Using Up Your Savings
Using up your savings to buy anything is never a good idea. Buying a car, a flat screen TV or a house should never empty your savings account. Let’s see why this happens so often and how to avoid it.
How Much Do You Need To Buy A House
Don’t you just hate it when people answer with “It depends.” What does that mean? Why don’t they just give you an answer? Because it really does depend on your personal circumstances. There are, however, some absolutes.
Banks require that you prepay your homeowner insurance 1 year in advance and escrow 3 month’s of mortgage payments. Let’s say your mortgage payment is $2,500 and insurance is $1,200. This totals $8,700. Title search and insurance is around $2,000 on a $350,000 house. Add $750 for a survey and $1,500 for legal expenses. Down payments can be 3.5% with a FHA mortgage or $12,250 on that house. There are also bank fees and inspection costs. You are soon close to $30,000.
I bet a lot of you were never told this when you got “pre-approved”. It’s not your fault. Marketing gurus teach you to look in the wrong direction. Read about Mr Happy Banker and you’ll understand why.
Can you see why so many people have nothing left in savings after buying a house? Because no one tells them what it really costs. Mr Happy Banker doesn’t. Websites don’t. My experience is that if they give you any estimate of costs, it’s less than reality. When you really find out how much it costs to buy a house, you use up every penny you have. You might even have to ask a family member for help.
The only solution is to sit down with an ethical banker from an excellent bank. It’s the only way to protect yourself.
Money Management and Starbucks
One day my niece Alyssa calls me up. Aunt Barbara, I need help! I’m in trouble! This is a great kid who’s a senior in high school so I’m thinking it can’t be too bad. What’s the problem? My father is going to KILL me! Why Alyssa? Because I used up too much gas driving around and I don’t have enough money to buy more. Ok, where are you? Starbucks. How nice. Are you with your friends? Yes, we come here all the time. What are you having? A sandwich and a caramel macchiato. Hmmm….I have a solution for you. Really Aunt Barbara? Yes, it’s only 25 feet away. It’s called McDonalds. You can get a cup of coffee there for $1. Get the point?
Money management makes you a saver. Of course I helped out my niece but only 1 time. She did learn. IF she went to McDonald’s for coffee rather than paying around $7 for a mocha whatever, she’d have $6 in her wallet. Multiply that by 3. That’s $18. Multiply that by 45 weeks (figuring most not all weeks) for $810 in savings. Now multiply that by 5 years for $4,050. This gives you an extra $4,100 to put down on a house.
Saving for a house or anything else requires some financial discipline.
The ONLY way this really happens is with a written goal, a written plan. It’s all those small things that add up to a lot. Here’s something else.
Cook. No kidding. Cook. Buying takeout is expensive. When you’re home on a weekend, say Sunday night, do some cooking and then freeze it. Make a ton of meat sauce. Use freezer bags to freeze dinner sized portions. You don’t need to be a gourmet cook. Buy nice bottled sauce, brown ground meat that you add some spices to, throw it together and you’re done. All you have to do one night is boil pasta while you defrost the sauce. Add in a salad and it’s a great meal. 30 minutes for less than $5. Order that in and it’s $25-30 for 2 of you. Cooking 2 meals each week and not ordering in will save you $40 per week. $40 x 52 weeks = $2,080 per year x 5 years = $10,400.
By not eating out 2 nights each week, eliminating expensive high calorie coffee 3 times most weeks you get $15,000 in 5 years. It’s easy. Put what you would have spent in a savings account every week. This is what money management is all about. Using up your savings for expensive coffee and ordering food is ridiculous. It’s not hard with a written goal and plan.
The Danger of Using Up Your Savings
Things happen in life. The furnace breaks one winter. You might be out of work for a while. Unexpected medical bills happen. You owe more taxes than you thought. Life has it’s unhappy surprises. Without at least 3 months of expenses in a savings account, you’re in trouble. There is no cushion.
What do you do? Some people put it on the credit card. Big mistake because now you’re in debt. Some people use their retirement funds. HUGE mistake. Hardly anyone puts it back. Others use their line of credit on their house. This is yet another mistake. By the way, I don’t care what you read or who tells you to do this, never ever borrow on your retirement funds to buy a house.
Buy a home right. Don’t use up your savings but do have at least 3 month’s worth of expenses in the bank. Don’t put yourself in a perilous position. Be financially careful so you’re not worried every month. Use the services of a great banker. Need one? I know several. Take good care of yourself.