Author Topic: Owning within your means...  (Read 3272 times)

chris316

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Owning within your means...
« on: March 31, 2017, 11:34:45 AM »
I'm looking at buying, owning, and investing in a home.

I read an ingesting thing in another thread that said you shouldn't put forth more than 1/10th of your yearly income towards a vehicle purchase. Or if you need more than 3-6 months to save for a car you can't afford it.
So If you make 50k a year your car shouldn't be more than 5k...
Of course everyone's situation is different but I thought that seems pretty reasonable "rule of thumb"...

Does anyone have any similar advice to buying a home within your means?

chris316

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Re: Owning within your means...
« Reply #1 on: March 31, 2017, 12:00:21 PM »
Obviously a home is partially an investment...
If you buy a house today you might pay 2ce the actually cost of the house with interest. Yet in 30yrs or when you pay it off the value of the house might increase to the amount you've payed...

Under the pinned "investment order" there is no info on how much or when to save for owning.... there is a "pay off ~3% interest debt" but that comes after maxing out multiple IRA accounts, which might be reached but once maxes are reached there is no money left over for saving... so how, what, or where is the investment order for owning a home?

mamagoose

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Re: Owning within your means...
« Reply #2 on: March 31, 2017, 12:09:47 PM »
Recommend reading "The Millionaire Next Door" - the advice in the book is that the market value of the home you purchase should be less than three times your household's total annual realized income (wages, interest & dividends). This advice has served us well.

Proud Foot

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Re: Owning within your means...
« Reply #3 on: March 31, 2017, 12:52:20 PM »
Another common one for the housing is to keep your monthly housing costs 25-30% of your monthly income.  Depending on who it is, some will include utilities and maintenance in that number while others will not include them.

Cwadda

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Re: Owning within your means...
« Reply #4 on: March 31, 2017, 12:54:00 PM »
There are zillions of different cases and possibilities. I'm making $44k/yr and buying a $360k multifamily that allows me to live in it for free. If this is attractive to you, look into multi family properties. Again, just one avenue of many.

Laura33

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Re: Owning within your means...
« Reply #5 on: March 31, 2017, 01:15:25 PM »
I think the problem is that you will hear a lot of rules of thumb, but none of them are really targeted toward the Mustachian audience.  E.g., mortgage lenders will allow you to borrow up to a total debt load of 41% -- but how the hell is anyone supposed to save anything if 40% of what you bring in is flowing right back out?  I have also heard home value up to 3X income, but wouldn't the reasonableness of that figure depend on how cheap/expensive mortgage rates are, what other costs you have, and whether you live in a LCOL or HCOL? 

Personally, I would look at it in the context of your monthly cash flow, based on a 30-year mortgage with the standard 20% down, if you can swing it.  How much do you want/need to save for your FIRE target?  How much are your other expenses?  So how much does that leave that you can afford for a mortgage, without sacrificing other things that you value?  Remember to include not just PITI, but increased utility bills and a maintenance fund.  Once you figure out a monthly payment, you can figure out how much house that will buy you, and start looking around to see if that will get you something that you would be happy/comfortable living in. 

And then, if you're like most people, your first crack at it will be depressingly horrible, and you will want to look at higher-priced homes.  :-)  That's ok, too -- but what is going to give?  Are you willing to deal with a multi-plex or basement rental to bring in extra income to offset the difference?  Are you willing to save less toward FIRE to get a nicer house?  Are you willing to work more OT/side hustle to increase your income to the kind of house you want, or move to a LCOL area? Etc. 

Tl;dr:  Don't go by generic rules, because those rules do not have your specific best interests at heart.  Figure out the sweet spot where what you are comfortable paying intersects with a place you would be happy to live in.  And if those two don't intersect at all, keep saving/increasing your earning potential until they do.

Scortius

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Re: Owning within your means...
« Reply #6 on: March 31, 2017, 01:35:06 PM »
We're in the process of budgeting for a home purchase and I agree mostly with what Laura has to say.  Figure out your range before you apply for a mortgage and before you start looking at houses.

My approach is to take our income and immediately budget for max 401k and IRA contributions.  Next, I subtract expected tax from my remaining taxable income.  Then, I subtract a slight over-estimate of all of our non-housing expenses.  Then I add in some more wiggle room (which I hope I can also put into savings).  What's left should be the remaining cash we have before spending anything on housing.  From that, subtract your expected utility bills for a larger house, along with expected tax, insurance, and maintenance costs.  What's left should be the absolute maximum you can spend on a house in terms of a specific mortgage payment, but you should try and cut that down a bit as well just to give yourself even more of a buffer.

Once you get that far, you need to figure out how much the total price of the house will be so you can start saving up for a 20% down payment (plus closing costs and moving pains, so more like 30%).  At that point, you should start saving aggressively for the down-payment.  If you are saving at an equal or lower rate than the expected increases in your housing costs upon a purchasing a house, you'll know that you've budgeted too much and you need to consider houses that are significantly cheaper.

For me, given that I have a moderately high income, the final numbers seem to favor approximately 3x my gross pre-tax income (including 401k matches), but we are aiming for houses in the 2-2.5x range.

FarmerAl

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Re: Owning within your means...
« Reply #7 on: March 31, 2017, 02:27:24 PM »

"Another common one for the housing is to keep your monthly housing costs 25-30% of your monthly income.  Depending on who it is, some will include utilities and maintenance in that number while others will not include them."

Does this statement include property taxes and insurance?

Proud Foot

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Re: Owning within your means...
« Reply #8 on: March 31, 2017, 02:54:54 PM »

"Another common one for the housing is to keep your monthly housing costs 25-30% of your monthly income.  Depending on who it is, some will include utilities and maintenance in that number while others will not include them."

Does this statement include property taxes and insurance?

Yes it does.  I have always seen to count your PITI and HOA (if applicable).  The other items are where it varies.

chris316

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Re: Owning within your means...
« Reply #9 on: March 31, 2017, 07:26:15 PM »
mortgage lenders will allow you to borrow up to a total debt load of 41% -- but how the hell is anyone supposed to save anything if 40% of what you bring in is flowing right back out?

I know some lenders now will allow up to 50% if you're in good standing... which is obviously rediculous!

Good info here though, I'm just trying to gauge what would be the logical way to help save for a down payment of a home without sacrificing savings towards retirement. I see a lot of "pay off house or invest more" threads on here, and this question has a similar dilemma to it. ...

chris316

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Re: Owning within your means...
« Reply #10 on: April 03, 2017, 03:10:44 PM »
We're in the process of budgeting for a home purchase and I agree mostly with what Laura has to say.  Figure out your range before you apply for a mortgage and before you start looking at houses.

My approach is to take our income and immediately budget for max 401k and IRA contributions.  Next, I subtract expected tax from my remaining taxable income.  Then, I subtract a slight over-estimate of all of our non-housing expenses.  Then I add in some more wiggle room (which I hope I can also put into savings).  What's left should be the remaining cash we have before spending anything on housing.  From that, subtract your expected utility bills for a larger house, along with expected tax, insurance, and maintenance costs.  What's left should be the absolute maximum you can spend on a house in terms of a specific mortgage payment, but you should try and cut that down a bit as well just to give yourself even more of a buffer.

Once you get that far, you need to figure out how much the total price of the house will be so you can start saving up for a 20% down payment (plus closing costs and moving pains, so more like 30%).  At that point, you should start saving aggressively for the down-payment.  If you are saving at an equal or lower rate than the expected increases in your housing costs upon a purchasing a house, you'll know that you've budgeted too much and you need to consider houses that are significantly cheaper.

For me, given that I have a moderately high income, the final numbers seem to favor approximately 3x my gross pre-tax income (including 401k matches), but we are aiming for houses in the 2-2.5x range.

This is very interesting and seems quite methodical. this is how I perceive what you're saying...

1. Take you gross income

2. Subtract Max 401k and IRA contribution accounts

4. Subtract expected tax from remaining taxable income.

5. Subtract a slight estimate of all non-housing expenses

          Then this his is what you have to put forth towards housing

6. Subtract TI(taxes and insurance), utilities, and maintenance costs

7. Subtract 5-10% or so for a buffer

          This would be your absolute maximum to towards a mortgage.

Is this correct?

Any thoughts on this?
« Last Edit: April 03, 2017, 07:30:28 PM by chris316 »

ketchup

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Re: Owning within your means...
« Reply #11 on: April 03, 2017, 03:55:35 PM »
Buy for the minimum dollar amount that which will provide you with the highest value.  There's no one-weird-trick unfortunately; one size does not fit all.  It's just an optimization game.

Nevertheless, data points:
First house price was about 1.5x my own low personal yearly income at the time.  Is now paid off and a rental property.
Current house purchase price was about 1.65x my 2016 household (of two) income.
Our (single) car was bought (last year) for about 1.7% our household income.

Household income is presently just above median for the country.  When I bought my first house (2012), I was making $12.50/hr part-time.

Scortius

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Re: Owning within your means...
« Reply #12 on: April 03, 2017, 05:08:52 PM »
We're in the process of budgeting for a home purchase and I agree mostly with what Laura has to say.  Figure out your range before you apply for a mortgage and before you start looking at houses.

My approach is to take our income and immediately budget for max 401k and IRA contributions.  Next, I subtract expected tax from my remaining taxable income.  Then, I subtract a slight over-estimate of all of our non-housing expenses.  Then I add in some more wiggle room (which I hope I can also put into savings).  What's left should be the remaining cash we have before spending anything on housing.  From that, subtract your expected utility bills for a larger house, along with expected tax, insurance, and maintenance costs.  What's left should be the absolute maximum you can spend on a house in terms of a specific mortgage payment, but you should try and cut that down a bit as well just to give yourself even more of a buffer.

Once you get that far, you need to figure out how much the total price of the house will be so you can start saving up for a 20% down payment (plus closing costs and moving pains, so more like 30%).  At that point, you should start saving aggressively for the down-payment.  If you are saving at an equal or lower rate than the expected increases in your housing costs upon a purchasing a house, you'll know that you've budgeted too much and you need to consider houses that are significantly cheaper.

For me, given that I have a moderately high income, the final numbers seem to favor approximately 3x my gross pre-tax income (including 401k matches), but we are aiming for houses in the 2-2.5x range.

This is very interesting and seems quite methodical. this is how I perceive what you're saying...

1. Take you gross income

2. Subtract Max 401k and IRA contribution accounts

4. Subtract expected tax from remaining taxable income.

5. Subtract a slight estimate of all non-housing expenses

          Then this his is what you have to put forth towards housing

6. Subtract PITI, utilities, and maintenance costs

7. Subtract 5-10% or so for a buffer

          This would be your absolute maximum to towards a mortgage.

Is this correct?

Any thoughts on this?

Yeah, that's a good summary of my approach.  That said, the simple answer is "buy the cheapest house you can find that satisfies the housing benefits you require."  The less you spend on a house, the more you have left to invest.  If you look at my approach, instead of figuring out how much house I want, I'm trying to figure out how much I want to save first.  You may want to save more or less, but I favor starting with that question first and using it as a way to answer the housing question second.

Edit: for step 6 you say subtract PITI, but we're trying to solve for the PI part of PITI, so there I mean subtract 'TI' (taxes and insurance) plus maintenance and utilities.  At the end we should have a cap for the mortgage payment itself, which is principal and interest.
« Last Edit: April 03, 2017, 05:12:27 PM by Scortius »

BlueMR2

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Re: Owning within your means...
« Reply #13 on: April 03, 2017, 05:22:51 PM »
As someone that has just recently suffered multiple house failures, car failures, motorcycle failures, and computer failures...

Own the least possible number of things that you can!  If you must own a house, pick a small one so there's less stuff to keep breaking all the #$% time!

SilveradoBojangles

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Re: Owning within your means...
« Reply #14 on: April 03, 2017, 07:05:10 PM »
We are buying a house, and we went through a similar process to that advocated by Laura and Scortius. We made a detailed budget that included our projected expenses, savings goals, etc., in order to figure out what kind of mortgage payment we could afford without stressing us out or throwing our saving goals off track. We came up with a number that was way lower than any rule of thumb would have recommended based on our income alone (~2x). In fact, family members have been trying to get us to buy more house, because we can afford it and who doesn't want as much house as they can afford? We decided that this house will be plenty for us, and provide us with some left over money to make some renovations, and then we think we will be in a good place to either sell it or rent it our in a few years when we are ready to move.

chris316

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Re: Owning within your means...
« Reply #15 on: April 03, 2017, 07:36:38 PM »
As someone that has just recently suffered multiple house failures, car failures, motorcycle failures, and computer failures...

Own the least possible number of things that you can!  If you must own a house, pick a small one so there's less stuff to keep breaking all the #$% time!

Noted!

We're in the process of budgeting for a home purchase and I agree mostly with what Laura has to say.  Figure out your range before you apply for a mortgage and before you start looking at houses.

My approach is to take our income and immediately budget for max 401k and IRA contributions.  Next, I subtract expected tax from my remaining taxable income.  Then, I subtract a slight over-estimate of all of our non-housing expenses.  Then I add in some more wiggle room (which I hope I can also put into savings).  What's left should be the remaining cash we have before spending anything on housing.  From that, subtract your expected utility bills for a larger house, along with expected tax, insurance, and maintenance costs.  What's left should be the absolute maximum you can spend on a house in terms of a specific mortgage payment, but you should try and cut that down a bit as well just to give yourself even more of a buffer.

Once you get that far, you need to figure out how much the total price of the house will be so you can start saving up for a 20% down payment (plus closing costs and moving pains, so more like 30%).  At that point, you should start saving aggressively for the down-payment.  If you are saving at an equal or lower rate than the expected increases in your housing costs upon a purchasing a house, you'll know that you've budgeted too much and you need to consider houses that are significantly cheaper.

For me, given that I have a moderately high income, the final numbers seem to favor approximately 3x my gross pre-tax income (including 401k matches), but we are aiming for houses in the 2-2.5x range.

This is very interesting and seems quite methodical. this is how I perceive what you're saying...

1. Take you gross income

2. Subtract Max 401k and IRA contribution accounts

4. Subtract expected tax from remaining taxable income.

5. Subtract a slight estimate of all non-housing expenses

          Then this his is what you have to put forth towards housing

6. Subtract PITI, utilities, and maintenance costs

7. Subtract 5-10% or so for a buffer

          This would be your absolute maximum to towards a mortgage.

Is this correct?

Any thoughts on this?

instead of figuring out how much house I want, I'm trying to figure out how much I want to save first.

Edit: for step 6 you say subtract PITI, but we're trying to solve for the PI part of PITI, so there I mean subtract 'TI' (taxes and insurance) plus maintenance and utilities.  At the end we should have a cap for the mortgage payment itself, which is principal and interest.

That's the question I'm asking- "how much do I want to save for a down payment on a house."
and there are some great answers here.

yes I mean just TI. edited in post above.

Scortius

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Re: Owning within your means...
« Reply #16 on: April 03, 2017, 08:35:59 PM »
As someone that has just recently suffered multiple house failures, car failures, motorcycle failures, and computer failures...

Own the least possible number of things that you can!  If you must own a house, pick a small one so there's less stuff to keep breaking all the #$% time!

Noted!

We're in the process of budgeting for a home purchase and I agree mostly with what Laura has to say.  Figure out your range before you apply for a mortgage and before you start looking at houses.

My approach is to take our income and immediately budget for max 401k and IRA contributions.  Next, I subtract expected tax from my remaining taxable income.  Then, I subtract a slight over-estimate of all of our non-housing expenses.  Then I add in some more wiggle room (which I hope I can also put into savings).  What's left should be the remaining cash we have before spending anything on housing.  From that, subtract your expected utility bills for a larger house, along with expected tax, insurance, and maintenance costs.  What's left should be the absolute maximum you can spend on a house in terms of a specific mortgage payment, but you should try and cut that down a bit as well just to give yourself even more of a buffer.

Once you get that far, you need to figure out how much the total price of the house will be so you can start saving up for a 20% down payment (plus closing costs and moving pains, so more like 30%).  At that point, you should start saving aggressively for the down-payment.  If you are saving at an equal or lower rate than the expected increases in your housing costs upon a purchasing a house, you'll know that you've budgeted too much and you need to consider houses that are significantly cheaper.

For me, given that I have a moderately high income, the final numbers seem to favor approximately 3x my gross pre-tax income (including 401k matches), but we are aiming for houses in the 2-2.5x range.

This is very interesting and seems quite methodical. this is how I perceive what you're saying...

1. Take you gross income

2. Subtract Max 401k and IRA contribution accounts

4. Subtract expected tax from remaining taxable income.

5. Subtract a slight estimate of all non-housing expenses

          Then this his is what you have to put forth towards housing

6. Subtract PITI, utilities, and maintenance costs

7. Subtract 5-10% or so for a buffer

          This would be your absolute maximum to towards a mortgage.

Is this correct?

Any thoughts on this?

instead of figuring out how much house I want, I'm trying to figure out how much I want to save first.

Edit: for step 6 you say subtract PITI, but we're trying to solve for the PI part of PITI, so there I mean subtract 'TI' (taxes and insurance) plus maintenance and utilities.  At the end we should have a cap for the mortgage payment itself, which is principal and interest.

That's the question I'm asking- "how much do I want to save for a down payment on a house."
and there are some great answers here.

yes I mean just TI. edited in post above.

Close, but I meant first figure out how aggressively do you want to save for retirement.  The down payment part comes at the very end once you've figured out your hosing budget.

chris316

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Re: Owning within your means...
« Reply #17 on: April 03, 2017, 08:48:40 PM »

[/quote]

Close, but I meant first figure out how aggressively do you want to save for retirement.  The down payment part comes at the very end once you've figured out your hosing budget.
[/quote]


right, right I have that dialed in and understood in figuring this. you're talking about the amount in #2, right?



1. Take you gross income

2. Subtract Max 401k and IRA contribution accounts

4. Subtract expected tax from remaining taxable income.

5. Subtract a slight estimate of all non-housing expenses

          Then this his is what you have to put forth towards housing

6. Subtract TI(taxes and insurance), utilities, and maintenance costs

7. Subtract 5-10% or so for a buffer

          This would be your absolute maximum to towards a mortgage.





Scortius

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Re: Owning within your means...
« Reply #18 on: April 03, 2017, 10:24:00 PM »
Honestly, I figure anyone here should automatically be doing #2 as the benefits of combining investments while lowering your tax burden are unsurpassed.

You may want to look more at decreasing #5 and increasing #7 as the areas where you determine your personal level of aggressiveness.