[Got a feisty article for y’all today while I recuperate from the festivities that is FinCon (our financial blogging conference – where, contrary to belief, we consume more than just #’s :)). I think you’ll enjoy this one ‘cuz Mark says all the things we wish we could say to our neighbors but don’t, haha… And they may or may not apply to ourselves as well :) Take it away, Mark!]
I own a single rental property. My tenants are a middle-aged couple with an adopted son.
Before I agreed to let them live in my house, I ran a background check, which included a deep dive into their finances. This has proven to be a fascinating opportunity for me as I was given free rein to snoop into what most of us keep as private information.
Upon completion of the snooping investigating, I learned that my tenants make a $hit-ton of money and were more than qualified to live in my house. On paper.
Fast forward twelve months to where we are today. My tenants have not paid rent on time once since they’ve moved in. While this is annoying as hell, they currently don’t owe me any money and have been maintenance-free tenants.
This is why I keep them around. I run an operation that consists of one rental and I do all the management myself. I believe I’m better off sticking with these clowns rather than going through the eviction process and rolling the dice with another tenant.
What makes this decision possible for me is that I don’t rely on the rental income to cover any of my expenses – I’ve got other sources of income for that. So, as long as the payments keep coming in at some point each month, I’ve accepted the tenants for who they are: one of the many Americans who makes bank but somehow still lives paycheck-to-paycheck.
Where does their money go?
It’s amusing how much you can learn about a family’s expenses without really trying. I don’t spend much time at the rental these days – I occasionally stop by to pick up rent or do a project. But, in these short and infrequent visits I’ve been able to pick up on a good chunk of my tenant’s regularly occurring expenses. The most glaring is the two gas-guzzling, temperature controlled behemoths sitting in the driveway. You probably refer to them as an SUV and a pick-up truck. Not me though. I’m smart.
So they’ve got these two giant vehicles that have fifteen seats between them and can generate enough torque to haul a space shuttle. I’ve already mentioned that this is a family of three so the fifteen seats are totally justified. But what about the towing capacity?! Surely they have jobs that require it. I’m not a nurse or a hospital tech, but both of these professions require the regular hauling of machines that can travel out of the Earth’s gravitational pull, right?
In addition to the duo $35,000 vehicles that are stationary 75% of the time, I’ve also observed a decorative piece that was added to the exterior of the house upon their occupancy – a DIRECTV dish. I’ve since learned that the husband/father/driver of the pick-up is quite the football fan so it’s imperative that he has DIRECTV’s premium package that includes NFL Sunday Ticket.
The final significant expense that I’ve been able to pick up on is the family’s frequent trips out of town. I know of these trips because they tell me about them:
Mark: Hey Roger. Tomorrow is the 1st of the month, just a reminder that rent needs to be paid by the end of the day.
Roger: Oh, shoot – is it the 1st already? Obama is always changing the calendar on me. In any case, we’re going to be out of town for a few days so we’ll just pay rent when we get back.
Mark: Yeah, Obama is the worst.
Over the next couple weeks they pay the rent balance, usually in two or three installments because “payroll screwed up our paycheck”. So they’ve made it known that money is tight and they rely on their next pay day to cover rent, yet they have no shame in telling me about all these trips that they go on the 1st of each month.
What’s wrong with this picture?
I’m not one to blindly judge someone else based on where they spend their money. Oh, who am I kidding – yes I am! But in all seriousness, I, nor anyone else, has the ability to determine what brings someone else value. Maybe the eight-seat, 17 MPG SUV and premium cable package is an expense that was deliberately evaluated by my tenants and thereby determined to bring the necessary value to justify the cost. Maybe.
Being the cynic that I am, my intuition tells me that this isn’t the case. No reasonable person would value inefficient, earth-killing transportation over the security of his/her family.
This seems like an appropriate segue to my first lesson…
LESSON #1: For the love of all holy, build and maintain an M-F’ing emergency fund!
Believe it or not, my tenants are riding a streak of good fortune since they’ve moved into my house. From what I can tell, there have been no medical emergencies in the immediate family, neither of the parents has lost their job, no natural disasters have cast ruin onto their physical possessions, and their landlord is a stand-up dude. Even amidst all this good fortune, they still manage to live on financially unstable terms.
Imagine what would happen if the good fortune ran out? If one of them had to spend time in the hospital? If their boss sobered up and realized their incompetence? $hit would absolutely hit the fan.
When times are good – that’s when one should start saving money for a rainy day. However, it’s during these good times when we feel invincible. When we feel in control.
Well, it doesn’t take much to turn those good vibes upside down. While I would never recommend going through life expecting misfortune to greet you at every turn, I strongly recommend preparing for that misfortune. Specifically, we should all take the time to calculate what six-months of living expenses is for us, and either set that aside in a secure but liquid location, or halt all extraneous spending until you have that amount saved.
Let me say that again. If you don’t have six months of living expenses saved right now, you need to stop all unnecessary spending. No going out for happy hour. No cable TV. No gym membership. No lattes from Starbucks. No Netflix subscription. By choosing to pay for any of these, you’re telling yourself and the world that you value luxuries more than your security. Grow up.
What else is wrong with this picture?
As I mentioned, I got to do a background check on my tenants prior to offering them a lease. A big piece of the background check included contacting their employers to determine how much money they each made. They must feel naked every time they’re around me. The things that I know… :)
Without getting into specifics, they each make good money. So as a household, they make great money. And it seems like their expenses should be relatively manageable. They rent a modest-sized home and have one kid. Kind of sounds like a personal finance junkie’s dream couple. So how do they manage to spend all the money they take home?
LESSON #2: Please, oh please, track your expenses.
I don’t believe in budgeting. Budgeting is for nerds and communists. Instead, I believe in spending money only on things that bring value into my life. But as the saying goes,”you can’t see the forest for the trees”. This is why tracking expenses is so critical – it allows us to gain a more comprehensive understanding of our expense categories and trends. Tracking expenses doesn’t replace being deliberate at the time of purchase, it simply enables us to evaluate how deliberate we’ve been over long periods of time.
Even though I don’t have a budget on how much I can spend on bars and restaurants each month, when I go back to review my expenses in that category, I’m able to reflect on whether the amount being allocated to that area is consistent with my values.
I make this evaluation not in terms of dollars, but in terms of hours.
Let’s consider an example with a bigger price-tag. If I was in the market for a car, I wouldn’t view the car as costing $22,000; I view it as costing me an additional four years of obligatory employment (or four less years of freedom). I know what my annual cost of living is so I thereby know what my retire-forever nest egg goal looks like. Thus, I’m able to determine the yearly setback a $22k purchase would have.
You can’t evaluate what you can’t measure. $22,000 is just an arbitrarily large number unless you know how it relates to the rest of your spending. Or maybe you don’t even consider it a large number. Maybe it’s just a number. Unless you have a baseline, you don’t ever truly feel the effect of spending. And that’s the world that my tenants exist in.
They don’t think twice about how much they’re spending on gas or TV or leisure travel because, quite frankly, they don’t know how much they’re spending.
They see all expenditures as independent:
“I can totally afford to put $100 of gas in my driving machine every week; I make $80k a year.”
“$200 a month for a cable package? Let’s get three! I can afford it.”
I can afford it. The most misunderstood phrase in the English language. Not to mention one of the most dangerous. This phrase, specifically the mindset behind the phrase, is the reason why my tenant’s finances are such a $hit-show.
The numbers speak for themselves. Their take home pay is roughly three times what I charge for rent, yet when the first of the month comes around, they don’t have the money to cover it. Still, the SUV stays filled with gas and TV spews premium channels. Do they genuinely value the cars and the cable more than the roof over their heads? I doubt it. I believe they simply don’t have a firm grasp on where their money goes.
One of the most frustrating parts about the late rent is the stories that come along with it.
The common theme behind these stories is that someone or something else is to blame for their current lack of funds.
I consider myself a reasonable dude. I’ve already explained that I don’t rely on the monthly rent check to cover my expenses (yet) so I’m okay with being lenient on when I get paid. I wish that just once my tenants wouldn’t cook up a story to justify why they don’t have the rent. Just once I want them to say:
“Sorry, Mark. We have the financial discipline of a Kardashian. We’re not totally sure where all our money has gone, but we’ve definitely spent it. Like all of it. We’ll take paying rent seriously for the next few weeks and we’ll get you the money before the end of the month. Thanks for being so understanding. And charming.”
A boy can dream.
LESSON #3: Take control of your F’ing finances. Do it!
Let’s get the exceptions out of the way upfront:
- Medical emergency
- Natural disaster
- Tyrannical government comes to power
The above items are situations in which we lose control over where we spend our money. I’m not sure if the list is comprehensive, but it’s pretty damn close. So, unless you can claim one of the above situations, where you spend your money is 100% up to you.
We need to take ownership of this fact. We need to embrace it.
So many of us are stuck in a paradigm that suggests certain expenses are required because these expenses have become the norm. We need to get away from that ideal; it’s self-crippling. We need to stop operating under the belief that we only gain true control of our finances once the “default expenses” are accounted for:
- Car payments and maintenance
- Food and drink expenses
- Gym membership
- TV package
These things are not required. There is no such thing as “default expenses”. Sure, we all need shelter and food and water (and Netflix), but we ultimately get to decide how much and how often we want to pay for these things.
Here are some excuses that I can imagine immediately coming the mind’s of readers:
“I live in Manhattan. I don’t have the option to spend less on a condo or apartment.”
Get roommates. Or move somewhere else.
“I need a car to get to work.”
Buy (or trade-in for) a used, fuel efficient car. And start carpooling with your co-workers. If you live in a urban area, evaluate public transportation options. Better yet, ride a bicycle.
“Eating and drinking is necessary for survival.”
Going out to bars and restaurants isn’t necessary for $hit. Neither is Whole Foods. Your local Jewel/HyVee/Target/Walmart is stocked with tons of nutritious, affordable food. And you don’t need to be drinking anything other than water.
“Exercising is good for me.”
Agreed. But you don’t need to pay a membership fee to exercise.
“I’ll miss a lot of Chicago Cubs games if I don’t pay for cable.”
Finally a reasonable excuse. :D
We’re all in different financial situations. We make different amounts of money. We value different things as consumers. It would be silly to think that we are obligated or required to spend money in a way that doesn’t promote our greatest quality of life.
I’d like to challenge my tenants to take ownership over their expenses. If they truly value the place where they live over their toys, they need to modify their spending to reflect that.
Make your finances simple again
Personal finance has a bad reputation. It’s caused sleepless nights, accelerated hair loss, contributed to weight gain, and ended marriages. Allegedly.
Just as I believe there is no such thing as a bad dog, only bad dog owners; I don’t believe that personal finances deserve the bad reputation, the person behind those finances does.
We all have the ability to take something that is portrayed as fundamentally complicated in advertisements and the media, and make it simple.
#1. Build an emergency fund
Having a six-month emergency fund will provide you with a sense of security and confidence. As a wise man once told me, “$hit happens”. Your emergency fund will allow you to treat this $hit as the road-bump that it is instead of the catastrophe that it could have been.
#2. Track your spending
Review your expenses at the end of each week. If you find that a certain category is taking more money than the value its providing in return, make an adjustment. If you do this honestly, you’ll find yourself living far below your means in no time!
#3. Take control
Remind yourself that you are in total control of your finances. If in reviewing your finances you find a trend that you’re not happy with, explore options to correct it. Sometimes significant changes like moving, selling your car, or canceling your wine-of-the-month subscription are required.
These lessons, while inspired by my tenants, are applicable to the vast majority of the middle class. If thoughtfully applied, you’ll find yourself enjoying a higher quality of life in which you’re able to focus on what truly matters to you.
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!