Putting the "7% Rule" to the Test on a Real Mortgage. Plus, an Economist on Stubborn Food Prices

16:32Elizabeth Ayoola:Yeah, yeah, yeah. But yeah, I really enjoy it. Part of why I was asking you about your hobbies is because that can be a natural segue into a different type of work after like your traditional job path. So like for me, I love gardening. I would maybe work at like a garden center or doing some kind of landscaping work. Have you thought about what kind of work might be of interest to you in that kind of thing? I mean, I've thought about it a little bit and I haven't really come up with anything that sounds good. But you like the outdoors in nature. You could potentially be a park ranger. Yeah. Something like that, potentially.

17:00Yeah.

17:00Elizabeth Ayoola:It's okay to not know what you want to do. We actually spoke to someone earlier this week. The episode will be coming out later named J.D. Roth. He was lucky enough to retire early, I believe around 40. And then he just had this thing after retiring where he didn't know what he wanted to do. And he was kind of aimlessly flailing. And then he discovered some hobbies. So now he is doing oil painting, water paint. But I guess my point is sometimes you don't have an exact plan of what you want to do after you retire, but you figure it out. Right. But it's good to start thinking about it early because some people end up going back to work, which is not a terrible thing.

17:32Elizabeth Ayoola:Sounds terrible to me. But I know someone who retired early and then he felt a little depressed because his whole purpose was tied into working and he didn't feel like he had an identity once he stopped working. So. And you just use the word purpose. And we talk a lot about your money values and what you want, what's motivating your decisions here. When you think about why you want to retire early, why you want to pay off your debt, what's driving that for you? I guess I just like the freedom of not having to be beholden to some corporations, especially feeling that right now. It's been kind of nice, you know, not having to work, especially, like I said, during the summer.

18:06And just like the whole experience of like having to job hunt and like beg for a job so that you can work 40 hours a week. Yeah, it's tough.

18:15Elizabeth Ayoola:It's tough and it's rough. So really the desire is financial independence. Retire early. FIRE! Which is the acronym FIRE. Yes. Max, you also wrote to us about what's the point at which you have too much cash? What are you thinking there and how much cash do you have just to remind us? So in addition to the six months emergency fund, I sold a bunch of stock options last year. Used part of that to put the down payment on my house. And then part of it, I did like a lump sum into the robo-advisor. And part of it, I've been holding back in a high yield savings account and kind of like doing dollar cost averaging investments.

18:50So I do still have like some of that cash as well. How much cash did you get from selling that stock? 230 ,000. Nice. OK. And how much do you still have? I invested about 100 ,000 in the RoboAdvisor. And then I think I have about another 40 ,000 in cash.

19:06Elizabeth Ayoola:Just curious. So I know you said you were thinking about increasing your emergency fund from six to nine months. Would you potentially draw the extra money from there? Yeah. I mean, like with this bout of unemployment, if it comes to that, I would draw from there. I was thinking more in terms of like once I have a job again and I'm like building up my emergency fund, whether I should target nine months instead of six. I think it makes sense to hold on to this cash right now, just given your employment situation. But in general, I mean, it's not a bad idea to have like$40 ,000 in cash for other financial goals, especially as a homeowner.

19:38Do you have a home improvement or home repair fund? Not at the moment. It's a new construction and it's a townhouse. So the exterior is covered by an HOA. So far, I haven't been too concerned about repairs. Okay. We spoke yesterday with a Portland broker who has been very curious about the new townhouses going up. I've been seeing them pop up around Portland too. And she was wondering how they'll kind of play out in the market over time. I might circle back with you in a few years and just say, hey, how's your home value? How are you liking the build of it? Because they look nice, but with some new construction, you just, you never know how it's really going to be.

20:13I bought a house that was new construction and it was fortunately pretty good, but you do have to spot check quality control things every so often. But it's just been nice to have, frankly, more housing in this town. So congrats on getting into one of those. Even though it is a new build, I mean, I had repairs in my house in the first couple of years. So a general benchmark is to say between one and 3 % of your home's value each year in an account just for things that pop up. So because it's a new build, you could probably get away with 1%, just given everything that you hopefully won't have to do to the house.

20:44But if you have something that you want to do, if you want to paint or improve the inside, you have free time. So you might get the itch to redecorate or something. Yeah, I've done a little bit of that. Yeah. I use my home repair fund for things like that too occasionally, just because, you know, like last year I bought a new bed because my bed frame was seven years old and just falling apart. So I think that is okay to use some of that home repair fund for things like this too, but something to think about.

21:05Elizabeth Ayoola:And in terms of having too much cash, I think the primary concern there is usually inflation. But you said you have it in a high yield savings account, right? See, our guests just be doing all the things. You want us to tell you you're doing a good job and you are. OK, so it's in a high yield savings account is keeping pace, hopefully with inflation. You're doing dollar cost averaging. So it sounds like you're in a good spot with the money. I think the more concern aside from inflation is people who hold cash. We once had a listener who was holding on to 200K and didn't want to invest it, was scared to invest it, but you're already doing the investing.

21:35Elizabeth Ayoola:So, you know, it's about your comfortability at this point and what works best for your goals. And how do you feel about everything you've done with your finances? I mean, you ticked off an impressive list of accomplishments in terms of where your 401K is, how much you have saved, your investments. How do you feel about all of that? I feel pretty good about it, although I didn't really get into like investing until the last few years. So I definitely kind of regret not starting sooner. And what was the push? What got you to start? It was, you know, I got to the point where I just felt like I had like the extra money to invest, like once my income hit a certain level.

22:07So for a long time, I was investing enough in my 401k to get my company match and not a whole lot beyond that. I started reading like some personal finance blogs and, you know, was making a little bit more money and was like, okay, I need to figure out this like IRA thing and, you know, maybe put a little bit more in my 401k.

22:24Elizabeth Ayoola:It just makes me think in a previous recording we did, we were talking about how it's never too late to start investing and you can still hit your goals no matter what age you are or where you're starting as long as you're focused and have a strategy. So you're a primary example of how much you've done in just a few years. Okay, given what we've talked about so far, how are you currently thinking about that sort of payoff debt versus investing decision that brought you here in the first place? I guess like probably about the same in terms of like splitting the difference. Right. Probably putting a little bit more into investing, but also trying to pay off my home.

22:55I hope it's reassuring that you don't have to pay off your entire mortgage. Yeah. Before you start investing. You know. Because you would miss out on all of the growth opportunity that time really brings you. And that's your greatest asset when it comes to investing is the time that's on your side. Right. And like with a home, like investing too much in that, it kind of feels like I'd be tying up a lot of money into an asset that is not very liquid. Yes, absolutely. Which is another concern. Yeah. Yeah. And also, these are things that you can tackle more head on when your employment is a little more stable, because that seems like it's your more immediate priority is just finding another job and being able to invest again.

23:27So where do you see your finances going over the next six months or so? What decisions do you think you might make to get to a better place? I think I'm on a pretty good track right now. Obviously, the next six months are going to be largely dependent on whether I find a job and how long it takes. When you find a job.

23:41Elizabeth Ayoola:Exactly. Because you're the exception, remember? Right. Yeah. Yeah. So just like when I find a job and how much savings I still have left at that point. Tech companies out there, we have a great person for you to hire right here. Look into Max's information. Well, thank you so much for coming on and sharing your information with us. We've really enjoyed this chat. Please keep us posted on how your job hunt goes, how your investments go, everything else, because we love hearing from our listeners. I think sounds good. In a moment, we give you the latest on what's really driving high food prices in this week's Money News.

24:15Today's episode is sponsored by Quince.

24:17Elizabeth Ayoola:Does anyone else feel like August is the Sunday of summer? It's the perfect time to hit reset before the autumn rush. And for me, that always starts with my wardrobe. Quince proves you don't need a crowded closet to look incredible. You just need the right pieces. Quince specializes in effortless, high-quality essentials like ultra-soft organic cotton and premium Mongolian cashmere sweaters. Everything at Quince is priced 50 to 80 % less than similar brands. They work directly with ethical factories and cut out the middlemen, so you're paying for quality, not brand markup. You know, recently it's been super hot in Texas.

24:51Elizabeth Ayoola:I mean, 100 degrees. And I remember I bought a couple of months back this 100 % cotton tank top from Quince, and it's been doing wonders for the heat. And also it washes so well. I love the quality. You know, Elizabeth, I am such a warm sleeper. We were just talking about this, how it's kind of gnarly that I wake up covered in sweat. every morning, but I don't anymore now that I have this amazing linen duvet cover that I got from Quince. I am sleeping so well, so cool, and so cozy. And it's all thanks to Quince. I might have to add that to my cart next. Upgrade your everyday. Download the Quince app for exclusive offers or go to quince.com slash smart money.

25:28Get free shipping on your order and 365 day returns. Now available in Canada and the UK too. That's q-u-i-n-c-e dot com slash smart money.

25:38Elizabeth Ayoola:This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+.

26:06All right, let's get to our weekly money news roundup where we break down the latest in the world of finance to help you be smarter with your money.

26:12Elizabeth Ayoola:Now, if you've been to the grocery store and it's giving you a heart attack at the checkout, like it has me, but I'm still here. Don't worry, it's not the bacon and pancakes in your car. It's high prices. And our news colleague, Ana Helhosky, talked to an expert with some insights about what is going on at the grocery store. Here's her conversation with David Ortega, a professor in the Department of Agricultural, Food, and Resource Economics at Michigan State University. David, welcome to Smart Money. Thanks so much, Ana. Appreciate you having me on. So take us back a few years. When you're looking at food prices over the last decade, what stands out to you the most?

26:47So when we look at a 10-year horizon when it comes to food prices, so the rate of change in prices, which is what food inflation captures prior to the COVID-19 pandemic was hovering around 1 % or 2 % year-over-year increase. And then when we got into the COVID-19 pandemic, in particular in 2022, we saw a double-digit increase in food prices, more than an 11 % increase year-over-year, and that was the fastest increase since the late 1970s. So about 40 years post 2022, we saw food price inflation start to moderate, meaning that the rate of increase has come down and it's currently hovering around 2.7 % for groceries, meaning that groceries today are 2.7 % higher than they were a year ago.

27:39We've moderated the rate of increase, but that doesn't mean that prices are coming down. It just means that they're not increasing as much as they were back in 2022 when we were looking at those double digit increases.

27:51Elizabeth Ayoola:So quite a bit of what we're seeing in food prices today can be traced back to the pandemic then. What's changed in the food system that isn't necessarily likely to reverse? The prices that we're looking at today at the grocery store, the price level captures the increases that we saw starting with the COVID-19 pandemic. We've also seen the impacts of climate change on food prices, impacts on production, the impact of disease like the bird flu that has really affected egg and poultry prices. Also looking at the impacts of policy, like the tariffs that have impacted just about a wide range of goods in the economy.

28:33And then much more recently, the impacts of the conflict in Iran, what that's done to diesel prices and how that sort of percolates down to food prices. When we're looking at prices today, those increases really factor in all of those shocks that the food system has experienced.

28:51Elizabeth Ayoola:So if you look back again 10 years, how much more expensive is the average grocery basket today than it was then? And are there any particular categories that really shifted in price? maybe not even that far, just prior to the COVID-19 pandemic. So say 2019, grocery prices are more than 30 % higher today than they were back in 2019. And if you go even further back, we're looking at even higher increases. And that's just for groceries. When we look at menu prices, which is the cost of food away from home, comparing them today to what they were prior to COVID. And in some cases, we're looking at almost a 40 % increase.

29:30When we look at groceries, some of the items that I've seen the highest increase include things like beef. Beef right now is almost 10 % higher than it was just a year ago. And a year ago, you know, those prices were higher than the prior year. When we look at the price of tomatoes, those are significantly more expensive today than they were just last year. Egg prices have been through a bit of a roller coaster ride. And a lot of that has to do with the impacts of the bird flu, what that's done to production. About a year and some months ago, we were looking at record high egg prices. Now, those prices have come down considerably because production has caught up.

30:07This summer, we've seen the price of lettuce actually plummet in July. A lot of that has to do with the food safety outbreak, the cyclospora outbreak, and what that did to consumer demand. So there's just a lot of variation when it comes to the individual movements of food prices.

30:23Elizabeth Ayoola:So let's talk a little bit about how people are reacting. Are higher food prices changing what Americans may consider normal grocery prices? And could that affect pricing behavior, even if inflation continues to cool? What folks are reacting to at the grocery store is the cumulative effects of inflation. So it's really the price level. And what we're seeing is that even though food inflation has moderated, the price level is significantly higher today than it was back in 2019. And so what that's leading to are changes in shopping behavior. So consumers are trading down. If you're buying premium products, now you're looking for conventional products.

31:02We're seeing people making shorter trips to the grocery store, much more frequent trips, so less of that stocking up that we did during the COVID-19 pandemic. They're price comparing much more, taking advantage of discounts that retailers are offering. And we're also seeing an interest in private labels or store brands that sell at a much more affordable price points. But I think it's worth highlighting that these higher prices that consumers are facing, they impact households very differently. So households at the lower end of the income spectrum are squeezed much more, and they are really the ones that are having to make adjustments in order to keep food on the table.

31:44Elizabeth Ayoola:Now, there's another trend that I've been noticing for the last couple of years, and that that's that grocery chains are increasingly using dynamic and personalized pricing that's based on demand and inventory and then changing those prices in real time. A lot like how airlines and ride sharing services work. But how widespread is this in food retail right now? And what could that mean for shoppers? So it's certainly a trend that we're seeing gaining some steam. And as you point out, you know, dynamic pricing is really the practice of changing a price based on a change in conditions. And this is nothing new.

32:16We see this on the airline industry. But where it's starting to get a lot of attention is sort of a subset of this type of behavior that's known as surveillance pricing, where companies may be using personal data to then target different prices to individual consumers. So looking at price discrimination at the individual level. But it's not something that's widely adopted by any means. There's been some cases that have gotten some attention, but it's not something that I would consider a widespread activity in the retail sector.

32:48Elizabeth Ayoola:Now, at this stage of the game, have we entered a permanently higher food price environment or could prices eventually move back toward pre-pandemic trend? I mean, there's been such a massive increase since then. It's a little hard to see that. Are there any specific categories where you would expect any meaningful relief in the next year or so? In aggregate, once food prices increase, they very rarely come down. That's just not how prices behave. So if we look at the last few decades when it comes to food prices, we've only seen price decreases a couple of times and they were very short lived.

33:24So you can think of this like a ratchet effect. Once prices tick up, they very rarely come down. That's, again, on the aggregate level. At the product level, there's a lot of movement. So, for example, egg prices have come down and I believe they're somewhere between 20 and 30 percent cheaper today than they were a year ago. We can expect to see, you know, prices remain low for eggs, I think, over the next couple of months. But there's still a lot of uncertainty with the nature of the bird flu and what's going to happen with that in the coming months. One area that's a big pain point for many consumers is beef prices.

34:00There's very little relief in sight for beef prices. A lot of that has to do with the fact that supply remains very constrained, but there's very strong demand. We're probably looking at higher beef prices for the next few months. When it comes to produce, I think there's just going to be a lot of volatility. You know, as we saw with tomatoes and as we've seen with lettuce overall, you know, prices tend to increase. And I think that's what we can expect, you know, on average going forward in the next few months. Now, those increases are going to be fairly moderate. So nothing like what we saw back in 2022 when we were looking at those double digit increases.

34:37Elizabeth Ayoola:And are there any policy levers that could meaningfully bring food prices down? Are most of the forces driving prices up outside of policymakers control? There is very little that a policymaker or an elected official can do to lower grocery prices. And that's because prices are set by market forces. So supply and demand. Now, policies can really impact the cost of food. It could make food much more expensive. In the case of tariffs, they are, by definition, a tax on imports. So tariffs can drive not just the price of imported food up, but also it can drive up the cost of producing food domestically that uses ingredients from abroad.

35:18So think chocolate, tropical fruits, those things, if they're tax, you know, can drive up those prices. Also, when it comes to the cost of labor and immigration enforcement, food is very energy and labor intensive to produce. And so changes in immigration policy, the immigration debate can really constrain the labor force that works in the agricultural sector and that can drive up prices. what we're seeing now is also the impacts of policy uncertainty, especially when it comes to trade policy, immigration policy. The uncertainty in and of itself can be inflationary because it makes it very difficult for companies to plan ahead.

35:55They have to come up with contingency plans and all of that drives up the cost of doing business. What can policymakers do to help make food much more affordable? there's a lot of buzz and discussion around the issue of affordability. And prices are just one part of the affordability equation. We have to look at wages as well. That really should be the focus. And also the focus should be on the safety net. Because again, it's low income households that are impacted the most. So policymakers and policies that help the most vulnerable Americans can go a long way to sort of helping food become much more affordable for that subset of the population.

36:34Programs like SNAP, the Supplemental Nutrition Assistance Program, has been key in fighting food insecurity and making food much more affordable for low-income households.

36:46Elizabeth Ayoola:All right. David Ortega, Professor of Food Economics and Policy at Michigan State University. Thank you so much for joining us today. Ana, it's been a pleasure. Thank you for having me on. And that's all we've got for this episode. Remember, folks, that our job as nerds is to answer your money questions. So please send them our way. You can leave us a voicemail or text us on a nerd hotline at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. And of course, this show is nothing without you. So we want you to join us next time to hear from an electrician in Portland who has some familiar questions about saving for retirement.

37:22Elizabeth Ayoola:While you're waiting, follow Smart Money on your favorite podcast app. That includes Spotify, Apple Podcasts, and of course, iHeartRadio to automatically download new episodes. And we're on YouTube. Run, don't walk to the episode description so you can find us. Yeah. And by the way, you can drop us your money questions on YouTube or Spotify, too. Here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. Some companies mentioned in this episode may be NerdWallet partners, but does not influence how we talk about them.

37:56Elizabeth Ayoola:And with that said, until next time, turn to the nerd.

38:04Elizabeth Ayoola:Do you hear that? That sound, right? That means that summer is officially here. It means that grown adults just sprint into the street for a frozen dessert shaped like a cartoon. But this summer, Mint Mobile has a better treat. Every plan, including unlimited, is$15 a month. And unlike ice cream, it won't drip down your wrist or look nothing like the picture. Does anyone have any cash? Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three months,$90 for six months, or$180 for 12-month plan required. $15 per month equivalent. Taxes and fees extra. New customer offer for initial plan term only.

38:32Greater than 50 gigabytes may slow when network is busy. See terms.