The following question has been edited into a Q&A format and some details may have been changed to keep our listeners’ information anonymous. Let us know what you think in the comments below, or if you have your own question, use the ASK P&B button!
Greetings. Huge friend and fan of the pod. I recently graduated and got a job paying about $70,000 a year as well as a $8,500 signing bonus. With very little savings, a 760 credit score, no debt, and an opportunity to live with my grandparents rent-free for the next year, am I crazy to be thinking about getting a starter home for about $150k within the next 15 months? Any advice in addition to the recent pod about “Rent vs Buying” will be greatly appreciated.
Should I keep saving money or invest in my first home?
Ultimately, home buying is a very personal decision. From my experience, I would recommend the advantages of living rent free as long as you can. Instead of immediately buying a starter home with a number of unforeseen expenses, I would use this unique opportunity to prioritize the following:
- Set aside money, at least an additional $1,000, for unexpected homeownership expenses
- Practice living on a budget that would include the cost of your future home to establish positive spending and saving habits before the bills and real life kick in
- Establish an emergency fund to sustain you for at least three and up to eight months of living expenses
- Save at least 10- and up to 20-percent of the down payment towards your home
- Check out Money After Graduation’s Why You Need To Put At Least 10% Down On Your First Home (And How To Save It!)
- If one exists, ensure you’re fully maximizing your employer’s 401k match during this time to jumpstart or accelerate your retirement savings
For example, if you saved just $416/mo from 25-35 and never invested again, you may have well over $600,000 in compounded interest and savings by retirement. Starting early and young is one of the easiest and best investment strategies.
Even an aggressive home loan is typically 10-15 years and most are 20-30 years. While interest rates are at historic lows, I don’t believe there is a rush to make your first home purchase when you have a chance to live completely rent and mortgage free. This seems like a great chance to grow, save, and invest your money. Sometimes these opportunities don’t come again so I would take advantage while you’re young.
Regarding other resources, if you haven’t already, check out wealth advisor and Episode 48 guest, Kirk Chislom’s pros and Cons of Renting versus Buying:
- Should you rent or buy a home?
- What is the true cost of home ownership?
- What you don’t know about renting vs buying can cost you
Best of luck!
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