Buying a House

As a financially savvy individual, you know you should be investing and preparing for retirement. Everyone wants to build a healthy nest egg, but what if you don’t have any extra cash or disposable income each month? These are two major roadblocks to investing. Another is buying a house while making sure you don’t end up “house poor.”

Problems with Rushing into Buying a House

The way you go about buying a house can dramatically impact the amount of money you have leftover at the end of the month. Spending too much on a mortgage or rushing into the wrong opportunity can cause two major issues:

• You rack up debt: If you put all your money into buying a house, you may end up taking out loans or putting day-to-day expenses on credit cards without the ability to pay them off. Going into debt just to make ends meet is never a good place to be financially.
• You have no disposable income to invest in: Because of inflation, money is always more valuable today than it will be tomorrow. As a result, you should strive to always keep your funds growing through wise, diversified investments.

A Look at Florida Homebuyers

Radio show host, author, and businessman Dave Ramsey recommends keeping housing expenses around 25 percent of your income. Following this advice, a Floridian earning the state’s median household income of $53,000 should spend no more than $13,500 per year—or $1,100 per month—on housing.

However, the average American spends about 37 percent of their income on housing. This means a typical Floridian might spend nearly $20,000 per year—or over $1,600 per month—on rent or a mortgage. This is a difference of roughly $6,000 per year.

Putting Your Money to Work for You

$6,000 per year might not sound significant, but this amount can substantially affect your investment portfolio. $6,000 is enough to fully fund a traditional or Roth IRA. You can use $6,000 per year to fund your children’s college educations in a 529 college savings plan. Or you can put $6,000 into stocks and bonds as a personal investment. The possibilities are endless!

Assuming a 7 percent rate of return, investing $6,000 per year starting at age 25 can grow to over $1.2 million by the time you reach retirement age, or 65 years old. However, if you spend an excessive amount of your income on housing and don’t have anything left to invest, you will not end up with the same nest egg when you retire.

Clearly, it’s essential to understand the opportunity cost of buying a house, especially if doing so will push your housing expenses too high. For more on how we can help you determine if a mortgage is within your budget, please contact Nelson Financial Planning. Our team of certified financial fiduciaries focuses every day on helping you change your life through a successful financial plan that provides peace of mind for the future.