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Buying A Home: When Is The Right Time?

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Humanity has come a long way since the time we lived in caves.

Back then, we simply had to find a cave that didn't have a bear inside of it, and we owned a home.

Now, it's a bit different.

There's a whole process and lots of different people involved in the home purchase event. There are also a lot of questions that will need to be answered, such as what are my homeowner's insurance costs going to be, how much do solar panels cost or where should I go to get my loan.

In this article, we will discuss what it takes to purchase a home.

Buying a Home: When Is The Right Time?

Buying A Home

How do you know when it's the right time to settle down and purchase a home? Is it when your bank account has the zeroes needed to put a hefty down payment, or when your kids have begun to drive you crazy inside of your two-bedroom apartment?

This answer varies depending on the individual or family's situation, but there are some guidelines to follow before even thinking about purchasing a home. Below is a list of these guidelines, and what they entail:

  • Credit: In order to get a good mortgage (unless you're buying in cash) you must have good credit. There is no way to even be considered for a home loan without having good credit. Lenders want to know that they will be repaid, and a history of late payments, collections, and other events that appear negative, can have a huge impact on your loan and you may even get denied for a home loan. A rule of thumb is to have a credit score above 700 which is considered “good” credit. Anything above 750 will put you in a very good spot in the lender's eyes.
  • Job Security: Another thing that mortgage companies want to make sure is stability in your job. They don't want to know that you've had six jobs in the last six months. This shows irresponsibility, and a lack of commitment. If you're going to keep paying a mortgage for fifteen to thirty years, they want to know you're a stable person and can keep a job for more than two years.
  • Down Payment: Before applying for a mortgage, you need to make sure that you can put down at least 25% of the price of the home. This will ensure you get a better rate, and that your monthly payment is as low as it can be. The less you put down, the higher your monthly mortgage payment will be, and the higher your interest rate will be.
  • Savings: Remember we were talking about job security. If you've had a few jobs in the past two or three years, you can give some security to the lender by letting them know that you have a large savings account. If you don't, you may have to wait a few more years to accumulate it.
  • Proper Knowledge: Buying a home is much more than just “buying a home.” It may be a month's income for the realtor, it may meet a mortgage broker's quota for the year, and it can be a great investment as well. For these reasons, you need to have the proper knowledge about escrow companies, title companies, realtors, contracts, negotiation, and the fine print of your mortgage contract. The aforementioned professionals can all help you with this, but it is always smart to triangulate with other professionals to make the best decision possible.
  • Market Trends: In the previous passage we mentioned how a home can be an investment for some. Market trends can cause this investment to increase and create a good return if you were ever to sell, or it can put people underwater just like it did in 2008. You must project your home's value into the future because you do not want to be stuck with a mortgage that is more than what the home is going to be worth in five to ten years.

There are many important items to think about before purchasing a home. These include knowing as much as possible about the home buying process to prevent problems, projecting future values and trends inside of your market, having a stable income, and good to great credit.

When everything is in place, you can begin to build the home of your dreams.

Financial Planning Is Planning For A Happy Future

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There are some areas of life one simply doesn't take chances on.

These are the areas of life where preparation is necessary. And of these, anything related to your finances should rise to the top of the list.

That said, it's often difficult to know what to expect on visiting a financial services professional.

choosing a financial planner

The entire concept often feels rather intimidating. In large part, this has to do with the seriousness and importance of financial topics. The professionals involved often take it just as seriously as one would hope, and this tends to lend a certain gravitas to the environment. That can make it feel a little intimidating at first.

However, one should remember that taking it seriously isn't a negative. One's financial future is serious business. And the fact that said business is taking it seriously is a good sign. Instead of being intimidated it's important to look at it as a reminder. It's a way of telling someone that it's time to really focus on the seriousness of the situation and what can be gained from it.

You're A Part Of The Process

And when focusing on the situation, there's something you should remember. The financial institution is essentially working for you. You're paying them for a service. That means that you're the one who should be in control of the process. Again, the atmosphere can feel somewhat intimidating at first. But it's important to remember that you're essentially the one guiding the process. If you're there about financial planning then that should be among the first things on the table.

That said, people at a financial institution aren't mind readers. They're there to help in any way possible, and they should have considerable expertise to provide to clients. But they need to know about their clients concerns and goals in order to properly meet expectations. As such, you should make sure that you plainly explain exactly what it is you're hoping to get out of the discussion.

The First Steps

Working with financial service professionals usually begins with a general concern. Probably the most common motivator involves retirement. There's a certain point in life where people start to really consider their golden years.

When retirement is an abstract concept, it's usually reassuring. It's a time to just relax and enjoy the world. But as it becomes a more concrete reality the concerns of any life-changing experience takes hold. People usually begin to wonder if they're going to be able to retire as soon as they would wish. Some might wonder if they'll be able to retire at all. And this is when they decide to look for advice. Retirement concerns are common to the point where it becomes a useful example.

Different people will obviously have different needs. But the general process of seeking financial planning tends to go along similar lines. As such, one can easily extrapolate from an example of someone planning for retirement.

Meeting And Planning For Different Strategies

Going with the retirement example, one would go in with well-defined retirement goals. It's important to have these goals well defined so that the professionals can plan for them. After discussing what one is hoping to accomplish the real process will begin.

There will typically be some discussions on strategies for saving money. For example, using a zero-based budget. But one should expect this to go into fairly extensive detail.

Scope Of Discussion

The discussion will usually go into almost every aspect of one's life that involves money. As such, the more documentation one has at hand the better. In the age of electronics, this can be a fairly simple process. If one tends to file taxes electronically, for example, it's often easily available online.

It's a good idea to see if one can access those files so that they're ready if needed. There's seldom need to print them out in advance unless specifically asked to do so. But it's still a good idea to have them available electronically. If they're needed, then it can save an additional visit later on.

From there, a real plan can begin to take form. And this is one of the most important things to keep in mind. Most aspects of financial planning involve long-term decisions. In fact, most professionals recommend planning for retirement as early as possible. And the same goes for any other large financial event in the future.

Using Free Resources To Keep Tabs On Your Credit Score

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One of the ways that you can stay on top of your finances is to track your credit score.

While a credit score isn't the be-all and end-all of your financial snapshot, it can still be rather helpful as you keep tabs on your overall financial situation.

While it might cost you money to access a more “official” credit score, there are plenty of ways that you can get a general idea of how you are doing when you use some of the free resources available for credit scores.

Free Credit Scores

free credit resources

There are ways to get free credit scores, including having a loan rejected. However, if you don't want to apply for credit just to see where you stand in terms of your credit, there are sites where you can see your free credit score.

Some of them include:

  • BankRate: Get your Experian score for free on this site.
  • Credit Sesame: Credit score, basic financial info, and more on tracking your financial situation.
  • Credit Karma: TransUnion score, as well as your VantageScore and even your insurance score.
  • Turbo from Intuit: Transunion score is supplied by Turbo, as well as a variety of helpful financial information about you and tips for your situation.
  • eCredable: You won't get a consumer credit score like you're used to, but you will get an idea of where you might stand with the help of the credit rating simulator.

It's important to note that these free credit scores aren't “official.” It's not what lenders see when they pull your credit. And they aren't scores that you would get if you paid for your score at myFICO.com. However, these free scores can give you a good idea of whether or not you are making progress with your finances.

Track Your Financial Progress

For the most part, free resources are best used to keep tabs on your general situation. You can use these resources to see whether or not you have good credit in general, as well as see where you could improve. Additionally, if you notice a sudden drop in your score on one of these sites, it could be an indication that there is something very wrong with your credit (including identity theft). Monitoring your situation can alert you to possible problems that you might need to address quickly.

If you think that the issue might be identity theft, you should check your credit report as soon as possible. If you haven't checked in the last 12 months, you should log on to annualcreditreport.com to get a report from each of the three major bureaus for free. Even if you aren't eligible for a free report right now, it is still worth it to pay to access your report if you think that your identity might be at risk.

Keep an eye on your situation, and you can watch it improve. Many of these sites offer insights into where you stand in comparison to others, as well as providing tips for improving your credit situation. If you are looking to take control of your financial situation, these free resources can actually be quite helpful. Get an idea of where your finances are going, and you'll be in a better position to improve your situation.

Do you know of any other free resources to keep tabs on your credit?  Tell us in the comments.

Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start A Baby Emergency Fund

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In one of my first posts on this site I gave a brief overview of Dave Ramsey's 7 Baby Steps, and gave links to a few other sites who talked about them.

Today I want to begin my series on the 7 Baby Steps by talking about Baby Step 1, saving up $1000 for a baby emergency fund.

Before You Start The 7 Baby Steps

The 7 Baby Steps can be a life changing paradigm shift for many people, but like any program to help you get out of debt and prosper, you need to be ready to change your lifestyle, and make some drastic changes to the way you're living.  You have to be ready to commit to no more consumer debt, and know that people are going to think you're  off your rocker. You're going to stand out from the crowd and be different – but that's OK!   To prosper and get ahead, you have to be different!  As Ramsey says:

You have to live like no one else, so that later on you can live like no one else!

You'll need to make some short term sacrifices so that later on you can prosper and give more and live more!

Dave Ramsey’s 7 Baby Steps

So here's a quick look at the 7 baby steps.  Today we'll cover step 1.

  • Step 1 – $1,000 to start an Emergency Fund
  • Step 2 – Pay off all debt using the Debt Snowball
  • Step 3 – 3 to 6 months of expenses in savings
  • Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
  • Step 5 – College funding for children
  • Step 6 – Pay off home early
  • Step 7 – Build wealth and give!

Baby Step 1: $1,000 To Start An Emergency Fund

The first thing you need to do when you're on the Baby Steps plan is make sure your necessities and minimum payments on your bills are taken care of.  Then, you proceed to baby step 1 where you  save a $1000 emergency fund.   What’s an emergency fund?  An emergency fund is your backup plan for when things go wrong.    What kinds of things could go wrong?  Here's just a start:

  • Auto needs repair
  • Unplanned emergency room visits
  • Lost job
  • Family funeral or wedding to attend
  • An occasional bill you forgot about (like your property taxes for example)

Unplanned Expenses Happen To Everyone

There's an adage, known as Murphy's Law,  that says,  “Anything that can go wrong, will go wrong“.   Dave Ramsey likes to say that an emergency fund will help keep those “little murphies” at bay and keep you from having a small emergency turn into a bigger one.

The problem is that we all have major negative events in our lives, but not very many of us actually plan for those occurrences.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

78% of us will have a major negative event.   Those numbers alone should startle you into realizing your need for an emergency fund.  And those numbers are only for the MAJOR events – we all have a ton of smaller expenses that pop up every year.

Is A $1,000 Emergency Fund Enough?

A lot of people see this first step in the baby steps plan and immediately bring up the point that $1000 just doesn't seem like enough money to save up for your baby emergency fund.   Ramsey suggests that for most people it IS enough to cover most emergencies.  All of them? Maybe not, but that's what Baby Step 3 is for, to save up a larger emergency fund to cover just about any major occurrence that could happen.

My wife and I ended up saving $2000 for our baby emergency fund – so we did increase the amount just a bit.  I think the key is to look at your situation, see what is reasonable to save up fast – in 1-2 months, and go with that.  Depending upon your situation a little less than $1000 might even work.

Where To Keep Your Emergency Fund?

When you save for an emergency fund a question often comes up, “Where should I keep my money?”.  People want to know if they should keep the money in a CD, a online savings account or some other type of account.  Ramsey suggests that you keep this money accessible, preferably in a bank with a local branch nearby, where you can get to the money quickly in an emergency.

Personally my wife and I keep our money at our l0cal bank in a money market savings account.  It doesn't earn much interest, but that's not really the point of the baby emergency fund.  The point is to insure against those unplanned events.  When you save up your larger emergency fund later on, you'll have more options on where you want to save that money.

Where do you not want to keep your $1000 emergency fund?  Keep them out of CDs, stocks, real estate, or other investments.  Keep it somewhere you can get to it in a short period of time.

Do Your First Budget

After you have decided to save up your $1000 emergency fund, the next step you'll want to take is to do your first “quickie budget” as Dave Ramsey calls it.  The reason?  If you're going to save the money and get out of debt, you have to know where your money is going, where you can cut, and where the money will come from to pay off your debts.  Download Dave Ramsey's “quickie budget” .pdf here:

Dave Ramsey Quickie Budget

Beyond doing a quickie budget, it would be a good idea to do a more in depth budget if you can using a free budget software like the one from mint.com.

A budget is telling your money where to go, instead of wondering where it went.

After you pay the minimums on all your debts, save as much money as you can towards your $1000 emergency fund.  If you need to sell some things on Craigslist, get a part time job, or sell your sacred baseball card collection, just do it!  Do what you have to and get that $1000 saved!

Next Time: Baby Step 2 – Pay Off All Debt Using The Debt Snowball

After saving up your $1000 emergency fund, the next baby step is to pay off all your debts using the debt snowball.   Stay tuned for that next time!

Have you used Dave Ramsey's baby steps?  Were you able to get your $1000 saved up quickly when you started? What did you have to do to get it done?  Tell us your thoughts on the Baby Steps in the comments.

Dave Ramsey’s 7 Baby Steps To Getting Out Of Debt

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For my first real post on this personal finance blog I thought it would be appropriate to talk about one of the people who have influenced my financial life the most, Dave Ramsey.

For those of you who don't know, Dave Ramsey is a personal finance guru who has a daily radio and TV show, in addition to personal finance seminar called Financial Peace University.

Dave Ramsey is extremely popular, and most of his radio and TV shows focus on helping people who have gotten themselves deep into debt, and need help in finding a way out.    One of the biggest ways they end up getting out of debt is by following his 7 Baby Steps plan.

Dave Ramsey’s 7 Baby Steps

Here's a quick look at Dave Ramsey‘s 7 Baby Steps plan for getting out of debt.

  • Step 1 – $1,000 to start an Emergency Fund: The first step asks you to save up a bit of “just in case” money – in other words – some money for just in case the unexpected happens.   What kind of unexpected things?   Things like flat tires, doctor bills, and a furnace going out in the dead of winter will be covered by this small emergency fund.
  • Step 2 – Pay off all debt using the Debt Snowball:  List your debts from smallest to largest.   Pay the minimums on all of the debts.  With money left over after you pay the minimums, you pay extra on your smallest debt – until it is paid off completely.   Once you pay off the smallest debt, you then start paying on the next smallest debt.
  • Step 3 – 3 to 6 months of expenses in savings:  Save up money to cover bigger emergencies, layoffs and big illnesses or other eventualities.
  • Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement:  Save money for your old age and retirement.
  • Step 5 – College funding for children: Save up some money for your kids education.  I don't think you should pay for all of it, but some is good.
  • Step 6 – Pay off home early:  Make some extra mortgage payments to pay down the principal and own your house faster!
  • Step 7 – Build wealth and give! (Invest in mutual funds and real estate):  Continue building wealth through mutual funds and real estate, and more importantly give til you can't give  no more!

When you write it down it seems like it would be so simple to get out of debt and start building wealth, but Ramsey is the first to tell you that it takes a lot of hard work and “gazelle intensity” in order to find your way out of the depths of debt.

I know personally that his plan can work as my wife and I have used it to get out of debt.  Is it a perfect plan for absolutely every situation?  Maybe not.  But it does work for a majority of those who try it and stick to it.

Over the coming days and weeks I'm going to do a series of posts talking about Dave Ramsey's 7 Baby Steps, one by one.  I hope that in talking about it I can give some hope to some of you out there who are looking for a way out.

What do you think of the 7 baby steps?   Have you used the plan?  Would you recommend it to others?  Tell me what you think in the comments and welcome!

Personal Finance Basics: Pay Cash For Everything You Buy

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My wife and I are going on 3 years debt free except our mortgage, and I have to tell you, it's a great feeling. 

I still remember sending in that last student loan payment, just having a feeling of a weight lifting off of my shoulders, and not having to worry about that obligation any longer. 

There was a new found sense of freedom we found by paying off our last debt.  We would now be more free to save, invest and give!

In our 3 years of debt freedom we've started to get back to the personal finance basics, doing things like living below our means, paying ourselves first, and planning for unplanned emergencies.    We've started keeping a family budget, and making sure we know where our money is going.  We've made a lot of big changes!

One of the major changes that we've implemented is that we're now starting to forgo the use of credit cards and finance plans, even on the biggest of purchases.  We're not longer financing our cars, or our furniture. Instead we're saving up and paying cash. If the money ain't in the bank and we can’t pay cash, we don’t buy it.

Paying Cash Can Be Done For Most Purchases

Saving cash to purchase most things isn't that hard if you plan ahead.   Last year we were finding that our old 5-6 year old desktop computer that we'd been using for years was starting to get slower, and our ability to upgrade the old machine was just about maxed out.  It was time for the old computer to move on, and time for us to upgrade.

In the past, as soon as we had decided to replace something, we would have gone out and purchased it on one of our credit cards, or signed up for a financing plan, so that we could get the item right away.  Things are different now because we only pay cash.  So instead of having instant gratification we saved up for a month or two and got together enough cash to buy a nice refurbished Dell computer.  We upgraded the desktop, but kept our old monitor.  No need to upgrade everything if we don't have to!  In the end we researched and found the best deal, and only spent $300 or so to replace our old machine.  Much less than we might have spent in the past!

Paying Cash For A Used Car

We also bought a used car about two years ago.  Now you might think that paying cash for a car wouldn't be do-able, after all a new or used car costs thousands of dollars!    But our last two cars have been paid for in cash.  It just requires that you have some discipline.   We used a plan similar to the “Drive Free Cars And Retire Rich” plan espoused by Dave Ramsey. Basically you start out by buying a relatively cheap $1500 or so car with cash. Then, over the ensuing years you drive that car and you pay yourself a car payment. When the time is right to buy a new car, you have enough cash to pay for it outright!  We've done it twice now, and we're starting to search a for a mini-van or SUV since we just had our first child.  We'll pay cash for this car as well!

Plan Ahead And Save For Bigger Expenses

If you want to do the same as we have and start paying cash, just start a budget, and include high ticket items (and smaller items) as a savings goal! When you plan ahead for big expenses, both emergency expenses and planned expenses like a new car, you'll be much further ahead when the time comes to pay for those expenses.

I will grant that some bigger expenses, like buying a house are much more difficult to do, and not everyone will choose to save up and pay cash for those.   We didn't.  But if you're really motivated, that can be done as well.

Benefits Of Paying Cash

There are tons of benefits to paying cash for the things you buy.  Among them:

  • No need to worry about missed payments or raised rates: If you don't have any payments to make, you don't have to worry about whether or not you made a payment on time or not. You also don't have to worry about whether or not your bank will raise your rates on your credit card arbitrarily.  That means less bill paying stress at the end of the month!
  • You can build wealth faster with no debt: When you have debt, it's much harder to save and build wealth.  Shun debt and you'll be better off!
  • Paying cash means you spend less: Studies have shown that people who spend cash just end up spending less money.   Using plastic means you'll spend 12-18% more according to a Dunn and Bradstreet study.  It hurts more to pay with cash that you have now, than it does to pay slowly over time with money you hope to have in the future.
  • You can get a cash discount:  Some retailers will give you a discount if you pay cash.  The reason?  You're saving them the interchange and processing fees charged to them when you use a credit card.  Don't forget to ask if there is a cash only discount!
  • Having less debt means less risk in a down economy:  When you have less debt you don't have as much risk when it comes to a job loss or other unplanned negative event.     When you have no debts, you don't have payments to make at the end of the month!

For me and my family the benefits of saving up and paying cash far outweigh the negatives, and we'll continue doing it for the foreseeable future.

Have you tried paying cash for the things you want, instead of using a credit card or financing plan?  Did you end up spending less, and did you feel more free by paying cash?  Tell us your thoughts in the comments!