We returned from a well-deserved break to find that our e-mailbag has begun to fill up with questions (admittedly, it’s a very small bag). So we decided to empty it out and provide some answers.
This week’s question is from a young man who wants to know how he can “start a family and buy a house” after he graduates from college, especially if he has a substantial amount of student debt. We’re not comfortable coaching readers on how and when to start families, but hopefully these tips will help him accomplish his other financial goals.
1. Don’t be in a hurry
This advice may pertain to starting a family, but it definitely applies to buying a house. Life can provide all kinds of surprises, especially when you are in the early stages of adulthood.
The financial danger lies in the fact that you usually have to come up with a significant amount of money for a down payment to purchase the home (often 10% to 20% of the purchase price).
If you lose your job, or need to move for another job (or your partner’s job), you may have to sell the house more quickly than you would prefer.
Depending on the housing market at the time, there is a good chance you could lose some or all of your down payment. Or, worse yet, owe more on the mortgage than what the sales proceeds would be. Don’t buy a house unless you are relatively certain that you are going to be staying in the area (and in the house) for at least five years after the purchase.
2. Spend (much) less than what you earn
Graduates who are fortunate enough to land a well-paying job are often either tempted to blow their new paychecks on shiny new purchases, or hurriedly pay off all of the student debt they may have accumulate during the previous years.
Although we prefer the latter to the former, the true path to success is to adopt an in-between philosophy. Try to keep your basic, recurring expenses (food, housing, transportation) to 50% of your gross paycheck.
True, that may mean sharing an apartment with a roommate, and/or delaying the purchase of a brand new car. But be honest—this would still allow you a more comfortable lifestyle than what you experienced during your recent college years.
3. Use the other half wisely
Divide the other 50% of your income among the following goals. First, make only the minimum payments required on your student loans. Then pay off any credit card balances that you have incurred, and try not to use the plastic again.
Next, try to save up at least three months’ worth of living expenses for emergencies (such as a loss of your job, or a surprise auto repair bill), and put that money in a safe, liquid account in your bank or credit union.
Last but not least, put as much as you can into a retirement account (hopefully at least 10% of your gross earnings). Use your employer’s at-work pre-tax retirement plan if you can (especially if your employer matches any contributions).
If you may need the money sooner than you expect to retire, use a Roth IRA instead. You don’t get a tax break on the deposits, but you can pull the contributions back out at any time for any reason with no taxes or penalties whatsoever.
Once you have met these criteria, you can start saving any extra money for a down payment for a home, and, by definition, by the time you have accumulated 10% to 20% of the prospective purchase price, you will be ready to take on the joys and burdens of a mortgage and home ownership.
Now that we’ve created a little more room in the e-mailbag, feel free your money questions to [email protected]
Your personal information will remain confidential, and the answers are free (and therefore, worth every penny that you pay for them).