How much to spend on your home - Tony King

Welcome to personal financial strategy the podcast; a podcast wholly devoted to you and your money  bringing expertise to bear on how you earn, invest and spend your hard earned cash. 

I am your host,...  Tony King,... and Today I would like to spend a few minutes chatting with listeners who are about to buy their first home or about to “upgrade” their home. 

Let me start by stating “there has never been a better time to leverage a real estate purchase than today”

Cost of Money =Low

No crystal ball,.. But I can not see a time in our typical mortgage horizon (30 years) when interest rates will be significantly lower, but I do think it’s a solid bet that over the next 30 years we will see significantly higher mortgage interest rates.

2020 and 2021 has seen large amounts of cash infused into the economy and even my High School economics book would predict two outcomes: 

Inflation - we are already experiencing this,.. We see it at the grocery store, at the gas pump and it has started to push home prices up. At least in my area of the country

The other historically predicted outcome would be a significant uptick in the cost of money i o w Interest Rates.

To Date November 2021 we have not seen this with 30 year mortgage rates at: 2.9%

And 15 year notes at: 2.25%

From a cost of money standpoint the time to buy a home or upgrade is ……… now!

Of course there are more things to consider than the cost of money and in fact, the primary consideration is “How much home should I buy”? 

Let me rephrase that into a better question: “How much home can I buy while still making a real monthly investment into my financial future?”

Whew ! That is a loaded question,... loaded with assumptions. Did you catch all the assumptions in that question?  Here they are:

#1 - The question assumes you have saved up a minimum of $2000 cash,.. ready to cover any emergency that may suddenly pop up!

#2 - The question also assumes that in addition to the $2k emergency fund you have tucked away 6 months worth of living expenses just in case there is an unanticipated change in your earning ability.

#3- The question assumes you have paid off all existing debt and are now prepared to take on a mortgage.

#4 - The question assumes you are on track with a solid monthly Spending Plan that contributes 15% of your monthly income toward a retirement account.

And finally the question assumes you are “ready to buy” meaning you have saved a few thousand dollars for a downpayment. We recommend 20% down payments to avoid spending anything on PMI,... our next calculation will not only reveal what price range of home you can afford but by doing so it reveals how much money you will need for a downpayment. 

Hey ...there you have it 2 birds one stone!

To calculate the correct price range to shop in,.. you must have a firm grip on the Cash Flow of your household.”  for details on how to form a Cash Flow Map and Cash Flow Plan review episodes 3 and 4 of this podcast,.. It is the best investment of 16 minutes you will ever make.

One of the magical outcomes of a bonafide cash flow plan is: you will know, to the penny, how much money you have on a month-to-month basis for “investment contribution” and investment contribution is everything when it comes to your financial future.

It's pretty obvious,.. The more $ you can invest monthly,... the brighter your financial future will be.

The takeaway here is: It is important to guard your monthly contribution to investment while purchasing a home

guiding principle,.. Keeping the home mortgage payment inside our recommended range of 25% to 35% of your net monthly income, serves to provide you a home and set you up to maximize contributions to investment every month.

I know this all seems like ,.. Kinda obvious,.. And it is,.. But ask any homeowner you know,... “When you were buying your home how did you determine what price range you would shop in?” 

I would lay money you will never hear: “We bought in the price range that would allow us to maximize our monthly contribution to investments, really setting us up well for our financial future” 

And if you did hear that , you probably wouldn’t want to be friends with that person. There are so many things to consider in buying a home, all we are suggesting is that this be on your “Criteria List” and that you measure this before signing on the dotted line. 

Signing will be so much easier if you know exactly what impact this decision has on your future,...,.. 

In keeping with our pledge to bring to our listeners:

“Practical Tools You Can Use” visit our webpage at PFS.com, click on the “resources” button and there you will find a simple , easy to use calculator to determine the price range of the home you should be shopping for based on your net monthly income.

And if you are interested in how to formulate your own CFM and CFP ,.. Attend one of our Financial Wellness Webinars,.. They are live webinars and free of charge,.. Just click on the “Join the Webinar” button on the web page and choose a date and time that works for you.

Hey … thanks for listening and until next time,... kkeeeepp Strategizing!

______________________________________________________________________________

Mack,.. Invests $250 dollars a month in front line investments. ETFs IFs etc. yield ,... let's say 7%, probably more but we scale it back to account for inflation,.. We are doing rough numbers 

 

In 25 years Mack has a pile of money in the neighborhood of @ $197,000

Vs.

Michelle,.. Invests $1000 per month in front line investments ,. yielding the same 7%,.. In 25 years Michelle has a pile of money in the neighborhood of @ $788,000 roughly Half a million dollars more!