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10 Dec 2013

What is Brian and Janna’s best path to home ownership?

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by Jesse Mecham

magnifying glassHere 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.

They’re living fully “buffered” (Rule 4), and they have a three month emergency fund. Awesome.

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.

The Budget

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
Pension $270
Other $0 to $100 Depends on wife’s income; need to fund more and more consistently
Groceries $500 Eat local and organic when possible
Restaurants $160
Recreational Beverages $50
Rent $625 Landlord pays trash and water
Renter’s Insurance $13
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?
Internet $57
Cable $0 No TV (Applause)
Car Gas $200 Any possibility of bike commuting,car pooling, or working from home some of the time?
Car Insurance $88
Car Repairs $50
Car Registration $20
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?
Health Insurance $283
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.
Kid Stuff $75
Gifts $15
Love Money $30 Flowers for my wife Way to show me up.
Blow Money $20
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.

Christmas – Big family – 15+ including siblings,some with spouses, etc. We budgeted $720, but won’t be spending even close to that since the much larger half of the family decided to forgo gifts and do a secret Santa thing instead. Should be able to roll many hundreds of dollars into savings, and cut this way back in 2014, too.

Dogs – We don’t spend $1200 on the dogs, but we budget that so we have a healthy veterinary category in case something serious happens. We have an emergency fund, but it feels better having a cushion designated for the pets, same as our car repair fund.

Cafeteria Plan – As others said, this is pre-tax money for medical expenses. We estimate conservatively but do use it all. In 2014, a portion of our childcare expense will also be run through this plan; something we didn’t do this year.

Childcare – Little one will attend a part-time preschool next year. $144 per week; comes to about half per hour what we pay now and will give “Jenna” more time to build her practice.

MFT – Great to see feedback from other LMFTs here. The $600 per month is net. We hold back money for taxes and other business expenses like licensing, CEU’s, conference travel, etc. in a separate off-budget account. Those numbers are not reflected in what Mark posted. Starting in January she will be adding a sales component to her job that has the potential to boost her income significantly. She is about half way to the required # of hours, but expects to knock out the other half in 12-18 months based on her new availability. Once she meets the requirements, she will be able to accept more clients and expect a slightly higher percent cut. She will still have overhead expenses for the office space, billing, marketing, etc that is handled by the group practice.

House – Good input from all sides. Kind of hard to hear that some think we can’t ever buy a house, but that’s what it feels like, so it shouldn’t hurt to say it out loud. I appreciate the honesty. A lower price point probably isn’t reasonable based on what I know of our local market. Moving out of town would bring the price down, but add other expenses and possibly reduce quality of life. Something to consider regardless.

We’ll be saving everyone’s comments and reviewing them more in depth over the holidays. Hopefully cuts here and there combined with the income changes will drastically alter the picture and we can cut a few years off Mark’s projections.”

Your Next Step

Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)


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