If you want to buy a home in the next 2 months, you should totally become my client.
No, I don’t have any special house-buying sauce, but it seems to be a trend among my clients: start working with me, and then buy a home before we even finish the initial planning process. It’s certainly an effective way to give you focus and motivation!
Buying a home is a huge financial change, especially if you’re living in the Bay Area or Seattle or NY or Boston…where both the tech industry and housing market are hot. Overnight, your financial situation is way different:
- Your monthly housing expenses are significantly higher
- You have a Giant Mortgage, even if you were able to put down an impressive down payment, and
- You have a giant single asset that requires ongoing maintenance.
All of your money habits are suddenly outdated…they are the money habits of a renter. What should you be doing now?
How’s That Emergency Fund Looking?
Did you use any of your emergency fund to buy your home? I suppose it’s too late for a stern “Don’t do that!” so I’ll simply say: This is Priority #1 now, building that back up.
And guess what? Your emergency fund needs to be even bigger now. One of the advantages of renting is that you can get out from under your monthly housing expense fairly easily; owning a house means, more or less, that you’re stuck. And your monthly payment for housing is now probably more expensive.
So, set up your paycheck to start re-directing or directing more money to your Emergency Fund until you’ve got about 6 months of cash to cover basic expenses. And you have even more basic expenses now! Homeowners insurance, property tax, possibly HOA dues, mortgage that’s higher than your rent.
A 6-month recommendation is a reasonable general recommendation, not knowing your situation, though obviously everyone has different circumstances. If you have other sources of income, maybe it can be shorter than that.
How About Taxable Savings in General?
Even if you didn’t deplete your Emergency Fund to pay for your downpayment, your taxable savings (that is, everything outside of your 401(k), 529, etc.) is certainly much smaller now. Having little to no taxable savings is an inflexible position to be in, and inflexibility is risky.
I want you to have a nice mix of money in your life, for your nice mix of goals:
- “Qualified” savings. For the most part, this is retirement savings, in tax-protected accounts like 401(k)s and IRAs. It can also be money in HSAs and 529s…basically money in any tax-protected account.This money is hidden away behind some barriers, and you’re not supposed to touch it except for its specific use (retirement, college, medical expenses), on penalty of, well, tax penalties. That’s the trade-off: you get the tax benefits in exchange for not touching the money except for very specific uses.
- “Non-qualified” (taxable) savings. This is bank accounts and investment/brokerage accounts at Schwab, Fidelity, Vanguard, etc. You don’t get any tax benefits for this sort of savings, but in exchange, you have flexibility.
You can spend this money on anything you want, at any time… which is why you used it to buy a house. This might be cash, simple investments in mutual funds, or maybe a A Whole Bunch of Company Stock.
- Home equity. Right after you buy your home, your “assets” are going to be dominated by your house. This is simply inevitable, at least in the higher cost of living areas. It’s pretty hard to turn home equity into groceries or a vacation or payment for a medical bill, so we want taxable money for those needs.
What is your balance of money among these three buckets?
You Need to Adjust to Your New Expenses.
So, obviously, your monthly expenses are now different (probably significantly higher), and you need to take some time adjusting to this new reality.
First, You Need to Know Your New Expenses.
Though I do not typically suggest that people track their expenses continuously, it’s gonna be particularly helpful to do so for the first few months of owning a new home.
I mean, projections are great and all, but reality is always different. Especially if this is your first home, there’s just no way you’re going to be able to precisely predict what your new monthly expenses will be like.
This exercise is intended to raise your awareness of your new spending habits, not necessarily to make any changes. Which hopefully makes the task sound a little less intimidating!
A New Savings Goal: Home Maintenance
Congratulations…you’re a homeowner! Now you can’t call a landlord when the toilet backs up. It’s all on you, baby.
A rule of thumb says you need to save 1% of the value of your house for maintenance costs, each year. Just bought an $800k house? You need to set aside $8000/year just to maintain it. Maybe some years you won’t use all of that…but don’t take it out, please…sure as God gave us green apples, you’ll need it soon enough.
So, set up a separate “House Maintenance” account, and set up your paycheck to automatically deposit that 1% over the course of a year. (You don’t necessarily need a separate account for each saving need or goal in this way, but doing so helps make it Crystal Clear whether you’re saving enough and what you’re spending.)
Eyeing Some Upgrades?
And this is just for maintaining your home, not improving it. You want to remodel? You want a new kitchen or to install a fireman’s pole from top floor to bottom (maybe a little bit of transference going on there)? That’s extra. And requires separate, extra savings.
How much extra savings will depend on what you envision for your new home. Personally, we spent a bunch of money on energy efficiency improvements early on, and we’re postponing the rest at least until these damn children and dog are older. And by older, I mean “Won’t ruin all my nice stuff.”
How Does This All Fit Together?
The single biggest reason people want to work with me is because there are so many uses for their money, and they don’t know how to prioritize. That prioritization list can be different for everyone, depending on the specifics of their situation. But there is merit in rules of thumb and general guidelines. If you’re varying from the rule of thumb or guidelines, you have to be prepared to explain why.
So, here’s a reasonable, prioritized approach to dealing with your money after you buy a home:
- Replenish your (now probably bigger) Emergency Fund.
- Save 1% of your house’s value to a House Maintenance Fund each year.
- Ensure you’re still saving at least 15% for retirement. (And remember, if you’re earning over $120,000/year, maxing out your 401(k) isn’t enough.)
- Save up for house improvements.
- Beef up your taxable savings (which you depleted to buy the home).
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.