The 1-2-3 Money Plan Part 23

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Let's split this task into two parts. The first half, "buy a home" is a recommendation to buy a house instead of renting.

The value of a home comes partly from its price appreciation. Generally, house prices increase over the long term. The house-price bubble that started bursting in 2006 was an exception.

Homeowners also get another kind of value, however. They don't have to pay rent. Instead, they pay on a mortgage, which ends up being a form of forced savings. When renters pay rent, they never see that money again. Meanwhile, homeowners are building equity in the property, a.s.suming they don't have one of those exotic "negative amortization" loans that were all the rage just before the housing bubble.

And if homeowners itemize their tax deductions, they can claim their mortgage interest, which is yet another financial benefit.

A home mortgage also provides leverage. You put down a small fraction of the home's worth in the form of a down payment. But when you sell the home, you get to keep the gain on the entire home's value-not just the down payment portion. For example, imagine you bought a home for $300,000 with a 20 percent down payment of $60,000. If you sell the house for $500,000, you get to keep all the $200,000 gain, not just 20 percent of it.

And you lock in your housing costs. Rents might rise every year, but a.s.suming you got a 30-year fixed-rate mortgage, your payment will be the same for decades.

Consider this startling statistic: The average homeowner has a net worth of nearly $200,000, while the average renter has a net worth of less than $5,000, according to the Federal Reserve Survey of Consumer Finances. And it's not because homeowners have 40 times the income of renters; they only have about twice as much.

The second half of this "buy a home" task is the qualifier "that you can afford." This is where so many people messed up during the housing crisis. Because of weirdo mortgages that artificially lowered the monthly payment, many people bought homes they could not afford in the long run.

One rule of affordability comes from the Federal Housing Administration. It contends that your monthly payment for mortgage princ.i.p.al and interest, plus real estate taxes, plus homeowner's insurance should not exceed 29 percent of your gross income. So, if your household income is $8,000 a month, you could afford a total monthly payment of $2,320.

That's fairly liberal. I might even cla.s.sify that as a "stretch" payment, meaning you'll probably feel pinched until your income rises over the years. Remember, the princ.i.p.al-and-interest part of your house payment stays the same with a fixed-rate mortgage. So, when your income rises, the payment becomes easier to make.

If you were going to stretch to afford a house payment or a car payment, the house is the one to choose.

You can play with mortgage-affordability calculators on the Internet at such Web sites as Bankrate.com and d.i.n.kytown.com to hone in on a comfortable payment for you.

3. Care about Spending.

And this is what it's all about. Remember that spending and saving aren't really different. Saving is just an intellectual decision to spend later, rather than now. If most people put as much time and effort into managing their money lives as managing their weekly TV watching, they would be far better off.

And daily spending matters. From supermarket shopping to your phone bills to insurance. You'll be far wealthier if you can develop the spending smart philosophy: Spend on purpose, rather than by accident and habit. And plug the leaks of wasteful spending, so you can funnel more money to things you truly care about.

Earning is important, but you can't outearn dumb spending.

So, care about all your spending, whether you're spending today, yesterday, or tomorrow. It's as easy as 1-2-3.

For more information about saving and spending smart, see my blog at SpendingSmart.net and my Web site at www.GregKarp.com. Feel free to e-mail me at [email protected]


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The 1-2-3 Money Plan Part 23 summary

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