volume@11
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I am interested in some opinions/practical advice about buying a home. I am looking to buy my first home. I have a spreadsheet that has all of the gory details so I have a good feel for what I can afford per month. What I am interested in is what is a good number for money leftover at the end of the month, after everything is paid? Besides saying millions of dollars, keep in mind that you have a normal job and are just a working stiff. You have limited means and the married spouse is not working due to a kid or two.
I know this is highly subjective to lifestyles etc but, knowing that there are some (with all due respect) old timers here, looking back into the past, how much would you have liked to allocate in available cash when all of the bills were paid? Allocation could be as simple as a savings account for emergencies. I am assuming no frivolous spending here, just a conservative approach? The number could just be a percentage of net income.
dennis
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Tue Feb 26, 2008 2:53 pm |
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coaster
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Dennis - I think it all depends on how much work you want to do on the house: how much you can do yourself and how much has to be hired out. If you have a lot of things you need to change you can easily spend 10% of the purchase price or more in the first couple years.
As far as an emergency account goes, it's recommended you have six months' living expenses in liquid funds. If there are two wage-earners in the household, you could reasonable dial that back to three months.
~Tim~
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Tue Feb 26, 2008 3:20 pm |
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volume@11
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Let me clarify this a bit more. Lets say that the house you buy only needs minimal work upfront. This would mean things like yard work and the occasional painting job. The assumption here is that you would do this yourself. Nothing significant like additions, full remodels, HVAC, major appliances, rewiring, etc. I say this as a starting point because I know somebody is going to read this and say there is no way you can move into a home, no matter how perfect you think it is when you bought it, and not change it in some way. There are changes to be made but you make provisions for that upfront by saving extra money before the purchase. This would be on top of the 20% down payment. Aside from this, say your savings also have 10% of salary going to a 401k.
You already have the 6-8 month emergency fund setup. You have what you think will be enough for basic improvements/changes that you may do upfront. You don't think that you will have to do major renovations though. It would be proper to say that your intentions is to find a place that needs minimal major stuff. I think somebody can pick out a good enough house because you can ask about the state most major things are in. You can ask for receipts/dates when the big things have been replaced. Besides, there will be an official inspection done too. You can then negotiate home purchase costs to some extent if these big things are needed.
This is a very "pie in the sky" type question because it leaves out the randomness of life. Humor me please.
So lets put it this way. Let's say that you are going to buy a house. You have a couple of choices in homes that you like. When it is all said and done, house #1 will leave you a net amount of money at the end of each month of about $500 but costs more upfront and is very nice. House #2 is cheaper, maybe needs some work but it is not required immediately, and leaves you an amount of $800 per month. It is not as nice as #1 but is not a dog by any means. Over a year's time (assuming no major developments/changes), you could theoretically save either $6000 or $9600.
In terms of pure numbers, keeping $9600 is a much better deal. You could always invest the difference in an IRA.
However, house #1 is much nicer and maybe living there would be better. It is hard to quantify what is meant by "better" but maybe it could mean that there is less traffic, more peaceful, etc. The thing that makes house #1 scary is that you only have a $500 cushion. That to me is a pretty close scenario. It would make me less secure because if you did have a major problem, now you have to pay for that problem. It will take longer to payoff because you have less to save per month. House #2 could be better but you know that it will never be as good as #1 and dumping tons of money into it is not going to provide the returns later in life.
So this sort of reflects my question. Is there a certain amount of money (some percentage) of income that you should have left over per month? It is analogous to the rule of thumb when buying a house. That rule of thumbs states you can usually afford about 3X your gross salary. Some sources put this at 26% and some use as much as 36%. I personally prefer something towards the lower end just in case something goes really wrong. I guess all of this is just a matter of comfort level. But with homeownership, even if you have $500 left over per month, that can go quickly if you go to home depot and start buying stuff. It all adds up.
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Tue Feb 26, 2008 4:57 pm |
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coaster
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The amount of free cash flow you want to have left over to invest for retirement depends on your age (years to go) and on your expectations for post-retirement income needs. A conservative number for a young person would be 10 percent.
~Tim~
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Tue Feb 26, 2008 5:55 pm |
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Apollo
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It is this type of scenario which will cause you potential financial problems in the future.
Here is my point of view about it:
You should not buy a house unless you have the cash-flow from your assets to cover the mortgage payment.
There are plenty of home-owners that were in a similar situation and are now facing foreclosure.
Home-ownership is great but if you approach it the wrong way it can have devastating effects later on (just look at the housing market right now). Just about every single person that will loose a home gets what is deserved and what should have been expected judging by their actions.
If you honestly try to figure out how much money needs to be left-over you are probably in no position to buy a home (sure you may get the mortgage, that may not even be a problem and the bank will tell you to go ahead and get it).
Just my point of view...
It is not smart to play it safe but it is safe to play it smart.
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Wed Feb 27, 2008 3:10 pm |
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volume@11
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Apollo, In regards to your last statement, I am not asking what "needs" to be leftover but rather what is a good rule of thumb that should be leftover. That to me is to be a starting point of how to not get yourself into trouble. I think this is a fair question to ask. Maybe I did not phrase my question the right way, but I hope this clarifies it.
If you sat down to do your budget and added up the "coming ins" and "going outs", you would have a number left over (hopefully in positive territory). My real question pokes at this number: Is there a rule of thumb for how much net money should be left over per month for a home? There are rules of thumbs for just about everything in life so I figured there was one for this case. Maybe I am too naive. If you can say to somebody, "you can spend up to 33% of your gross salary for a home," then maybe there should be a statement that says, when all the bills and obligations are met, you generally should have 20% leftover from the incoming net salary. The 20% is just a made up number but I don't know why there could not be something that was more representative of a rule of thumb. This number would then be a low starting point and you would want to be higher than it when considering buying a home.
If somebody then went and did their budget and realized that hey, I have only 5% left over every month and I am struggling now," they could then take steps to raise that number and correct things. That is all I am asking about.
dennis
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Thu Feb 28, 2008 7:14 pm |
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coaster
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Dennis, the reason you're not getting the answer you're looking for is because there is no one firm answer that's right for everybody. I gave a general "rule of thumb" in my post above, but I can't say whether that's right for you or not. Only an analysis by a financial professional can give you the answer that's best for you.
~Tim~
Eye Candy : Why Whimsy
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Fri Feb 29, 2008 2:32 am |
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Avino
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Hi Dennis,
Everything being said above is true. Let me tell you about my experience, I bought a multi family house last year, very big nice and comfartable, but after moving in and living there a few months my monthly expenses shot up. And with home prices going down, If I had waited another year I would have gotten a much better deal on the house. Even though I have rental income which covers half of my mortgage, after all my bills and living expenses, I only have about $400 left over a month. (I do save another $900 a month in pre tax for retirement ).
My credit is good, my credit card balances are all nearly 0 and my car is paid off, so if an emergency came along I could use credit. But that is my point, I would rather not use credit. Looking back, I would have felt much better if I had at least $1,000 to $1,200 left over every month after all my bills and living expenses and pre tax retirement contributions.
With that money I would build up my emergency fund to about six months worth of expenses, and then after that point, invest the majority of it to generate more cash flow. My current focus and plans are on reducing debt so that I can keep and invest more of my after tax income.
~A.
Also blogging @ avinos2cents.blogspot.com
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Fri Feb 29, 2008 4:16 pm |
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