Should and Is

If you’ve read my blogs at length, you’ll know I’m fond of a particular story about United States Marine Colonel “Chesty” Puller. The story goes that he was in command of a unit at the Chosin Reservoir during the Korean War, and upon receiving news that his unit was completely surrounded by the Communists, he declared: “Good, they can’t possibly escape us now.” It’s a funny little quote, made all the more incredible by the fact that the unit proceeded to fight their way out of entrapment, and the majority of the Marines in the battle lived to see another day. Yet, I bring this anecdote up not infrequently, not because of its history, but because of the spirit it entails. Against overwhelming odds, in brutal conditions, despite all desire that things be better or different, the attitude against the awful wasn’t despair but enthusiasm. “Things are terrible? Good. Let’s get it done.”

I invoke this anecdote once more in the face of a world rife with “should” and “shouldn’t.” For example, this week, a video of a woman complaining about her commute has been making its way around the internet. In the video, the woman says she’s at her first job straight out of college in marketing. However, because it’s expensive to live in the city (NYC specifically), she lives in New Jersey and has a commute that sees her leaving home at 7:30 am in the morning and not returning until 6:15 pm at the earliest. “How do people find time to work out, or cook for themselves, or date?!” She exclaims. This is on top of another video that made the rounds a week ago in which another young woman said she wouldn’t take any of the entry-level jobs in her collegiate field of study because she could make more as a bartender as she’d been through college than the entry-level wages being offered in her field.

Should these women get over it, or should things be better? Well, I think we can agree that commuting and working almost half of every day is brutal and that entry-level wages could certainly use a pick-me-up. Yet, despite the good intentions beyond any well-meaning should, lies the simple reality: Is. So today, we’re talking about some of the “should and is” in personal finance, and how we can bravely face them.

My Profits… Our Losses

So goes the meme above.

Credit to the anonymous internet dweller out there who came up with this meme, but there’s a very important issue herein. Many companies are remarkably proud to boast of record profits and the accomplishment of KPIs by their teams, only to be stingy with handing out raises and bonuses. The CEO drives into work in a new Mercedes Benz on the same day that performance reviews and annual raises are handed out: 2%, well below inflation. Of course, the inverse then comes out even more so. When a company or organization goes through tough times, while the CEO likely isn’t out buying a Rolls-Royce, the tough times must suddenly be felt by everyone. “I know you were a 5/5 rated rock star employee, but we can only give you a 2% raise. It’s more than the 1% we gave everyone else, and times are tough!” Yet, the rewards of managerial outperformance seldom trickle down meaningfully, and the costs of managerial malfeasance are collectively felt.

For a salient and timely example, look at Charles Schwab. The company is now literally the largest custodian of investment assets managed by registered investment advisers in the world after completing an acquisition and merger with TD Ameritrade, and its financials show running profits in excess of a billion dollars over a twelve-month time period. Yet, in the face of declining margins relative to a more profitable previous year, the executive class of the company made the decision to lay off 2,000 employees across all divisions. Now, layoffs themselves are not a failure. It can make all the business sense in the world to eliminate one division or team within a company that no longer aligns with the overall mission or direction of the company. However, layoffs performed solely to free up capital for the profit and loss statement, with no meaningful strategic reason beyond financial reporting? This is a sign of a complete failure in leadership, and one that has collectively punished the employees of the firm rather than the leaders who are ultimately responsible for its performance in the aggregate.

Should companies give appropriate raises during the good times? Yes. Should the company give appropriate raises during the bad times? Yes. Because if the performance is there, the employee doesn’t deserve to be paid less after another year of experience is developed, and effort is made for the company, and if the performance isn’t there, why is this person still working at the company? Performance is table-stakes for employment, but so are raises, equal or greater than what inflation demands. The simple mandate is here: People should be paid well, but the reality is that it doesn’t always happen. However, the counter-point is readily available and obvious: If a company fails to pay you what you’re worth (never less than the purchasing power of what you earned the year you started or the most recent year), then it is imperative that you take your talents elsewhere. The good news for the employer is that this is easily rectified: Pay your employees no less than you’ve paid them in the past, and if that’s financially difficult for the company, that is the leader’s problem, not the employee’s problem.

College & Student Debt

An easy candidate for these issues is the cost of college. Here, I speak less for the student and more for the parent. We have had hundreds of couples sit in our offices over the years and tell us their philosophies on college. The views are diverse; everything from “we’ll pay for all of it” to “I paid for mine, they can pay for theirs,” and every imaginable gradient on the spectrum in between. The simple fact is that college, even an affordable, no-frills college, is an expensive proposition. This is also compounded by the observed change in the cost of education, which has inflated at a rate of 747% more than inflation over the past 60 years. To put that in context, to discount four years of tuition at CU Boulder today, you’d have gone from paying $54,496 for just four years of tuition (books, room, and board, not included) to paying $7,295; and that’s with inflation adjusted!

Nice as it would be for parents to write a $911.87 check every semester and be done with the costs of college, that’s not the world we live in. The “should” conflicts with the “is” of the costs, and whether parents plan to pay for college or not, schools and our education system expect them to pay for some if not all of the bill. Thus, for those students whose parents haven’t decided to save and pay for their full ride, an issue arises. Students without any meaningful parental support are still reliant on their parents to co-sign for loans that fall outside of the needs-based-aid category, and in turn, parents are on the hook for their kid’s ability to complete college and attain meaningful employment from the experience, and thus be able to afford to pay back their loans.

Of course, students have another option, which is to simply opt out. While there are plenty of famous college dropout anecdotes where kids have dropped out only to become incredible financial successes, the problem is that these aren’t just a statistical anomaly, they’re so far to the end of the bell curve that to include them in any meaningful study of the value of college would be unlikely, given how grossly exceptional those outliers are. Instead then, we are left with the uncomfortable fact that college graduates, and according to the social security administration, even those with “low-value majors” are still expected to earn $630,000-$900,000 more in a lifetime than their high school diploma-only peers. Even those who participate in trades now see earnings roughly equivalent to those provided by a four-year degree, and in some cases, attain such income much more quickly than the white-collar cohort.

So we return to the should and is. It is a simple fact that college is a materially significant expense, but one that can increase earning power dramatically compared to those who do not incur the expense. We can say that it should be faster, cheaper, and more accessible, but it isn’t. So whether you are a parent planning to sit out your kid’s tuition bills or a student thinking they’ll dodge the college thing and simply make it on their own, take seriously the potential that the opportunity costs involved in avoiding the issue are much greater than the hard dollar costs of simply saving for the potential expense or incurring the debt to complete an education. Some natural options for saving include using a 529 plan or even just funding a 529 plan for the tax deduction before paying for tuition. In turn, even though student debt is a material burden, qualifying federal student loans are effectively capped as being a “10% income tax” using income-based repayment, and in those niche cases where a college graduate simply isn’t earning much after graduation, the good news is that non-payments or nominal small payments based on low income can still qualify toward forgiveness.

The Cost of Buying a Home

Kaitlyn and I purchased our home in 2021 for $645,000 at a 3.125% interest rate on a 30-year conventional mortgage. The monthly payments for principal and interest are $2,763.02, and then there’s an additional $682.09 for insurance and property taxes, amounting to $3,445.11 per month. Frankly, we’re overpaying, judging by the annual escrow refund checks we’ve received for the past two years. Yet, the same home purchased for the same amount today with the average 30-year mortgage rate would cost $4,987.40 just to pay down the principal and interest, and a monthly total of $5,669.49 to pay for the same home; that’s a 64.56% increase in monthly spending on housing simply over a two years delay in purchasing.

“Housing shouldn’t cost so much!” Anyone reasonable would say in light of such information. But the issue in this given example isn’t one of fortunate or unfortunate timing but simply of interest rates. We have been badly spoiled over the past decade by low interest rates providing incredibly affordable housing for those who could get a downpayment together; yet, for those even a mere year or two behind the curve, housing now threatens to cost easily twice as much as it would have a mere year or two earlier.

The singular fact, then, is also that housing prices have not declined. Historically, in times of high interest rates in the past (the 1970s and 1980s, for example), there has been a much healthier equilibrium between housing prices and interest rates. Raising rates meant lowered prices, and lowered rates meant increasing prices. Yet, we have fallen behind on building new housing so badly that now even a new normal of moderately high interest rates –yes, even 8.5% is moderately high compared to other times in relatively recent history—that now prices not only stay high, but keep growing higher despite the interest rates. One might think that a house becoming 64% less affordable might push the price down, but in fact, the house we bought is now worth 16% more than we paid for it.

Herein we have the clash of should and is. We should build more housing, reduce property tax rates, and create state and federal incentive programs to help consumers save more for their first home (something like a 401(k) for first time home buying, perhaps?) Yet, at present, we are stuck with the “is.” There is not enough housing, the current interest rate environment is what it is, the Federal Reserve has no mandate to make housing more affordable, and wages haven’t kept pace with inflation, let alone housing inflation. So, for those attempting to buy a home without access to the “bank of mom & dad,” the only options are to control or cut the cost of living to increase the amount that can be saved or to adjust expectations for what constitutes an acceptable first home. Is it an elegant solution? No. But waiting for interest rates or housing prices to come down soon is a fool’s errand, and are both entirely outside of anyone’s individual control. The only material options available are to either increase savings to help make a purchase more affordable or to adjust expectations. It shouldn’t be like this, but it is.

Some tools that can help keep pace with the issue: First, utilizing high-yield savings accounts to preserve the power of your downpayment. Too often, those saving for a home do so in a checking account or a run-of-the-mill savings account. Yet, there are savings accounts paying north of 4% (above inflation, which currently sits at 3.7%) and even some money market and CDs that are paying above 5%. While these aren’t guaranteed to keep pace with the rate of inflation in housing prices, leaving your money in a non interest-bearing account is a surefire way to lose purchasing power as you chase a forever-moving goal post for a downpayment.

A second strategy is to evaluate your earnings seriously. While a stable W2 or consistent P&L for a business owner are important parts of qualifying for a home, nothing can accelerate your home savings like making a career move to increase your income. This doesn’t mean you should join a multi-level marketing company or start a side hustle, but it’s a meaningful step to either ask for a raise, look for an increased income in your field by applying for work, or consider taking on additional work until you’ve gotten into a home.

The third strategy is purely psychological. I’m loathe to use this phrase, but it’s a meaningful one when thinking about the current housing and pricing crisis: “Date the rate, marry the house.” This is a popular expression by mortgage brokers and real estate agents, and while I’m loathe to use it, they’re not wrong: you are not married to your mortgage rate, or even the home you purchase, for life. Ultimately, hemming and hawing about the purchase price of any home, the interest rate you borrow to buy it, or the monthly payment is likely to be a temporary feature in your life. Homeowners move on average once every decade, and even those with long-term holdings are expected to refinance their purchase if interest rates get better, which may not happen soon enough to be helpful in the quest to purchase a home, but certainly can help you accept that things are as they are, and the is outweighs the should.