwork ahead, right? A detour. Take a detour. That's the same concept we will see in buying a home, retirement, or education.

Pete: Planning the retirement, yeah.

Kevin: Exactly. Like you have this plan to go here, but occasionally there's going to be, hey, you're going to have to make an alternative plan. You're going to have to change the direction. They still have the same goals but a different way to get there.

Pete: No, I love that.

Kevin: So definitely mapping it out is the Key.

Pete: I love that. It's kind of like a plan. It's like writing the plan down. So if I don't map out where I'm going, I'm just driving, trying to get to the place. Like, I know of this place that I'm going to, let's say Disneyland. I need to go south, but I'm going to go south. And then, so then what? Like, what do I? What's the plan? How do I get there? So I love that. So what are some? So, do you help your clients write down this plan?

Kevin: Yeah, no. So again, whether education or retirement, that's more so what I do. Like on that education plan, we'll look at, hey, your kid's going to be graduating high school in 14 years, what's inflation, the cost of that? What do we need? Or for retirement, you have to retire at 65 and spend X, Y, and Z. How much are you saving? You know? With buying a house, it's the same way, you know? You can't, like you said, you can't just say, oh, I'm going to buy a house. You have to build up savings. As we said, you don't use yours. If you don't want to use your emergency savings on this, you have to put away those savings. You have to save and have a plan and like, like we're saying, because if you don't, you might not end up buying a house or retirement or education.

Pete: So, like when I put my GPS in, I have to look at it to actually get what constantly. I can't look at it once and say, "Oh, I know exactly how to get there. There's going to be like four or five turns, six turns maybe, of where I'm going. And so, if I have a plan or a goal, I have to look at that goal every day. I have to get my plan in my brain so that I can actually execute that plan.

Kevin: Exactly. Exactly. Spot on. Spot On.

Pete: I love that. Cool. Okay, let's see. What roles does home ownership play in a family's overall financial plan, would you Say?

Kevin: This is a good one. And I thought there were so many routes I wanted to go with this, so I thought I'd keep it basic. So, there are two types of assets, right? There's appreciating and depreciating. A depreciating asset would be like, hey, I want to buy a truck. The value of it's going down.

Pete: Ford F-150.

Kevin: Ford F-150, they go down quicker.

Kevin: So, you have to think about the house as an appreciating asset. Alright? So this helps the financial plan because it helps build your net worth. As you pay this down, it increases your net worth, and your spending power. Eventually, the goal is to pay your house off in 30 years. You know, a lot of people tend to move before that 30 years is up, but to those that get it paid off, if this is a part of, you know, hey, my goal in retirement is to spend X, Y, Z, you don't have to have a mortgage. You don't have to be paying stuff on that. The goal is to have it paid off so you live scot-free. Well, insurance and taxes, but for the most part, you're not spending. So, it is an appreciating asset to have. And the other thing too is, and you wouldn't see this probably more than I is, people that have to upgrade their homes, generally if they're going to upgrade their homes, they're going to need a house. You know, you can't, unless you're making a significant amount of money to qualify for a, you know, really nicer houses are 700 up right now, to qualify for that, you need to be making probably 200,000 or 300,000, something like that. I don't know. You would know better than I.

Pete: For how long or how much of a house?

Kevin: For 700 plus.

Pete: Oh, absolutely. Yeah.

Kevin: But if I had a house that, let's say, is now worth 500,000 that I owed 400,00 or owed 100,000 on, you're in a better position.

Pete: Absolutely.

Kevin: And so it helps you get into the next house. It gets you into the next house. Or when you retire, it helps you not have a house payment. And basically, your costs are minimal.

Pete: Yeah. No, I love that. So, most. There are so many ways I could talk about this with financial planning and retirement. With home ownership, there are so many ways that it can fit in. Real estate has been one of the number one wealth-building tools in the entire world. So, most billionaires made their wealth from real estate. And so when buying a home, like what you're saying, I always say it's a forced savings account.

Kevin: Yeah.

Pete: Part of that mortgage is paying down the balance of the home.

Kevin: Yeah.

Pete: And if you buy and if you want to buy multiple homes, then the renter is now paying down that mortgage. And just slowly but surely, you're building wealth.

Kevin: Yeah.

Pete: By paying down that mortgage, and then, obviously, real estate. I was talking to someone earlier today. This is another statistic that I follow. The last 81 years - Guess how many years out of the last 81 years has real estate declined?

Kevin: Ohh, on average or in a single year?

Pete: Out of 81 years, how many of those years out, since 1941, since they've been tracking, how many of those years did real estate decline?

Kevin: I don't know.

Pete: It's staggering. 7 years only.

Kevin: That it? Wow. That's a lot.

Pete: And so 5 of those years were in 2007 to, I believe, 2011, 2012 were five of those years. And 2 of those years were in 1990 and 1991. Well, in 1990 and 91, real estate declined 0.1%.

Kevin: Yeah.

Pete: And and and it was, like, point and then 1% in 1991.

Kevin: Jeez.

Pete: So it's not like it was, like, a huge drop. It wasn't like a crash. So real estate, when planning for retirement, is an absolutely incredible way to help retirement. It is an absolute great way to build wealth.

Kevin: Yeah.

Pete: For for the family.

Kevin: And I think you hit it on the head too. You're paying yourself. You're not, and you think you're not buying a home. You're paying yourself. It's a savings account. It is. I think it's a good mentality to think of.

Pete: Yeah. Okay, that's that's that's awesome. Okay. Let's see. How can how can families navigate potential financial risks associated with homeownership? This is a good one.

Kevin: Yeah. I think we kind of covered this. It is 6 months of emergency cash.

Pete: Yeah.

Kevin: You know, there that that's going to come up. You know? Your AC unit's going to come out, you know? These are just natural things. The thing is, if you don't have this emergency cash, what are you relying on? You're relying on, hey, I have a 401k. Maybe I'll pull for that, Which is, again, I would never recommend that because, you know, you're giving up all this compounding interest that you basically are saying, hey, I'm going to work longer.

Pete: Yeah.

Kevin: Or, I'm going to spend less, you know? It might be, I'm going to downgrade my car, you know? Sell your car, you know? Again, it's a depreciating asset, so you're not going to get what you got out of it, into it. Or what you put into it. You're not going to get out of it when you sell it because it's a depreciating asset.

Pete: Yeah.

Kevin: So, again, I think the biggest thing is that emergency 6 months emergency cash.

Pete: Yeah.

Kevin: Yeah. Have that.

Pete: You mentioned 401k and for our listeners. They may not understand because a lot of our listeners might have 401k, and it might be contributing to 401k Of course, you can use this as an emergency, but what happens if someone needs to access that 401k?

Kevin: Yeah, so if you access it there first, it counts as income for that year So it could bump you in a tax bracket, which not only would that money be taxed at a higher rate, but so would your salary.

Pete: Yeah, yeah. The salary could also be bumped into a higher tax bracket because it's the total income they made.

Kevin: Yeah. And if you pull before fifty-nine and a half, there's also an additional 10% penalty. It's just let it grow, let it sit there.

Pete: Yeah.

Kevin: It’s another one of those savings accounts. You just put it into it and let it grow because, again, otherwise, you're going to tax, and it's going to mess with your income. And for older clients, too, depending on how much you take, it could mess with the amount of social security you get.

Pete: Oh, interesting.

Kevin: By how much you take out.

Pete: Yeah. Yeah. This is kind of off the cuff as well.

Kevin: Okay.

Pete: And maybe you can answer this maybe. I know there's some regulation around it, but for 401k, I do have many clients that have these old 401k loans from a previous employer. And they have worked for, let's say, UPS or something for five years. And then they go and work for, let's say, FedEx or another company. They still have this 401k, and they don't have anyone helping them manage it. How do you help with 401k, or how does that work?

Kevin: Yeah, so if someone has a 401k and it's, it's at their previous employer, that's what we love to do. We want to help put it into. An investment tool and help build out that. How were we talking about mapping out a plan?

Pete: Yes.

Kevin: We want to map out a plan for them. We want to help them hit retirement. My main goal is to see people succeed. I want them to all retire, live happily and have a houseboat on Lake Shasta. It could be, and so when you have these old 401ks, and, or if you don't know what's going on, cause you're like, I know, I think it's at some employer. You aren't paying attention to your funds. And you just want to do that. You wouldn't buy a home and then be like, oh, I think I have a house in, in Anderson somewhere, you would be like, oh, I have this. And by knowing what you have, you can build out your whole plan, whether it's retirement.

Pete: So you'll help people write out their plan like we were talking about, correct?

Kevin: Yeah. Navigation. That's the main goal we want. We want to build that. And, if home buying is one of the things that they want to do, we say, hey, let's look at this. If they say, hey, we have a lot of debt, we'll say there are two different approaches to paying off debt. We'll say, hey, which, let's get that out of debt. And it's it's saving. Cause some of these credit cards are. are charging 20 percent interest per year. And it's insane.

Pete: The credit card debt right now is at an all-time high, just over a trillion dollars. And also the savings. So, credit cards are getting higher. It's the most it's ever been. And the savings are the least. I don't know if it's the least it's ever been, but it's pretty low. It's getting lower and lower in the last couple of years. I think it's, and we are in dire need of people like yourself to help. I think a lot of it is just education and discipline.

Kevin: Yeah, discipline that, that is the most difficult thing people struggle with is the discipline.

Pete: Are there any specific strategies or considerations? For families looking to leverage their home for future financial goals.

Kevin: Yeah, that's a good one. And I think you would probably be able to hit more on the head on this. But there are times when refinancing. They do refinance cashouts there's, he locks. I've even seen how reverse mortgages could benefit people. That's one of those things too, how they fear, oh, I can never buy a home. There's also a fear behind reverse mortgages, but all this goes back to being well-educated on what it is before you dive into it. And that's why we're coming and talking to a pro like you.

Pete: Yeah, I agree; I would also add to that, Kevin, is that they have a team, have their mortgage guy and a financial planner, and also maybe an accountant to help them navigate a lot of this stuff because you're right, there are misconceptions about reverse mortgages and it's an amazing tool for someone that's 75, 78 years old. I talk to them on a weekly basis about this type of situation where they didn't have those savings. Going through life, they didn't have that savings. However, do you know what they did? They paid down their mortgage. And that mortgage, and now they have lots of equity in their home. And some of them are free and clear. Some of them have a very low balance. Now, what happens is at this age, they need help. They need care, they need help, and they're looking for answers. This is another financial tool that a home can provide in retirement years because a reverse mortgage takes that mortgage to a point where it no longer has a mortgage payment. They still have the tax and insurance, of course, but they don't have a mortgage payment on a reverse mortgage, so it's for the rest of their life. And so I educate, and I take education courses that also talk about the reverse mortgage.

Kevin: And I think you hit on the head have a team. No, you're well-versed in this. So if someone came to me, I'd say, hey, talk to my buddy Pete. And there's a reason for that: the people that we surround ourselves with, our professional world, are people that we trust. We don't. I'm not going to send you off to a lender that I don't know or someone if it's going to be someone. Hey, I trust this person with my mortgage. Yeah, you did do my mortgage. I think that's something that plays in is getting going to these people that you're, you know, recommendation guys obviously, these people trust them. Still, it's getting educated about it. You're going to be in a better position to make better decisions, which goes back to mapping it out.

Pete: Yeah. Yeah. I think about just every family I've helped; some have the financial planner and the mortgage guy, the accountant, the CPA, and all of it. But imagine a world where every single person had someone they trusted. That they could bounce a financial planner they trusted. Hey, Kevin, what do you think about this? My kids are going to school. Should I get some student loans? What do you think about this? I got this 401k. It's so much life, and these families are just going off of what they know best, and it's not anyone's fault. I guess it's just that they don't know what they don't know, and that's why they have that team. It is so important.

Kevin: Yeah, absolutely. I couldn't agree more.

Pete: How do economic conditions impact the decisions of first-time home buyers, and what should they be aware of?

Kevin: Yeah, interest rates. Oh, man. Interest rates. They create a lot of fear. I think you mentioned it, but back in the 70s, interest rates were like 30%, which is crazy to think about. Obviously, house prices were lower. But income was lower to income was lower to, I think there's a graph. I don't hold myself to this, but there's a graph that shows how home prices have increased and how salaries or income has, and home prices have just.

Pete: It's not the same.

Kevin: Exactly.

Pete: Affordability is getting more and more challenging.

Kevin: Exactly.

Pete: Yeah. The affordability spread is getting thicker and thicker. And I don't want to say that to scare people because. Each person is different, and you put down your goal and look to achieve that goal regarding the interest rates. You're right; it's scary. It has scared a lot of people. And my take on that is, is it affordable? Can you afford the payment? Can you afford to save also monthly with that new mortgage payment? Do you agree?

Kevin: I'd agree for sure. And if you're planning on holding the home for longer than five years, go for it. And, again, that's not a recommendation or anything. But, if you're going to, if you're going to hold this house longer, get the house. And you can always refinance. You can always do that if it's affordable. You have your emergency cash, like just be smart and have your 50, 30, 20 plan, or whatever your planet's current plan is. Make sure it fits into your budget.

Pete: I love that. Yeah. One more thing on the interest rates: a lot. Another misconception is people think that because interest rates are higher, we're going to have a crash.

They think that home value is going to crash. And the, my, my take on that is, is I don't think that we're going to have a crash. I think that real estate is going to continue just because of. The current value, or sorry, not current, the current demand and how much supply we have for on the market like with your statistic here in the 70s 30 percent in 1981, interest rates are at 18 percent, and What do you think home values did appreciate it to five or six years before 1981?

 

Interest rates were around six to eight percent five or six years earlier. Yeah. So what do you think home values did in 1981, 82, when interest rates went up to 18?

 

Kevin: They probably came down, right?

Pete: No, they appreciated.

Kevin: No way.

Pete: Yeah, that's crazy home values went up.

Kevin: Wow.

Pete: Yeah, and the reason why is the supply and demand. It wasn't necessarily that. It wasn't necessarily because rates are higher. It means we have a crash, but in 2007, interest rates were higher, but interest rates came down, we still had the crash, so it's not all towards the rate, as far as, but, um, that plays a decision on, with that's why I say if you can afford the payment and it fits within your budget, go for it. Like what you're saying, if this is going to be a long-term play, like someone, if someone comes to me and says, Hey, I'm going only to own this house for a year. And I would say, Hey, probably not the best time to buy and sell in a year if they came to me in 2021, I'd say, yeah, not a bad move, but right now, no.

Kevin: Yeah. Yeah. No, I agree. A hundred percent. Yeah.

Pete: All right. So, are there regional or national trends that families should consider when entering the housing market?

Kevin: Oh, I like this question. I got a good response. Okay. Have you heard of the herding concept? No. Okay, so hurting.

Pete: Herding?

Kevin: So it basically people do as everyone else does, right? If you say everyone is refinancing right now, in your head, you think, oh, I have to be refinancing. Remember when we had the big refinance boom? Everyone's, oh, I have to refinance too. I don't know what mine is. I'm 5%, but I have to get down to 3%. If you hear, oh, now's a bad time to buy, everyone thinks, oh, it's, now's a bad time to buy. And there's this hurding effect that, or concept that people have. So I don't think there's like a national trend.

Pete: Would you say FOMO? It could be fear of missing out.

Kevin: It could be a FOMO, absolutely. And what's crazy is, people are not buying right now because they're like, oh, interest rates are high, I'm going to wait for them to come down. And it goes back to our last question: If you can afford the house, don't get into this hurting concept of, oh, interest rates being high. I'm not going to buy it because you know what, it might be good for you. And a lot of times, that's why I say, whatever the trends are. I just push away from it and say, what's good for you right now? And it goes back to talking with a person who's a professional for you because you can take a generalized concept and apply it to yourself, or you can build that. Back to the map, personalized map for you. And I think a lot of people, though, fall into that herding concept, and they tend to get cold feet.

Pete: I have I've got on, on the opposite side. By the way, this is not financial advice, but I had FOMO on Bitcoin. And I bought Bitcoin, and I lost me on it, and Bitcoin is doing what it's doing, but right now, it's just not for me because I had the FOMO. I had the national trends, everyone's into this thing, and dah, but I didn't take it. I didn't have a personal conviction on why I was buying Bitcoin, but I think your point is to follow your plan. There are so many shiny objects that can happen. Oh, I got to do this, and I got to do this. Find your plan every day. Look at your plan and follow the plan. Basically.

Kevin: Yeah. And it goes back to the shiny things and also the bad things. How many times have I heard that the housing market will crash in the last two years?

Yeah. And so you talk to anybody, hey, are you going to buy a house? No, the housing market's going to crash in the next couple of years. And you talk to them and say, what does it mean for the housing market to crash? And they're like, I don't know, but it's going to crash in two years, and I don't want to be in it. And so it's good as there are shiny things, the bad things. So they move.

 

Pete: So what you're saying, Kevin, is to stay in your lane, stay with your plan. I love that. So, the most important thing that I've gotten out of this podcast is to stay in my plan. I'm going to. I have a plan. I'm going to stick to it, and I'm not going to deviate.

Kevin: Exactly. Exactly. Yeah. Spot on.

Pete: Yeah. Okay. Cool. Financial education for first-time homebuyers. Any good advice on just more education that first-time homebuyers, maybe some resources?

Kevin: Yeah, no, it's funny cause as we keep going, everything just lines up. I like it when that comes off. I don't think there's a resource or tool meant for one person. We're all authentic and have our own personalities, our own goals, our own things we strive for. Similar to, tools for building your finances, buying a home is meeting with a lender, meeting with a realtor, meeting with an advisor, meeting with these professionals, and building a plan personalized to you.

Pete: I love that. Yeah. No, that's perfect. So. I always ask I think that was, one of our last questions, but I always ask every guest that comes on to tell their story of how they bought their first house and are okay with sharing.

Kevin: Yeah, absolutely. Okay. So he had all of the advice I just gave, so this is what happened. It was. I had just moved back to Redding in 2018, right after the car fire, I believe. And so house.

Pete: From?

Kevin: It was from Texas.

Pete: Yeah. Okay.

Kevin: And, So I was looking for a house to buy, and I wasn't looking, but a realtor was like, hey, why don't you buy a house? And I'm like, I went with that misconception. I can't. I don't make enough to buy a house. I can't do that. I like renting, and he's no, you can do it. Meet with my guy. And I was like, okay, I'll meet with, and I met with a lender, and he showed me how much I could afford. And I'm just like, this is crazy. I can buy a house for this many hundreds of thousands of dollars. And he's, yeah. I'm like, how, like, how does that make sense? I don't make it. And so what it did is it opened my eyes saying, hey, it opened my eyes and said, hey, there are options for you, and so I, again, my very eager newest realtor who was like, hey, let's buy you a house, let's buy a house. And and it's funny. One of the things was don't sell your truck to buy a house. I went and sold my truck, and I bought a house.

Pete: That's not bad. That's not bad.

Kevin: But yeah, that's what I did.

Pete: So you sold your truck, and because you sold the truck, you had the money for the down or the down?

Kevin: Exactly. And so I, and then I ended up buying a. More cost-effective car. I see, and so it was nice, and at the time, I was commuting over to Weaverville. So, it worked out well for me.

Pete: Nice. Kevin, thank you so much for joining us, and I'm super thankful for the time we spent.

Kevin: Yeah. Thank you for having me. This is fun. I'm hoping to start podcasts in the future, but this was good, so I appreciate it.

Pete: Nice. Cool.