Home Planning

[Payn_it>>>]

My wife and I are very close to breaking into being in great financial shape. My car will be paid off in 2 months, and i just got a raise. We are starting to pay for her bachelors degree, but her parents are helping out.

I've looked into short term investments and have decided that for the durration of CDs in realation to ammount put in and yeild, that we wouldn't be making enough to warrent locking the money in a CD.

So my next thought is IRAs or 401K. Which i can do through work and plan to do soon.
But what we really want is a house. We'd like to get some thing in the next 3 years. right after her graduationa and right before i go back to get my mechanical engineering degree.

Our current rent it $918 monthly for a one bedroom in Roseville CA.
My question...
What's a good down payment for a home apx 185,000 and what'd payments be. Where the heck do i start? i've never done this before.

Sorry for the long read. any advice is grately welcomed.

Micah

[Payn_it>>>]

i know payments are really going to depend on intrest rates and term, but i still need to know where to start.

[jIM_Ohio]

First, I would put at minimum 10% of gross pay into retirement accounts each paycheck. Do that- use 401k or IRA, but get in that habit- the habit of saving is more important than the amount itself.

For a 185k house, I would plan to save 30% of that cost for the downpayment.
20% is what bank will want
the other 10% is what you will need to close and move in

20% of 185k is 37k
you will need another 18k or so for closing costs, moving costs, and fixing costs (assume the AC breaks the day you move in).

You will finance 185-37=148k
148k financed for 15 years at 5% is a payment of $1170/mo

[Payn_it>>>]

ok so...as we stand our savings plan is this...
One year, No Debt and 5K in savings.
Year 5, match that 5k savings to have 25k in the bank

I'm always looking into the 401K and waiting till our bills are expenses are less than 40% income to start pooring into savings. for 616 a month we can have that 37,000 in 5 years. I know it'll take some time to get to that 616 a month. As we stand now we're looking at 240 a month goes budgeted into savings. but thats also with a $350 a month car payment that'll be gone in two payments. that's 590 a month free for savings. at 590 a month saving for 5 years is 35,400. and where i stand i think i can bank on raises in the future. as well as my wife being promoted after her degree.

So with this info, do you think 5 years is a realistic goal?

[jIM_Ohio]

ok so...as we stand our savings plan is this...
One year, No Debt and 5K in savings.
Year 5, match that 5k savings to have 25k in the bank

I'm always looking into the 401K and waiting till our bills are expenses are less than 40% income to start pooring into savings. for 616 a month we can have that 37,000 in 5 years. I know it'll take some time to get to that 616 a month. As we stand now we're looking at 240 a month goes budgeted into savings. but thats also with a $350 a month car payment that'll be gone in two payments. that's 590 a month free for savings. at 590 a month saving for 5 years is 35,400. and where i stand i think i can bank on raises in the future. as well as my wife being promoted after her degree.

So with this info, do you think 5 years is a realistic goal?

I didn't follow all the math

If you are going into a house by saving 35k cash, but 401k balance is zero, I suggest you have your priorities backwards. Long term goals and needs come first from a financial sense.

[Payn_it>>>]

And isn't a home considered long term? i plan on starting that 401K prior to buying the home. (within the next 6 months for the 401K)

[jpg7n16]

Do you both already bring in incomes? Will she get a raise/new career after she obtains her degree?

If you go from a 1 income family to a 2 income family - this problem goes away fairly quickly. Say 1-2 years. Just don't increase spending as income increases.


And yes - if you have 35k cash but no 401k, your priorities are a bit out of whack. But if you have a lot in your 401k, and none in cash you'll never get to reach your goal of having a home. You need to find a happy middle somewhere, but I'd err on the side of putting "too much" in retirement.

Don't forget that you need a 3min-6max month emergency fund in place in addition to your down payment for the home.

[jpg7n16]

And isn't a home considered long term? i plan on starting that 401K prior to buying the home. (within the next 6 months for the 401K)

Not to everyone.

Retirement money is supposed to last you until you die. A house, you may move between now and then.

But the main thing that matters is what is important to you and your wife. We would suggest that retirement is important - and should be among your top priorities (if not #1), but you need to determine for you and your family what you want to save for.

Jim is real big on retirement savings.

[disneysteve]

And isn't a home considered long term?

You are comparing apples and oranges.

401k is an investment.
House is not an investment.

Saving for retirement is a need.
Having a place to live is a need.
Owning your own home is a want.

Needs come before wants.

Start funding your 401k to at least the full company match.
Be putting 10% into retirement overall.
Have a 6-month emergency fund.
Have a 20% down payment.

Then you will be ready to buy a house. Until then, keep renting.

[Payn_it>>>]

right...yes we both bring home income. The best thing, is that she currently works for my mother and we're in line to take over the business and become sole owners. so income on her end will grow greatly. on my side, once i finish school i can guarentee my income will increase as well. i'm only 21 and making my age without any form of degree for one of the largest mechanical engineering and contractors in California.

6 months income as we stand now is. about 22K. I like the sound of that, but is this a realistic goal in this day and age? how do you suggest a family with no kids and nearly no debt raise 22K in emergency funds and 37K for a home and a 401K.

[jpg7n16]

You are comparing apples and oranges.

401k is an investment.
House is not an investment.

Well, technically a house is an investment in 100% real estate. It generates "income" (by saving you from paying rent), it is expected to increase in value over the long term, and to one day be sold at a gain - maybe not by you, but by your kids or kid's kids.

Getting a mortgage is borrowing a ton of money to invest it all in one piece of real estate. And paying 5% for an investment that is expected to gain 2-3%.

Housing is not necessarily an investment - more of a living expense, but a house is an investment IMO.

The main expense that people attribute to the home -a mortgage-, is actually an expense related to the debt on that home investment.

Saving for retirement is a need.
Having a place to live is a need.
Owning your own home is a want.

Needs come before wants.

I 100% agree with these statements.

[Payn_it>>>]

we have no problem renting especially while we're in school. we just want to know where to start... so in steps

#1, 401(k)
#2, 6 Month Emergency Fund
#3, Saving for Down Payment

Any modifications?

[jpg7n16]

right...yes we both bring home income. The best thing, is that she currently works for my mother and we're in line to take over the business and become sole owners. so income on her end will grow greatly. on my side, once i finish school i can guarentee my income will increase as well. i'm only 21 and making my age without any form of degree for one of the largest mechanical engineering and contractors in California.

6 months income as we stand now is. about 22K. I like the sound of that, but is this a realistic goal in this day and age? how do you suggest a family with no kids and nearly no debt raise 22K in emergency funds and 37K for a home and a 401K.

6 months is actually reasonable and realistic, but it is the max you should have in cash for an EF. The range is 3-6 months.

I'm 25 and have no plans whatsoever for buying a home in the next 5 years. I really like apartment living. So if you're of the mentality that, "well I'm supposed to have a home by now" get that out of your head.


How do we suggest that you do it? Try to make the most you can. Live on a lot less than you make. Do that for a long time.

[jIM_Ohio]

Here is my take

Your are 21, young... and asking good questions.

For retirement savings, starting early is the single best thing you can do, but the assumption here is you have a positive savings rate going to retirement investments. Investing 10% of a 30k annual income is going to be better than investing 20% of a 60k income later. The only exception to this is if income will shoot up considerably in a short (3-4 year) time window. If you have to wait 10 years for one spouse to get business and second spouse to get degree, then you are better off investing a small percentage now than a large percentage later.

For house savings you have the right attitude (get a house while you are young). Steve is correct in that having a house is a want, not a need.


The best thing you can do is save 20% of your gross pay. 10% to retirement and 10% to house savings is my suggestion.


Having a house is an ASSET, it is not an investment (in my books). JPG mentioned it saves you "income"

Well, technically a house is an investment in 100% real estate. It generates "income" (by saving you from paying rent), it is expected to increase in value over the long term, and to one day be sold at a gain - maybe not by you, but by your kids or kid's kids.

and it depends on your interpretation of investment and income for that to be true. A house will usually increase in value, but historically that increase has been just above inflation, so its not the greatest investment in the world. In addition, the house will cost you as much or more because you are paying interest on the loan to get it.

Meaning if you get a 185k house, put 37k down, finance 148k at 5% for 15 years, you will have paid the following:

37k down
148k back to bank (as loan principal)
and $63k in interest

so you would have paid 247k for a house you valued at 185k. So you have an asset, but you paid more than it was worth at time of purchase. If you sell it for more than 247k, then it became a good investment, but who knows if price over 15 years will go up 33% or so?

That 247k you spent is not adding income to your bank account, but it is taking money you would spend on rent and turning it into an asset over 15 years.


Because you are not in debt, the best things you can do are the following:

1) Stay clear of high debt
2) Spend less than you earn every year
3) accomplish financial goals with broad focus- meaning put a little to house fund and a little to retirement (do not ignore one goal or the other). The only time to isolate one goal over another (IMO) is when situations are bad (like you have high debt).

[jIM_Ohio]

we have no problem renting especially while we're in school. we just want to know where to start... so in steps

#1, 401(k)
#2, 6 Month Emergency Fund
#3, Saving for Down Payment

Any modifications?

#1a, 401(k)
#1b, 6 Month Emergency Fund
#1c, Saving for Down Payment

do all 3 at same time- do not isolate one as being more important than others