While there is a sliding scale here (especially for pricier cities), this means that if you are spending more than a third of your monthly paycheck on housing (rent or mortgage plus average home maintenance costs), you are likely in this category.<\/p>\n
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When you rent at the top end of your price range, you are simply blowing money. I won\u2019t bore you with the reasons behind why that<\/i> is a bad decision. More interesting are the reasons behind why buying<\/i> a high-priced home is bad for your financial position. When you buy a home that stretches you to your financial limits, two things happen:<\/p>\n The end result is that folks take on a highly leveraged position against an asset that will typically increase in price slowly\u2014at the rate of inflation\u2014and in the process, use up all or most of their liquidity and take on a huge monthly liability. Housing is also illiquid, meaning that it typically can\u2019t be sold quickly and without high transaction costs (approximately 6 percent of the sale price is paid to buyer\/seller agents alone, and that\u2019s just a start to transaction costs).<\/p>\n All of this means that the homebuyer purchasing property at the top of their household price range is stuck\u2014they can\u2019t move, they can\u2019t quit or change jobs in many cases, and they have a greatly reduced cash reserve, leaving them vulnerable to the vagaries of life.<\/p>\n The most optimal approach: <\/strong><\/i>Live with roommates; “house hack<\/a>” by buying a place and renting out rooms or additional units<\/a> (like a duplex, triplex, or quadplex); or \u201clive-in flip<\/a>\u201d by buying a fixer upper, moving in, improving the place, and selling a few years later\u2014greatly increasing your odds of generating a huge tax-free profit<\/a>.<\/p>\n All of these choices significantly negate the consequences associated with the former decision and allow for a flexible approach to major life decisions outside of housing down the line. And yes, all of them involve a very real change in lifestyle\u2014a sacrifice. The cost-benefit analysis is for you to decide.<\/p>\n A good middle ground: <\/strong><\/i>Purchase a home or rent a place that costs one-fifth or less of your after-tax take-home pay.<\/p>\n No, perhaps you won\u2019t be able to live in the cool part of downtown in your favorite city, but you will quickly reap the rewards of a dramatically faster rate of wealth accumulation if you make such a housing decision.<\/p>\n The stakes for your housing decision are likely the highest of the five decisions I list today. For most Americans, no other financial decision will have as great an impact on lifetime wealth accumulation as the choice you make in the first place, or few places, that you choose to live.<\/p>\n Transportation expenses, including car transportation, public transit, and airfare, are the next largest category of expense for most Americans. Some simple decision-making in this arena can save you tens of thousands of dollars over a 10-year period, and hundreds of thousands of dollars over a career.<\/p>\n The least optimal approach:\u00a0<\/strong><\/i>Purchase or lease a new high-end luxury vehicle.<\/p>\n A new car will depreciate 20 percent the moment you drive it off the lot and an additional 40 percent (60 percent cumulative) over the first five years of vehicle life. Leasing the vehicle is even worse.<\/p>\n The optimal approach: <\/i><\/strong>Forgo a vehicle entirely or buy a well-researched, older model with a solid life expectancy in spite of its advanced age.<\/p>\n A good middle ground: <\/i><\/strong>Purchase a 5-ish-year-old model of an economy vehicle that you will enjoy driving.<\/p>\n Maintain it well, and shorten your commute as much as is practical to avoid putting unnecessary mileage on it.<\/p>\n Overbuying on your vehicle purchase is inefficient, bad math. No matter what you drive, you will likely adapt to it after just a couple months. Insurance, maintenance, registration, and depreciation are all significantly more expensive in the first five years of a vehicle\u2019s life. Let someone else pay a premium for that, and enjoy a model that is a little older and a lot cheaper. It will still get you from A to B, but in a short period of time, you\u2019ll be considerably richer.<\/p>\n As a bonus, make sure to research travel rewards, such that you are able to score a couple of cheap or low-cost flights and hotels for those vacations or life events that you may fly to a few times per year.<\/p>\n I can\u2019t help but think that a shocking number of career decisions are made on a whim. Think back to high school and college. What influenced your decision on whether and where to go to college? What influenced your selection of a degree\/major\/minor? What influenced the decision to go work for your first company? Was it a conscious set of choices that led to your current job, your current desk, your current location? Or did life take you there?<\/p>\n If you are like me (the start of my career, specifically), much of that process was reactionary. The person who wanted to be a doctor, lawyer, or accountant and knew so from an early age is the exception, not the rule. For many of us, the selection of a career has more to do with circumstance, with decisions made as teenagers reverberating through the decades.<\/p>\n If you are in a career making a median income or close to it and either dislike or are apathetic enough about your job where you would leave it the moment you achieved moderate financial freedom<\/a>, then you need to think long and hard about what got you there and where your career is taking you.<\/p>\n Related:<\/em><\/strong> How Much Money Do I Need to Retire?<\/a><\/em><\/p>\n The least optimal outcome:<\/strong> <\/i>Work a job with poor prospects relative to your potential, where you are underpaid and where you are in a lousy environment that you don\u2019t enjoy. Maintain ignorance about what your skillset is worth in your local market, and remain unclear about what advancement opportunities may or may not be in store for you.<\/p>\n The most optimal outcome:<\/strong> <\/i>You are currently well paid, enjoy your work environment, and you have a clear picture of the work you would like to be doing. You have a realistic, well-researched understanding of what best-case scenario pay is for that future position. You continuously network and take steps on a quarterly basis year after year with deliberate intent to move toward your long-term career goal.<\/p>\n A good middle ground: <\/i><\/strong>Write down your current pay, benefits, and career prospects, and be brutally realistic with yourself as to the odds of improvement in the coming years and where you stand in relation to your current market value. If there\u2019s a meaningful discrepancy (people with your experience have significantly advanced titles\/salaries in your market), put yourself in a life position where you are comfortable interviewing at other companies or asking for appropriate title\/comp change.<\/p>\n You likely spend most of your waking hours preparing for work, at work, and returning from work. What is your strategy with your career? Why would you voluntarily show up to something that you do not like, especially if you are accepting a lower paycheck than you could otherwise find in your market?<\/p>\n A surprising number of people seem to have no serious career plan, dislike their work, and<\/i> are underpaid relative to their current skillset! This is a short-, medium-, and long-term loss. If this is even partly true for you, be honest and set about fixing this situation. There are myriad careers that pay well, offer great prospects, and do not require a college degree. You may be surprised at just how cheap the switching costs are.<\/p>\n As an aside, many people find themselves in this position partway into a career because they paid too much for housing, too much for their vehicle, and do not have a cash cushion capable of supporting them through any periods of no or reduced income while they contemplate their next career moves.<\/p>\n The costs of mismanagement in those other areas of finance force them into a liquidity trap, which makes the uncertainty and risks of losing income by taking time to find a new job or the risk of losing their current job unacceptably high. Because they live effectively paycheck to paycheck, these folks don\u2019t have the option to take even a slight reduction in base pay for greater opportunity.<\/p>\n Don\u2019t let that be you.<\/p>\n If you make great decisions around your housing, transportation, and perhaps in your career, you will be able to pile up a surprisingly large amount of money in surprisingly short order. The next best way to lose in the game of long-term wealth accumulation is to abdicate decision making when it comes to investing and put your money in historically poor-performing asset classes and investments.<\/p>\n The least optimal approach: <\/i><\/strong>Not investing at all.<\/p>\n OK, we know this, so let\u2019s move to the next worst thing.<\/p>\n Closely following the decision not to invest is the<\/i> decision to invest in something you don\u2019t understand<\/i> just because a figure in your life told you to do it. Many people cannot tell you what they invest in inside their 401(k). They might own mutual funds, individual stocks, or REITs. But they couldn\u2019t tell you why they are invested in each asset, can\u2019t describe the breakdown of what they are investing in at a deeper level, and don\u2019t understand the fee structure associated with their investments. They also have no long-term philosophical approach to investing. Rather, they make one-off decisions with little research or understanding behind those decisions.<\/p>\n The most optimal approach:<\/strong> <\/i>Understand and have clear rationale behind why you are making every investment decision, and be able to articulate exactly what is in every part of your portfolio and why it is there.<\/p>\n The most optimal approach is to read, listen, watch, or otherwise consume a material amount of investing and personal finance content from a variety of sources. Make this a life-long, or at least career-long, pastime. Then, arrive at a sound, long-term investing philosophy and stick to it through the ups and downs of the market. Invest with the end in mind, in a manner that makes the most sense to you.<\/p>\n The optimal investing approach may vary considerably depending on where you live, what you do for a living, and how much effort you choose to put into your portfolio. For example, I have investments in real estate in Denver, Colo. I also invest in index funds, I invest in small private businesses\u2014like the one I work for\u2014and I have a book (partly about investing, yes) that I wrote that produces royalty income.<\/p>\n Related:<\/em><\/strong> What\u2019s a Better Financial Strategy\u2014Making More or Spending Less?<\/a><\/em><\/p>\n\n
Decision No. 2: Transportation<\/h3>\n
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<\/p>\nDecision No. 3: Career<\/h3>\n
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<\/p>\nDecision No. 4: Your Investment Approach<\/h3>\n
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