Do you want to buy a house or live in your car? One of the biggest dilemmas facing young first time home buyers is having an excessive car payment. A big car payment can sky rocket your debt to income ratio thus making it impossible to qualify for a home. Your debt to income ratio is your monthly fixed debt payments divided by your gross monthly income. If this ratio exceeds 45% you may have a problem qualifying for a mortgage. My advice to you if you are a first time homebuyer or are in the market to buy a new home is to buy a car that is reliable and gets you to and from where you need to go.
I know that it is tempting to keep up with the Joneses, but that game won't get you into a property. Beyond just buying a home, there is an opportunity cost to your future for taking on a huge debt burden with making car payments. A big car payment can make your savings account non existent. Having money in the bank will also give you peace of mind. I would rather worry about where I’m going to go on vacation rather than trying to figure out how I'm going to make the next Expedition payment. The sooner you start saving the sooner you can retire. I don’t know about you, but I would rather be at the beach in retirement than trying to make it in the rat race.
You may ask yourself, 'so if I do decide to give up my $700 a month Cadillac Escalade on my $3000 a month income and buy a home, what will that do for me?' First of all, if you give your Escalade to buy a home your net worth goes up. Why? Over time your Escalade will continue to go down in value. Eventually it will go to zero. The home you buy, historically, will only go up in value. Statistics have shown long term that home owners are 34 times wealthier than renters. The average renter has a net worth of $5000, while the average home owner has a net worth of over $170,000.
Would you rather look good driving to work and worry about your retirement, or worry about what your friends will say when you are still driving your seven year old Hyundai while you have peace of mind about your retirement with an average net worth of $170,000. I know what I would pick.
If you really do want to buy a home and you need to save up some money for the down payment, give yourself a raise. How do I do that? The easiest way, without getting a 2nd or 3rd job is to do an evaluation of what you spend money on. I would recommend keeping a daily journal of everything that you spend money on. You might be surprised.
Yes those runs to Starbucks do add up. I had a client do this exercise and they discover that they were spending close to $300 a month just on coffee. That is nearly $3600 a year. You could practically buy your own store for that much. Have an insurance quote evaluation done on all of your health, auto and property insurances. I use the resources at GetPreQualified to check around quickly for the best rates. Are you still on AOL? You can cut that bill in half by switching to NetZero. The internet still looks the same. I think that you get the idea.
If you do the exercise for a week, I think that you would find out something about yourself. I know that when I did it, I discovered that my wants had a major control of my wallet. When I woke up to this unconsciousness, I saw how automatic and programmed a lot of my spending was. There is nothing wrong with just living by your needs. You may even find that it is an easier way of life. Not worrying about money is a blessing and owning your own home is even better. For more information on how to buy a home visit: Steps to Buying a Home.
Article by Dave Mason
