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How do I save up for a first home?
Also: Million-dollar giveaway; cut-rate mortgages;
stock market predictions
By John W. Schoen, Senior Producer,
MSNBC
Feb 25, 2007
"I am a 23 year
old living in Massachusetts. I am currently fully
employed and living with my girlfriend
who is also fully employed, although combined we
make about $61,000 pre-tax. Both of us want to begin
saving
money so we can buy a home in the next 5 years, but
we find it very difficult to do so while living in
such a high-rent area. We both have a 401k and find
that this
is the most that we are able to put away. What are
your tips on saving while living in an area with
a high
cost
of living."
—
Joshua, Boston, MA
You’ve probably already heard the usual advice
for savers: cut back on dinners out, rent movies instead
of going to the local Cineplex, cancel those premium
cable packages. Changing your spending habits, obviously,
is an important and necessary first step. Everyone's
budget is different, but to become a saver, you're going
to have to get creative. (The other way to save more
is to go make more money, but we’ll assume you’ve
exhausted that track for the time being.)
The problem with the general advice about cutting back
spending — or even getting anther job — is
that you still have to agonize over each spending decision
and carefully monitor your savings account to know whether
you’re making progress. Most people don’t
have this kind of patience or discipline. To get around
that problem, our favorite approach is the Pay Yourself
First system. If you haven’t come across it, it
goes something like this:
Figure out now much you want to save — which,
in your case means looking at some houses, asking about
a mortgage and coming up with a down payment number.
Then figure out how fast you want to save it. (The plan
works for any other savings goal.)
Let’s say you want to save $20,000 over 5 years.
To get there, at 5 percent interest on savings, you’ll
need to put aside $67.65 a week, or $293.94 a month.
(Weekly gets you there a little faster because compounding
works harder.) To change the target amount, use one of
the calculators out there. We like bankrate.com)
The important thing is to treat that saving deposit
like another involuntary paycheck deduction (like taxes).
To set this up, go to a bank or mutual fund company,
open an account and have them automatically deduct your
savings from your paycheck (If they want to charge a
fee for this, find another financial institution.)
The result is that you just gave yourself a pay cut;
in your tax bracket, that’s probably about 8 percent
of after-tax income. That means you’ll have to
figure out how to make it through the month with 8 percent
less money. No doubt this will entail some sacrifice;
we have yet to come across a savings plan that ’s “painless.”
The strength of this system is its simplicity. You never “see” the
money you’re saving. But you know you’re
going to reach your savings goal — as long as you
don’t dip into that savings account or run up your
credit card. Yes, this is going to hurt, especially at
first. But there’s really no way around that. The
confidence that you’re going to reach your goal
should help keep you on track — and may help dull
the pain.
If your savings goal is long-term (say, more than three
years) you may want to consider moving some your accumulated
cash into riskier investments like stocks to increase
your return. A longer time horizon helps smooth out the
market’s ups and downs, but you still risk losing
some of your hard-earned savings. So a lot depends on
how critical your goal is. The consequences of falling
short in your quest for a big screen TV are a lot less
than losing the down payment on a house for a growing
family.
One other thing to consider: if you’re already
saving in a 401k plan, you may be able to borrow against
it for the down payment on a first home without paying
any penalties. (To find out, check with your HR department
or plan administrator.) But then tapping into your 401k
savings before you retire sort of defeats the purpose
of saving for retirement.
The problem you’re going to have (as we see it)
is that in the “high-rent” housing market
you’re living in, you’re going to have to
stretch to find something affordable no matter how much
you save. For someone in your shoes, this probably means
finding a run-down “starter” home that you
then fix up over time. (Shop carefully. There are “starter” homes
and then there are “money pits” — so
insist on a thorough inspection before you buy.) Or you
may end up moving to a cheaper or more distant neighborhood
to get started and then trading up as your income rises.
That’s one reason average commute times are up — many
housing markets have priced people out of housing near
their jobs.
There are general guidelines for how much house you
can afford, but they are only a starting point. In the
end, the real issue is how much mortgage you can comfortably
carry. There’s no easy way to do the math: a lot
depends on your monthly costs, how much additional debt
you have, etc. Bankrate has a pretty good calculator
for that too.
"If I would like to give New Yorkers a Christmas present
and drop a million dollars from a helicopter over
Manhattan, would this be a crime?"
— Nick S., New York
The only legal wrinkle we could see would be the gift
tax. The IRS says you can only give away $12,000 a
year to any individual without paying taxes. So if
someone got lucky and scooped up more than that, in
theory, you’d have to file a return and pay the
gift tax.
It’s conceivable that if your generosity tied
up traffic or sparked public pandemonium, the NYPD
might decide to cite you for creating a public disturbance.
But our hunch is that – unlike the Cartoon Network’s
recent Boston bomb scare – public sentiment would
be on your side.
So as long as you obtain the money legally, and your
helicopter pilot follows all FAA regulations, we say:
go for it.
And when you decide when and where to make the drop,
please let us know in advance.
"I'm always seeing ads and hearing commercials for
mortgage loans that say you can get a super low rate
or a $300,000 loan for $700 a month. Are these places
legit? What is the difference in these places and your
local bank? Should I consider calling one of these
places?"
—
Janet, Auburn, Ala.
The monthly payment on a $300,000, 30-year fixed mortgage
at 5.75 percent comes to $1750.72. There’s really
no alternate way to do the math. A so-called “interest
only” loan - (you still owe the principal at
the end of the life of the loan) would be several hundred
dollars less, depending on the term.
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