‘Money With Katie’ on Financial Advice, Taxes, and Investing

On this episode of The Long View, blogger Katie Gatti Tassin discusses key financial decisions and her best-performing finance-related podcast.

Here are a few excerpts from Katie Gatti Tassin’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Openness Has Been a Bit of a Secret Sauce

Ptak: What do you think of target-date funds? Do you think they’re a good hands-off option for people, especially those who are just starting out?

Tassin: To me, the data around target-date funds’ performance really speaks for itself. I know Vanguard has released data in the past that their investors in target-date funds pretty substantially and consistently overperform the investors who are trying to do it themselves. That said, my only criticism is that I find they tend to be too conservative. Or rather they tend to get too conservative too early. So, my personal approach has been buying target-date funds within my 401(k), where that’s the primary option, that are farther out than my actual retirement date. So, I may plan to retire in 2050, but I’ll buy a 2065. I also like the Paul Merriman 90/10 portfolio where I believe they suggest putting 90% into a target-date fund and then putting the other 10% into something like small-cap value so you can make it a little bit more aggressive. But I think generally they’re a great invention.

Benz: You referenced the period earlier on in the pandemic where we saw a lot of newer investors dabbling in pretty speculative assets. You probably encountered this with some of your peers, or perhaps some of your listeners where people were trafficking in meme stocks and crypto certainly. What were you thinking and maybe saying to your audience during that time?

Tassin: Well, honestly, I was like these people are nuts. I don’t know if I am just not imaginative enough, but I tried, really, really tried to understand the underlying value of things like bitcoin and NFTs and I just couldn’t do it. I could not square the supposed value with the price, so I just stayed away. And by the way, my husband invests in cryptocurrency. So, I say “nuts” endearingly. I’m like, OK, well, whatever, keep it to your 3% allocation or whatever it is. But I think my fear of losing money was greater than my fear of missing out, and fortunately, at least from where we’re sitting right now, in January 2023, it saved me from a very expensive mistake. I don’t know what will happen in the future, but I think it’s important to have an investor philosophy, and mine is really contingent upon do I understand why this thing has value and how it makes money? And if the answer is no, then I’d stay away. So, I stayed away.

Ptak: One subject of debate among personal finance people is whether it’s important to have a budget or whether people should reverse budget—set a savings target and then make sure their spending conforms to that target. How do you think people should do it?

Tassin: I’m hesitant to say should anything, but my general perspective is that what gets measured gets managed. And I would consider myself an extremely financially fluent person and I overspend when I stop tracking. I think humans are just not innately very good at eyeballing this kind of stuff. So, I do think that there is an extent to which you can dial up or down how granular you’re getting for your personality and for your preferences. But I definitely think the “Oh, you don’t need a budget.” I think it’s a slippery slope for 99% of people. That said, I do think it’s a psychological game that you have to play with yourself. Anytime you feel really restricted, you are going to lash out and overcorrect. It’s just human nature.

So, it can be valuable to have certain categories where you are going to give yourself free reign and categories where it’s practically impossible to overspend to a large degree just by nature of the type of purchase. So, a popular example is coffee. Even if you buy an expensive coffee every single day, you’re probably never going to spend more than, I don’t know, $200 a month on coffee. That can be a relatively inexpensive psychological win that will help you stay on track in areas that are a little bit bigger or trickier. But I tend to skew more to the side of when in doubt, you should probably be tracking it. Do I think Jeff Bezos needs to monitor his grocery spend? No, he owns Whole Foods. He’s probably fine. But for the majority of us, we’re going to be well-served by knowing where the money is going every month.

Benz: Many people are emerging from college with staggering amounts of student loan debt. How would you suggest that people balance the loan pay down with investing for the long haul?

Tassin: This is a tough one, and I would add historically unprecedented. Young people starting out life with a mortgage-sized amount of debt over their heads with no asset to offset that—we’ve never really seen that play out before. So, I do have a lot of empathy for people that are in this position. I’d say, tactically, the first thing I would look at the interest rate, and I’d say, if you’re paying down a loan with an interest rate of 3% to 4%, you have relatively cheap debt; I wouldn’t rush it. I would make your minimum payments and then direct any excess investable income to a more productive path, like investing in the stock market, or even right now T bonds, or real estate, or whatever it is that you feel best fits your goals.

But beyond that, debt can be really, really psychologically burdensome to people. So, I think there’s an element of this that’s if you’re on this journey, it can be helpful to really celebrate and gamify the progress that you’re making. So, in the Wealth Planner, we have a debt-payoff section in the “net worth” tab where every month you’re supposed to go in and actually record the new balance and watching it get smaller as your net worth gets larger is super intoxicating. So, I would recommend determining what portion of your income every month is going to go to work for you making your net worth bigger, whether that is via investing, whether that’s paying down debt, whether it’s doing both at the same time, making sure that there’s a specific portion of your income that increases your net worth because you are deserving of financial progress and you should also benefit from your hard work, not just your employer or the companies from whom you are purchasing things. You should be directly benefiting from that labor as well, and this is a really direct way to make sure that that happens.

Ptak: Wanted to ask you about housing. I think you said that one of the biggest money myths is that buying a home is a good investment. Why are you unconvinced that’s the case?

Tassin: I feel like anyone over the age of 40 right now is like, “Oh, she doesn’t know anything.” But I think to me it’s really simple that your cost basis matters when you’re talking about what makes a good investment versus a bad one. And simply put, houses right now are no longer cheap. The stock market isn’t cheap either, by the way, but you can dollar-cost average into a stock market, and you cannot dollar-cost average into a house. So, you lock in the price that you pay. I think we tend to underestimate how much we’re going to spend as homeowners, how much it’s going to cost to maintain a property, and we overestimate how much joy it’s going to bring us.

So, on the latter point, there was a 2022 academic paper from the Journal of Happiness Studies—I can’t believe that’s a thing, but it is—that examined measures of subjective well-being in homeowners and in tenants, and they found that homeowners for whom the purchase of the home is the main reason that they moved, on average, systematically overestimated their long-term satisfaction gain of living in that house. So, it gets back to this idea of extrinsically oriented versus intrinsically oriented life goals and how we tend to have biased beliefs about what’s going to make us happy.

But on the former point, this one is a little bit easier to assess mathematically, and I believe that assessing it mathematically is crucial in something that a shockingly small percentage of Americans do before they dig down deep for the down payment because housing as a narrative is just gospel in the United States. But the median home in the U.S. today is around $450,000 per FRED data, and with mortgage rates hovering around 7%, affordability is pretty much at an all-time low. And we tend to assume that no matter what, no matter how much the house is cost, no matter what the interest rates are, it’s always going to be net cheaper than renting. But that’s just not the case. It is such a hyperlocal equation that sometimes renting and investing the cost difference between your price to buy and your price to rent is going to get you net further ahead than if you had purchased.

So, my rule of thumb and the way that I like to think about it and the way that we will approach the situation in the future is, I’m going to look at my price to rent ratio in my area as a gauge for whether or not the rental market or the housing market has been hotter in recent years, then compare my unrecoverable costs. So, right now, we live in a strange market. I can rent a $1 million home for $3,000 a month. But if I were to buy a similar house on my street—and I know because I looked into it and I tried—I would have had a monthly PITI of around $6,500, roughly $5,000 of which would have been interest, taxes, and insurance. So, in that case, my unrecoverable costs of owning are about $2,000 a month higher than my unrecoverable cost to rent. So, obviously, in that scenario, you can then flesh that out and say, well, the rental market is obviously going to keep going up, my fixed housing expense will stay the same. How many years would I have to live here for the rental market to eclipse my monthly payment? And in our case, we were going to be long gone by the time that would have happened.

So, it’s not to say that real estate is no longer a good investment. I think that’s a laughable statement. However, I do think young people are sold a bill of goods about what buying a house means that often falls short of expectations. And so, I’m always just very encouraging of running the numbers of really understanding what you’re getting yourself into and making sure that you are not lowballing the estimates for how much it’s going to cost, because when the HVAC goes out or when the washer dryer units go kaput, all of that is going to be on you, and I think a lot of new homeowners, it’s a jarring shift that you just want to make sure you are totally ready for, and you have the cash available to handle those things when they come your way.