Buying a Home

I bought a home two years ago, and it was a great experience. I learned a lot, both about the home buying process, and about what levels of frustration and confusion it can cause. Through the process, and watching a number of my close friends buy homes, here's a couple of ideas for what to think about when buying a home.

1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.

2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.

3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.

4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.

Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.

Automatic Withdrawal Budgeting

Idle hands may be the devil's plaything, but idle funds are what gets us into trouble. Unappropriated money is what leads to splurges, debt, and purchases which are later regretted. I have generally found that creating a budget which allowed for the least amount of idle funds is the best way to ensure that your money is going to where it belongs. But how can you properly appropriate funds. Automatic Withdrawals and payroll deductions.

There are some general payroll deductions which many employers offer which are smart for almost everyone. These include health insurance, 401(k), and a flexible spending account for medical expenses. All of these are deducted from your adjusted gross income, and should be utilized to some extent by everyone.

Then there are some personal initiatives you should take in order to secure yourself financially. Automatically paying off 100% of your credit cards, utility bills, mortgage, and insurance each month. Don't put yourself in a position where you need to think about it. Not only do most banks have online bill pay, but some provide incentives for signing up for it. http://online.wsj.com/article/SB110246841042693926.html Think about it. All of your bills get paid, you don't need to think about it, and you get an incentive.

Lastly, you can create ongoing disbursements for your personal priorities. Automatic withdrawals for your IRA http://helpcenter.ingdirect.com/ingd/Topic.aspx?category=DIST1, 529 Account http://www.529.com/content/how_aippayroll.html, Debt Payments http://www.moneyunder30.com/debt-payments, or just moving 10% of your take home salary to a high interest savings account on a monthly basis. http://www.gobankingrates.com/savings-account/easy-ways-to-build-your-savings-account-automatically/ This will keep your checking account pretty lean, and you will not be tempted by higher balances to purchase things you don't need.

We all have far too many things to think about, and setting up automatic withdrawal budgeting priorities from your checking account takes away the burden of remembering what needs to be done. It allows you to prioritize with a clear head and ensure that your money goes where it needs to be, and not where you may want it merely in the short term. Moving idle funds to your established personal priorities by setting up automatic payments and withdrawals will help you build the financial foundation you want without the revolving burden of keeping your priorities at the top of your to do list.

401(k) Matching

How much do you put away for retirement? The answer, invariably, is not enough. Money put into your   401(k) or other pre-tax retirement program is exempt from Federal income taxes, so it benefits you later by having money saved, and benefits you now in terms of lowering your tax burden. It goes without saying that you should, at the very least, contribute as much as your employer will match. For instance, my employer matches dollar for dollar up to the first 3% of salary, and then 50 cents on the dollar up to 5%. Translation: 5% of my salary is contributed, and 9% of my salary goes to my 401(k) equivalent each month.

But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.

If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.

Individual Retirement Account

The first piece of advice I'd offer is to start an individual retirement account. There are two options in this arena. A traditional IRA has current contribution limits of 5000 dollars per year. If you contribute to one of these (which you can start at virtually any brokerage firm (mine is at Vanguard)), you can deduct the amount you contribute (up to 5000) from your tax liability. Also, you don't get taxed on the earnings until you take the money out of your account (like when you are in your fifties or sixties or later). The alternative, a Roth IRA, has the same contribution limits, but you can't deduct the money from your tax liability. However, when you remove the money later in life, all the money is tax-free. Basically, on a Roth, you pay the taxes now, and on a traditional IRA, you pay later. You don't pay taxes on the earnings on either. You can't contribute to a Roth if you make more than UPDATED 107,000 per year. For more details, on things like if you are married filing jointly, check out: http://www.rothira.com/tools/income-limits.php

Now, you may be thinking, why, as a 16 year old, should I think about retirement? First, you should think about lowering your taxes. Second, you can take the first 10,000 of earnings out of your IRA without paying a penalty if the money is for a down payment on your first home. 10,000 in tax free earnings towards the biggest purchase of your life. The third reason is that the longer you save for your retirement, the less you need to save per year. Remember, in retirement, you will be paying less in taxes because you will likely need less money, because large expenses in life like education and a mortgage will be paid off. So, your taxes will be lower. All in all, starting an IRA as early as possible sets you up when you want to buy a home, and when you want to retire.

http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index.htm

http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx