Here we have Brian and Janna. They have a 16 month old child, two dogs, and a desire to buy their first home. Janna is a licensed marriage and family therapist; Brian is a city-employed landscape architect.
Brian recently transitioned from the private sector to his new job with the city, allowing him less travel, lower cost insurance, and a higher salary. Brian currently brings home $1,558 biweekly. He’s listed his health and life insurance premiums in the budget below even thought they’re deducted from payroll, so we’ll add $140 per paycheck back in and call his income $1,698 every two weeks, or right at $3,400 per month. His two extra paychecks per year (because he’s paid biweekly) are available for savings.
To increase his income, Brian would have to change his job title – moving toward management and away from design work, which he loves.
Janna, although licensed, has to complete a certain number of hours in practice before being able operate independent of her mentor (for lack of a better word). She bills her time at an average of $80 per hour, but half of that goes to overhead (rent, insurance, etc associated with the practice) and to her supervising therapist.
She’s also an adjunct professor at her alma mater, teaching an average of one class per semester.
All said and done, Janna nets about $600 per month.
Brian and Janna have no debt – which is why I’m waving my hands at the small difference between my estimate of their monthly income and their average outflows (listed below). It’s obviously all balancing – just not progressing as quickly as they’d like.
The Goal is Home Ownership
Brian and Janna would like to buy a home in the $150,000 to $175,000 range, with 20% down, as quickly as possible. Look over their budget, then help me help them figure out how to get into the house.
|Category||Budgeted||Brian’s Notes||Mark’s Notes|
|Charity||$500||Brian didn’t specify where this goes.|
|Savings & Rainy Days|
|House Downpayment||$0 to $400||Goal to buy a house, but funding currently depends on wife’s income.|
|Christmas||$60||Gifts for immediate family only|
|Term Life Insurance||$70||For both of us|
|Vacation||$150||Saving for out of town wedding next summer|
|Child’s College Fund||$0||Would like to fund more|
|Other||$0 to $100||Depends on wife’s income; need to fund more and more consistently|
|Groceries||$500||Eat local and organic when possible|
|Rent||$625||Landlord pays trash and water|
|Electricity and Gas||$150||Could you switch to CFLs and save here? Adjust to hotter summer temps and cooler winters?|
|Phone||$97||$20 stipend from employer||Could you save money with Ting?|
|Car Gas||$200||Any possibility of bike commuting,car pooling, or working from home some of the time?|
|Car Replacement||$0||Would like to fund more|
|Medical Cafeteria Plan||$167||I’m not familiar with these. Would it be irresponsible to drop it?|
|Household Meds||$5 to $10|
|Personal Care Items||$0 to $20|
|Household Items||$20 to $100|
|Clothing||$100||Gotta get this down. This is easy money.|
|Haircuts/Massage/Etc||$50||I’d beat up on this category as much as possible.|
|Love Money||$30||Flowers for my wife||Way to show me up.|
|Education||$0 to $10||Professional/personal development|
|Childcare||$300||Part-time nanny; might increase to $750 for full-time preschool in the next 18-24 months|
|Pets||$110||2 dogs – food, meds, vet|
|Entertainment||$0 to $20|
|Budget Total||$4,235 to $4,895|
The Ugly Math
The $35,000 down payment goal (20% of $175,000) would take 11.7 years to reach if you freed up $250 per month (and saved the money in a savings account). Which is to say: it’s a big goal that’s going to take a long time without major changes to the finances.
If we factor inflation into the equation, your money will be worth about 30% less in ten years (3% inflation per year), which means you’d need to save up about 30% more to make the equivalent down payment. That takes your required monthly savings up to $325 in order to achieve a 20% down payment on a $175,000 house (inflation-adjusted equivalent) in 10 years.
(Unless you could earn 3% per year on your down payment savings! Maybe Betterment could help.)
So, this gives me two thoughts:
First, I suppose this is why there are programs that allow people to buy homes with less than 20% down. I bought my house back when the world had lost its mind, and I did some wonky 80/20 financing where the 20% was called a “home equity loan.” Terrible loan, terrible interest rate – we’ve covered this all before.
Point is, I’m ignorant about your lower-down payment options. I have a friend who got himself a great loan recently with less than 20% down, and he bought his way out of Private Mortgage Insurance. His break-even on buying out the PMI is something like two years, so as long as he stays in the house a good long time, he’s coming out great without having had to save up the full 20%.
I hope commenters will chime in with their own stories of how they got reasonably priced loans without a full 20% down payment.
Second, I’m all for the 20% down payment. I think you’d find the purchase less stressful if you had such a big chunk to put down. But the numbers are telling us you’ll need to be saving something north of $500 per month to come up with that down payment in, say, 5 – 6 years.
How will you come up with an extra $500+ per month. Same as the rest of us: through increased income and/or reduced expenses.
There’s more upside in Janna’s income than Brian’s, for the time being. If Janna could accelerate her clinical hours and start pocketing a higher percentage of the $80/hr she can bill, I see the family’s income potential shooting up over $100,000 per year. If you take the budget laid out above and change the income to $100k+, it’s not very hard to get to $500/mo in house savings.
Reducing expenses is the trickier, more emotional piece for most of us. I see some places I could cut back in your budget, but that’s me.
The two of you have to come together, decide how much the goal matters to you, and weigh all other purchases against the value of the goal (sort of like we did with Carrie the other week).
With every discretionary category, you have to ask yourselves:
Is that more important to us than getting the house?
In many cases, you’ll say Yes. Some of your expenses will be more important than accelerating the home ownership goal. In other cases, you’ll have to answer the tough No, and push that money toward your down payment category.
I hope the discussion is helpful, and wish you the best with your goal to get into a house!
Update: Brian emailed me this as a follow-up to the post.
“Charity – $500 is 10% of gross and represents an important part of our life. We’ll choose giving over a house.