How could your house mess up your retirement plans? Picture this: A family of four live in a nine-hundred square foot house with one bathroom and two bedrooms.
No, I’m not talking about some middle class family in China. Instead, the above description is one of an American family…from the 1950′s.
For some reason, twenty-first century Americans have been brainwashed to believe that bigger (and more expensive) is better. Besides having to have the priciest car we can afford as well as the latest and greatest technological gadget, we cannot be happy in our home unless each family member has at least six hundred square feet.
It doesn’t necessarily ruin retirement plans if every kid has her own room or if the house has more than one “living area.” But it can.
Consider this: mortgage companies regularly approve homebuyers for loans that are two times more than what is safe for a family to be paying each month; that is, a fixed-rate payment including taxes and interest that is no more than 25% of the household take-home pay.
In other words, a mortgage company will happily approve you for a loan that will end up eating half of your take-home pay every month. This can mess up your retirement plans in several different ways.
First, if you have any other debt, you probably won’t be able to pay it down very quickly because you will have little – if anything – leftover after paying the mortgage and household expenses.
Second, should the household breadwinner lose his or her job, the family is in real danger of foreclosure. Unless they have a huge emergency fund saved up, they will very quickly find themselves behind on their mortgage.
Third, think of how much more quickly you could build wealth if you had an extra twenty-five percent of your income to invest every month!
When purchasing a home, then, how can you make a choice that won’t end up hindering your retirement planning? Apply the following four principles:
- As mentioned above, keep the mortgage payment to where it is no more than 25% of your take-home pay on a fixed-rate mortgage. Even better, have a 15-year fixed rate mortgage which payment fulfills that criteria.
- Buy a house no bigger than five hundred square feet per person; smaller, if you can live with it.
- Do not buy a fixer-upper, unless you are really handy and want the challenge. Otherwise, you will sink so much money into fixing it up that you might as well have bought a house in better condition in the first place.
- Never, never, never take out second mortgages on a house. If you need extra money for something, make the sacrifices necessary and save up the cash.
Don’t let your house interfere with your retirement plans! If you are serious about reaching a financial goal, apply the above principles.