Archives for May 22, 2018

Growing up doesn’t always mean moving out of your parents’ house, as evidenced by the swelling ranks of adult children who have returned home after college — or who never moved out.

Called “the boomerang generation,” this group now includes about one out of every three Americans between the ages of 18 to 34, according to the most recent U.S. Census data. With college commencements just a few weeks away, it’s likely more parents will soon face a host of questions about what it means when their adult kids move back home, including how to handle finances.

“The families who have done it well are those who set expectations about what adulthood means,” such as finding work and helping with bills, said Rebekah Barsch, vice president of planning at Northwestern Mutual.

“No barista jobs. Nothing.”

Amanda Abella moved back home with her parents after she graduated from college in 2010. The job market in Miami was tough for a new grad, and housing costs were high.

“There was no administrative work, no barista jobs. Nothing,” she said.

Instead, she moved back home with her parents, a stay that stretched to seven years. Her brother also moved into their parents’ Miami home for similar reasons. The move allowed her to invest in building a career as a business coach and personal finance writer, while also saving for retirement.

“It’s one of the smartest things you can do. Just be aware there are certain things you need to do to make it work,”
Abella said.

Setting expectations

Key to managing finances — and the emotions often tangled up with money — is talking honestly about expectations before adult children move home, financial experts say.

That includes setting a target for how long the adult child will live at home, with the caveat that plans often change, Barsch said.

She recommends discussing parents’ expectations about contributing to household expenses, as well as helping the adult child create financial goals such as saving for retirement or a down payment on their own home.

“It’s really asking the question, ‘Are you moving back in as an adult or as a child, who is fully supported?’ ” she said.

The rent question

Charging rent can be an emotionally fraught topic, especially for adult children who may be shocked if their parents ask them to pay to live in their childhood home. If parents want to charge rent, they should ask for below-market rates, advised Shelly-Ann Eweka, a wealth management advisor at TIAA.

“The idea is you are providing some sort of subsidy to build up some financial wherewithal,” she said.

Other parents may decide to forgo rent because it gives their adult children a chance to build their savings. That’s the case with Sidney Eley of Burlington, Vt., who said she and her husband don’t charge their 29-year-old daughter rent because she’s saving to buy her own home.

Her husband “went to the bank with her, and they laid out a plan on how much she would need for a down payment,” she said. “She is working toward completing that goal.”

But, she noted, the relationship between parents and adult children is deeply individual. “If she were the kind of child that was spending a great deal and not saving, I would have a lot of difficulty with that,” Eley said.

Retirement goals

Don’t neglect the impact on parents’ retirement goals, TIAA’s Eweka said.

“Make sure that you are saving for retirement and paying down debt, then you will be able to see clearly how much money you can use to support your child,” she said.

More than one in 10 Americans say they receive financial support from their parents or family members, with a majority of those receiving help with bills, basic necessities and housing, research from Northwestern Mutual found.

But even paying for an adult child’s mobile phone can damage a parent’s own retirement savings, according to a 2017 study from NerdWallet. The financial site found that paying for adult children’s expenses — from rent to clothing — could siphon off up to $227,000 in retirement savings.

Household expenses

Adding another adult to the household will boost household expenses, creating an opportunity to talk with adult children about the costs of running a house, Eweka said.

“You may not have turned off the lights at night because you weren’t paying the bill. Now you’re like, ‘Let’s turn it off,’ ” she said.

Abella said she paid for her own phone and auto insurance while living at home. Her lesson: “Don’t expect your parents to pay for everything.”

Desperate homeowners are stretching their finances to buy a home, and lenders and mortgage backers are increasingly willing to accommodate them.

It’s difficult to purchase a home in a buyer’s market – and 2018 certainly meets that standard. Pent-up demand and an extreme shortage of homes have led to a rapid increase in prices that outpaces recent wage gains. The problem is acute in the market for starter homes and critical in high-value markets like San Jose, Seattle, and Austin.

Desperate homeowners are stretching their finances to buy a home, and lenders and mortgage backers are increasingly willing to accommodate them. This strategy increases homeownership but puts more households at risk of future default by overloading them with debt – increasing the chances of another housing crisis.

How much debt is too much? Lenders gauge this through your debt-to-income ratio – the total monthly debt you have as a percentage of your income. Traditionally, a debt-to-income ratio of 45% is the upper limit for allowing conventional loans without special circumstances.

In July of 2017, the mortgage backer Fannie Mae raised this limit to 50% in an attempt to help potential homeowners who could meet mitigating criteria (at least twelve months cash reserves and a 20% down payment). New data from CoreLogic suggests that many new homeowners have taken advantage.

CoreLogic found that approximately 20% of conventional mortgage loans over the past winter were taken out by borrowers with DTI ratios above 45%. That’s nearly three times the percentage of loans made in the eighteen months prior to Fannie Mae’s DTI ratio limit increase, and the largest percentage since the housing crisis.

Since the supply of homes is unlikely to improve anytime soon – especially in the starter-home market, where builders make minimal profits – the concern is that lenders will loosen credit even further and authorize too many risky loans.

As a potential homebuyer, you must resist the temptation to stretch your budget on the assumption that everything else will fall into line. Homeownership has significant running costs that first-time homebuyers may not fully grasp.

Personal finance expert and author Jordan Goodman says, “The biggest mistake people make when they are buying their first home is underestimating the expenses involved.” Goodman cites property taxes, insurance, and maintenance as typically underestimated expenses.

When your total expenses already leave you with little financial cushion, it only takes one large unplanned event such as a medical emergency or a job loss to push you into a debt spiral. A high DTI also means that it’s unlikely that you have an adequate emergency fund and are saving enough for retirement.

Take this into account as you search for affordable homes. Even though a lender may offer you a loan that raises your DTI above 45%, there’s no reason you must accept it. Scale back your search to homes that don’t force you into an excessive DTI – and if you can’t find one, lower your spending and pay down other debts to drop your DTI to a more manageable level.

The desire for homeownership can overcome common sense when it comes to finances. Don’t let your dreams overrule your pocketbook. Assess your housing needs and finances properly to make sure that you aren’t overpaying for your new home – and know your realistic limits in case a bidding war starts.

Consider the advice of Greg McBride, Chief Financial Analyst for Bankrate.com, who suggests limiting your home purchase to no greater than three times your annual income. Otherwise, you may end up in a situation that Jordan Goodman describes as, “The house owns you. You don’t own the house.”

We have all the information you need to get your budget “skinny” by summer.

Winnie Sun, known as “The Wealth Whisperer” from Sun Group Wealth Partners in Irvine, joined us with some great tips to put more cash in your wallet.

1 EARN ON YOUR SKILLS – GET YOUR SIDE HUSTLE GOING

Earn on your skills: Take a look at sites like @Fiverr online marketplace for freelance services, @Upwork @Craiglist @Taskrabbit @Bideo and find ways to make a little on your side hustle.

2 ONLINE SURVEYS

Swagbucks, Vivatic, MySurvey, Survey Bods, etc. These apps pay you for your opinion! If you’re good with writing, take on editing or writing gigs online.

3 GET FREE MONEY FOR ONLINE SHOPPING

Ebates, Honey and even airline sites which give you miles for shopping on what you normally need (vitamins, groceries, household items, etc).

4 WATCH VIDEOS FOR MONEY

There are companies such as Swagbucks that pay you for watching YouTube videos, etc. Watch live television shows and be an audience member.

5 PAY YOUR UTILITIES WITH CREDIT CARDS – USE THE CARDS FOR CASH POINTS

Bills are paid in full and you’re earning free cash back or points for vacations.

6 FIND YOUR TRIBE — JOIN A “SIDE HUSTLE” GROUP

Discover a new hobby that doesn’t require you to spend, but rather instead, to earn. Join a “side hustle” or entrepreneurial group. Join others who are mindful of money to learn new ways to earn and save.

Pacific Gas and Electric Company (PG&E) wants customers with air conditioners to know they can cool their home for less as temperatures heat up. Today, PG&E shares four simple ways for customers to save energy and reduce cooling costs.

“This spring and summer, we want to help our customers manage their energy costs and save money. Customers can utilize our tips, tools, and programs to uncover savings through these hotter months,” said Vincent Davis, senior director of customer energy solutions at PG&E.

1. Raise the thermostat when at home and turn it up when leaving: Customers can save on annual cooling costs for each degree the temperature is increased in their home during the hot summer months. Set the thermostat to 78 degrees when at home, health permitting. Turn it up to 85 degrees when not at home.
2. Check air filters once a month: Heating and cooling consume the most energy in the average home — up to 50 percent of total home energy use. Dirty filters cause your system to work harder to keep the area cool, wasting energy and money.
3. Consider purchasing a smart thermostat for your home: Through PG&E’s Smart Thermostat Rebate, customers receive a $50 rebate on the purchase of new smart thermostat to help save on home heating and cooling costs. Visit PG&E’s Marketplace to compare and shop for qualifying ENERGY STAR® models.
4. Maintain your air conditioner: Customers can lower their monthly energy bill by keeping air conditioning equipment working at top efficiency. PG&E’s AC Quality Care Program offers a free AC assessment ahead of summer and list of available AC-related rebates.

To take advantage of additional programs, tools, and savings opportunities, PG&E recommends customers:

• Go to pge.com and sign up for a free online account. Signing up to access an online account is critical to customers’ understanding their energy use. When logged in, customers can also, review energy use and costs, compare bills, and more.
• Find a rate plan that works best for their home at pge.com/ratechoices. Customers can analyze their energy usage and find the lowest cost or most convenient rate plan, based on their electric use history. PG&E customers can also explore new time-of-use rates to determine what works for their home.
• Avoid bill surprises with Energy Alerts and Budget Billing. Customers who need help balancing their budget and avoiding bill surprises can sign up for the free Bill Forecast Alerts at pge.com/energyalerts to be alerted by text, phone or email if their monthly bill amount is projected to exceed the amount they specified. Customers who wish to receive a more consistent and predictable monthly bill based on their average annual usage can sign up for Budget Billing at pge.com/budgetbilling.
• Take a free Home Energy Checkup at pge.com/myenergyuse. This simple web-based assessment allows customers to find out how much of their household’s energy goes to heating, hot water, appliances, and lighting. Customers will receive a personalized list of ways to reduce energy and lower their bill. It’s free, easy and takes only five minutes to complete..