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I want to talk about the journey towards buying your first home. It starts by paying off debt and building your savings. It's really easy to fall off the bandwagon when it comes to getting your finances under control.
Here's the way I found to work TOWARDS a house:
- Set up your automation and accounts for everyday expenses.
- Build your 6-12 months of emergency savings.
- Begin investing in index funds.
- Meet with a broker to assess your financial position relative to how much you'd like to borrow.
- Readjust your borrowing power based on rising interest rates.
- Build an additional buffer for post-home purchase (ensures you have enough left over just in case).
- Buy a house.
As you can see, building the buffer is step 2. The buffer ensures that if unexpected expenses occur, we can cover them without becoming mentally derailed. It's hard when you have to move money back and forth between accounts because it feels like progress is being taken away from you.
The automation in step 1 will automatically push money towards your savings account. What some people do is create a whole new bank account with a different bank and have the money transferred there. This account has no associated card, which removes the temptation to spend it.
Let's add time to the equation. What tends to happen when you've automated your accounts is that it just happens in the background. Before you know it, you've built up enough savings. You might think that the next step is to buy a house. But I actually think people should invest first.
Now, before you start telling me it's risky, hear me out. Index funds, which are a basket of stocks that allow you to become automatically diversified, are relatively low risk and have good returns, even in bad economic times. You can even buy index funds specifically tied to property.
Because it now takes much longer to save for a house, while you wait for the best time to strike, the value of your stocks goes up. In fact, in my personal situation, after I had my 6-12 months saved up, I began buying stocks each month. But it took a few years before the timing was right to get a house. In those few years, I ended up accruing an additional $15k in stock value, which I could sell to buy my house.
Luckily for me, during the time I was buying stock, I was still diverting some of my funds towards saving for a house. After meeting with a broker, he told me I actually had enough in my savings to buy a house, which meant I could leave the stocks to keep growing and still buy a house.
This is a win-win situation and gives me a number of options. If I suddenly need cash, I can always liquidate some of my stocks (which I've never had to do). By leaving my stock, it can just grow. Another win for me.
Moving my savings towards property means the money in my home is now growing as well. Any renovations I do also build equity.
Now, I have mentioned a few times that having equity sounds good on paper, but it's not real money until you sell the asset. That is true. But the way I like to think about finances is to try and have a win scenario for every situation.
If the stock market crashes tomorrow, I have cash on standby to purchase stocks at a discount. If the market instead jumps, I already have stocks to ride the wave. If housing prices go down, it's fine because I already have a home to live in. If they go up, my equity increases. If I lose my job, I have several other income streams.
Every which way you look at it, I have some form of protection. That is true security. Just because it says 'full-time' on your job contract, doesn't mean you have security.
So take it
