The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: minimountainmustache on February 25, 2015, 09:29:53 PM
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I'm pretty new to MMM, but have been hooked on reading as much as possible to learn how to better save+budget for future. I'm 24 yrs old, single, living in a fairly low cost of living area. I would really love to buy a house as soon as possible, because most rentals cost the same, if not more than a mortgage here. However, up until about a month ago, I've always had really low paying jobs (in an industry that I love!) and haven't been able to save much. I just got a new job that almost doubled my income (and it's still pretty small!) and I just wanted some opinions on whether it was a realistic goal to have enough saved for a down payment in about 15 months (which would mean renewing a lease in May of this year, for another 12 months). My max budget for a house would likely be $150,000, and honestly I could get something for $110,000 and be really happy. There are tons of small, cute, houses in really good shape here in that price range. Anyway, sorry for rambling, I will get to the specifics!
Income: $36,000/yr + 17-18% yearly bonus (which I will get next year), and a small December bonus (~$1200)
- I contribute 8% to 401k which is matched by my employer, and also have $14.00 deducted every paycheck to use the company gym, and $14.00 total deducted every paycheck for Dental and Vision coverage.
This leaves me with a little over $1900.00 a month take home. I live with my boyfriend, and luckily get to split a lot of expenses with him, which helps a lot.
Current expense per month:
Rent: $400
Utilities: $60-$75 (this is high, we live on the 2nd floor of a house that is split into two apartments. We split utilities with the tenants downstairs, and they are extremely wasteful, and leave lights on all day, do about 20 loads of laundry a week, etc...not a lot we can do about it unfortunately)
Comcast: $20
Trash: $10
Car Insurance: $95 (about to lower this to $75, have always had super high coverage, but I think I could trim some here)
Gas: $40-50 (higher in winter. I bike to work about 4 days a week almost year round. A couple months in the winter it can be harder, and I drive a little more)
Groceries: $250-300 (this includes household items)
Medical Expense: $320
Renters Insurance: $18
Misc expenses: ~$50-60 ? Usually this is for bike maintenance. I have 4 bikes, and race competitively, and things break. Thankfully I know a lot of mechanics and can usually pay with beer :)
Total= ~$1300.00
Assets (Not much!)
Car- $6000.00: 2003 Honda Element...paid for
Savings account- $1000.00
Bikes- these don't count, do they? :)
I have no liabilities. No loans/debt. I have good credit, but my history is young. I am hoping to build up my credit to an even better level in the next year to prepare to purchase a home. I am also waiting on an insurance settlement for a car accident that I should get a decent amount from, which I plan on putting away into a savings account for a down payment. I am interested to know also, what is the best kind of account to save money in short term for a goal purchase?
So, is my goal realistic? I know I will probably not be able to get quite to the 20% down payment mark by next May. But I want to get as close to that as possible, and then see what kind of houses are available in my price range.
Are there any other areas that I can cut out in my budget to put me on a better path of savings?
Thanks for all opinions and help!
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Before you save for the house down payment, you need to save up for an emergency reserve. I don't suppose you'll want to hear this, but you need to have at least 6 months' worth of living expenses set aside. For you right now, that's $1300 x 6 = $7800, which would take you a year to accumulate at your present savings rate.
Good luck.
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"You need to save up for an emergency reserve." +1
If you are considering buying a home, you DEFINITELY need an emergency cash cushion for unexpected expenses (appliances break, hot water heaters die explosive and watery deaths, exteriors need painting, roofs need replacing, etc - it all adds up!). You should budget about 1-3% of the cost of the home for yearly maintenance (closer to 1% if it's a new home, closer to 3% if its an older home). Try to have the first year's maintenance money already saved before you buy, in case you're hit with something big right off the bat. Also, you need to save for a down payment of 20%, so that you don't waste money on PMI.
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"You need to save up for an emergency reserve." +1
If you are considering buying a home, you DEFINITELY need an emergency cash cushion for unexpected expenses (appliances break, hot water heaters die explosive and watery deaths, exteriors need painting, roofs need replacing, etc - it all adds up!). You should budget about 1-3% of the cost of the home for yearly maintenance (closer to 1% if it's a new home, closer to 3% if its an older home). Try to have the first year's maintenance money already saved before you buy, in case you're hit with something big right off the bat. Also, you need to save for a down payment of 20%, so that you don't waste money on PMI.
Don't make the mistake of thinking it can't happen to you...we once bought a house that needed the septic system replaced in the first four months we were there. Expensive.
Rent longer, save MORE!!
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Don't forget about closing costs. In some areas, it can be common to get the seller to pay closing costs, in other places not. That's usually between 2-5% of the home price. That's in addition to your downpayment and emergency savings.
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The advice for reserves first are all correct along with accounting for closing costs (although you usually can get a seller to include them for a higher sale price).
While you're building up reserves, talk with your bank (go in person, it helps) and see if they can help you get a pre-approval amount. It will give you a lot of useful information about your credit standing, potential rates, range of houses to look at, estimated closing costs. Also as you get farther down the road this makes you a more attractive buyer than joe off the street.
A pre-approval is free, provides feedback and can be updated later if the situation improves.
Consider how volitile your position is, if you have to go back to a lower paying spot, can you still make payments?
One last thing, make sure you are clear with the BF about if you are buying the house or if you both are buying the house. If it's both then both financial situations need to be scrutinized openly and honestly. If it's just you, make sure that works with your relationship.
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IMO, your income is not high enough to afford a 110K home. Right off the bat this makes you semi-dependent on your BF to pay the mortgage. What if you break up? Your mortgage will be twice your current rent, and that doesn't factor in taxes and maintenance.
I personally wouldn't want to be house poor at your age. If you can find a house for 90K or below, look into it. Otherwise rent.
FYI, we have a 120K mortgage, and my husband makes over twice what you do. We aren't house poor, but we aren't living whole off the hog either. Home ownership adds up!
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On a $110k house (with $22k down) you'll be paying $120/month in taxes/insurance $215 in interest (assuming 15 year 3% loan.) Add to that ~1% in maintenance or $92/month. So you're at $427 in irrecoverable expenses, and an additional $400 being tied up in debt pay off rather than being saved/invested. That's not taking into consideration closing costs. But if you stay there long enough for the interest to drop lower, and you don't get hit with big maintenance issues, it could be better than renting, financially. But that's assuming you stay there long enough. I'm usually pretty discouraging when it comes to buying homes but as long as you don't stretch your budget (and go for that $150k house) you can probably make this work.
However, taking your closing costs, down payment and the extra $400 you'd have left over each month and dumping it into investments could result in a lot more money in the long-term. Have you run through this: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Looks like you need $22k down and are saving $600/month... that's 36 months.
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"You need to save up for an emergency reserve." +1
If you are considering buying a home, you DEFINITELY need an emergency cash cushion for unexpected expenses (appliances break, hot water heaters die explosive and watery deaths, exteriors need painting, roofs need replacing, etc - it all adds up!). You should budget about 1-3% of the cost of the home for yearly maintenance (closer to 1% if it's a new home, closer to 3% if its an older home). Try to have the first year's maintenance money already saved before you buy, in case you're hit with something big right off the bat. Also, you need to save for a down payment of 20%, so that you don't waste money on PMI.
Don't make the mistake of thinking it can't happen to you...we once bought a house that needed the septic system replaced in the first four months we were there. Expensive.
Rent longer, save MORE!!
Every toilet broke right after we bought our first house. It had been winterized.
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I agree with all these posters - keep saving for a while.
When you do buy, have you considered buying a duplex-triplex-fourplex and living in one of the units for a few years? That would put you on the fast road to FI.
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Do you have any reason to think your LCOL area could turn into a HCOL area in the near future? If not, then from a purely financial perspective, I don't really see much of an advantage for someone in your position to feel the urgency to rush and buy a home. Instead, I would just keep saving. A good buffer a.k.a. emergency fund representing several months of living expenses would be a worthy first goal. I like having a few thousand in a boring savings account and the rest in something a little higher on the risk/reward scale like a short-term bond fund. These type of accounts are also just fine for saving house down payment funds you may be tapping within 2-3 years.
When you are ready to buy, keep in mind that not only do you have principal and interest on the mortgage, but you'll also account for home insurance and property taxes. And then any maintenance hassles. . . .
How knowledgeable do you feel about money? In addition to MMM's awesome blog, I've also liked Eric Tyson's "For Dummies" series of personal finance books to help people get oriented. I'm sure other forum members have their favorites too.
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"You need to save up for an emergency reserve." +1
If you are considering buying a home, you DEFINITELY need an emergency cash cushion for unexpected expenses (appliances break, hot water heaters die explosive and watery deaths, exteriors need painting, roofs need replacing, etc - it all adds up!). You should budget about 1-3% of the cost of the home for yearly maintenance (closer to 1% if it's a new home, closer to 3% if its an older home). Try to have the first year's maintenance money already saved before you buy, in case you're hit with something big right off the bat. Also, you need to save for a down payment of 20%, so that you don't waste money on PMI.
Don't make the mistake of thinking it can't happen to you...we once bought a house that needed the septic system replaced in the first four months we were there. Expensive.
Rent longer, save MORE!!
Every toilet broke right after we bought our first house. It had been winterized.
My power went out during a storm, sump pump stopped working, I ended up with drywall damage/replacement.
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"You need to save up for an emergency reserve." +1
If you are considering buying a home, you DEFINITELY need an emergency cash cushion for unexpected expenses (appliances break, hot water heaters die explosive and watery deaths, exteriors need painting, roofs need replacing, etc - it all adds up!). You should budget about 1-3% of the cost of the home for yearly maintenance (closer to 1% if it's a new home, closer to 3% if its an older home). Try to have the first year's maintenance money already saved before you buy, in case you're hit with something big right off the bat. Also, you need to save for a down payment of 20%, so that you don't waste money on PMI.
Don't make the mistake of thinking it can't happen to you...we once bought a house that needed the septic system replaced in the first four months we were there. Expensive.
Rent longer, save MORE!!
Every toilet broke right after we bought our first house. It had been winterized.
My power went out during a storm, sump pump stopped working, I ended up with drywall damage/replacement.
Within a year of buying our house, we had to spend $2,000 on tree removal. Stupid us didn't really pay attention to the trees on the property, and by the next spring it was obvious at least three had to be cut down. Neighbors were complaining. We went super, super cheap. If we had used a fancypants tree removal company, this number would have been twice as much. We basically used three guys and a truck and it was a harrowing experience to watch them scale the trees while cutting them down.
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Sorry to enter the echoplex of "things that can go wrong immediately after buying a house" but...
In 2007, I bought a condo that had been vacant for a few months. Nothing major happened during the vacancy, but I still had to do some repairs on toilets & bathroom walls ($2200). In 2013, my husband & I bought our first house after a fairly clean inspection (new AC, 7 year old roof, updated plumbing). In the first month, we had to pay $3-500 for a replacement part on the AC unit. Three months later, we ran our dishwasher and it rained in our finished basement (couple hundred or so for plumber to investigate the root cause, several weekends spent drywalling). This year we replaced the roof ($6k) because the previous owners had gone cheap on the roof and we had some leaks.
If you decide to move forward, absolutely make sure that you're not zeroing out your savings when you buy the house - keep a few thousand in reserves for repairs/problems, probably 3-5k (more if your place is older). Homeownership is great, but it can also be a real bummer.
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my first home was actually a co-op. The downside was a monthly fee, but the upside was really, really good for me as a young single woman: exterior maintenance and infrastructure, plus any damage caused by a failure of same (e.g. a leak in the ceiling damaging my drywall), was dealt with and paid for by the co-op board. I got to own something, do decorating work and have "my own home" but I wasn't saddled with the full brunt of work that home ownership can involve, and I knew the board members were looking out for me, as it was in their best interest as well. Would you consider something like that?
I'm also wondering about your boyfriend. Would he pay rent? Or buy in with you? While the standard advice is don't buy anything that forces you to rely on rent, that would soften the risks here.