How much house can you really afford?

I wrote this post for my client SelectQuote about the coming spring house hunting season.

Turn one calendar page and it’s spring – prime time for the housing market to open exciting new doors after a long winter lock-down. 

If you’re planning to move this year, you may be dreaming of luxury kitchen appliances, soaring ceilings, spacious walk-in closets, granite countertops, wood floors and a three-car garage. But before you jump on the next tour of homes or contact a real estate agent, stop and ponder this question: How much house can you really afford?

A little homework ahead of your house hunt will help you set realistic expectations, save you time and ultimately land you in the right place without making you “house poor.” Increasingly, financial advisors recommend using the 28/36 rule to help determine how much house you can comfortably afford. 

Ramit Sethi, in his bestselling book, “I Will Teach You to be Rich,” spells out how to use the 28/36 rule to help you decide what is likely the biggest purchase you’ll ever make. This rule is also used by mortgage lenders to determine how much loan you can get. Here are the basics:

• Your maximum housing expenses should not exceed 28 percent of your gross monthly income. This number includes everything that’s bundled into your home mortgage.
• Your total household debt shouldn’t be higher than 36 percent of your gross monthly income. This is known as your debt-to-income ratio. 
• If your maximum housing expenses and total household debt are at or lower than 28/36, you should be able to safely afford the house you’re considering. 

Calculate Total Housing Expenses

Add up everything included with the mortgage: principal, interest, property taxes and insurance. If your prospective home is within a homeowners’ association, add the annual fees to get the complete picture. This bottom line should be less than 28 percent of your gross monthly income, Sethi advises. 

For example, if you earn $4,500 per month, your total mortgage should be no more than 28 percent,or $1,260 monthly. 

Calculate Debt Ratio

Add up the monthly debt you owe divided by your gross monthly income. Debt includes mortgage payments, credit cards, student loans, car payments, medical bills, etc. For example, if you earn $4,500 per month and have $1,500 in monthly debt, your debt-to-income ratio is 33 percent.  

The Bottom Line

In the above two examples, your housing expenses vs. debt ratio is 28/33. This is below the 28/36 rule, so you should be able to afford your targeted home. 

Saving for a Down Payment

Financial advisors recommend making the biggest down payment you possibly can for your new home – at least 20 percent. Then shop for a fixed interest rate 15- or 30-year loan and do the math. If your calculation falls below the 28/36 rule, the home is probably a safe purchase. 

But, still, life happens, so be conservative, rather than springing for that dream house that may bring financial trouble in the future. House hunting is an emotional experience. Many home shoppers fall in love with a property they may be able to finance, but truly can’t afford if life takes a sudden turn for the worse, such as losing a job, an accident, major illness or an expensive needed home repair. 

Setting a housing budget is crucial in the homebuying business. Serious financial evaluation, including pondering the “what ifs,” is essential to a successful home purchase. 

How to Help Your Home Search

An online calculator can help you determine your mortgage payment as you shop for your new house. Enter your anticipated loan information and the calculator shows your monthly payment for a fixed loan. It can also calculate the loan amortization, which is the schedule that describes the repayment of the loan principal over time.  

Enjoy the Adventure

Although you have much to ponder as you shop for a new home, if you do your financial homework first, you’ll eliminate some of the stress of the search. Work with a recommended licensed real estate agent to get valuable free advice about how to evaluate and compare various homes you’ll visit. Happy house hunting – your ideal-home-for-now may be well within your reach.

You, too, can live like the rich and famous

If you’ve ever bought a Powerball lottery ticket and fantasized about how your life would be fabulous if only you would win, it may be comforting to know that some of the super-rich live pretty much the way you live right now. At least some of the time. 

Multi-millionaires and billionaires obviously have the capital to do whatever they want, wherever they want, as often as they want. Many, however, opt to live modestly, focusing on growing their businesses and maintaining their wealth instead of how to spend their money. 

Some ultra-rich celebrities shop at Walmart, Target and the Dollar Store, eat at McDonald’s, style their own hair, prepare their own meals, drive old cars, shop for cheap coach class travel and live in the same modest house they’ve owned for decades. 

A few well-documented examples:

Warren Buffett, chairman and CEO of Berkshire Hathaway (net worth $82.3 billion) lives in a stucco house in Omaha that he bought for $31,500 in 1958. 

Mark Zuckerberg, founder and CEO of Facebook (net worth $74.2 billion), drives average cars –  an Acura TSX, a Volkswagen hatchback and a Honda Fit, all valued under $30,000 each. 

Tony Hsieh, Zappos CEO (net worth $780 million), lives in a 240-foot Airstream in a trailer park. 

Michelle Obama (net worth $40 million) drives herself to Target to shop. 

Understanding how the very rich stay that way is the key to finding more wealth and peace in your own life. Here are a few habits of the rich that you can adopt:

Live Below Your Means

The overnight millionaires who quickly lost it all forgot the simple concept of saving. They spent as much as they could as fast as they could and wound up in worse financial shape than ever. Don’t go into credit card debt, hoping you’ll make more next year and be able to catch up. Set a budget below your means and stick to it.

Live in a Modest Home

Just because you can trade up doesn’t mean you have to. If you’re happy and comfortable where you are, stay. Maintain your home well, update your décor as needed and it will rise in value. 

Hunt for Freebies

Your email inbox is probably crowded right now with offers for free or super cheap products. Accept them and use them. Also search the Internet and print ads for buy-one, get-one deals on products you normally use. 

Curb Your Restaurant Habits

Eating out, even at modest prices, adds up. Keep tabs for a month on your restaurant meals, including carry-out, and you’ll be surprised at how much this habit costs. Preparing food at home is much more economical and you can control the portions and the calories. 

Start a Side Hustle

If you want to save more money, make more money. What can you do in a few hours each week to bring in extra cash? Turn your hobby into an income stream? Take on freelance projects from your business colleagues? Think about your talents and interests and how you can turn them into profits.

Make a Grocery List and Stick to It

Impulse purchases ruin a grocery budget and the supermarket is designed to grab you with attractive displays in aisles and on end caps. Plan your meals, make a list of only what you need and stick to it. Shop alone if others in your family tend to lure you in the wrong direction. 

Buy Only What You Need

If your closet is already stuffed full, don’t buy more hangers. Buy fewer clothes. Quite likely no one remembers if you wore that same shirt last week, as long as it’s clean and in good repair. When it comes to high-ticket items like a new car, if yours is reliable and in good shape, why trade it for the latest model? 

Go for Simple Entertainment

Concerts, movies, plays and attractions with admission fees all cut into the budget. Opt for free or low-cost leisure-time pursuits like concerts in parks, movies on TV, free programs at the library, exploring nature and a potluck dinner with family and friends, followed by board games. 

Bank that Raise

When you get an income boost resist the impulse to spend more than usual. Bank the extra cash and save it until you really need it. 

None of these frugal habits may really turn you into the next Bill Gates or even a millionaire. But simplifying how you think about and spend your money will help you live a comfortable and more relaxing lifestyle, much like the rich and famous. Plus, you’ll find yourself with extra cash and maybe even on the road to wealth. 

Insurance protection for college students – a worthwhile buy

This blog post I wrote for my client SelectQuote shows the value of insuring college students.

College students don’t likely see themselves as someone who needs term life insurance. Getting to class on time, grade point averages, hanging out with friends and keeping up with the latest social media trends are more likely top of mind. After all, they’re young and healthy and any vague thought about an untimely death is scary business and best avoided. 

Financial experts, on the other hand, advise that term life insurance for college students is extremely important to at least these two categories:

·      Parents who have co-signed a student loan. 

·      College students with a family or financial obligations like a mortgage or other debt. 

 

The High Cost of Education

Consider, first, that college education is a huge investment that may require a student loan. Check out these average costs of tuition and fees for the 2017-18 school year: private colleges – $34,740; state residents at public colleges – $9,970; out-of-state residents attending public universities – $25,620. 

Multiply those dollars by four years of college and parents and/or students are shelling out somewhere in the range of $39,880 for the most affordable option to $138,960 at the top level, just for tuition and fees. 

Add another $35,548 to $40,356 for room and board, and the cost of a bachelor’s degree is beyond mind boggling. It’s no wonder roughly 68 percent of new college graduates carry student debt averaging $35,000.

No parent likes to think about the death of a child, but what’s worse is being weighed down by debt along with the grief of losing a beloved son or daughter. When you consider the extreme affordability of term life insurance for college students, it’s practically a no-brainer.

Top insurance companies will cover a healthy college student for $250,000 in term life insurance for about $10 for females to $14 for males per month. A policy with a lower pay out, say $50,000, or enough to cover college debt, is available for about $8 a month for females to $11 a month for males. 

How Student Loans Work

 

If you have a federal student loan, any debt owed upon the student’s death is forgiven. The loan is cancelled and co-signers or the student’s estate do not have to repay the money. However, that’s not the case with a private student loan from a bank or other other lender, which must be paid off. 

If there’s no co-signer, the lender will take money from the student’s estate, if one exists, to pay off the balance. If a parent, spouse or friend co-signed the student loan, the co-signer is on the hook for the debt. That’s where life insurance helps in avoiding a financial crisis. 

 

Needs of Nontraditional Students 

Of course, not every college student is young and single and relying mostly on parents to cover their school expenses. Increasingly, students 25 and older are common in undergraduate programs, with 18 percent of all undergraduate college students married. For the most part, they’re paying their own way. And about 25 percent are also raising children while pursuing college studies.  

Adding term life insurance to an already strapped budget may seem like a heavy burden to college students, but premiums go up with every birthday. A college student who buys life insurance makes a sound financial investment at a price that will never be more affordable. 

 

How Much to Buy?

 

Term insurance for students should at minimum cover any college loan debt and the policy should be equal to the estimated repayment of the loan – say 10 or 20 years. Parents or spouses of college students should also consider adding enough term insurance to cover funeral costs, debt from other loans such as a car or home mortgage, plus the loss of present and future income and the resulting burden on the family.  

The best time to insure a college student is before their first day of classes. But even if the college career is well underway, it’s not too late to take action. 

Simple tips to avoid credit card debt

With credit card offers making up a huge chunk of junk mail, it’s all too easy to say yes to yet another deal that may trigger a downward cycle of debt. It’s a fact – the best way to secure your financial future is to avoid credit card debt.

Used properly, credit cards offer many advantages including convenience, a record of your purchases, protection against fraud, building a positive credit history, and perks including free travel, discounted merchandise and more.  

Used to excess, a credit card is nothing more than a high interest loan rather than a substitute for cash. This is how many consumers get into credit card trouble: As debt builds, they take out yet another card that offers a balance transfer, low monthly payments, no interest for a defined period and other attractive perks. Yet caving into such offers practically ensures debt for years to come as the average annual credit card interest rate is a whopping 16.15 percent. 

Here are tips from financial experts on what to avoid, as well as how to use credit cards wisely. 

What Not to Do

• If you can’t afford it, don’t charge it. If you don’t have the cash on hand for a purchase, you’re living beyond your means. Before you charge, be sure you can pay off the credit card balance when the bill shows up in your mail. Cardholders who usually carry a balance have average debt in excess of $7,500.
• Don’t take cash advances. When you accept a credit card offer of cash in advance, interest begins to build on the day you accept the cash. Even if you pay your bill in full at the end of the month, you’ll pay back the cash you borrowed, plus a high interest rate and a transaction fee. 
• Don’t purchase special services. Credit card companies sometimes offer extra services like credit card fraud protection and life insurance. These are typically overpriced and unnecessary. Just say no. Leave those services to trusted companies. 
• Don’t boost your budget. If you get a raise, a bonus, a tax refund or a cost-of-living pay increase, resist the urge to charge more purchases each month. Instead, put your additional cash into an account that pays interest and save it as part of your emergency fund. 
• Avoid unnecessary fees. Common credit card fees, aside from interest rates, include late payments, returned payments, balance transfers and cash advances. If you’re considering a balance transfer, contact your credit card company to make sure you understand any hidden costs. 

Do This Instead

• Create a budget and pay your balance monthly. Instead of giving into the temptation of maxing out your card by reaching the limit set by the card company, create your own budget based on money you have in the bank. Then monitor your credit card purchases throughout the month and make sure you’ll have enough to cover your credit card bills in full. 
• Pay on time. When you miss a payment deadline, the credit card company can charge late fees as well as raise your interest rate, as specified in the fine print on your credit card contract. Default rates are sometimes twice the standard rate, so pay attention to when your payment is due and send in your money in time. 
• Limit the number of cards. You probably need no more than two major credit cards. Having more makes it difficult to keep track of your monthly transactions and to pay on time. Refuse credit card pitches at retail store counters and toss out the offers that come pouring into your mailbox. 
• Read the fine print. Before you accept a new card, be sure you fully understand the interest rates, late fees and default fees. Credit card companies make huge money off consumers who fail to pay on time, so be aware of the rules before you sign up for a new offer. 
• Carefully consider cards that offer rewards. Many cards offer “no annual fee,” and these are good for most consumer purchases. However, if you travel for vacation, a card that offers airline or hotel points may be a good option; or if you want to get first dibs on concert tickets, you may find helpful cards. Such cards with special benefits may have an annual fee, but the perks you receive may make up for that. If you’re not really interested in the deals those annual fee cards have, shop elsewhere for a card that fits your needs.  
• Pay yourself first. Build an emergency savings fund that could cover a minimum of three to six months of basic expenses if you are faced with a period of unemployment. That way, you’ll not slip into excessive credit card use while you’re looking for a new job. 

If You Already Have Credit Card Debt

• Stop using your cards. Start paying in cash, rather than continuing the cycle of charging and going deeper in debt. Remove credit cards from your wallet and lock them in a safe place at home. For online purchases, use PayPal, linking your account to your bank account or debit card, but not to a credit card. For a convenient way to pay when traveling, use prepaid cards offered by MasterCard, Visa or American Express. 
• Make extra principal payments. When your credit card statement arrives, don’t just pay the minimum. Take extra cash out of your monthly budget to pay down your card following a set schedule. 
• Save for your goals. If you’ve been accustomed to charging major purchases like furniture, appliances or vacations, save up instead. Consider opening a dedicated savings account to cover your wish list and put aside money each month toward your goal. 
• Build your emergency fund. When something like the refrigerator breaks down at home and you must buy a new one immediately, dip into your emergency savings to cover it, rather than resorting to your old habit of charging the purchase.  

There’s nothing scary about credit cards if you learn to limit and manage your cards and control your charging habits. The danger sets in when you actually have to start paying those high interest fees because you got into credit card trouble.