Amy was sure of one thing - her dad would always have plenty of financial advice for her. Now that she’d reached her mid-20s, the steady stream of fatherly “money guidance” reached a new high. Amy knew his heart was in the right place, and she appreciated his concern for her financial future. But all of his favorite stories were straight out of the 1980’s and 90’s, and Amy usually just rolled her eyes at how simple, quaint, and inexpensive everything must have been back then.
Career paths got the biggest eye rolls of all. Back in the day, Amy’s dad had found an entry level job with an automotive parts manufacturer in his mid-20s, worked his way up through the ranks, managed to avoid the occasional rounds of layoffs due to his seniority, and was now a mid-level executive. “You can’t afford to be picky,” he’d say. “Just find a steady employer, stick with ‘em, do your best, and in the end they’ll reward you for your loyalty!” Ummm… sure, Dad.
Amy had developed a completely different philosophy, which was: in today’s job market, what matters most are the specific, marketable skills you manage to build, not so much who you work for. After high school, she’d worked in various medical lab and nursing assistant jobs and found she really enjoyed the work environment in the healthcare field. What her dad saw as “jumping around” among hospitals, clinics and nursing homes, Amy knew was her path to accumulating experience, as well as to find jobs that would accommodate her class schedule. She’d been pursuing an associates degree in radiation therapy, and was less than a year away from receiving it. She’d met a couple of radiation therapists at one of her first hospital jobs, and her discussions with them made her feel like she could become a successful one, too. Research told her that qualified radiation therapists made great money, and were in demand just about everywhere.
But there was one thing her dad kept saying that wasn’t so easy to dismiss: “Paying rent is like throwing your money away!” The evidence was hard to ignore. Her dad’s house was now completely paid off. (Which he reminded her of. Frequently.) His monthly payments were just for homeowners insurance, property tax and an occasional repair - that was it. More to the point, the house was now worth a staggering four times what it originally cost him to buy it. “5% a year for 30 years, that’s compound interest for ya!” Not only that, he’d saved on taxes all along - and would save even more when he eventually sold. “I get to keep a quarter million of the gain free and clear from any taxes, that’s the capital gains exclusion for ya!” Despite the cringe-worthy delivery of his advice, deep down Amy knew he was onto something fundamentally much better than her current lease-after-lease strategy.
A few of Amy’s friends had been mentioning a house buying financial readiness calculator that they’d found on the I Am Net Worthy website. Her current lease was due to expire in a few months, she didn’t know anything about buying a house, but thought that running her current situation through the calculator couldn’t hurt.
The calculator was simple enough; most of the inputs were things she knew well enough just off the top of her head. She’d had a few misadventures with credit cards early on, and even though she’d finally paid off all the balances, her credit score was still well below average at 585. Her annual gross income as a medical assistant was $28,000, which broke down to a monthly take-home pay of $1,600. She managed her monthly expenses pretty carefully, never exceeding $1,200. That allowed her to sock away at least $400 every month, which eventually resulted in a very nice savings account balance of $10,000. She grudgingly admitted that this probably never would have happened without her dad’s constant harping on the virtues of saving.
The calculator provided her a quick lesson on emergency funds. It turned out that her Net Worthy risk adjusted e-fund recommendation was 6 months expenses. That meant that her ideal balance should be $7,200 (6 months times $1,200 average monthly expenses). But it went on to explain that when saving up for a house, it was a normal strategy to draw the e-fund down to only one month, and divert the balance to the house saving fund. (Of course, after buying the house, the next priority is replenishing the e-fund back to its previous level.) Translation: she now thought of her $10,000 savings account as broken into two pieces: $1,200 bare minimum e-fund, and an $8,800 head start on her house fund. Not bad!
Last, she did a little research on house prices in the area - which resulted in a pretty good case of sticker shock. She finally managed to define “minimum acceptable” housing for herself all the way down to $200,000 - which meant, a tiny one-bedroom condo, in a well-worn, modest part of town. Even though it seemed like a step down from her snug but cheerful apartment, she kept forging ahead with the calculator, wanting to find out once and for all if she could finally stop “throwing her money away” on rent.
Confident that everything was in order, Amy took a look over at the output panel… and her heart fell. She’d set her sights on just about the lowest price housing in town, and she wasn’t even close to being able to afford it. True, her e-fund was up to snuff, but she fell short in every other category. Ouch! The inconvenient truth was: she had a long way to go before being financially ready to buy a house - any house.
The next time her dad went onto his usual rant about rent, she had an answer for him - she got out her phone and dejectedly showed him the calculator.
“Well no wonder! This calculator’s crazy,” roared Amy’s dad, after he’d studied it. “The market’s a lot more wide open than this nowadays. Let’s go down to Easy Eddie’s Mortgage Bank right now, and find out the real story. We’ll get you into a house yet.”
True to form, Easy Eddie’s first words to her were: “We’ll get you right into a house, little lady!” And sure enough, as Amy went through the numbers, Eddie was singing a very different tune than the Net Worthy calculator. First, he surprised her by saying, “585 credit score? Sure, we can make that work.” When she said she had nowhere near 20% down payment saved up, let alone closing costs and move in expenses, he quickly countered with, “20%? You gotta be kidding me! How does 3% sound, little lady?” But finally, even Eddie was stumped about what to do about Amy’s income level compared to the monthly payment. He called it the “debt to income ratio,” but he stressed that she wasn’t that far away - and advised her come right back in as soon as she could raise her income just a little bit.
Three years have gone by since Amy’s first encounter with the house buying financial readiness calculator, and a lot has changed. The biggest news first: Amy succeeded in completing her educational program, and is now working as a radiation therapist at a leading local hospital. She finds her workday - and her paycheck - substantially more rewarding. Her annual gross income is now $58,000, and she is hopeful that with more years of experience it can grow even more.
While her income has gone up, her expenses have gone - down! Amy thought she was being financially responsible before, and she was - but those red scores on the calculator three years ago motivated her in a big way. When the lease on her apartment ended, instead of renewing it with the inevitable bump in rent, she went in together with two friends and shared a bigger apartment. She didn’t even mind when her dad said, “A little less privacy, a lot less rent, that’s saving money for ya!” It was true though. Her monthly expenses were now down to $1,000, while her monthly take home has grown to $3,200. That’s allowed her to really save, and her house fund is now a healthy $50,000.
Her credit score has taken a jump, too. Her higher income has allowed her to qualify for a couple of new credit cards, and increase the credit limits on her existing ones. That’s sharply lowered her utilization, which in turn has boosted her FICO score up to 650.
The experience three years ago with the calculator was a wake up call for Amy. It caused her to decide that she definitely wanted to be a homeowner, and now that she fully understood exactly what was standing in her way, she was willing to work hard for it. Her reasoning was - if paying rent is throwing money away, I don’t want to drag the process out any longer than I have to, let’s do this!
The more she learned, she saw Easy Eddie in a new light, too. Yes, going that route would get her into a house faster, no doubt about it. And everything that Eddie was offering was perfectly legal. The problem, she learned after doing more research, is that those “easy” mortgages were more expensive in the long run, and riskier too. So she resolved that as long as she was going to go all out to make this happen, she was going to make a point of doing it the safest, and least expensive way possible - even if that meant waiting a little longer.
Now, she was ready to see where she stood, after three years of sustained focus and energy. The moment of truth! Satisfied that everything was in order, she sneaked a peek over at the output panel and - wow - no more red!
What an improvement! Oh, it was going to be close, and she might have to grind out another few months of savings, but the calculator made it plain - if Amy wanted to buy that one bedroom condo, she was very darn close being financially ready to do it. Here’s another thing that Amy learned: if her readiness was good enough for the calculator, it was way beyond good enough for Eddie!
There was just one problem. She was no longer sure if that one bedroom condo was what she wanted to buy. Or, if she was even looking in the right state.
There’s more to buying a house than being financially ready. Everything, across all the important parts of your life, need to line up in support of the decision to buy. Nugget 6.2, in particular, caused Amy to pause and reflect:
The more Amy considered buying a one-bedroom condo, the more she felt that would be too confining. She wasn’t necessarily ready for marriage and/or kids, but - something was telling her that her household size was unlikely to remain stuck at “1” for the entire next five years. She wanted the flexibility to be open to that, not boxed in by a mortgage.
And speaking of boxed in, Amy was feeling increasingly disenchanted with life in her high cost of living hometown. She came to realize that the only reason she still lived there was by default - it was a classic “love/hate relationship” with it. She’d always lived there, it was comfortable in its familiarity, so she never really wholeheartedly considered any other possibilities. But now that she had the kind of credentials and work experience that would allow her to earn a great income virtually anywhere, she was paying more and more attention to Nugget 6.5:
So Amy spent the next year exploring options. She took a series of weekend trips to a few different areas, which appealed to her from a lifestyle standpoint, but which also featured much lower cost of living than her highly urbanized hometown. After a few near misses, she hit the jackpot - a cute little university town, tucked away in a gorgeous setting, with a good sized health care community closely aligned with the university’s medical school. It was perfect! Lots of job opportunities, and dramatically more and better housing options than she was used to at home. Best of all, it wasn’t all that far away. It was reassuring to know that if she missed her dad’s fatherly financial lectures, he was only a few hours’ drive away. Besides, those lectures were going to be sounding very different if he was going to be delivering them to a brand new homeowner!
So with a year’s more saving, and credit score improvement, Amy was ready to make the move. She found a fantastic job in radiation therapy that paid even a little more than her previous job. She found that for just a slightly higher target price, she could afford a much wider range of choices than before. Eventually, she found the perfect choice - a two bedroom house in quiet neighborhood a few miles away from campus, for $240,000. Her plan was, with parents and alumni frequently visiting town for various university events, she could airbnb her second bedroom, and add some supplemental income to her financial picture. That way, if and when she decided that she was ready to expand her household - she’d already have the space to do so.
By this time, she was well familiar with the calculator. It only took her a few minutes to run the numbers, and she smiled as she saw her dream of homeowner heaven confirmed:
Amy smiled as she realized: so much had happened in her financial life over the past five years. At times, it had seemed like home ownership was a million miles away. The years of saving, the three roommates crammed into the small apartment, her dad’s well meaning advice, and all the rest. But on the other hand, she saw how that sacrifice was truly, profoundly paying off. She’d never pay rent again. From this point on, her little two-bedroom house was entirely likely to appreciate in value, year after year, for as long as she owned it. Not many single people can afford home ownership, but Amy has found a way, and she’s found it relatively early in her financial life. The calculator kept her focused on the goal, and it also kept her from taking the Easy Eddie route, which she very well might have ended up regretting. This way, she’ll forever avoid the annual end-of-lease panic and scramble, she’s on safe and solid financial ground, and she’s well on her way to a bright financial future.
Buying a house is a very big decision; don’t do it unless you can commit to staying in that house for at least 5 years
The geographic aspect of buying (which region of the country, which state and city) is more critical than ever—make it a deliberate, conscious choice.
If you decide to buy, there are five significant financial readiness tests you’ll need to pass.
Set a target price to yield just enough house to meet your needs for the foreseeable future, but no more than that.
The most important financial criterion in selecting a house is resale value.