This is post #2 in the First Hundred Days series designed to answer the question “Should I Buy a House Now?”. We often go to professionals to help us make decisions, but whether or not you should buy a house now, isn’t one of them.
By the time you walk into a real estate office or speak with a lender, you should already know whether or not you should buy a house now. A lender tells you whether or not you CAN buy a house, not whether or not you SHOULD buy a house. An agent helps you select which house, and guides you through the process of buying a house. Only YOU can answer the question of whether or not you SHOULD buy a house, and this series is designed to assist you and give you confidence in your decision.
Step 1 – Calculating Your Gross Income for Home Buying Purposes was addressed yesterday.
Step 2 – Account for how you have spent that Gross Income, using hindsight.
It’s pencil and paper time…yes, you have to move away from the computer for this step 🙂 Take out all of your bills from the last 12 months. You are not making a budget in this step. You are accounting for every dime of your gross income for the last 12 months. Get three different notebooks and mark one of them WANTS, one of them NEEDS and the other one WASTED. Everyone has that dream where they go to sleep, and every dime they’ve ever wasted shows up in their bank balance the next day. So let’s not pretend we haven’t wasted any money over the last 12 months.
You are not finished until the total dollars in the three notebooks equal your total gross income from Step 1.
You, and no one else, can determine your needs. I NEED a cell phone…it’s not optional for me, for others it may be optional. I don’t NEED a landline (though I have two) so I guess that goes in my WASTED notebook. Don’t Google sample budgets for this. Make your own choices. Picture yourself without that item when determining which notebook it should go in. I WANT to see my children and grandchild X times a year (anyone who thinks seeing their children isn’t a big expense is a lot younger than I am, LOL)
Everyone’s wants and needs are different, and what you view as a need could appear to be wasted money from someone else’s perspective. That is why this is a very personal part of the decision process that no one else can answer for you. You may have children with expensive sports activities. You may feel getting that Starbucks Coffee everyday is not optional. It is your right and obligation to determine your own personal wants and needs. No real estate agent or lender can tell you what you have “left over” from your gross income to spend on a housing payment.
I know this step is a lot of work, but it’s almost year end and a very good time to pull those receipts anyway. If you don’t have receipts, you’ll have to fudge a bit, BUT starting today keep more receipts than you have in the past. Put a big envelope in your car for this purpose. If you use three envelopes marked NEED, WANT and WASTED, all the better. You may find you waste less money if you force yourself to put the receipt in the money WASTED envelope on a daily basis.
Even if you decide not to buy a house at the end of these First Hundred Days, the process should be of value to you, by forcing you to account for every dime of your Gross Monthly Income. Better to START the process with accountability, then to be forced into facing a hard reality AFTER you buy a house.
I attempt the same thing using a download of my checking account history into Quicken (Excel would do it too)and it works pretty well since almost all transactions are electronic and are labeled with where they are spent. I have very little cash spending and it’s a safe assumption that any cash withdrawals went to “wasted”.
I do notice that there is an inverse correlation between age and percent of spending that is electronically trackable, but this should work pretty well for anyone who came of age in the 90s or later.
“…but this should work pretty well for anyone who came of age in the 90s or later.”
In writing this series I am using 12 real people as my target audience, and that audience is evaluating whether or not the advice is helpful to them. 3 are baby-boomers, 3 are generation X, 3 are generation Y and 3 are people born in other countries who have been in the U.S. for 10 years or less. Only 5 out of 10 have “electronically trackable” expenses, and none of those 5 account for more than 60% of their gross income on a regular basis.
I would say 9 out of 10 of my actual clients use excel spreadsheets and have trackable expenses, because a large percentage of them work for Microsoft or Google. But that is not the norm for people who may find these advices of most value. In fact, the youngest (Generation Y) rarely sit at a computer, and spend more time sending text messages than emails. Using a cell phone to track expenses is of most value in the Y generation.
My goal is to have an online tutorial that I can disseminate to high school seniors and people in their early to mid 20s. That has long been a dream of mine. To interact with High School Seniors and young adults in a way that will provide some clarity on life-lesson-finances, before they incur substantial debt payments.
I received a call from a young woman in her 20s about a month ago who was standing in front of a $500,000 house. She targeted that home because it was the lowest priced home in the area where she currently lived with her parents. Many people assume that entry level housing is their goal, and rely on the fact that if they are entering the housing market, they can buy an entry level house.
If more people refused to buy until they could afford the house, we would not have had a housing bubble. Agents don’t create housing bubbles. Sellers don’t create housing bubbles. Buyers create housing bubbles.
To answer the question I just received in email, if you are a married couple, each person should do their own separate notebooks. A wife does not get to determine how much of the money her husband spent was wasted, or vice versa LOL!
Perhaps step 3 for some, will be bringing the WASTED notebook to a marriage counselor.
Point taken, but I do think the electronic method could save a lot of time for some people, anyone who primarily spends with a debit card or automatic bill pay. It would also make it possible for someone who doesn’t have all their receipts for the past year.
“Many people assume that entry level housing is their goal, and rely on the fact that if they are entering the housing market, they can buy an entry level house.
If more people refused to buy until they could afford the house, we would not have had a housing bubble. Agents don’t create housing bubbles. Sellers don’t create housing bubbles. Buyers create housing bubbles.”
Buyer’s assumptions are formed partially by the news releases, TV commercials, mailers, and other advertisements the “experts” in the RE community bombard them with every day from birth to death.
People’s agents (the salesperson type of agent, which most are) reinforce those expectations and downplay any fears or hesitations (like fear you can’t afford the payments), using the literature from the “experts” above. Some agents are very skilled at that, particularly given that the customer is already trained to trust the agent as a buyers advocate.
Some people who thought they couldn’t afford a particular house or neighborhood were “advised” to see a mortgage broker, and “You’ll be surprised how much house you can buy”.
I guess what I’m saying is there was(is) a lot of advice coming from the Real Estate Community seeming to contradict the things I think you are posting about in this series. There has been very little advice like you are giving for the last 8 or so years.
Prior to a month or so ago I had only seen this type of advice in high school economics, and at Seattle Bubble, and any agents who mentioned that site were trying very hard to dispute and discredit it.
“There has been very little advice like you are giving for the last 8 or so years.”
Most of the Country was in an up market during that time. Waiting until you had all your ducks in a row could have cost you a lot more in the long run during that time. 2001 to present for most areas equals double the price and in some areas triple the price.
In this market it is more likely that you will buy at a lower price if you take the time to get all of your ducks in a row in advance of buying…hence 100 days of advice 🙂
Advice has to be tempered with market conditions. I’m not saying all agents think like I do, but that is definitely my rationale. I would not have suggested anyone wait to save 20% down in 2000 through 2005. I am not suggesting that for everyone today, but clearly I am suggesting that to more people today than I did 2000 to 2005.
If market conditions change during the 100 days, I reserve the right to alter advices as well…but I don’t expect that to happen.
I am re-writing some advices I gave in 2006, as the information is not currently relevant (as to appraisals for instance) and in fact my advice is the exact opposite of what I said in 2006. If current market conditions did not alter advices, no one would have to find the copyright date in the book 🙂
“Advice has to be tempered with market conditions.”
OK, but if you are going to blame buyer’s for creating a price bubble, you have to save some of that blame for those who put forth such a huge effort to get those buyers to do what they did. You could also save a little of that blame for the system that made it so easy and profitable to convince those buyers to do what they did.
Your advice probably wasn’t so self serving like most. I still see the sales pitches coming from the industry in TV, newspaper, and mailers, and almost no other “RE professionals” are publicly saying to get all your ducks in a row first.
I think my new avatar is making me more aggressive. I can totally imagine the little green monster shouting out my last few comments.
I agree. Most importantly, until the industry gets on board with their function being representing people who are buying and selling houses, instead of selling houses, I have no hope that there will be an overall improvement…ever. I don’t see even a glimmer of hope in that regard either.
That new avatar clearly doesn’t look “cautious” 🙂 Perhaps it’s time for you to choose a permanent or semi-permanent avatar. Something that reflects caution, and yet not inability to act at the appropriate time.
Cautious:
Have you heard the commercials for gold lately!
You’d think you could NEVER lose any money buying gold.
It’s human nature to follow bubbles.
“It’s human nature to follow bubbles.”
Too true, Roger, too true. It doesn’t mean we don’t have a system that exacerbated the situation though.
Its a good thing there’s no bubble in tech stocks, otherwise we’d really be in trouble (:^0
Roger, LOL now I can’t get the sound of ringing phones and that guy’s Ross Perot voice from the commerical out of my ears! Thanks A LOT!!! 🙂
It’s very sad when people lose confidence in banks. It sends them in all kinds of directions that are not good, including too much cash in the house if they have a burglary.
Ardell, what do you think?
Cautious but ready to pounce, or just way to predatory?
Affordability advice based on short term market conditions is bunk. Unless you’re buying a house to hold for less than 5 years, honest advice in 2001 vs 2008 hasn’t changed at all.
As we’re all well aware, flipping in the early part of the decade was a viable strategy, and any unclosed flips from 2005 on are probably dead or dying.
We saw a few good years of short term ownership. Buying for the long term hasn’t changed a whole lot.
We’ll revisit that in six years…
Ardell,
Excellent post on money management in general. Too bad congress is not forced to keep such notebooks (let alone understand the difference between “needs” and “wants”).
I don’t know if I’d use the word wasted on money. I’d never be able to sleep then. But this article is right on the money. No pun intended. And it’s almost that time of the year. Pretty soon I’ll get my W2 and say, what?, I made all this money? Where did it go? Then you figure it out, just as you have above and see where all the money went. I’m a little more organized this year, thanks to my accountant and Quick Books.
Julia,
Using the word “wasted” may appear to be negative, but it’s actually a positive. Once you determine it was “wasted” you can set that amount aside as money available for housing payment.
If you determine you wasted $180 a month, deciding not to waste that money buys you $30,000 more in housing price.
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