How to save for a home purchase🏡
Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by Fortune Recommends in an article — by Stephanie Colestock, “Buying a house? Here’s how to save (and how much)” — regarding how families prepare for a home purchase.
The 30% rule, yes or no?
The first step to determining how much to save for a home purchase is calculating how much to spend. Many people hold on to the idea of the 30% rule—that up to 30% of their income should be allocated to home ownership—but the 30% rule comes from a 1969 public housing requirement called the Brooke Amendment; it is from a period over five decades ago when health insurance, job benefits, stock options, retirement savings, and the public safety net were not nearly as strong as they are today. Thus it may have made sense, from a life-risk perspective, to limit the amount of one’s dollar income put toward housing. Of course, every person’s and every family’s financial situation is different and should be judged separately, but from a high level perspective, better ancillary benefits mean that more income should be available today for home payments, especially if both partners or spouses within a household are employed.
Your home is an asset
Additionally, many people look at their home as a savings vehicle versus stocks and bonds; this is especially true for those with low mortgage rates where a larger fraction of every monthly mortgage payment goes to paydown principal.
You need to look at the big picture of your income plus benefits, hopefully with the help of a financial advisor, to determine the ratio that feels right. There is no magic number, but if you have more than just pure salary, consider your home part of your savings plan, and interest rates are not too high (or drop from today’s levels), then maybe that 30% rule bumps up to 38% or close to 50%.
Saving without a plan is like driving without a road map
Developing a comprehensive financial plan should be the first step to save and budget for a home (as well as any other major life priority). Saving without a plan is like driving without a road map; you can do it, but it won’t be efficient and you may not end up where you intended. You should look at all your assets (including insurance, inheritance, and social security), all your debts and liabilities (including leases and school loans), and your lifestyle choices. Each person will have their own visions and priorities regarding what saving for a home (or saving for retirement) means and every situation will be different. Do you aim for a starter condo/home or stretch for something larger? If you aim to save for a 20% downpayment, the time difference between saving for the two can be considerable. Sometimes it is worthwhile to get a foothold in sooner and then trade up down the road.
You don’t want your goal to be too far away to visualize; if that is the case, you can set nearer financial goals in order to figuratively build up your savings muscles and habits.
You don’t want your goal to be too far away to visualize; if that is the case, you can set nearer financial goals in order to figuratively build up your savings muscles and habits. If home ownership seems to far in the future, focus on shot or medium-term goals like saving for a trip abroad, a travel van to be a digital nomad, an engagement ring, money to start your own business, or any other important priority. You can always change your mind on your priorities and trade them up; maybe the funds you’ve been setting aside for your dream lake-boat can be added to other assets to secure a downpayment on an abode.
Start saving yesterday
Nonetheless, in general, one of the keys to saving for home ownership (or anything else) is to start yesterday. The sooner one starts saving and trying to compound wealth (in T-Bills, a money market, or brokerage account) the better: maybe that means forgoing fancy coffee drinks, working extra hours, eliminating some delivery or streaming subscriptions, downgrading your gym membership, selling old sports equipment, or getting an extra roommate, and funneling those savings into a long-term investment plan. Examining expenses, large and small, can be immensely helpful in eliminating financial burdens and making people feel like they are progressing towards their goals. Frequently, a key here is to eliminate high interest rate liabilities like credit card debt. People often don’t realize how much money goes toward interest rate debt that compounds at +18% and how damaging that can be for long-term wealth accumulation.
Quoted article excerpt is below:
By putting down at least 20% on your home, you can avoid the added expense of PMI from the get-go. You may also qualify for a lower interest rate on your mortgage, since the loan presents less of a risk to the lender. But it’s not always the right move.
“It’s true that it is usually worthwhile to avoid PMI by putting more down, but if it means missing out on the perfect home, then maybe not,” says Michael Ashely Schulman, partner and chief investment officer with Running Point Capital, a financial-planning firm. If you aren’t able to put 20% down, “remember to cancel PMI once you are above the necessary threshold in order to reduce payments,” Schulman adds.
Home is where one starts from.
~T.S. Eliot
Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Past performance is not indicative of future results. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-23-27
