Don’t spend your house money on coffee

Wouldn’t it be great if your bank had an “auto sort” to earmarked categories?

There are a million articles around the web on what the future is going to look like, but every time we get TO the future, it looks a whole lot more like the past than it should.

Picture this…you go to Starbucks and try to buy coffee with your debit card. You order your daily Frappuccino and your debit card is declined.  You quickly grab five bucks out of your wallet and pay for your order with cash.

You call up your bank account on your iPhone and it says you have $853 in your account…BUT, you have NO money for coffee.

People are so much happier when they know they are spending their money on the “right” things. They are happier when they KNOW they are not overextended on certain expenses. I spent last week in Redondo Beach CA with my eldest daughter. She has only been in her “new” apartment for about two months. She asked “do you use gross or net income when determining…” I quickly gave her the formula for determining housing expense based on gross income. I showed her how to strip out overtime and bonus monies to calculate “dependable” gross income.  Miraculously (or not) her rent equalled 23% of her gross income. I said that’s perfect…just right. That should leave you at least 5% of gross toward saving for a house.

I was amazed at how happy she was to know that her rent payment was exactly would it “should” be…in fact, a tad under what it “should” be. You could say I “made her day”. That’s when I got the idea that your bank statement could “make your day” every single month, if it was broken down to earmarked categories.  Imagine a day when you can’t wait to rip open that bank statement, for concrete evidence that you were on target as to your personal financial goals.

One of the “old” lender guidelines for approving a mortgage was seeing that the would be borrower had deposited “the difference” between their current housing payment, and the soon to be approved new housing payment, into their savings account on a regular basis. Rent is $1,300 a month.  Mortgage payment will be $2,200 a month. $2,200 minus $1,300 ($900) was deposited into their savings acount every month for 15 months prior to purchase.  Downpayment of 3.5% of sale price (FHA) = 15 months of housing payment difference.

Let’s break that down.

1) $2,200 a month equals a loan amount of roughly $400,000

2) $2,200 a month equals 28% of $94,000 gross income

3) $3.5% downpayment on a $400,000 house is $14,000

4) Factor in another $8,500 for Closing Costs

Let’s say your bank let you plug in 28% of your gross income to be earmarked for “housing expense”.  Every time you got a raise, you changed your gross income so that the bank statement continued to calculate 28% of your gross income for housing expense, even if your rent didn’t increase.

You make $65,000 a year (2 incomes) when you rent your first apartment for $1,300. 28% of gross is $65,000 divided by 12 times 28% = $1,516.67 a month. You find an apartment for $1,300 a month. The bank STILL allows $1,516.67 a month for ONLY housing payment, and automatically transfers the difference of $216.67 every month to an earmarked housing expense account.

While visiting my daughter we drove through a neighborhood and she said, “I love these little houses with yards”. Contrary to news media reports on housing, there were none, nada, NO houses for sale for blocks and blocks in that neighborhood, so I couldn’t quickly give her an accurate read on price. But given I have worked that area before, I estimated price at $350,000 in today’s market (50% down from peak there), $400,000 tops.

Now she knows exactly what she needs to get the house of her dreams. She knows how much money she has each month to set aside for future housing expense (28% of gross minus rent payment). She knows she can sock away the bonus and overtime money and raise money into an earmarked housing account, because we didn’t use that money to calculate the future housing payment, we only used “dependable” salary income sources.

How great would it be if the ATM card said NO, you can’t buy this coffee with your house money!? 

 Of course for one expense you can do it yourself, but if you could plug in all of your expenses so it said

 “no, you have no money in your gift account – give that person a card”.

 “Hey, you are using 1/5th of your annual electric bill expense this month – shut off some lights when you leave the house”.

How hard can it be to combine a bank account program with an expense program so they operated as one? Maybe some bank has that feature, if they do let us know.  If not, someone should “invent” it.  The bank that says “We help you keep track of, and achieve, every one of your personal financial goals”, might just have the ticket to the bank account of the future.

In the meantime, don’t spend your house money on coffee.