67 comments

The American Dream is Slipping out of Reach! Waaaah, Waaah!

A little-known fact about the MMM household is that Mrs. M. actually holds a real estate license. She got this a few years ago as a way to help us both explore our shared interest in houses (buying, selling, renting), and as a way to help a few customers to find homes in our area as well.

But one interesting thing about having this license is that you also get regular propaganda from the trade group called the National Association of Realtors (NAR). Now, I’m all for groups of like-minded people sticking together to support each other. But I am NOT for the extreme case of this, where groups try to change public policy in a way that benefits them, but actually hurts the country as a whole. For example, oil-related companies strategically hiring fake scientists and republican congressmen to inject doubt into the public debate about Global Warming. And pretending that they are actually trying to help us all, rather than just ensure a continued flow of regulation-free oil profits. Industry groups with motivations like that need to fuck off.

What I’ve found, after reading a few years of the internal messages from the NAR to its members, is that they seem rather slanted towards only increasing the profits of Realtors, and being a bit selective about the evidence they latch onto. They did things like pushing for higher and higher tax credits for first time and repeat homebuyers, and they’re always pushing for lower and lower standards for mortgage eligibility, because having everyone buy a house at the highest possible price is in their best interests.

So recently I got to read this funny email from them:

Call for Action: 20% Down Payments Put the American Dream Out of Reach

Could your clients afford a 20% down payment? Could you? Can you envision what your prospective client pool will look like if new regulations governing Qualified Residential Mortgages (QRM) take effect this year?

Neither can we. And neither can many elected officials in Congress who did not intend for these regulatory provisions to be so narrowly defined. We must continue our efforts to explain how detrimental the new QRM rules would be to the ongoing housing and lending crisis in America.

According to NAR Research, 60% of recent home buyers made less than a 20% down payment, and it would take 14 years for a typical person to save up a 20% down payment to buy a median-priced home.

—–
Could my clients afford a 20% downpayment? Well, after a year or so Mustachian Boot Camp they certainly could.

Could I afford one? Umm, Yeah. True, it took me until almost age 25 to get there, but that’s because my first house was $235,000 at the time, I bought it as a single person, and I wasted the first few years after graduation driving an unnecessarily expensive car.

It would take 14 years for a typical person to save up a 20% downpayment for a median-priced home“. Wow, very interesting. Let’s assume these typical people are luxury-oriented and they are ready to jump straight to a single-family home for their first purchase as I did, bypassing any sort of condo or townhouse starter home. The median price of these is $170,000. So the downpayment is $34,000. How much do you have to save over a 14-year period, to end up with $34k? Let’s assume only a 4% return on your savings, since you just want a reliable bond fund that won’t fluctuate in value when you need it for the downpayment.

The desperately non-Mustachioed savers in the NAR’s example were socking away only $150 per month towards their first home!

Now I don’t want to be too elitist here, but I do have to insist that someone who can only save $150 per month is NOT READY TO BUY A HOUSE YET! A person with this level of discipline is probably going to buy couches and dishwashers on the installment plan too, and perhaps even, gasp, borrow money for a car.

Imagine what would happen to such a person if he lost his job! He would instantly feel a sharp monetary pinch. If enough people had this situation simultaneously, we’d have to invent some sort of National Insurance system to ensure that they continued to get a stream of money even when they were unemployed. We could call it “Unemployment Insurance”. What a funny idea.

And imagine if the precariously financed homes of these ultraborrowers ever fell in value? They would instantly owe more on the house than it was worth.  If this happened with simultaneous job loss, some would not even be able to make their mortgage payments, and the banks would have to take back the homes. Others would deliberately walk away from their mortgage obligations, deciding that it’s better to break their promise of repayment than to honor it and lose money. It could become a vicious cycle, with falling home values causing even more defaults, and we’d have a national housing price crash.

Yeah, now that we think through that hypothetical situation, maybe we SHOULD ask people to put 20% down. Partly as an incentive to keep their homes through a downturn, and partly just as a test to see if you’ve read enough Mr. Money Mustache articles to be disciplined enough for home ownership.

The US Federal Minimum Wage is $7.25 per hour right now. $1200 per month if you never do any overtime. Still over $1000 after payroll taxes. Even if you’re in the worst case, single and want to own your very own house and split the cost with nobody, you save your downpayment by sharing a house with roommates for $350/month, and buy your groceries, food and clothing for $250. You’re saving $400 per month and you’ll have your 20% downpayment in less than 7 years.

And it is damned hard to make minimum wage in this country. I pay people $15 per hour to paint walls or dig fence post holes for me occasionally, and I feel guilty for ripping them off with such an embarrassingly low wage. Independent house cleaners charge $25 to $40 per hour.

So, no, I don’t think it’s unreasonable to suggest that people rake together a 20% downpayment for their first house, just as I don’t think it’s reasonable for anyone to borrow money for a car of any price. If the minimum wage earner can do it, you can do it too with your fancypants high salary. You just have to get a bit more badass about it.

 

 

  • Robert Muir May 31, 2011, 9:19 am

    Excellent article MMM. I fully agree that 20% down should be a requirement. When shenanigans are allowed to reduce that limit, problems nearly always arise.

    However, your thinking on the $15-$25/hour folks is a little skewed. Remember that most of these folks can not work a full 40 hours a week because so much time is wasted between jobs, traveling to and from jobs, and trying to find jobs. My hourly rates are over 5 x that amount, but I only get that when I’m turning the figurative wrench. All the in-between, sole prop. time is “wasted” and has to be calculated in.

    Reply
  • Amy May 31, 2011, 9:48 am

    “And it is damned hard to make minimum wage in this country.” Sorry, but this just isn’t the case. There are many people who suffer from being paid ‘minimum wage’ instead of a ‘living wage.’ Even if those who take min. wage jobs stick around long enough to get a raise, that raise is going to be very small. From my experience with these types of jobs, it can be as low as a 4 cent increase.

    Similarly, your budget for a single person making minimum wage is very skewed. Health insurance would eat up any extra money remaining and is not realistic for those who own cars and need to pay for gas/repairs.

    “… just as I don’t think it’s reasonable for anyone to borrow money for a car of any price.” You seem to continuously generalize throughout this article. There are many ways in which financing is important and helps people make purchases for what they need in life.

    Considering all you have said, since even those on minimum wage can save up for a 20% down payment then why didn’t you, I’m assuming someone who makes much more than minimum wage, save up for 100% of your home purchase? Following your logic, it is not reasonable to finance anything that you could possibly save up for, no?

    Reply
    • MMM May 31, 2011, 10:37 am

      Excellent, I enjoy a dissenting opinion!

      I certainly agree that there are many people making minimum wage, and I’m not making fun of these people. Minimum wage was the foundation of my own career in the early 1990s. But part of the philosophy behind this particular blog is that you fight against mediocrity and always keep an eye out for a leg up in the employment market. If you’re sitting around waiting for a raise from your employer, you’ve already lost. Employers don’t give people raises.. people have to get their own raises. Even with no schooling, you can crack open your local Craigslist and fight for a job wielding a paintbrush or shovel that pays 50-100% above minimum wage.

      And, yeah, I’m saying that you don’t own a car when you make minimum wage. There are millionaires in this country who are car-free, and I would become car-free in a heartbeat if my income ever dropped below $25,000/year. Cars are an expensive luxury, not a necessity. See the articles “Meet Mr. Money Mustache and Get Rich With.. Bikes”.

      Finally, the reason I bought a house on 80% credit was because they were appreciating rapidly in my town in 1999 during the downpayment saving period. I calculated that it would be worth paying interest to get in before the prices got too high. Also, I was willing to sacrifice some money for the luxury of homeownership, admittedly not perfectly financially rational. You can become less and less rational the more money you make. In a rich country like ours, you can afford to waste SOME money. But if you make sure you save a good chunk of it by living a lifestyle 50-90% cheaper than your income, you get ahead.

      That’s the MMM way, and I’m gonna keep writing about it, and I hope to hear MANY more complaints!

      Reply
      • Amy May 31, 2011, 12:35 pm

        I agree 100% that people should always be on the lookout for better opportunities, but once again you are generalizing. If you live in a town in which Wal-mart is the only employer and the wait list to get a position there is something like 7 years, chances are that there is going to be difficulties finding other types of jobs. Fighting against mediocrity is fine, but someone has to be the mediocre to your excellence MMM and you seem to be leaving those people behind with your message.

        Cars are actually a necessity for most Americans. I’m not sure if you’ve seen the state of our public transportation, but it is horrible. If you are in a suburban or rural area then you need access to a car. Bikes are great, but once again you are generalizing. Are you going to be riding a bike in -15 degree weather living in the Chicago suburbs? Maybe if you’re single and have a job that allows you to show up in a mess when you keep slipping off the road. But if you have kids? No way in hell that is happening.

        Reply
        • MMM May 31, 2011, 12:58 pm

          I believe these counter-examples are covered by the “Waaah, Waaah” section of the headline. The typical no-can-do attitude is pretty much the driving force that forces me to write this blog.

          Reply
          • Amy May 31, 2011, 1:37 pm

            There is a big difference between Waaah Waaah and acknowledging systemic roots of oppression in my opinion.

            Just to get this straight, the whole logic behind your site is that most of the poor people in this world are just utterly lazy?

            Reply
            • Frans February 2, 2012, 2:37 am

              Lazy is the wrong word for it. Comfortable. Why change something that, in your mind, works?

              MMM has in his ways made me realize that my life doesn’t work, so I’m doing my best to change it.

              Reply
            • T Schmidt December 1, 2013, 9:13 am

              I just have to respond to Amy’s comment about biking to work and being a mess. I used to work at a fine dining restaurant and would roll my clothes up in my backpack and have a washcloth to do a little cleanup when it was a hot ride in. I always looked better than 90% of the other staff and got many compliments from management on how I presented myself. And it was really not that much effort.

              And if you live in a town that only has Walmart for an employer (which isn’t actually possible, but anyway) MOVE! Not it may not be easy but come on! There is no point in living somewhere with zero opportunity. You may say you stay for family, etc. but if they care at all they would rather see you taking better care of yourself than living close by.

              Reply
        • bigato May 31, 2011, 4:33 pm

          Just for the record, I live in rural area, I’m not single and my job does not allow me to show up in a mess. I don’t have -15 here, minimum -5. And I never had a car and bike to work in the city everyday.

          Reply
        • Grace July 17, 2011, 8:54 pm

          “I’m not sure if you’ve seen the state of our public transportation, but it is horrible.”

          Seriously? I’ve been to america, and traveled by bus and train/subway on at least 3 states, It does not seem to me they are terrible as you call them.. Come to Latin America and ride a bus, and THEN tell me your transportation sucks!.. If you get back alive to tell the tale.

          I live in a nearly third wold country and even I can see the sense of that. Why get into a huge debt when you can try and fight your way to take from slight debt to no debt at all.. That can work even here! And the minimum wage here is like $100 a month!

          Though the poorest live on a $2 a day income, not that it will be easy for those people to find a roof but hey! even they manage, why can’t someone who makes over $100 a month? and I’m sure the situation is different there, with taxes, higher prices and everything, still, if people here can make it, why people there couldn’t?

          Reply
        • Johonn February 12, 2012, 3:20 am

          If you’ve read some of the earlier blogs, you’d realize that your argument has already been answered. Cars are a necessity for most Americans because they choose to live far from their work. At least one of his blog posts deals with this. If you’re so far from your job that you have to use a car, you should move, and if you’re attempting to save up for a down payment on a house, chances are you’re in an apartment, which should make it a no-brainer and easy to move.

          Reply
        • Uncephalized June 8, 2012, 12:12 pm

          If you don’t have a job and don’t have any prospects for finding one or producing income on your own in your area, why would you continue living there?

          Reply
        • Clemens September 10, 2012, 10:46 am

          1) Why would you want to live in a town where Wal-Mart is the only employer? That sounds like a pretty dreary place, and there should be no excuse for continuing to live in such a place.

          2) The public transport is horrible because Americans are so enamored with their cars. If more people started to use and demand public transport, it would improve. Same goes for bikes.

          3) Then don’t live in the suburbs. Also, there’s no bad weather, only bad gear.

          Reply
        • David May 8, 2014, 11:57 pm

          Cars are not a necessity in America. We just like to think they are because it is what we are used to. I just read an article about Brazil and it mentioned a lot of poor people commute 1.5-3 hours each way by bus to get to their low paying jobs. Americans throw a fit about how inconvenient public transport is if it takes 30 minutes. I am guilty of this as well and currently just drive everywhere without thinking about it.

          Reply
  • eva May 31, 2011, 10:24 am

    YES…except for that very last bit. Many, many people work minimum wage in a variety of service occupations: retail, food service, etc. These jobs are also often NOT full-time or benefited, which means no overtime possible nor health insurance. Virtually every 20-something I know works a job like this.

    Reply
  • Geek May 31, 2011, 10:24 am

    MMM: I agree completely about the 20%.

    I would go further. The “American Dream” was out of reach when mortgages became standard instead of the exeption. Perhaps it’s always been that way though. The middle class uses loans to live like the upper class. I’m attempting to either never buy a house or pay 100% when I do.

    Suggestion for a post: a history of money lending (from horses to cars to houses to anything).

    Reply
    • Steve May 31, 2011, 2:49 pm

      I’m wondering if you’ve out-thought yourself on this one Geek. I’m buying a house and it has been financed. The payments are less than we paid when we rented, only now, the payments are going toward buying the house.

      If we were still renting, we would have had two 5% rent increases by now and it would be increasingly hard to continue to find cash-flow to save for purchasing outright when the price of homes begins to rise as it has historically.

      However, we’ve locked our payments in pre-inflation and additional payments will knock out the remaining principle in our home.

      Reply
      • Geek June 1, 2011, 4:59 pm

        You mean I’m going to be Priced Out Forever!??

        You’re happy owning. How nice for you.

        I’m happy renting. How nice for me.

        Not painting walls, not owning a fridge or washer or dryer, not fixing stuff that costs money (they’re re-roofing this year in our apt complex!), and not having to pay 6% realtors fees and another 1-1.5% closing costs every time I want to move. Not being trapped in my job because my house is hard to sell, or alternately stuck with 2 mortgages. It’d be nice to have a yard for the dogs, but maybe I can rent someone’s extra house sometime. And sure, it’d be nice to be in the property holding landlord class… someday. Once I stop moving.

        Once I’ve saved up enough to buy a house, I’ll think about it. But for now I could lower my rent 10% merely by throwing out some junk and moving to a smaller place.

        Reply
        • MMM June 1, 2011, 6:24 pm

          Niiiice, Ms. Geek. I admire your hardcore attitude towards housing costs!

          I agree that in most cases and especially expensive cities, it is more profitable to rent rather than to own a house. People who state otherwise are either missing some of the costs of homeownership, the cost of capital, or assuming a much faster-than-inflation appreciation for the homeowners.

          That’s why I always have to make fun of my own irrationality every time I mention that I own a house.. and an expensive one at that. Part of being a Mustachian is that you must acknowledge your luxuries for what they are, to avoid confusing them with necessities. Then you can easily make adjustments to your luxury level if you ever need to scale up your moneymaking instead.

          Reply
        • Steve June 2, 2011, 7:14 am

          I don’t think you’ll be priced out forever and there are a ton of advantages to renting and you touch on most of them in your post. If you are moving around a lot, I’d say it would be dumb to buy…especially in this market.

          However, when you decide to buy a house, if your interest payments are smaller than your current rent payments, it’d be wise to buy as opposed to renting and trying to save up enough for a house. The math works out that way.

          Reply
  • Jennifer May 31, 2011, 10:57 am

    Hi 3M,

    I found your blog at ERE and just wanted to share my story. I’m a 41 year old single mother of a teenage boy. I became a nurse 6 years ago and since paid off $80,000 in debt and bought and renovated a home (huge undertaking..costs doubled..would never do it again!).

    I got tired of the corporate hospital crap and went from full-time staff to per-diem in February. Now I only work when I want, which is about 8 days a month!

    My only expenses are my mortgage-$2555 (I know.. ridiculous.), car insurance-$46, internet-$63, cell phone-$70, health insurance (bought my own)-$92, utilities-$180 and charity-$35. I spend about $400-$600 a month on food, gas and misc.

    I save about $1200 a month in a regular savings account and contribute just the company match to my 401k. I live simply and only spend money on necessities. My goal is to have enough saved in 3 years (when my son graduates) to quit work all together and live in a small cottage or sailboat near the ocean.

    I’m getting ready to put my house on the market and rent something around $700-$800 to increase my savings to $3000 per month. I figure I’ll need 14 years of cash to live off until retirement, social security and inheritance kicks in… and I can always pick up some part-time work (at an island coffee shop baking muffins..)

    Do you think I can do this? Everywhere I read it says I should be investing in index funds, but I feel safer not gambling the money I’m saving. I could always work a bit more, but I like being rich with time! On my 5 days off a week I read, play my guitar, visit with neighbors, walk the dog, and I’m home with my son after school each day.. life is good. I feel like I’m living a semi-retired life right now. People are always asking me how I do it, and I just tell them I don’t spend money. It really is that simple. I enjoyed reading your blog.. good luck!

    Reply
    • mr s May 31, 2011, 10:23 pm

      Jennifer, I’m kinda in the same boat as you, saving, scared to invest in funds what kind of number do you think you will need to quit and live off of till ss. thanks

      Reply
      • Jennifer June 1, 2011, 6:52 am

        Hi Mr. S,
        I call it the FOi3 plan.. (F*** Off in 3 years!)
        I’ll need a minimum of $1000 per month for 14 years.. which is $168,000. That seems doable, right? I’ll probably start picking up extra shifts to arrive at my goal sooner.
        What are your plans?

        Reply
        • mr s June 1, 2011, 9:00 am

          Hi Jennifer, FOi3 is AWESOME! where do you plan on living, on only 1000.00 per month. Wife and I are saving to move to warm climate(tropical) by ocean in 4/5 years can rent a small place and other than that we live pretty cheap but plan on needing 2500.00 per mo. In 14 years your going to be 55 right? s.s. doesn’t start for us till 65. thanks for the info.

          Reply
          • Jennifer June 1, 2011, 6:15 pm

            Thanks S, I’ll be checking out the USVI in July. South Carolina has always interested me.. My plans aren’t concrete yet. All I know is that I’ll be somewhere warm in 3 years whether I have all the money I need or not. I am through with the east coast winters!
            I’ll be 42 soon, and my plan starts at 45. 14 years from then I’ll be 59. I think I can collect Social Security at 62 (not that I’m counting on it). I’m not worried about starving.. I don’t plan on being a complete sloth those 14 years ; ) Maybe I’ll be a tour guide or something..
            I read this quote recently…
            “Invent possibilities that don’t exist yet”

            Reply
            • T Schmidt December 1, 2013, 9:17 am

              First off good for you, and I’m sure people have already told you that you really should invest some of the money. You can split the investments to reduce risk but it is sill to not have your money working for you. There will be ups and downs, but the numbers will average out.

              Reply
    • Kim P April 3, 2014, 10:10 am

      I know this comment is very far after the fact but I love what you said! It seems so simple how you explain it. I admire your lifestyle.

      Reply
  • Interiordesignr May 31, 2011, 10:59 am

    That is some vicious propaganda. I share your opinion of like-minded organizations banding together to spread false information in order to sway the masses and maximize profits for themselves. You should see the propaganda that comes out of design organizations like the ASID (American Society of Interior Designers) attempting to solicit more funds (over the $400 per year membership, which is not tax deductible due to their lobbying efforts) to fight for legislation effectively shutting anyone out of the market who doesn’t belong to their organization and pay over $1500 to sit for their exam. Ridiculous!

    Reply
  • Sarah May 31, 2011, 11:20 am

    The problem is our country celebrates being lazy. We celebrate it by having excusses, and we’ve bought into the line… “in order to have a good life you must buy blah blah…”

    If we encouraged people to work their children… with out even (gasp) pay, so they can learn to work first, and appericate when they are paid… and maybe encouraged kids to take responsablity for cars, college and such… then just maybe they would understand the value of hard work and a penny.

    Instead I watch young kids sitting on their butts taking the trash out once a week and earning $10… I watch Teens parents paying insurance, and for the car because they are “to busy in school”, yet I see these kids hanging out all the time… I watched my neighbor have his 25 year old son move back in with him because he couldn’t make his rent payment… good grief! If you haven’t figured it out by 25 you’re a loser…

    Yes, for every situation there is some kind of sob story… but that’s their choice to buy in to it…

    Reply
  • Mrs. Money Mustache May 31, 2011, 2:19 pm

    For me, this article and the discussion reminds me of the sense of entitlement that Americans feel – for example, the idea that having a car is a necessity.

    The US is a very rich country compared to many others. I think it’s easier to see from an outside perspective… although Canadians are catching up to Americans today, when I first moved here in 2000, the huge differences in wealth were very quickly apparent. There is massive abundance here and many Americans feel that they have the right to this kind of abundance, at whatever cost.

    It’s really a matter of changing your perspective and maybe breaking the mold of society a bit, but it can be done. Almost everyone I knew growing up in Canada didn’t have a car until they were in their mid to late 20s. I got my first car at the age of 25 – used of course. It is bitterly cold in Ottawa, Canada — much colder than Chicago. I never once occurred to me that I needed a car. Before owning a car, I went to school and I worked at various jobs all over the city, some minimum wage and then later some at higher than minimum wage, but the point is, I bought a car because I felt I could afford it. I didn’t need it. Sure I had to take 3 buses sometimes to get where I needed to go, but I brought a book and it was fine. I see entire families on buses all the time. Kids are awesome with experiences like that. Here in the US, I see teenagers with their own cars. This was very very rare when I was growing up.

    When you work for things, and you work for them hard, you really appreciate them a lot more. I’ve talked to a lot of people that feel they MUST have 2 cars and they MUST live an hour or more away from work and that they don’t have a choice in these matters, but they DO! It’s very common for Americans to think this way, I find.

    Of course there are a lot of people that live on minimum wage and that need other kinds of assistance. Sometimes single parents that are really struggling. These people are not lazy. I know that in Canada, there are a lot of programs to assist these folks and I’m hoping that there are programs to help them sort out how to get out of any financial binds they might be in. I’m also assuming that the majority of these people are renting homes, in which case, this article would not apply to them.

    Good discussion!!

    Reply
    • Roger May 31, 2011, 4:07 pm

      I agree!

      I just got back from a great vacation to Brussels, Normandy, and Paris and the contrast was interesting. I hope I’m not overgeneralizing, but…

      1) The European citizens use much more public transportation, bicycles, and motor scooters. There are hardly any large cars. I would walk by metro stations that literally had thousands of commuter bikes parked. In the US, citizens feel entitled to gas guzzling SUVs and energy eating McMansions. Bikes are for recreation not getting around.

      2) There is generally no tipping in most restaurants, etc. When I asked why, I was told that even waiters and bartenders make a decent wage. In the US, nobody would claim that minimum wage is a decent wage. Most restaurant workers receive minimum wage and rely on tips.

      3) There is a sense that people work to live rather than living to work as is often the case in the US. The conspicuously wealthy are viewed with some suspicion instead of being worshiped and emulated as they are in the US.

      Overall, the cities I visited seem much saner than American cities.

      Reply
      • eva June 10, 2011, 10:23 am

        Actually, it is legal for tipped staff to receive less than minimum wage–the federal floor is $2.13 with some stipulations (that are probably rarely followed). http://www.dol.gov/elaws/faq/esa/flsa/002.htm

        However, tips can be very lucrative, depending on the business and season.

        Reply
        • MMM June 11, 2011, 12:36 am

          Hi Eva,

          Actually, that link you sent confirmed what I always have said about restaurant waiters and other tipped staff: they are guaranteed at least minimum wage, even if nobody leaves a single tip!

          “If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference. ”

          Thus, we should not feel the obligation to tip out of a feeling of pity for someone who otherwise make only $2 per hour – a common misconception. I still tip well just to be nice and especially if the waiter is doing a good job. But the obligation part of it annoys me.

          The tipping system in the US is actually a subsidy to the restaurant owner, so they can get away without paying their staff! I like the system in Australia and New Zealand better, where the staff is paid more by law with higher minimum wages, tipping is much less customary, and everything is more official and above-board. And yet, I find that restaurants in Oz are no more expensive there than they are here. Hmmm…

          Reply
      • Tom October 18, 2013, 8:05 am

        Yes, Europe is different when it comes to owning a car, bike, etc… First off, you need to realize that Europe is much older than the U.S., and is MUCH smaller. Rarely do you find new housing developments going up in Europe because much of the countryside is already being used. Unlike in America where there is just SO MUCH EMPTY LAND! The infrastructure in Europe is old and was designed when people lived in dense areas, which is unlike most American cities. In cities where you have high density, like New York or Chicago, the public transportation works quite well. However, in other areas where the urban sprawl has taken over, public transportation is often not an option, like Phoenix for example, which I believe is one of the largest cities in America when it comes to actual physical size (not people size). Do they have buses? Yes, but because of how the city has been designed, you truly do “need” a car. The roads in Europe are small, and spaces are smaller, so naturally, they have smaller cars. Even in these smaller cars you have to pull over sometimes to allow oncoming traffic to pass on your “two lane” road. Well, we just built bigger roads in America because it made sense, and it was safer, and then so did bigger cars, and then so on and so on…. It’s not so easy to just tell people to use public transportation, it really depends upon the city and how it has been designed and their individual circumstances. Comparing public transportation in Europe to America is like comparing a banana to a motorcycle.

        Reply
        • Kruidig Meisje October 22, 2013, 1:09 am

          For most Americans however, most trips they make are not that far (< 10 miles). Then the bike is an option, unles, as MMM put it, you are a clown (or in invalid)

          Reply
        • Deedee November 22, 2013, 5:35 am

          Tom, over here in Europe we actually have a lot of free space.
          Ah and for the wider and therefore safer roads I would recommend to you to compare e.g. Germany with the US in the WHO statistics of road fatalities per year in relation to population.

          Reply
          • Mr. Money Mustache November 22, 2013, 10:23 am

            Indeed – the old US argument of “Big Country calls for big cars!” makes sense on the surface, until you actually try living in the US without designing car-dependence into your lifestyle. Then you realize, hey, it is easy to do 90% of your transportation by bike here, and save the car as a luxury for inter-city travel if you are rich. Which you will be, if you don’t design the car-dependence into your life.

            The secret is of course to think about these things when you are choosing where to live and where to work. Most people do the opposite, and then realize “oh, I need a car to get to work”, which is true because they made it so.

            Reply
    • Rainbow Rivers May 31, 2011, 4:47 pm

      This is a fantastic discussion and I agree with many Americans feeling entitled to the wealth of this great country. I can assure you having a car is a nice luxury but not needed. As a single mom at one point in my life, I walked 5 miles a day while pregnant to work for minimum wage as a nurse aide ( way out in the country no public transportation) I do not think financing a car is a neccessity. We have paid cash for a few cars and financed 2 cars in my 25 years of living as an adult and I can tell you I will never finance another car in my life. I will pay what I can afford in CASH. I think many people no matter their income still have no clue on how to spend or save and in general can be quite wasteful always wanting “good things in life” yet this puts their spending priorities way out of whack. Even someone supporting a family on minimum wage has the ability to save or invest on a monthly basis.

      Thinking out of the box can be a very useful tool in learning to see things from a difference of perspective. There are opportunities everyone, just many do not recognize them when they present themselves.

      Reply
      • Scott November 21, 2012, 8:51 am

        You are awesome!

        Reply
  • Fu Man May 31, 2011, 4:39 pm

    Hi Mrs. MMM! Out of curiosity, what did you have to do to get your real estate license?

    Reply
    • Mrs. Money Mustache May 31, 2011, 4:57 pm

      Hi Fu Man,

      Getting my real estate license was relatively easy, as far as the education component goes. I did all the coursework online through Kaplan (http://www.kaplanprofessionalschools.com/). I did the online lecture series for $1099. I took it nice and slow since I was home with our son most of the time. It ended up taking me about 9 months to complete everything and do the final test, but you could do it much quicker than that. The biggest obstacle was the cost, but I made that back on my first 2 commission checks.

      Once I finished up the coursework, I went around and interviewed with real estate offices within biking distance of my house (of course!). The best one by far was Keller Williams, so I started up with them and became licensed through them. You have to do at least 2 years with an office before you can be an independent real estate agent (in Colorado, at least). Those 2 years with Keller Williams were really vital to my learning, as what you learn at Kaplan is such a small piece.

      Hope that helps!

      Reply
      • Fu Man May 31, 2011, 5:41 pm

        That does help! Thank you! :)

        Reply
  • Pete C May 31, 2011, 10:12 pm

    Hi MMM! Great article, and I agree with it for one more reason (I’m not sure if this was already stated in comments)…. a 20% down payment is sensible from a borrowing standpoint… but it’s *also* entirely affordable once it drives overvalued units down. Fewer buyers on the market makes sellers reconsider their 20% price markup.

    I honestly don’t think any house less than a lake-side mansion is worth half a million dollars. The only reason single family houses approach this value in the first place is easy access to unaffordable loans.

    Reply
    • Dave June 1, 2011, 6:34 am

      Picking up on the “Americans-have-it-easy” theme, up here in Canada there’s no tax deductibility for interest we pay on our home mortgages. There has never been a public hue and cry about this. Certainly I’ve never felt shortchanged and over the years have owned two principal residences with mortgages. Funny how some Americans (mostly right-wingers with nefarious agendas) accuse us of being a “nanny nation.”

      Reply
      • Robert Muir June 1, 2011, 8:22 am

        Tax deductibility is NOT a benefit. Since everyone takes it into account when they’re shopping for houses, all it does is raise the prices of houses. In fact, because everyone overvalues the tax deduction, it probably inflates house prices more than earned from the deduction.

        Reply
  • Lucky June 1, 2011, 11:13 am

    Deductible Interest: I read a suggestion that the govt. should allow a tax break not on interest paid, but prinicpal paid. Imagine.

    MMM, you should use more swearing. It’s entertaining and really drives the point home.

    America is Rich? I’m not sure about this. The top 1% are worth 14 trillion. The majority are pay check to pay check. Most people hear the US is rich, but they have no medical, little income, maybe no job. Psychologically the price of feeling like a loser has great implicaitons, not to be measured of course.

    Reply
    • MMM June 1, 2011, 1:11 pm

      Hi Mr. Lucky, thanks very much for your innovative ideas and your support!

      YES, America is still very rich. It is true that all the saved wealth is held by the various levels of Mustachians (defined loosely here as people who spend less than they earn), but even the people living Paycheck to Paycheck have the potential of being rich. If you have an actual stream of paychecks, you still have a shitload of money coming in compared to the cost of food. And having enough to eat already makes us rich.

      I’m not denying that there are real social problems and real unemployment and poverty at the bottom of the ladder. Other blogs can deal with that topic much better than me, including Ms. Rivers, a fellow commenter on this thread.

      Mr. Money Mustache is aimed squarely at middle and upper-middle income earners, the majority of whom are still mostly broke due to spending and investing problems. It is them I actually know how to help, with the added benefit of reducing our destruction of the Earth.

      Reply
  • Kevin M June 2, 2011, 1:01 pm

    It shouldn’t even be called The American Dream anymore, it should be called The American Entitlement. Everyone thinks they DESERVE to be a homeowner, but I would guess 50% or more have no clue what it takes – financially and otherwise.

    I sure as hell didn’t when I bought my fist home at 23 (before I even technically graduated college) with no money down. Then we HAD to trade up to a bigger, better house 3 years later because we were working hard and deserved it. I look back and wonder how the hell I did it – with basically no savings at all. If something major happened back then I would have been screwed. Thankfully this time we did it right – 20% down, no PMI and a healthy savings account in case of major expenses – like the $7,000 HVAC system we had to replace last year.

    Thanks for a nice counterpoint to the ridiculousness of the NAR.

    Reply
  • Anita June 2, 2011, 2:59 pm

    I need practical advice here. Currently we are homeowners and we are thinking of moving out of state for various reasons. Unfortunately in my area the real estate prices took a huge hit since we bought our house. While we would not have to do a short sale, we won’t get much if any money when we sell our house. So that means we need to save enough money, again, for a down payment. In the past years our financial situation was not great and we ate through most of our savings due to lot of reasons. However, now that our financials have stabilized I calculated and we should be able to save at least $2000/month for our our next down payment. We are planning on moving in 1-2 years. How would you suggest investing this money to get the maximum return but with the plans of needing the money in 18-24 months or so?

    Reply
    • MMM June 2, 2011, 4:46 pm

      Hi Anita,

      Good Question – it depends on how safe you want the money to be versus how much investment gain you want to earn on it. The safest and least profitable place is just an ING Direct Savings account – currently paying 1.0% per year or $200/year on a $20,000 balance (email me if you want a referral code for $25 for this bank).

      Going up very slightly in risk but quite a bit in return is an investment-grade bond fund such as Vanguard’s fund with symbol VSTBX. Its returns over the past year have been 4.2%.

      As a comparison for how stable bond funds like this are compared to the general stock market, check out this graph on Google Finance:
      http://www.google.com//finance?chdnp=1&chfdeh=0&chdet=1307054344546&chddm=141542&cmpto=MUTF:VSTBX;MUTF:VFINX&cmptdms=0;0&q=VSTBX VFINX&

      You would also have gotten dividends from the bond fund as part of your profits, which are not reflected in the graph.

      But anyway, yeah – investment-grade short term bonds can be a good answer for relatively stable short-term places to ‘Stash cash for things like an upcoming tuition bill or a dowpayment. There is still a risk of some price fluctuation in the event of extreme financial turmoil, but
      if you look at similar bond funds over the recent 10-year period that includes the biggest financial crisis since the Great Depression, the bond funds STILL returned nice stable returns averaging over 4% through the whole period.

      Like this older fund for example:
      https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/performance?strategy=1800275325

      That’s stable enough for me!

      Reply
      • Rainbow Rivers June 2, 2011, 5:18 pm

        What if one is willing to take on a more riskier but higher yield possiblity? :)

        Reply
        • Dave June 3, 2011, 1:10 pm

          I would suggest being very conservative with any investment you plan to cash out in the next 2-3 years.

          Reply
  • Wes Hansen June 25, 2011, 3:19 am

    To rent, or to buy? A conundrum. In certain cities there is however, a middle ground. MMM, you once posted that if you live in Manhattan you should be earning 300k, or get the hell out of dodge. Well, I earn considerably less than 300k, and I OWN my own apartment, mortgage free. I live in a limited equity co-op. The best of both worlds. I live in Chelsea, a prime neighborhood in Manhattan, and my maintenance, and utilities are about $550.00 per month. The co-op is responsible for repairs, etc. Getting in is not easy, lottery, waiting list, etc. but if you spend the interim renting, and educate yourself about the various co-ops, 80/20 apartment deals it is well worth it. It took me about 5 years to get here, but I feel I’ve developed a rather nice mustache…BTW a comparable apartment on the open market would run about $2700.00/month. If anyone wants more information, I would be happy to share, @ butterscotchpudding@rcn.com.

    Reply
  • Macs July 9, 2011, 7:49 pm

    I wish I could claim credit, but I read it on another blog: “It’s called the American Dream because you have to be asleep to believe it.” Thankfully, the Mustachian philosophy gets people a lot closer it making an American reality – wherein people know they can only spend each dollar once over. 20% down seems about right – gives a good protection to the downside (as property DOES go down occasionally…) and of course it means you’ll have that Mustachian discipline before even crossing the threshold.

    And I totally agree that the tipping culture in the US is a massive subsidy to restaurant (etc) businesses. Here in the UK it is a totally diferent culture. First off, a tip is a ‘gratuity’ – from the Latin ‘gratis’ meaning ‘free’ — ie freely given, not an obligation. Personally, I expect to see a price list (menu) that tells me the price I’m going to pay. That’s it – my contract is with the restaurant – they tell me what they provide, give me a price, and I agree or not. Simple. IF the staff are brilliant, atually exceptional, I’ll tip. If they ‘just do their job’, I don’t. That’s what wages are for!

    So imagine my shock and surprise first time in a US restaurant when the waitress who’d spent all evening sucking up to the obviously rich diners at another table came rushing out of the door after us after I’d left a ‘keep the change’ tip…. What was our problem? (Huh?) Why were we so miserable? (You had time to notice?) Do you know what they pay us here? (No, but why should I?) You call that a tip? (NO – but this IS a tip: UNIONISE!!!)

    Classic clash of cultures situation, but I feel the whole US restaurant ‘system’ is toxic. Underpaid workers, with the businesses trying to shift the guilt on the customers. A worker should expect to be paid by the employer; the business should price their goods appropriately to cover wages.

    OK, rant over…

    Reply
    • Richie Poor June 19, 2014, 4:25 pm

      I’m not sure I understand the American restaurant complaining. Since the industry is so massive the prices are pretty well set by the free market. If the establishment did pay the servers $15 per hour the prices would likely be reflected on the menu unless there is some benevolent restaurateur who doesn’t like profits. Not all of them are even filthy rich. So either you want the wage to be reflected in the menu price or you want the restaurateur to subsidize your luxury meal.

      Also missing from the discussion is that many server make a killing on gratuity. I’m sure there are servers in small town diners that barely scrap by but there are also many college age servers that clear $500 a week or more while on a schedule that also allows them to go to school. If I could balance a tray I would have tried to get this gig in college.

      But why not celebrate that different cultures have different restaurant practices? You may see it as the business trying to ‘guilt’ customers but there is only guilt involved if you are a cheapskate that can’t afford to tip but would like to dine out anyway. I see it as an opportunity to be the generous party and personally line the pocket of a cheerful bringer of food and drink. Sometimes it even leads to very attentive service despite your experiences.

      Having said all that, dining out is stupid and unnecessary and none of us need to do it. But if anyone reading the blog does it on occasion then I say enjoy the food and enjoy the tipping experience. Generosity is a wonderful feeling. If you don’t like tipping then cook yourself, cut your own hair, and carry your own luggage. All of which we should be doing anyway.

      Reply
  • DP October 27, 2011, 1:03 am

    My question is, today, when mortgage rates are around 4%, is there any scenario where you *would* recommend more than 80% financing on a home?

    For example, let’s say it takes me 3 years to save enough for a 20% downpayment, but by 2014 rates are up to 7%.

    I’m just making these numbers up, of course, and rates could just as easily decrease in the next 3 years. But you get the idea–do you think it’s *ever* worth it to take advantage of a “good deal” (i.e., low interest rate or just a really good sale on a house) and buy a house even when you don’t have 20% available to tie up in it?

    Reply
  • marven January 5, 2012, 12:42 pm

    I browsed onto Huffington Post today to see a big headline about how economic mobility in America is gone, and was immediately directed to an entire NYT article with the full story and corresponding research. I figured it would make interesting reading for the Mustachians among us, but it doesn’t do much to help the issue. So how does one spread the Mustachian principles to those who apparently need them the most–those in the bottom fifth/tenth? Here’s the article, for those who want to shake their heads in disbelief: http://www.nytimes.com/2012/01/05/us/harder-for-americans-to-rise-from-lower-rungs.html?

    Reply
  • Laurie March 18, 2013, 6:35 pm

    It is hard to find a job that pays more than $8.50 an hour where I live. I have been looking for 10 years, and recently landed a job that makes me more money that I ever made in my life! $15/hour! Woooo! I have a Bachelor’s Degree, my baby daddy has a Bachelor’s, my brother and sister have Master’s, and we still cant find work. Don’t get me wrong, we all work, and are constantly looking for better work. There are just no jobs. So I disagree that it is easy to find above-minimum-wage work. I guess it depends on where you live.

    Reply
  • laurie March 18, 2013, 6:39 pm

    I forgot to mention that we have found that working for ourselves DOES pay much more, the problem is finding enough work to sustain us. It’s a work in progress, but I’m optimistic. Our goal is to someday be able to work for ourselves full time.

    Reply
  • Carla April 18, 2013, 9:34 am

    Fun fact: what today is a qualified mortgage would have been a sub-prime loan in the early 1990′s. Mostly because DTI ratios are 40%.

    However, the qualified mortgage stands a solid chance of crashing the housing market by shutting off the credit stream. So while it’s great in principle, it may not be so great in practice. Only time will tell on this one, I suppose.

    Reply
    • Amateur Moustache July 9, 2014, 12:08 pm

      Carla,
      I am just reading this (reading from the beginning), and I am really curious to understand your statement better. Can you elaborate and/or direct me to some reading that would help? (Note: Reading such as The Big Short is about the extent of my understanding of the housing crash, etc)
      Thanks–

      Reply
  • Charlie September 29, 2013, 5:03 pm

    Hey MMM!

    I know this is a super old post, but I had decided to back track and read your blog from the beginning and so far I’m loving it! I was wondering what your opinion is on building your first home. I know its obviously cheaper to purchase a home that’s already been built, but hear me out:

    The home I’d like to build is planned to be small (about 500-600 sq ft) and extremely energy efficient. I plan on installing things like triple pane windows and adding solar paneled roofing. I feel like if I start out with everything being new and high quality it will push maintenance back by several years which will counteract some of the cost (although I know not much), and if I can make it as efficient as possible, that will reduce the rest of my bills forever.

    I plan on saving up 20-25% of the building cost and taking the rest out as a building loan, which I can then transfer to a fixed mortgage once the house is completed. What do you think of this plan?

    Reply
    • Mr. Money Mustache September 29, 2013, 5:16 pm

      Building a house from scratch can be stressful at times (mainly for the parts you depend on other contractors for, which is like herding cats), but it’s a good battle. Another strategy is to buy the land, park a nice trailer on it, live in the trailer while you build the house with cash as you can afford it (I find that loans make things way more complicated and expensive as the bank may insist on a licensed builder and subcontractors, etc).

      Reply
      • Cadence December 31, 2013, 11:54 am

        MMM – I am new to your blog as well and have been reading a lot! Funny, this reply of yours is exactly what my hubby and I have talked about doing. We are definitely people in your EMERGENCY YOUR PANTS ARE ON FIRE type of situation, however, so buying anything anytime soon is not practical/happening. We’re in a Boston suburb, i.e. EXTREMELY high cost of living. Luckily we are renting from a friend and our rent is very good for the area ($1200 for 2BR) and we are able to be 1mile from my 96yo grandmother as well as a lot of other family. So far, this is what has kept us here.
        I look forward to learning lots more from your blog and to finding was of saving $$ everyday (starting with taking the T to/from our NYE festivities rather than cabbing it home (we were always going to T there) for $40 if we could even find a cab!).

        Reply
    • Bunnykick2000 January 23, 2014, 10:16 am

      Hi Charlie,

      I built my own home. It is an awesome experience. I consider it to be like a Master’s degree, figuring all the time and studying that went into it. My goal was to build a “bill free/ maintenance free” home. It has worked out pretty good. First thing to do is take a building/design class at the community college and go from there. In the design class we designed our own homes and then did calculations on how much energy it would use. Just brilliant.

      You don’t have to buy everything new. It took us so long to build the house that we were able to scavenge many items off the side of the road from others doing their re-model projects. i.e. bathtub, lumber, glass block, bunch of other little things, plus we have a second hand construction type store in our town.

      Important factors for your home: MASS, GLASS, INSULATION and ORIENTATION.

      Best of Luck. Hop till you drop…

      Reply
  • Melissa Blogger wannabe March 5, 2014, 12:18 pm

    Hi Mr.MM
    So I read this post… (working my way from the beginning of time) and I even got around to reading all the comments( sometimes I don’t) so I know that Anita asked a very similar question back in 2011… Mine is the same… I currently live in California and we want to buy a house … The houses here are just over priced… I went to university in Michigan so I know how much more affordable houses can be. I am totally up for moving to a new state … I love traveling and new experiences (hence MI for school)… I was also considering CO since my husband has family there too… So the question again is we want to save the 20% (50g’s probably) but where do we save the money… I don’t want to leave it in my savings account that pays … Um .0001 or something … But I thought investing it would be too risky… I checked out the VSTBX and it seems like it’s doing poorly … WhAt is your recommendation with these changed times?

    Reply
  • Ben May 6, 2014, 3:31 am

    I really love the advice of this blog. I’m 32 and on target to pay off my mortgage within 5-6 years (4 years in and over 75% done, and put 35% down payment). I work a tech job, moved to another country for the benefits there, have bicycled more than driven my entire life, eschew consumer goods, recycle/reuse, cut my own hair for years, etc. I say all that because I want to establish I’m not making excuses for myself. But that while I love this blog and the advice, I wish you acknowledged that this is not advice everyone can follow. Anyone middle class or above? sure, but there are huge swaths, literally millions of Americans that this is literally not possible for.

    Again, I say there are definitely people who need to read this, but those people are not the poorest of Americans, they are largely the middle class. I know I personally would enjoy the posts more if the tone were tweaked slightly to acknowledge that sometimes choices are outside of our control.

    Reply

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