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When we deploy our hard-earned dollars, we all have our financial reasons. But are we focusing on the right thing? Consider four examples:
Homes. When folks buy a home, they’ll often dwell on the potential price appreciation, the tax benefits and the advantages over renting. But I’d contend there are two reasons that are even more compelling: Buying a home locks in our housing costs and, with every monthly mortgage payment, forces us to save.
Health insurance. Yes, health coverage helps with medical bills. But forget the size of the copays and the deductibles. When I look at health insurance, I see two huge financial advantages: We benefit from the discounts that insurers negotiate with medical providers, and our annual cost is limited by the out-of-pocket maximum. Everything else, I’d argue, is secondary.
Auto insurance. We carry auto insurance so we’ll be covered if we crash the car, right? Sure, that’s one of its roles. But the repair cost of a bad crash pales next to the financial hit we’d face if we hurt or killed others in an auto accident. That’s why I see the primary role of auto insurance as providing liability protection, and why most folks should probably also add to that coverage with an umbrella-liability policy.
Portfolios. Many folks buy investments for their income—the dividends from stocks, and the interest from bonds and cash investments. There’s nothing wrong with that. Still, when we think about why we should buy the three key asset classes, I believe it’s better to think of them in terms of the role each plays in a portfolio.
Specifically, I’d view stocks as a portfolio’s engine of growth, bonds as the financial shock absorber and source of spending money in the event of a drawn-out bear market, and cash investments as the place to go for immediate portfolio withdrawals.
The points about health insurance and liability insurance are important. We need to be insured against the catastrophic. A few years ago this was discussed at length on HumbleDollar.
As for owning a house making housing costs predictable? Not so sure. New roof needed sooner than expected. Air conditioner dies. Sewer backs up. Bathtub pipe backs up and ceiling downstairs collapses with a big bolus of water. Homeowner’s insurance skyrockets. Roots from tree crumbles section of foundation.
But those events will also be reflected in rent plus you will be at the mercy of a landlord to fix them promptly and correctly.
We bought a condo to avoid some of that, but since we bought in 2018 the AC had to be replaced, a hot water heater went, water leak from neighbors above us required new bathroom ceiling not covered by insurance, property taxes have increased to $13,500 and HOA fees from $700 to $950.
There is no escape. On the other hand what we paid $580,000 for now easily sell for over $800,000.
The rent for anything close to what we own is $5,000 or more a month.
It’s a throw of the dice I guess.
Thanks, Jonathan, for a good post. I wanted to mention that having a paid off house means to us that our family would have a place to land if things got rough. As long as we pay the property taxes. I sleep well at night knowing this. Chris
Yep. Back when we owned a house, even though it wasn’t in a place we wanted to stay, we used to comment that if the proverbial poo hit the fan, at least we owned our house. Now that we’re nomadic we no longer have any fixed abode, never mind own it outright. Lately we’ve been thinking of purchasing one even if we don’t live in it all the time.
There m