The Housing Crisis: America’s Biggest Wealth Killer

18.3 million Americans are considered house poor. Are you one of them? You know what I'm talking about. Your friend who saved up for years and now they brag that they're a homeowner. But it turns out they can't afford to eat out anymore. They can't travel for another 23 years. And every Saturday, the entire family spends three hours rinsing and drying out paper towels so they can reuse them. It doesn't have to be this way. I'm gonna break this video down into three parts. I'll explain exactly what house poor means. I'll show you two real examples of people who escaped being house poor. And I'll show you what you can do if you find yourself in this situation too. So let's jump right in with part one. What is house poor? House poor means that an overwhelming amount of your take home income is going towards your house. I'm talking about your mortgage, utilities, repairs, everything, leaving very little money for other expenses you have, such as cell phone bills, groceries, car, and also saving and investing. For example, let's say that your household take home pay, just for easy math is $8,000 a month. And you bought a house for $500,000. Let's assume you put 20% down. You've got a 7.5% mortgage. That means your monthly mortgage is around $2,800. But I always add 30 to 50% to the monthly payment, which accounts for invisible phantom costs like maintenance on the roof repair. That's going to happen 11 years from now, but I need to save for it today. That means if you were to add 50% in, you will actually end up paying approximately $4,200 a month, which is more than half your paycheck. Beware. This is where invisible phantom costs can get you. Now, I know a lot of you are rolling your eyes right now saying you got to be kidding me. Boohoo. Homeowner complaining about putting themselves in a bad financial position. Wait a second. It's not that simple. There are a lot of extenuating circumstances that can quickly put well intentioned people into a position of being house poor. For example, getting laid off after a company restructured. That's nobody's fault. One parent deciding to stay home after having a child, leaving a job to take care of, an elderly parent, going back to school, and many more reasons. Yes, there are a lot of things that can happen to make somebody house poor. But luckily there are also some ways to avoid it. That brings me to part two. Real examples of being house poor. I recently asked my followers to share their stories of being house poor and I got a huge amount of responses. So first of all, thank you to my community. I always appreciate how responsive you are. Let me share two of these situations of people being house poor. First up, the young homeowner who didn't run the numbers and how she fixed it. Julia is not house poor anymore, but when she first bought her house, it happened very quickly. Let's take a look at her housing stats at the time of purchase. When she bought her house, her household income was $45,000 or $3,750 a month before taxes. She lived in Columbia, South Carolina. Her house was purchased for $166,000 and her mortgage payment was $1,020 per month. Julia was single when she bought her house, so she also asked two roommates to live with her, which would help offset her mortgage. But after the first year of living together, Julia decided she wanted to live alone, so she sent the roommate's packet. If I quickly run the numbers myself after she started paying the mortgage on her own, here's what we get her mortgage over her gross income was 27.2%. Now that number falls below the typical recommendation to keep your total housing costs below 28% of your gross income. However, notice I use the word total. We need to factor in all the phantom costs above and beyond the mortgage. That is why I always add 50% to the mortgage to account for these invisible costs. Now yours might not be as high as 50%, but I like to run conservative calculations. If we add 50% to her costs and divide it by the gross income, that is 40% of her gross income. Way higher than the recommended 28%. Julia told me I thought I could afford it. Hashtag didn't run the numbers. She said she quickly went into massive credit card debt, furnishing the house in addition to being a bridesmaid in Four Weddings. During a short period, she she said she was constantly stressed, overwhelmed, and felt like the rug would be pulled out from under her at any moment. Just think about it. Very few people even factor in the idea of moving and furnishing a new place. Those are phantom costs. You gotta account for that. So how did Julia escape being house poor? She started driving for Uber right before COVID and then she resumed when she felt safe enough. By taking up a side job, she was bringing in more money than before. She also focused her attention on the high interest credit card debt she'd been carrying around. She paid that off. Then she put that Extra money towards paying off her car. With the credit card debt gone and the car loan gone, it eased the stress off of the mortgage payment. But she didn't stop there. She also received a $5,000 raise every year, bringing her current income to $75,000 overall. Well done. Now let's take a look at another situation. A creative entrepreneur who who hustled to escape being house poor. At the time of buying their house in 2021, Kendall and her husband were making very good money. Let's take a look at their housing stats. At the time of purchase, their household income was $400,000 or about $33,000 a month before taxes. They lived in Nashville, Tennessee. Purchase price of their house was 1.15 million and their mortgage payment was approximately $4,300 a month. But within two years of buying, a few things happened that that led them to becoming house poor. First, Kendall burned out while running her own business and had to take a step back from working so hard. Then her husband lost his job and within two years of buying, their income was cut in half. On top of all of this, she and her husband are now involved in a lawsuit with their previous homeowner. They've paid tens of thousands of dollars in legal fees with no resolution yet. Kendall told me, quote, the lawsuit is something I never expected. After as a risk of home ownership, Kendall and her husband felt stressed and worried. With everything that had happened, I can only imagine how tired they felt having to hustle so hard and be involved in an ongoing lawsuit. But that didn't stop them. So how did they escape being house poor? They worked diligently to increase their household income again. And they did it in a few ways. Number one, they rented out extra space. This was an easy win for them. They rented out their mother in law suite, the house for photo shoots and their whole house while she and her husband traveled. Number two, they grew Kendall's business. Kendall had to hustle to make up for the loss of 150k from her husband's income. Fortunately, since she works for herself, she can put her foot on the gas to make more money when her family needs it. Number three, recasting their mortgage. A mortgage recast is a form of prepaying the mortgage by making a lump sum payment towards the balance. The lender then re amortizes the loan with the smaller balance and and the new lower monthly payment. To recast their mortgage, Kendall and her husband pulled out $200,000 from their brokerage account, which personally I do not recommend. But now their Mortgage payment is down from 4,300 to 2,800 per month. Before we move on to part three, do me a favor, hit that subscribe button and turn on notifications, because every week I'm giving you new perspectives on handling your money. And I don't want you to miss out on any of these tips. All right, now that we've seen real examples of people buying, being house poor and escaping it, that brings me to part three, what to do if you are house poor. If you're house poor, first of all, you know it because you're constantly worried about yet another thing coming up in your house. You've probably had to cut back on other parts of life that you enjoy. Why? Because of this damn house. House poor is not just in the numbers. It's a feeling. It's waking up and going, oh, God, what? What is going to happen today? All right, now listen to this part closely, because I'm going to give you the exact solutions you need to escape being house poor. Just like Julia and Kendall in the previous examples, there is hope. While these two homeowners are separated by hundreds of miles and they have totally different household incomes, they both made one key decision to help them escape being house poor. They found ways to make more money. So what can you do? You have three options right on the table, and some of you watching this video may be able to do a combination to improve your situation even faster. Let's take a look at option one, Cut your expenses. Now, this might seem obvious, and I'm certainly not going to sit here and tell you to cut back on how much you spend on broccoli, but I do have a different approach than giving up everything you love. The best way to save money by cutting costs is to only focus on things you don't really care about or don't use. That way, the change is more likely to be permanent. No, I'm not going to tell you to cut back on $5 coffee. It's pointless. It doesn't even add up to that much. It's. Here's a much better approach to cutting back. Focus on your two big wins. These are areas where you spend a lot of money. So if you cut back in these areas, you'll make way more progress than trying to cut back 3% on 25 different areas. For most people, they overspend in two areas, always two. It's very simple. Housing and vehicles. Now, I know you're here because you're already spending too much on your house. So let's just look at Your transportation costs. According to the U.S. bureau of Labor Statistics, the average U.S. household spent $1,022 per month on transportation in 2022. I'm not even going to put on my freaking urban planning hat and talk about what a disaster this is for Americans who are forced to own a car just so they can go to the freaking public library. But anyway, back to the car payment. This isn't just your car payment. It's the gas, parking, maintenance, repairs, etc. That's a lot of money every month. Also, you can have the free freedom Americans love Freedom. Freedom of getting in a freaking car that costs you over $1,000 per month. How deranged is this? The third highest expense according to this study. Food. Americans spent an average of $778 per month on food in 2022. And I can tell you from a lot of conversations I've had with people, people spend way more than they realize here. They will tell me, literally, oh, ramit, I only eat out. Like, hardly ever. I go, oh, wow, that's so interesting. Hardly ever. Like, give me a number. Oh, like, like never. Like twice a week. Like, max twice. I go, really? Twice? In my head I'm already like, multiply that times three. Because it's never the number they tell me. It's always the number times three. I go, that's so fascinating. Hey, last week, how many times did you eat out? Suddenly they look down and they start avoiding. I don't know. I said, well, let's just start at Sunday. Oh, Sunday. You know, we actually ate out twice, but that was unusual because it was Sunday because we had our friends coming over. And then what about Monday? Oh, well, Monday, you know, I did stop at the gas station in the morning, and it turns out that guess how many times they ate out. Seven times. Almost magically, it is the number they tell me times three. So please, can we get honest about how often we eat out? Look, I'm not the Jack in the box Scrooge, okay? If you want to eat out, fine. If you can afford it, God bless. But you've got to be honest. Honest with yourself and honest with the people around you. And I can tell you, if you're watching this video right now, you're not being honest with yourself about how often you eat out. Bottom line. So, looking at your own spending habits, what are the two biggest categories besides housing? Download my conscious spending plan template. It's free. It's in the description below. Put your numbers in and will automatically show you how you stack up against Others, these two categories, these two discretionary categories that you can cut back on are going to be your big wins. Two items that you spend a lot on, but you know that you could cut down with some effort. Now here's what we're going to do. We're going to target cutting back 50% over six months in these areas. Why cut back over six months? Why don't we just go from $400 a month to zero? Because I want this to be sustainable. This isn't just about hard reset. This is about a lifestyle change. It makes it more sustainable, more likely you will actually stick with the changes. So let me show you what it looks like. Let's say one of your categories happens to be eating out. And like I said, this is true for most people. Let's say you're currently spending out a third thousand dollars a month eating out for a family. Okay, easy math. Here's how it would work to cut it down over six months. First month, 920 bucks. That's like one or two meals. Simply cut those out. That's very sustainable. Month two, take it to 840, then 740, 660, 580 and then 500 again. Notice how gradual it is. A lot of what you will quickly discover when you make these changes is with some planning, you can actually cut these numbers quite dramatically. It's not a race. But within six months you can often see these numbers cut in half. Apply that same principle to a second big win. And now we are talking about hundreds of extra dollars per month, even thousands in extra cash flow. Okay, now that you've learned how to cut costs in a sustainable way, let's move to option number two. Increase your income. Now, there are lots of ways you can increase your income. If you already have a job, it's a complete no brainer to negotiate for a raise. So. But you don't just walk in your boss's office and go, pay me more please. That's not how it works. You need to do careful planning. Don't worry though. I created a whole video showing you exactly how to negotiate for a $10,000 plus raise, which by the way, I've helped lots of people do. I will link it in the description below. If your existing company tells you they don't do raises, you try and you get rejected. Or you simply do not have any growth potential there. Guess what? It's time to look for a better paying job. During that job hiring process, you have more leverage than you'll ever have to negotiate your salary. For example, One of my students named Robert went from a job making $52,000 a year to landing a new job where he now makes more than $100,000. That is potentially generational changing income. But let's say you already like your job. Let's say you make a good salary. What about earning money on the side? Many of my students started earning more by creating a side business while working a full, full time job. Slowly creating a business that allowed them to live the life they want. Some of them kept their jobs, just made some extra income. Some of them decided to go full time with their business. It's totally up to you. One of those students is Graham, for example. He built his side business into a full time career. He's now able to spend six weeks in the south of France with his wife and two daughters. He didn't work at all during that six week vacation because he set up his business to run smoothly while he was out of the office. If you are interested in making more money on the side, but you aren't sure where to start and you don't yet have a business idea, check out my earnable program. I will link it in the description below. Now that you've seen different ways to earn more, that brings me to option number three. Sell your house. Move to a more affordable place. Now listen, no one is going to follow this advice because almost nobody ever does this. But I have to tell you anyway because I want to stretch the possibilities of what you have in your mind. If you are struggling to pay for the house you already own, is this the kind of life you want for yourself? Do you see clear line of sight on how your situation is going to improve? If not, it might be time to make a major lifestyle change. As a guideline, please remember that your total housing costs, including your mortgage, interest, taxes, insurance tax, today's maintenance and tomorrow's should ideally be no more than 28% of your gross income in high cost of living cities like New York, Louisiana and San Francisco. In fact, in a lot of cities in America right now, it is really difficult to hit that number. But when your housing costs go up above 28%, they can go to 30%, even 32% sometimes. But when they go higher than that, things get really risky. And and if something unexpected goes wrong in your life, like an unexpected car repair or certainly a job loss, you are in extreme risk of not being able to pay your housing. It also means the higher that number is, the more you're paying for your house as a proportion of your income. The Less you are saving and investing and that's a big problem for your future. Your retirement is not just having a paid off house. You need more than that in order to actually have a successful retirement. To reduce your housing costs, sometimes you might have to make the biggest decision of all, and that is selling your current place and looking for something more affordable. That might mean renting, it might mean buying a smaller place, or it might even mean moving to a different city. But I want you to be aware of this as a possibility. Now to quickly run the numbers and see what makes financial sense for you. I recommend you use the New York Times buy versus Rent calculator. I like this calculator because it has a lot of variables you can play with and it makes it really easy to see if buying or renting is better for you. And if you're looking for a smaller, more affordable place to buy, go online and search for mortgage calculator and rerun the numbers. A lot of people who got stuck in a situation being house poor never actually calculated how much housing would cost before they bought. So if you want to be conservative in your estimates, if you're considering buying, take the monthly mortgage payment, add 50% on top to get closer to what you will actually pay. You may disagree with me, you might want to change that number. That's up to you, but that is the number I use in my own calculations. Of course, running the numbers on a new house or even trying to decide between buying and renting can seem daunting. But it's extremely important to understand the actual numbers when you are making the biggest purchase of your life. That is why I created a video walking you through the process step by step. Check it out right here.