Am I Unclear?

I just don't get it with people. Now that interest rates have jumped several percentage points in the past few years, people are now getting slammed with higher mortgage payments. They decided it would be a good idea to buy a house WAY out of their means because they thought that they'd refinance at the end of the "sweet" years and they'd be ok.

Well now they're not ok. People's house payments are jumping 10-30% and there's tons of people who are going to lose their house because of it. Let me run some math for you all:

Take your gross wages, how much you make in a year before taxes, include your spouse in this equation, multiply by 3 and that's roughly the amount of house you can afford give or take a bit. So, if you make $40,000 and your wife makes $35,000, that's $75,000 total. That means you should be able to afford a $225,000 home give or take. If you don't have much debt, say no car payments or low credit card debt, you could probably bump that to $250,000 max. If there are no homes in the area that are in that range, move to a more remote area or rent an apartment.

If someone is telling you that you can afford a $350,000 or $400,000 house with that kind of income, you should walk out of their office immediately as they are not looking out for your best interests.

So let's continue with the fictional $40,000/$35,000 husband/wife team. What happens if she gets pregnant? What happens if you or her loses their job? What happens if you are sick or injured? All of these things and more happen to everyday good people. Do you want to be unemployed and worried about how you're going to make your house payment? No, of course not, so don't fall in love with a house if you can't afford it.

Here's the best advice that I can give in this situation. It was given to me a long while ago by an equally wise man: Don't live above what unemployment pays. That way, if you lose your job, which is the most likely situation to cause financial troubles, you don't have to worry about anything other than finding a new job. You won't have to worry about making a choice between making the mortgage payment and eating. Trust me on this one, it's much nicer to get up in the morning and look for a job and not develop an ulcer doing it.

Don't get involved with credit card debt. Use credit cards as emergencies only. That way you'll have a buffer if something bad happens.

Buy a used car: Used cars, especially Japanese ones (Honda and Toyota) are just as reliable as new ones, so why pay an extra $5-10,000 for that new car smell? Get a car that's 1-3 years old and you'll save thousands.

Don't eat out: Eating out is probably the #1 sucker of your spare money. I admit my wife and I eat out ALL the time. If we didn't, we'd probably save $500 a month. But we don't live above what unemployment pays and we don't have much debt (other then her student loans which are about to come due soon), so we can afford that. If we couldn't, that'd be the first thing to go.

All I'm saying is: be fiscally responsible and it'll make your life a lot less stressful when catastrophic things happen.

Travis
travis@rightwinglunatic.com