Are you Financially Prepared?
Certain things in life are done one step at a time. Putting on
your socks before your shoes for example. There is usually a good
reason for the steps involved. Before you jump headfirst into home
ownership take a look at your whole financial picture. No one can do
this but you. No one else will care how the purchase of a home will
effect your particular situation the same way that you will.
What Are Your Spending Habits?
Most people have a spending pattern. They earn an income each
month and either spend all of it, some of it, or maybe even more
then they are earning. The average American saves less then 5% of
their take-home income. This is considerably less then the average
industrialized country. If you intend to buy a home, it is best to
be the type of person who consistently saves more then 5% of their
income.
First, you need to save money for a down payment. You can try to
get some of the money you need from relatives, but unless you are
putting down at least 20%, most lenders will require that you have
at least 5% of your own money into the purchase. With some relatives
there can be strings attached to a gift, so make it clear up front
if there is anything expected of you.
After you buy your home there will be additional expenses each
month. If you have already developed a pattern of setting aside
money to go into savings, it will be less difficult to come up with
the extra money needed for these additional monthly expenses.
Collect the data
Go over your spending habits for at least a 3-month period. Analyze what you are spending in a typical month on housing,
clothing, and other miscellaneous expenses.
Once you’ve collected your spending information, take into
consideration what new costs will occur after you purchase the home,
such as transportation. Use the following table to assist you in
this task.
Item Current Monthly Expected Monthly
Average ($) Average with Home Purchase ($)
Income _______________ _________________
Taxes _______________
_________________
Social Security _______________ _________________
Federal _______________ _________________
State and local _______________ _________________
Housing Expenses
Rent _______________ N/A
Mortgage N/A _________________
Property Taxes N/A _________________
Gas/Electric/Oil _______________ _________________
Water/garbage _______________ _________________
Phone _______________ _________________
Cable TV _______________ _________________
Furniture/Appliances _______________ _________________
Maintenance/Repairs _______________ _________________
Food and Eating
Supermarket _______________ _________________
Restaurants and takeout _______________ _________________
Transportation
Gasoline _______________ _________________
Maintenance/Repairs _______________ _________________
State Registration Fees _______________ _________________
Tolls and parking _______________ _________________
Bus or subway fare _______________ _________________
Appearance
Clothing _______________ _________________
Shoes _______________ _________________
Jewelry _______________ _________________
Dry Cleaning _______________ _________________
Haircuts _______________ _________________
Makeup _________________ ____________________
Other _________________ ____________________
Debt Repayments
Credit/charge cards _________________ ____________________
Auto Loans _________________ ____________________
Student Loans _________________ ____________________
Other _________________ ____________________
Fun Stuff
Entertainment _________________ ____________________
Vacation and travel _________________ ____________________
Gifts _________________ ____________________
Hobbies _________________ _ ___________________
Pets _________________ _____________________
Health club or gym _________________ _____________________
Other _________________ _____________________
Advisors
Accountant _________________ _____________________
Attorney _________________ _____________________
Financial Advisor _________________ _____________________
Health Care
Physicians __________________ _____________________
Hospitals __________________ _____________________
Drugs __________________ _____________________
Dental & Vision __________________ _____________________
Therapy __________________ ______________________
Insurance
Homeowners/renters_________________ ___________________
Auto _________________ ___________________
Health _________________ ___________________
Life _________________ ____________________
Disability _________________ ____________________
Educational
Courses _________________ ____________________
Books _________________ ____________________
Supplies _________________ ____________________
Kids
Day Care _________________ _____________________
Toys _________________ _____________________
Child Support _________________ _____________________
Charitable Donations________________ _____________________
Other
________________ _________________ _____________________
________________ _________________ _____________________
________________ _________________ _____________________
________________ __________________ ____________________
_________________ __________________ _____________________
Total Spending :
(Subtract from income)
Trimming Your Budget
You will find that you may need to trim your budget in order to
save enough to buy a home. This reduction in monthly expenditures
will also come in handy after the purchase to allow you to afford
the other costs involved with home ownership.
The first thing to look at when trimming your budget is what are
your balances on credit cards and auto loans. It is a good idea to
reduce or if you can, eliminate these expenses entirely. The
interest on this debt is usually high, and not tax deductible. You
will be doing yourself a great financial favor by riding yourself of
this debt.
If you currently have savings that you could use to pay off this
debt you should consider doing so. The interest being earned on your
savings accounts probably does not come close to what you are paying
on this debt each month. Also consider that the interest you are
earning on your savings is taxable. Just be sure that you can access
emergency funds should you need to, either through family or
friends.
If you can not pay off your debt you should consider looking into
obtaining lower interest rate credit to refinance your debt into.
Then try to reduce your spending and use that money to pay down your
debt.
It would also be a good idea to close most of your credit card
accounts. If you pay with a credit card because of its convenience
you should consider using your bank debit card instead. This card
can generally be used like a Visa or MasterCard but the money is
automatically deducted straight from your checking account. That way
you are only purchasing items from accessible cash. This also gives
you an excellent record of your spending.
Next go through your budget and cut what is not a necessity. Focus your spending with an eye on value. Small adjustments can add
up to a lot of money over time.
Once you have analyzed your spending you should come to only one
of 3 different conclusions:
You spend too much: When some people analyze their spending they
become horrified at how much certain small extravagances are costing
them. Even a small cost adds up over time. You must decide where to
make the reductions, and stick with your decision.
You’re saving just enough: Maybe you’ve already made the decision
to save and have been doing so for some time. Great! Just remember
that buying a home can put some changes into your current savings
plan. Make sure you review your current savings plan with the added
costs of home ownership worked in.
You save a lot: If you are one of these rare people who can save
a large portion of their earnings, congratulations! You may be able
to stretch the amount you spend on a house and even borrow more then
you expected.
How Much do You Need to Save?
Most people don’t know the answer to this one. You need to have
money saved for things other then the purchase of a house. Everyone
should have at least three months worth of living expenses put away
in an accessible savings account at all times. That is a minimum.
Knowing your savings goals and planning on how to achieve them is
something that should be addressed before you ever purchase your
first home. Each person’s situation is different, and that makes
their savings goals different also.
First Set Your Goals
You don’t need to know exactly what you want to do in the next 40
years, only some idea of what you want. Even if you are sure that
you don’t want to retire, it is important to put some money aside
anyway. Things can change, and it is best to be prepared.
Retirement Accounts
The IRS has gradually taken away a lot of our tax write-offs in
the past few years. One thing that has remained, although changed in
some ways, is our ability to put money into a retirement account and
reap the tax benefits. This is a very desirable benefit and one that
everyone should consider.
Money placed into a 401-k or 403-b is usually tax deductible,
saving you from paying the taxes on these funds in the year for
which the contribution was made. The money you earn from these
investments compounds over time and you do not have to pay the taxes
on this money.
The sooner you start to deposit money into an IRA account the
better. The advantages that can be taken from the compounding of the
earnings on this type of account can be staggering. Consider the
following scenario: A man at age 22 invests $2,000 per year into an
IRA for eight years. He invests a total of $16,000 and then, at age
30 stops adding any money. When he retires at age 65, he will have
amassed $642,750, assuming he reinvests his capital gains and earns
an average ten-percent rate of return.
Let’s look at what would happen if the same man were to wait
until he was age 30 to start saving. He put $2,000 per year into his
IRA for every year until he retired at age 65. He invested a total
of $70,000 and accumulated $542,050.
Why would he have $100,700 less, if he invested over 4 times
more? It’s the power of compounding. The sooner you start saving,
the longer the money has to grow.
Putting money into some type of a retirement account is a good
idea, both for the savings and the tax benefits. One thing you do
not want to do is put money you are saving for a home or some other
short-term goal into this type of an account. Withdrawals from this
account prior to age 591/2 will incur a penalty. So besides paying
the taxes on this money, you will also pay a 10% penalty to the
federal government and usually an additional penalty to the state.
Some people have borrowing privileges against their employer’s
retirement-savings plans. With these arrangements you can fund for
your retirement, reap the tax benefits, and also borrow your own
money for the down payment of a house. Be sure that you understand
that this money must be paid back, and what those payments will be.
Your Down Payment
It can be difficult in a rising home price market to accumulate
enough money for a 20% down payment. In fact many loans are now
available with a 3, 5 and 10 percent down payment. It is important
to keep in mind though that these lower down payment mortgages have
additional costs added into them.
A mortgage lender is most likely going to require you to obtain
mortgage insurance if your down payment is less then 20%. PMI
(private mortgage insurance) typically adds several hundred dollars
to $1,000 or more annually to the cost of your loan. It protects the
lender financially in case you default.
PMI is not a permanent cost. You should no longer need PMI once
you can prove you have 20% equity in your property. Equity is the
current value of your home minus the balance of your loan. The 20%
can come from loan pay-down, appreciation, improvements, or any
combination of these. To remove PMI most lenders require an
appraisal of the property at your expense.
Saving For Your Down Payment
The first thing you must decide is how much money you will need
and how much you need to put away each month to get there.
The type of investment you choose to accumulate your savings will
depend on your time frame for home ownership. If you plan to
purchase a home within the next 5 years you will have to be more
cautious with your investment because there won’t be enough time to
make up for any down turns in the market. That puts any type of
stock purchase or stock mutual fund out of the picture entirely.
There are other types of mutual funds however. A money market
mutual fund is invested in only safe securities. You will not have
to worry about losing you principal. Bank savings accounts will also
pay interest but usually at the same amount or less then the best
money market. This is because the banks aren’t as efficient and low
cost as money markets.
If you really want to save at a bank you should shop around. Smaller savings and loans or Credit Unions sometimes offer higher
rates.
If you expect to be saving for over 5 years you can look at a few
other more risky investments. Specifically long term bonds and
stocks. A bank certificate of deposit may also be a good investment.
Find out today's rates.
North Atlantic
has
hundreds of programs
so If you don't see what your looking for call or
e-mail
us for an addition product list.