Saving for a House... or a Condo?
I've always wanted to save up enough money to buy a house outright, without dealing with paying double for the house because of mortgage rates. I don't like the idea of buying anything piece by piece and paying more for it.
How hard would it be to save up for a condo on my own? Well, pretty hard given the cost of living in the Bay Area, but is it entirely impossible?
I probably should get my rent down quite a bit if this is my goal, for wasting $1050 a month on rent that could be put towards monthly house payments seems to be just as ridiculous as paying interest on a mortgage.
This is the first time in my life (as soon as my raise kicks in) that I feel like I'm making more money than I need. I've always spent too much as it is, but yesterday when I was re-doing my budget I found that I had the luxury of liberally deciding where to place my hundreds of dollars of savings per month.
I feel guilty for making so much, but when it comes down to it $60k after freelancing and working 40 hours a week is not *that huge* of a paycheck. It's certainly more than I ever expected to make, and yet I know people my age making much more. What do they do with all that money? I guess the only thing to do... other than living frivolously... is saving for a house and retirement.
Of course, I'm making $62,400 a year between my 40-hour-a-week gig and my stable 10 hours a month marketing writing job, plus any extra freelance pay I take in over the year... but all that's without any benefits. Last gig I was making $50k plus the $400 a month for the freelance gig, but I had great health benefits at no cost to me. So in the end I think now I'm making just a little more. Plus, I've chosen a crappier health insurance so I'm not spending as much on that as I would had I chosen to stay on COBRA.
In any case, if I keep doing a good job at my current gig, and gee I hope I will, I'll only be looking at raises down the road. Who knows how much... and I'm not sure the marketing writing gig will last forever... but it seems fairly stable (I work for my uncle and write for four different newsletters he designs and sends out each month for his marketing company and the only reason I'd stop writing them is if he loses a client).
I feel overwhelmed with the money I'm making. It's not that much, yet it's way more than I know what to do with. Except I certainly could spend it all at the mall in one day, given a slip into depression and a pick-me-up shopping spree.
Instead, I really want to focus on saving. It's tough seeing my Roth IRA, stocks and mutual funds slipping, but it's nice to have some extra cash to play with. The major question is, where do I put the money? I know they say to max out your Roth first, but that seems kind of silly if you want to go to grad school or buy a house. This year, for instance, I've put $4000 in my Roth, so I have $1000 left to contribute. Next year, though, I'll have less savings up front to dump in my Roth. I've put $7000 in there total for the last two years, I think. It's down to $6800 or something right now.
Meanwhile my CDs, even those with crappy interest rates, are obviously up a few hundred dollars after being locked away for a year.
To buy a house, and to make money off my money, it seems the Roth might be the wrong place to put my money. Of course I want my savings to multiply towards my retirement, and it's nice to think of what the money would do over the years if I max out my account every year... and I don't have a 401k at work or anything, so it's up to me to save my money for retirement.
It's funny, because my boyfriend isn't thinking about any of that yet. Every time I try to tell him to start saving his money in a Roth he gets all defensive and doesn't want to talk about money matters. He thinks I'm being preachy. Meanwhile, I'm just trying to educate. Oh well, he usually isn't so stubborn about things, but when it comes to money he wants to figure it out on his own. Fair enough. I just consider him the man I will one day marry, and if I'm going to have money in retirement and he won't, that will make for one lousy retirement.
Of course, I might die well before retirement (hopefully not) or he might (no!) or maybe we won't get married at all. Life has too many uncertainties to put all my eggs into one tax-free basket. Right?
But still, the question remains... how do I save $500k for a house so I can pay off the house (or at least most of the house) up front?
I really wish I could save $500k and my boyfriend could save $500k and then we'd both buy a $1 million house. How long would it take to save $500k?
If I save $2000 a month, that's $24,000 a year.
So it will take some time. It will take 21 years.
So I could buy a house in 2029 when I'm 45. That seems in poor rational.
But... what if somehow I get a raise and I start saving $3000 a month somehow? That's only 13 years. So I could buy a house in 2021 when I'm 36.
The sad part is that house prices will likely go up by then. Now, and in the next few years during this recession, is the best time to buy. The money I'll end up paying on inflation and such might end up matching what I'd pay on a mortgage.
I don't understand how I could save for a house.
4 comments:
In the Bay Area, it probably is pretty impossible. However, if you moved to the midwest, you could get a 2 bedroom condo for around $200k.
If you saved $3,000/month for 8 years earning 4% interest in a taxable account (25% federal, 4% state); you would have $329,316.41. Including an inflation adjustment (3%), you would have $258.098.77.
your logic (I think) doesn't quite work. A mortgate will make you richer in the end than saving up to buy a house outright, because the rate is most certainly less than you could be making in the market. And all that time, you'll be renting renting renting! But, if it is important to you, do what works for you.
Don't fee guilty about 62.4k. You earn it. And in SF people whine about not being able to "make it" on 100k!
Max out your Roth--you can always withdraw it for a house (including the interest) if you need (though I don't recommend). Even contributing the max, you should have quite a bit to put into CDs, etc for a house if you aren't contributing to a 401k.
Set some high savings goals and put the money where you won't touch it, until your cash flow stops feeling like "more than you know what to do with"
Are you also taking into account how much you'll be paying in rent during the 13 or 21 years that you'll be saving? I think that all of the rent money you paid might be more motivation to get a mortgage sooner rather than saving.
Don't feel bad about the money thing at all. I'm younger than you and I expect to be making around that in about a year - I make $55,500 now. Plus, living near San Francisco, everything costs more, so you should be making a lot!
Its not smart financially to buy a home outright, especially if you have to struggle for years and use all your savings to do so.
First, as you wait for years (maybe even decades) until you can afford to save $500K, you'll probably just farther behind really since home prices will be going up as well (and so might interest rates). Second, there are great tax incentives and plenty of government programs that encourage home ownership. You get to deduct all interest you pay, plus property taxes, plus closing costs and origination fees, plus private mortgage insurance. Third, the whole reason owning real estate is a good investment is because you can buy it using leverage. You only pay $10,000, but you own a $100,000 asset. The asset goes up 5% in one year to $105,000, and that means your return on investment is 50%!!
A smarter plan would be to save at least a 10% downpayment and boost your credit so you can get a very low rate mortgage. As long as you can afford the monthly payments you will be fine.
It's OK to end up paying more than the house is worth at initial purchase. By the time you pay off the mortgage you will almost certainly NOT have paid more than it's worth when you pay it off.
I bought my condo one year ago. I put 20% down, and my mortgage payment (incl tax/ins/HOA) is just about what I would otherwise be paying in rent. But my $170,000 condo increases in value by about $550 a month. Plus I pay down the mortgage by about $130 a month. Which means just by paying what I'd otherwise be paying in rent, my net worth goes up $680 a month before I even save a dime!
PS - You can always take your contributions out of a Roth IRA penalty and tax free, and you can take out the interest/gains penalty free in order to buy a house or to pay tuition costs.
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