Reader Mailbag: Sources of Information

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Buying the next house
2. Starting over from scratch
3. Loan disqualification
4. Starting a business
5. Taking care of Mom
6. Building credit with business cards
7. Stocking my HSA
8. New side business and taxes
9. Diverting retirement to mortgage
10. Interest calculations

One thing that deeply frustrates me about personal finance and, frankly, most of modern life is that many people seem to be completely unable to distinguish between sources of information. They seem to think that all sources of information are equal or that sources of information that claim to espouse their values are more trustworthy than those who do not.

Here’s the truth, people. Never stop investigating the things you hold true in your life. Look at sources you agree with and sources you do not. When you’re about to make a life decision based on information, research it thoroughly before you make that move. Don’t just trust everything to one voice – mine or anyone else’s. The more diverse opinions and information sources you have, the better.

Q1: Buying the next house
My fiance and I own a modest town house in an up-and-and coming neighborhood very close to Seattle. Home prices are bloated like crazy here compared to other areas, but the education is great and it’s very safe. While we love our home and have spent almost two great years here, we’re going to need an upgrade very soon. Our home is 1500 sq feet with 2 bedrooms and 2.5 bathrooms. We originally planned on spending ten years here and dealing with the small space, but as time passes we’re less sure about that. A new development has started up the street from us, and they’re making gorgeous homes that range from 2,000-3,000 sq ft. We’ve taken a tour of a few of the demos and the craftsmanship is superb. We’re absolutely in love. The neighborhood isn’t going to be finished for another 3-5 years (possibly longer), but the houses are going up for sale as they complete them.

They’re the perfect size for us, and the perfect life style for us. They were also in our budget for what we wanted to spend on our next house. However, the problem is that we weren’t planning to spend that money for another ten years (not five). A house in that area is an even better investment than our own house, and would no doubt make more money (even in this economy). My fiance and I are thinking about buying one of the middle sized ones (around 2,500 sq ft) 3-4 years from now (after our wedding). We’re just not sure if we could handle the debt, and don’t want to over burden ourselves. The houses mostly feature finished “basements” with exterior entry that could double as apartments, and we would plan to rent that out (since we’re waiting on having children for awhile).

They cost around $625,000-$660,000. While I do not have a credit score yet (I never took on a credit card and I’ve never had debt), my fiance’s credit score is over 750. We’ve never made a late payment. He makes around $85,000 a year, while I am currently out of a job (I got laid off because of the recession and nobody has hired me yet. I had to work full time out of high school school so college was not an option for me. Which, I don’t mind, as I study on my own and read textbooks at the library). I’m 20, and when I do get a job again it will probably be around $17,000-$20,000 a year. My fiance (24) is working up the ranks as a software engineer and has a very secure job. Even without my job, we’re relatively comfortable. We don’t save much money, but we never go over budget and we’ve been able to afford nice things. To save money we’d clearly have to cut back (get rid of cable tv, start cutting coupons and stop eating out). We’re also possibly going to rent out a room for $400 a month.

I really do not know who else to turn to, Trent. My family has never been very good when it came to financial advice since money was never a problem with us (I grew up with a very wealthy family where everything was provided. My parents never thought to explain to me how much work managing that money was). Is it possible to save enough money for a 15-20% down payment within the next five years, or are we going to have to wait longer? Is there any advice you can give us regarding saving that money?
– Erica

I think there are two real rules of thumb you should follow before you take out a mortgage. If you can’t fulfill these two statements, you’re begging for something bad to happen in your life and to have your house be subsequently foreclosed on.

First, you should have a 20% down payment before you start shopping. If you’re looking at a $600,000 house, you should have $120,000 in the bank before you even start looking. Without that, you’re going to have a mortgage with a higher interest rate or with worse terms for you.

Second, you shouldn’t get a mortgage that exceeds twice your household annual income. In your case, that would be a mortgage of $210,000 or so. If you have a mortgage larger than that, you have little or no room for failure. A job loss or even a salary cut would be absolutely devastating if you’re in that kind of debt situation.

At this point, you’re far short on both counts. If you want to make it to that point, you’re going to have to make that your sole focus for the next few years. Your husband is going to have to dominate in his career path and you’re probably going to have to get a career going, too. While you’re at it, you’re going to have to buckle down and start doing some very intense saving.

Q2: Starting over from scratch
I was a widow at age 45. My husband died of prostate cancer. Everything I had went into his care and then some. I have since remarried and am trying to rebuild my financial future – at age 51. I have no clue how to effectively invest what little I can invest. I have seen others in a similar situation – illness and death sucks their financial security into a black hole. Have you already addressed this in a similar way? If you can I am interested in how you would deal with this

– Dori

The biggest thing is that you can’t spend your time worrying about what could have or might have been. You’re 51. You have very little saved for the future. What are you going to do from here?

I don’t have the details of your specific situation, but I can almost assure you that a big key to your plan is to start earning as much as you possibly can. Do you have a skill set that will help you find work that will earn significant money? Can you build on what skills you have (with additional education or training) to earn significant money?

Your concern here isn’t finding the perfect place to invest your money for retirement, but making sure that you are actually accumulating money to save at a significant rate. You must have that in place first before worrying at all about where to invest it.

Whatever you do have should probably go into a Roth IRA (assuming the amount is less than $5,000). Open one with your investment house of choice (I use Vanguard) and put it into something fairly conservative.

Q3: Loan disqualification
Despite never missing a single payment on any bill (something I’m quite proud of), I recently got a letter from PNC bank, the holders of my federal student loans. Apparently I have been disqualified from their interest rate reduction program (2% on one loan, .5% on another loan) because I was paying them TOO EARLY each month. Note that I was still within the payment time frame for the month, but they apparently disqualify you if you don’t pay within the 5-10 days prior to the due date. If you pay 11 days beforehand, you’re disqualified. They claim that they sent me a notice of this in August, except in August I moved to Philadelphia and lost some mail because of my change of address taking awhile. I never get any other billings from them because I do everything online. The biggest problem is that this is the second time I’ve been disqualified; the first time was because my parents, despite being sick, try to send a 5-10$ payment into the loan company when they’re able. Because during a payment period they received that payment first before my larger payment that covered the full monthly amount, they claimed that the first payment wasn’t the correct amount and disqualified me “because the payment can’t be split over numerous payments in a payment period.” My parents’ effort to help shot me in the foot.

It feels like they’re fishing to disqualify me for any reason they possibly can. The bank is refusing to talk to me without the federal government acting as an intermediary, and they’re stating they doubt they’ll help because its the second time I’ve had an exception. I don’t know what else to do. 2% interest is a lot of money potentially. I feel like I’m being punished for paying them back whats owed. I’m considering opening an issue with the Better Business Bureau but I really don’t know what good it will do. Do you have any suggestions?
– Sean

Likely, they are trying to disqualify you. Why wouldn’t they? There’s an agreement between you and them that reduces your interest rate and thus reduces the income they earn. Why would they not want to end that agreement if you didn’t follow the terms of it?

Companies are not out there to act in your best interest. Even the best customer service is almost entirely self-serving for the company. They provide it because it enhances their reputation and becomes a part of the package they’re selling to you, a la Land’s End.

If your agreement was worded that way and you violated the agreement, it’s completely within the company’s rights to adjust your interest rate.

Q4: Starting a business
I recently picked up the hobby of homebrewing. The thing is, I really enjoy it – to the point where I’m becoming a bit obsessive about it. I’ve had a secret dream my whole life to open a restaurant, specifically a quiet sort of bar with good food. I want to open a brewpub. However with over $100,000 in debt still staring me in the face I know there’s no place on earth that will give me a business loan to get started. If I stick 100% to my guns I should be out of debt entirely in about 6-7 years based on my current earnings. I’m following the avalanche method to get out. Is there any way you can think of in the meantime that I can prepare for the venture? I know you made the transition from engineering into a rather different field. I’m an engineer myself (don’t ask how you make the jump from psych to engineering, its a long story :) ) and would just like to see what advice you have.

– Matthew

I would suggest filling your spare time in those years with as much learning about brewing as you possibly can.

Making your own beer is just the start. You should be talking to other microbreweries. You should be touring breweries. You should check out every book on industrial brewing you can from the library and reading them thoroughly.

Through this process, you’ll figure out whether this is really something you want to be doing with your life. If you don’t, it’s no big deal – you still learned many things along the way. If you do, you’ll be as prepared as possible to make the leap.

Q5: Taking care of Mom
My parents divorced when I was quite young, and I am an only child raised by my mom with no support from my dad. The only family I know is her and a few of her elderly relatives. Despite a traumatic marriage, coming from a poor family, and no education, my mom was good with money and managed to provide for me fairly well, for which I am grateful.

I am in my late 20s and just finished grad school. I have a job in my field, but it doesn’t pay well, so I live at home and want to search for a better position in a city where I have more friends. I used savings to help pay for school, so I am trying to rebuild my savings and retirement. I also have $50k in student loans. I am serious about gaining financial independence so I can focus on more meaningful work.

My mom was laid off 2 years ago and has not looked for a new job. I have tried everything to help, from offering to make a resume, encouraging her to get a degree and making a list of job postings for her to apply to. Her reaction is always defensive and angry, regardless of whether I take a kind approach or use tough love.

She used to cover bills with her unemployment, but now uses savings. She’s started cost-cutting in a negative way – buying poor quality food/household items, getting rid of health insurance. There are also many things in the house in disrepair, that I don’t have the skills or funds to fix. Because of her outlook and loss of job skills, I have little confidence she will work again, and she is too young to retire. She seems to think things are fine, but I have a huge weight on my shoulders.

I want to move away and progress my life and career, but feel the need to stay at home and save money now to bail her out later, especially having no able family. I am even considering a second job. I want to help, but giving her money enables her to avoid her problems and hinders my goals. I can’t financially support both of us, and I don’t feel I should take care of someone being irresponsible, despite her being smart enough to know better. I am tired of the anxiety and unhappiness – how can I help this situation without giving up the things that are important to me?
– Roger

At some point, you have to recognize that people have to choose to help themselves. You can lead a horse to water, but you cannot make them drink.

If I were you, I’d give this some distance. Step back and let her hit her rock bottom, whatever that is, then be ready to help her pick herself up (at your discretion, of course).

Do not let your mother’s choices bring you down. She will find her own path through this. It will probably be different than the path you would have taken, but that’s fine.

Q6: Building credit with business cards
I’m 27 years old with 10k in student loans and I’ve never owned a personal credit card. On the advice of a co-worker, I have made large purchases on my corporate American Express card in order to build credit. I’m not too certain of the limits around this– at what point does this become detrimental and I should apply for my own personal rewards-card? I want to optimize my spending and build credit.

– Chris

The first thing you need to do is make sure this card is actually appearing on your credit report. I’d head over to the FTC’s website at annualcreditreport and find out what your credit report actually looks like.

The biggest thing that purchases on your card has shown is that you have a history of making your payments on time. The size of the purchase really doesn’t matter too much – what’s important is that you’re showing yourself to be reliable, which has a positive impact on your credit.

It probably wouldn’t hurt you to have a card of your own, especially if your business card isn’t appearing on your credit report. If it is (and you’ve been making your payments), you’ve probably already got a solid credit score.

Q7: Stocking my HSA
My question involves how much money should I be putting in my Health Savings Account. I am 26, relatively healthy, single, and maxing out my Roth. My employer provides me with a high deductible ($1450) insurance plan and an HSA, to which my employer and I both contribute $50 per month. $1800 is in the account as of today. Should I keep adding to it at my current rate or are there any benefits to maxing out my contribution for the year? My HSA allows me to invest with Charles Schwab now that my balance exceeds $1000, should I do this?

– Michelle

Since you have more than a deductible’s worth saved in the account, I think it would be okay to reduce your contributions. How much depends on whether your employer continues to contribute without you. If you reduced your contribution to $0, would your employer still keep putting in $50?

I would adjust my contribution so that $50 a month is going into the account in total, then redirect the remainder into something else you need in your life.

I probably would not invest with Schwab, at least not in anything with risk. The downside to that risk is far worse than the upside of a little bit of growth within an HSA.

Q8: New side business and taxes
My wife and I both have full time jobs, but my wife does some event/portrait photography in her spare time. She would eventually like to do this full time once she builds up a good reputation/client base in the area. In the past year she’s earned about ~$5,000 max from the 10 or so photo shoots she’s done. We keep all of our personal finances separate and she mainly just keeps the cash from her “business” in a envelope in our home fireproof safe. We have not formed any sort of LLC or anything, so no “company” exists yet. My immediate questions are relating to taxes. Do we need to report that money as income on our taxes? The amount of time she spends shooting/editing/etc. doesn’t come close to equally $5,000 even at a minimum wage. Not to mention she’s spent at least $3,000 on camera equipment. So, she’s undoubtedly operated in 2010 at a loss.

– Sam

Your wife is running a business as a sole proprietorship. She should report all income to the IRS, as well as deduct the expenses she incurred for this.

I would highly recommend using TurboTax or some other form of tax software for this. You don’t want to mess this up and the small investment in such a software package will alleviate some serious pain later on.

Typically, it’s not an issue registering a sole proprietorship at a small loss for a year or two, but continual losses often looks like a tax dodge and can garner IRS attention. Just be honest and you can’t really go wrong.

Q9: Diverting retirement to mortgage
We are way underwater on our home. Our outstanding mortgage is $134,260.99 and our estimated home value is now around $85,000, so there’s no way we qualify for the MHA program as things stand now. I know you are really big on saving for retirement, but I still wonder if in our situation it wouldn’t be better to use about $30,000 from our IRAs to pay down some of the home so that we will qualify. This won’t be the entirety of our retirement savings but it’ll put a big dent in it. We’re both looking at retirement in about ten years. We’ll both have Social Security and my husband has been a union carpenter all his life so he’ll also have a pension. At the rate we’re going, the home won’t be paid off for another 15-20 years. What do you think?

Another thing we’ve been considering is simply buying a rental property outright with money from our IRAs and using the income from that to help with living costs. Our IRAs and 401k sure haven’t been making any money over the years (in fact, they’ve pretty much just rebounded from the most recent value dive) and at least a rental property would provide a regular and substantial inflow of cash. The real estate market took a huge hit here in San Bernardino County, CA, so it’s not unrealistic to find a property for $30,000.
– Lydia

There are several problems with treating an IRA as a savings account.

First, it takes money straight away from your retirement. What happens if your husband passes on and there is no pension, or your husband and you split for some reason? The IRA money will be your key to survival.

Second, you’re going to get hit with a big tax burden if you start withdrawing IRA money prior to retirement. It will be treated as regular income that year, which means that you’ll have to pay income taxes on it, plus you’ll also have to pay an early withdrawal penalty on top of that. Remember that this income will be on top of your normal income, so you’ll be likely handing 40-50% of it right to the federal and state governments.

It’s almost never worth it to withdraw an IRA early. You lose a large chunk of the value of it right off the bat while also increasing your retirement risk.

Q10: Interest calculations
I have two bank accounts, one that earns 1.50% interest that is compounded monthly and another that earns 1.00% interest but is compounded daily. Which one would earn me the most interest?

– Evan

I would take the 1.50% interest account, without question.

The differences between compounding do make a difference, but it’s a small one. If the rates were the same, I’d vastly prefer the daily compounding.

What actually happens is that the quoted rate is sliced up over each of the periods and paid out at the end of the period. So, your monthly compounded account pays out 0.125% interest on your balance each month, with that amount usually going right back into the account. The other account pays 0.00274% interest each day.

Let’s just look at a single thirty day month. You start with $1,000 in each account. At the end of the month, the first account will pay out $1.25 and add it to your balance, giving you $1,001.25. The second account will pay out a little bit shy of three cents a day. At the end of the month, that account will have $1,000.85, according to my envelope math. Now, that’s better than what you’d have with monthly compounding, which would be about $1,000.83, but it doesn’t make up for the huge difference in rates.

Go with the 1.50% account.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. J says:

    @ Sean (Q3) – In addition to contacting the BBB, you should consider contacting your state Department of Banking. Trent is right that the bank has no interest in helping you if they can legally avoid it, but if you are persisent and can involve government regulators, it may become easier for the bank to work with you than against you.

  2. Minnie says:

    Extra information for Sam (regarding his wife’s side business): your wife’s TIME is NOT tax-deductible. The camera equipment is deductible as a business expense. Your wife is NOT operating at a loss as far as the IRS is concerned. Also, you will want to look into self-employment taxes. I am a law-abiding freelancer and, unfortunately, law-abiding freelancers have to pay self employment taxes through-the-nose. Best wishes to you and your wife!

  3. Hope D says:

    I believe Trent could recommend a good book to Q2.

    Q-5: It sounds like his mother is depressed. I would try to find out if there is anything physically or mentally wrong. If she kept everything together until now, what has changed?

  4. Jessica says:

    #1- Why do you suddenly feel the need to have a bigger house? Are you expecting triplets? Two people in a two bedroom, 2.5 bath sounds pretty good to me! It sounds like you just want to keep up with the Jonses and their pretty, large houses up the street. Besides the mortgage, don’t forget the other costs of home ownership that increase along with house size and home value: property taxes, homeowners insurance, furniture/decorations appropriate for that big house, lawn care / yard equipment, larger utility bills, more expensive / higher capacity heating and cooling, etc.

  5. Riki says:

    Q1: You can’t afford the house you want. Not. Even. Close.

    – 1500 sq feet isn’t enough space for you? Are you kidding?

    – Saving $120K in the next 5 years would require saving $24K per year. That’s $2000 monthly. Can you do that?

    – Buying a house that size means an automatic increase in utilities, taxes, and insurance. These increases are significant and must be factored into your plans.

    – A mortgage of that size (around $500K, depending on the down payment) is more than 5 times your fiance’s current income. Even factoring in steady salary increase over the next 5 years and any money you might earn, you are opening yourself up to significant risk.

    – You need to focus on getting an education so one day down the road you can afford a home like that. It would take an impressive salary for a family to afford that level of living on one income only. At the moment, your earning potential is significantly impacted by your lack of formal education — you need to go back to school.

    I don’t want to sound harsh, but Erika, I think you need a bit of a wake-up call when it comes to what it takes to live the lifestyle you want. Perhaps growing up in a wealthy family has skewed your perception of financial management . . . by all means, live frugally and save as much money as you can, but please don’t buy more house than you can afford. You will not have the life you want if every penny you make goes toward paying for your home.

  6. Rebecca says:

    Regarding “Taking Care of Mom” (Q5), it sounds like the mother could be kind of depressed. Just a thought, but someone who knows how to take care of oneself (financially or otherwise) but refuses to do so probably isn’t just being stubborn for the sake of it. If there’s a religious advisor or other low-cost counseling service she could turn to for support, that might help mom begin to get back on track toward taking care of herself. (I’d suggest a therapist, but she says mom got rid of health insurance, which probably makes the costs of professional counseling prohibitive.) Money and finances are as much about mind as math, right? Just an idea; maybe it’ll help.

  7. gharkness says:

    Q-5, Hope D has it right. This situation just screams early dementia, depression, or Alzheimers. Please take your mother to the doctor!

    Q-1 While I am sympathetic with your love for this house, it is always a mistake to “fall in love” with a house. Falling in love with a house will almost always cause you to make poor decisions, from which it is hard to recover. Be glad that these houses are out of your price range until you are able to look at them more objectively!

  8. Kim says:

    Trent, I think you missed some of the benefits of the Health Savings Accounts (HSA). HSA’s can be used similar to a 401K, IRA or Roth as a great retirement tool. The $$$ put into an HSA are taken out of your paycheck before taxes. The $$$$ can stay in your HSA to pay medical costs (without paying taxes). The $$$ can be withdrawn for qualified medical expenses at anytime w/o paying income taxes. Hopefully this will be later in life. Another beauty of the HSA is that once you reach 65, you can take the HSA $$$ out for any expenses (after paying income taxes), similar to a traditional deductible IRA. We max out our HSA yearly ($6400/yr for a family + $750 max from employer) and letting the funds build up for retirement like an IRA or Roth. In retirement we will use the $$$ to pay medical expenses or after 65 for whatever we want. We now have about $15,000 in our HSA after 2 years which are invested in various mutual funds and index funds through the brokerage. We only started in our 40’s, I can only imagine what we would have if we had been able to start maxing out our HSA’s in our 20’s. Something to consider. It is a great savings and retirement tool. I say max it out if you can afford to.

  9. EmilyP says:

    Your advice on the HSA isn’t taking into account that the contributions are untaxed (I admit I don’t know whether investment earnings in the HSA are also tax-free). Working through an HSA is a good way to have tax-free medical expenses (in general expenses totalling <7.5% of income can't become tax deductions). In addition, $1450 is the deductible before the insurance starts paying *most* of the eligible bills, while the HSA funds can be used for not only the deductible, but also any copays, procedures not covered by the insurance, dental, etc. It's like a portion of the emergency fund that is tax-free, thus accumulates 20% faster (and inaccessible except for medical emergencies, which isn't all bad).
    One good way to estimate a good account balance think of a situation you'd like to have covered: If she had a significant but not major accident and, say, broke an arm, involving an ambulance and an ER visit, run the numbers with and without a hospital overnight and 6-10 PT appointments. That'll meet the deductible, but how much would it also run in copays? Is $1800 enough? In a regular year with nothing but routine care (checkup, dentist, etc) how much are her expenses?
    I'm using my HSA (my employer's cheapest insurance offering) as an active savings plan for when we're ready to have our first baby. We'll change over to one of the better insurance plans when it's time, and have the HSA reserve to help pay for pregnancy expenses.
    In short, the HSA can be used for a wide variety of expenses, and it sounds like Michelle's got solid retirement savings. If there's not anything else specific she'd rather be saving for, I'd keep the HSA contributions at the level she's got them.

  10. Kim says:

    Ooops, our contribution to our HSA is $5400/ year + $750/yr match from our employer for the max of $6150/yr allowed by the Feds.

  11. valleycat1 says:

    Q1 – I’m with Trent (to a point) & answers #3 & #4. Why do you need an upgrade, especially of that magnitude? We have lived in a 1300′ 2BR 1BA house for 15 years & it’s plenty of room. And it’s paid for. Get real on your expectations, or as Trent advised get really serious on getting a LOT of money saved up.

  12. Steve in W Ma says:

    @Q1, Erika,

    Money in the bank trumps a big house any day of the week.That 120K that you can save for the downpayment (and that’s easily possible on 85K per year, probably 55K takehome) would be better used as financial cushion and retirement money than it would be to buy an asset drain like an overly large house.

    If you guys manage to buy that big house, your life is not going to get better. I’m wondering if the idea of the house is a substitute for other things going on in your life–realize that, beyond the level of possessions you currently have, having more or better of them will NOT improve your happiness, especially if it costs so much to hand on to them that you both spend all your waking hours working to pay them off.

    I’d stick with the house you have, or even consider downgrading if you can find an area that has good schools an a lower cost of living near where you are. It sounds like kids are in your plans since you are talking about school systems. Wouldn’t you rather be able to stay at home with your children than be forced to work to pay off an excessive housing cost? I’d suggest saving at the level of 25k per year, then NOT spending it. If you guys can save 125K in 5 years, that means you can save 250K in 10 and 500K in 20. Wow, that doesn’t sound like a lot does it? But by buying the $600K house up the road you will have eliminated even that amount of a nest egg (and college fund). I’d say–take a breath, establish some longer term financial plans that include your retirement and your kids’ education, see what kind of savings rate those things will require, and THEN and only then consider “upgrading” your possessions.

  13. Tracy says:

    Another note on the HSA – deductibles are yearly, and so it will continue to reset every year – so it’s also a good idea to have more than 1 year’s worth in savings.

    I definitely wouldn’t cut my contribution unless you need the money in another area. Also, I would start investing the money now that you’re qualified but I agree you’ll want to choose low-risk investments for it at this point.

  14. valleycat1 says:

    Q9-Trent wasn’t adamant enough. Do not use retirement $ toward the house or other real estate or anything else. If you need to reduce additional payments into retirement to make your house payments, then do that. Even if you had more years to retirement, it isn’t to your benefit to make withdrawals from those funds.

  15. Kevin says:

    Trent gave some great answers. I just have a couple of things to add.

    Q1: Erica

    If I had a nickel for every red flag in your letter, I could afford the house you’re considering.

    First of all, you’re not even married yet, and you’re looking to tie your lives to this behemoth of a mortgage? What if it doesn’t work out? What a nightmare you’d have on your hands!

    Secondly, your current house is plenty big for you guys. You don’t even have kids yet, and 2 bedrooms isn’t enough?

    Thirdly, you readily admitted you currently spend your entire income, with little savings capacity.

    Fourthly, you’re neglecting to consider all the increased expenses (utilities, taxes) and upkeep associated with a larger house.

    Fifthly, your household income is nowhere near high enough to take on that amount of debt.

    In summary, you absolutely, positively should NOT buy this house. It’s not even close. I guarantee it will be a disaster. DO NOT BUY THIS HOUSE. I cannot make this any clearer.

    Q3: Sean

    I suspect the discounted interest rate you were enjoying was intended to provide relief for people struggling to make their loan payments. Since you clearly have the financial means to comfortably pay back your loan, why do you feel entitled to continue enjoying the subsidized interest rate? That rate is intended for people who can barely make their current payments on time.

    As Trent said, banks are not in the business of lending you free/cheap money. They’re in the business of making a profit. You’ve violated the terms of the agreement, so legally, they’re justified in bumping your rate up. Heck, even ETHICALLY they’re justified, since the subsidized rates are for people who need it – not people who can easily pay early.

  16. Steve in W Ma says:

    @Q3, Starting over from scratch,

    The first thing you need to do is figure out how much a year you are going to want in retirement to have a reasonably comfortable existence. Then you need to figure out where it’s going to come from. I’m guessing a part of it will have to come from Social Security, so look at your most current Soc. Sec statement and see what your projected benefits are. Then take 70% of that because the system is under stress and payouts will in most cases be reduced from those current estimates on the statements.

    The rest of your monthly income stream has to come from somewhere else. If it’s $1500, you need about 300 times that amount in savings, and preferably 400 times that, to provide a long term stream of $1500 monthly income (say, 30 years’ worth). That’s 450,000 to 600,000.

    This is a staggering amount if you only have 15 to, max, 20 years to get it.

    Now find a way to get that amount of money.
    I agree with Trent that at 51 it will likely involve increasing your current income somehow. I would suggest also finding a way to cut expenses on a monthly basis.Figure out what you really CAN and CANNOT live without becuase eventually (not that far in the future) you will not have the earning possibilities you have now and you’ll need to rely on saved assets (and social security). Unless you have a LOT of those then you need to get very realistic about exactly how much you’ll have and what that means for your lifestyle in the future.

    As always, I suggest checking out Early Retirement Extreme. Your retirement won’t be early but it will be in a short period of time–so the site could be useful. It also has a number of financial and investment guidelines that may helpful for you to know and use.

  17. DougR says:

    Sam, I’ve been filing for maybe 15 years based on my side business, in addition to a regular payroll job in a completely different field. I declare every nickel I make in my side business (in addition to w2 income) and expense every nickel I’m entitled to, all strictly legit. Last year for the first time, my side business income was higher than its expenses (woohoo!) but I’ve had no problems with the IRS, and per a cousin of mine (who prepares taxes professionally) people in my circumstance usually don’t. (YMMV, of course!)

    Your wife is in this as a pro, so she might as well find out who in your area specializes in preparing professional photographers’ taxes. Most specialized businesses tend to have tax specialists who provide knowledge & guidance about exactly what’s allowable & what’s not, and might save you a ton of money if you file as a sole-prop business. You have to decide if it’s worth several hundred dollars (maybe) in fees to get your taxes done professionally; but in my exp. you only need to have a pro do it once. (I’ve been doing my own taxes for several years just basically cutting & pasting what my preparer did years ago.)

  18. Adam P says:

    Wow..a 2 bedroom 2.5 bathroom 1500 sq foot townhouse isn’t big enough for 2 people???

    What is wrong with this couple? Good lord. Maybe she is expecting triplets.

    Also love how she is 20, unmarried, unemployed, but wants to buy a $600k 3000 square foot house. She should be the picture they put in the encyclopedia with 2008 subprime mortgage crisis entry.

  19. Steve in W Ma says:

    @Erika, for perspective on comparative lifestyle, (as you mentioned growing up in a family that didn’t condition you to moderating your lifestyle–which I understand)
    I make $30,000 per year and save 12K of it. That means that of my approximately 25K takehome, I only spend 13,000 of it per year on housing, food, clothes, car….you get the idea. (yes, it’s tight, but that 12K annualsavings–which isn’t even quite enough for what I want, by my own calculations, to save for my later years) is the maximum I can squeeze out of my earnings.

    If you multiply that 13K of expenses times two (for the two of you) that’s 26K, call it 30K.

    give yourselves another 5K for luxuries per year and your expenses should be at 35K. TOPS.

    You guys should be banking the rest (I’m guessing just north of 20K per year) and keep banking it until and if your income rises to allow you more spending money.

    Really, for a couple, I would hope to bank 30k-40K per year. It may take a while to get to that point but I would consider it a reasonable goal. If you add your own expected earnings into the pot, that’s another 15K per year (takehome) right there, which would put both of you guys right in the pocket.

    Keep in mind that you can always SPEND later but you can’t always SAVE later.

  20. Steve in W Ma says:

    @ Q5, MOM

    It is imperative that you both tell your mother directly how her decisions are affecting you AND to concurrently form plans for you to move to the city you actually want to be in.

    This will do two things: 1) it will clear up your relationship with your mother, in which you are currently fulfilling a caretaking role that is very negative for you and is unfair to you

    2) Both actions will force her to deal with her economic reality.

    She’s a big girl. She gave birth to you, she raised you, she was and is an adult. You don’t need to take care of her. Maybe she’ll need some help when she gets old and infirm, but she isn’t there now and you both can cross that bridge when you come to it.

    For now, you are young and vital and you should go and do young and vital things–like move to a place that has real prospects for you, prospects of your own choice.

    Your mom needs to shape up and face reality. The best thing you can do is to hit her with a dose of reality and make the life steps that make most sense for YOU right now.

    I sense that you are currently in a “codependent” relationship with her so this will likely be very difficult for you to do but you should do it even if you are scared. Find some friends to support you in your planning and to talk to, then pull the trigger on the plans.

    If you don’t move away within the next two to three months, then at the very least move out into a place of your own or into a roommate situation to get yourself partially out of the negative aspects of the relationship you are currently maintaining with your mother.

  21. Steve in W Ma says:

    You guys are in desperate shape. You can do 2 things: (1) sell the house and pay the differenence, then buy a more inexpensive house (shouldn’t be hard in CA). Do a strategic default on the mortgage, then buy one of those 30K homes with cash.

    Yeah yeah yeah its “immoral,” tell that to the banks.

    Check up on the legal consequences in CA of defaulting and whether it is a “no-recourse” state or not, obviously, and hire a lawyer/get professional legal advice before taking this step.

  22. Steve in W Ma says:

    @Q9, actually, how effective is the MHA program? If it’s good and it works, then 30K from your IRAS might be a good idea. (in this case, the author of the blog didn’t address your question by researching MHA and actually giving an informed answer based on that research).

    I’m not going to research to program to answer this question either, but that’s the approach I would take.

    Another question is: will your combined pension and soc sec payments provide enough cash flow that you might not even need to worry about this? I would figure this out as well as it would be good to know. Beyond assuring you have adequate cash flow in retirement to support your house, the rest is simply “maximizing” a situation that may already be sufficient.

  23. DougR says:

    Q5, Roger: I completely understand your feelings, having been through a similar circumstance. But Trent’s right on this one. You owe yourself the best start in life that you can give yourself, and I’m sure your mom, in her better moments, would wish that for you too (and if she doesn’t, all the more reason to step away). My relationship with my mom was tough for me, there was always the desire to shine for her by solving her problems (which often meant putting my own life on hold). To my biased view, the best way to shine for her is to become a success on YOUR terms, in YOUR way.

  24. mike says:

    @comment 12 (Kevin)Re Q3
    Rate reductions for student loans are not always for people who are having trouble paying. Every loan I’ve had/seen, between my wife and I there are 4 sets and were something like 16 loans before consolidation, they offered a rate reduction for paying on time to everyone. This was not because people needed the help, but as an incentive to get the money on time, which allows the bank to earn more with that money. 2% is a huge discount and may be means adjusted, but the .5% is right in line with the on time payment reductions. In which case, being disqualified for paying too early doesnt make any sense.

    It all depends on what the agreement said and how it was worded. In any case, your emphasis on the Ethicality of if may be misplaced.

  25. Telephus44 says:

    I just wanted to respond to Kein #12. When I was paying my student loans,my lender offered an interest rate reduction if I made 48 consecutive ontime payments. It was a REWARD for paying my bills on time. I don’t think that Sean is necessarily acting out an entitlement mentality and taking advantage of subsidized rates meant for those who can’t pay their bills. You seem to imply that Sean is somehow being unethical, which I don’t think is a fair characterization.

  26. Telephus44 says:

    I just wanted to respond to Kevin #12. When I was paying my student loans,my lender offered an interest rate reduction if I made 48 consecutive ontime payments. It was a REWARD for paying my bills on time. I don’t think that Sean is necessarily acting out an entitlement mentality and taking advantage of subsidized rates meant for those who can’t pay their bills. You seem to imply that Sean is somehow being unethical, which I don’t think is a fair characterization.

  27. Katie says:

    Agreed, #22 – if the lender offers a program and you qualify, there’s no shame in taking advantage of it even if it IS meant to help people who can’t pay their bills. In reality, that’s clearly not the case so it’s just an entirely off-base comment.

  28. Jonathan says:

    Several others have already beaten me to it, but I’ll add myself to the list of people saying that 1500 is NOT a small house.

  29. tarynkay says:

    Q1- you mention renting out a room as a solution for paying the mortgage on your dream house. So I suggest that since you have already an extra bedroom and 1.5 extra bathrooms, go ahead and rent out a room now. (My husband and I rented out a room in our 800sqft 2br/1ba apartment when we were first married. It was fine.) You will either not mind having a roommate and save a lot of money towards your downpayment OR you will hate having a roommate, realize that you are going to also hate having a roommate in your dream house and get rid of the roommate after a few months. Then your house will feel HUGE and LUXURIOUS. Repeat whenever you start to feel discontented.

  30. valleycat1 says:

    Q1 – I could easily fall in love with a $600K house too. That’s why I don’t even look at them (& why realtors love to show you homes beyond your stated price range).

    I’d also add that in addition to a behemoth of a mortage & the associated increased house costs, you’d be buying into a very expensive lifestyle to go with it. Which you cannot afford.

  31. RE: Starting a business

    Why didn’t you suggest they learn what it takes to start a business, operate a business and so forth? There is a lot more to it than just running on passion.

    Personally, I think they ought to learn about incorporation, legalities of running a business (especially one which provides a product that people will consume), tax laws, etc. Hit the books, talk to lawyers, learn everything you can in order to get your business up and running from a legal standpoint and be sure that you’re protected in the event of a lawsuit.

    And of course, learn the trade as well as you can. People aren’t going to buy your product if it isn’t good or doesn’t stand apart from the competition. Find a niche and become an expert.

    Good luck! Starting a business is a lot of work but can be worth the effort!

  32. Des says:

    RE: Q1

    I don’t understand – you say that you are going to need an upgrade “very soon” but you also say you are waiting a while to have kids. Why the need for the upgrade?

    Trent is right on with his advice. You guys need to be making $300k+ to afford that house, and even then I’m not sure I would say it is a good idea. DH and I make significantly more than you, and because of that we had the luxury of buying a home that is 1x our annual salary. It is 784 square feet, but we feel that financial security is more important than impressing our friends with a big fancy new house.

    I am a moderated Dave Ramsey fan, but I do like his mantra “Live like no one else, so later you can live like no one else.” You don’t want to be that couple that had all the nice stuff in their 20s but has to claim bankruptcy in their 30s. No one is impressed with that couple.

    Instead, be the couple who lives modestly and everyone assumes makes an average salary, but then gets to retire at 50 and travel the world. Or, gets to pay cash for their child’s college. Or, gets to make a sizable donation to their favorite charity. Or pays cash for some giant-a$$ house. Or, whatever you want…

    Point is, that house is a terrible idea no matter which way you slice it. Kudos for dreaming big, but you are not there yet.

  33. Johanna says:

    I agree with everyone else that Erica and her fiance cannot afford a $600K house, and almost certainly will not be able to afford one in five years. But I don’t think they’re quite as far off as Trent and some others are making them out to be. The “limit your mortgage to twice your income” rule seems to have been pulled out of thin air by Trent. It’s a *very* conservative limit, and it’s not realistic for many people. Especially when interest rates are low, a mortgage of three times income should be doable by most people. Even four times income might not be stretching it too far, depending on how much you spend on other things. Still, that means that Erica and Future Mr. Erica need to be making at least $130K combined.

    And to address another red flag in Erica’s letter that I don’t think anyone else has mentioned yet: Erica talks about buying a house as an “investment” that will “make money” for her. That is a very foolish way to look at it. Over the long term, housing cannot sustainably appreciate at a rate much greater than inflation – otherwise, nobody would be able to afford a house.

  34. Courtney20 says:

    Johanna – I’ve heard the “2x your income” rule in other places besides here, but I’ve never understood where someone managed to come up with a hard and fast rule like that – it seems like it would depend on your tax bracket, current interest rates, etc etc. The “mortgage payment < 25% of your take home pay" seems to make a lot more sense to me.

    If I go by the 2x rule, that would limit us to a maximum mortgage of $306K. But at today's rates, that's a monthly payment of $1610, or less than 19% of our take home pay. Not that it would be bad to make the choice to limit ourselves to that amount, but it certainly doesn't spell imminent doom if we went higher. If we went by the 25% rule, we'd be looking at a maximum mortgage of about $412K which is probably more reasonable.

    No matter which way you slice it though, Erica and her fiance cannot afford a $625K house based on their current income.

  35. Des says:

    @Johanna

    While I don’t know where it came from originally, the 2x income doesn’t come from Trent. It was the standard rule of thumb in my grandparents day, and that was when one income was the norm. If housing values on the whole pace inflation, I don’t see why it would be a less-valid rule today than it was in their time.

    The median income in America is about $50k, which would put a starter home at $125k, if you put 20% down. I live in an expensive area, and there are TONS of starter homes in that range (2-3 bedrooms, 1-2 bath, 900-1200 sf). It is probably not realistic for New Yorkers, but for most areas it is reasonable.

  36. Michelle says:

    Q4: Why not pick up a part time job in the field, like at a wine and beer store or at a restaurant. Work once or twice a week, learn more about beer and the restaurant industry.

    That’s what my bf does (we’re interested in wine and one day having a boutique winery) and we’ve learned a lot! Plus we get a bit of extra income and the occasional free bottle of wine. :)

  37. Gwen says:

    @Q5 Roger:
    Hi Roger – while I´m completely with Trent and the other commenters in that you should take care of yourself and your life I also have the feeling that maybe there is a component on how to keep peace whilst talking (I have that thing with my mother – I love her still sometimes when I was younger we ended up quarreling) and I´d like to suggest two books to you that might be worth checking out to have another approach in the communication. One is short and quite a gripping read the other one is longer and more paramedical directed but still worth the effort.

    The short one is “Peacetalk 101″ from Suzette Haden Elgin where she writes a story about a family father that decides to end his live because he cannot face it anymore – and between what his last 14 days looks like and if he indeed will do it the author communicates how to talk to people in a way that is giving everyone involved peace.

    The other one is “The worst is over” from Judith Acosta and Judith Simon Prager – it mostly is about how to talk to (para)medic clients but the second part deals with chronic illnesses and how to talk to them. Whilst your mom might not be ill it might help to get the whole situation in a different frame of mind whilst you take good care of yourself.

    Wishing you stamnia in difficult times! Gwen

  38. Just a reader says:

    @Q7:

    It depends on your circumstances, but if you have the extra income you should max out your HSA. This is a tax-deferred account (like your IRA or 401K) that you can withdraw for medical expenses as needed, now or in the future (it doesn’t expire like an FSA). You are required to have a HDHP in order to contribute, and you may have a different plan in the future. You can keep what you have, but if you don’t have a HDHP you won’t be able to contribute.

    This is based on my personal experience. When I had an HDHP this is what I did. Then I continued using the money after I had a low deductible plan. If I had stayed longer with the company I would have continued to max it out, because health costs are sort of guaranteed to be an expense as long as civilization lasts.

  39. Jackie says:

    Q9. The MHA isn’t all it cracked up to be. Find your local HUD office and go to an info session and prepare to be blown away. One of the things I learned is that even if you qualify for MHA, banks don’t actually have to modify your loan. It’s purely optional on their part and most want nothing to do with it. It is absolutely not worth dipping into your retirement to gamble on actually getting a worthwhile modification.

  40. Tom says:

    @johanna – Glad you brought that up. While I still think a $600k house is out of their reach, I can easily afford my 200K mortgage on much less than he brings in. The 2x your salary argument makes more sense when interest rates are 7-8%, not 4.5-5%

    Also, let’s point out and applaud Erica’s gut feeling that it is too early to move into a house like this for her and fiance. So, Erica, go with your gut and don’t do it. It is fun to look at models of big fancy houses, but your numbers provided don’t support buying a house at that price.

  41. Tom says:

    RE: HSA Accounts.

    I have one and wouldn’t begin investing inside of it until I had a comfortable amount of money set aside for what i could reasonably expect to pay in a year for medical expenses. I’ve never checked out my brokerage (JPM-Chase), but given that the company nickels and dimes you left and right ($5 a month for statements, $10 to write a check, etc.) there are probably big expenses involved

    Also HSA tie you to High Deductible Health Plans – and my plan penalizes you for no longer carrying that coverage. That’s a consideration investing in one for down the road when you may think that insurance is no longer right for you.

  42. Des says:

    RE Q9:

    If you would like to buy real estate with your retirement funds, you need to google the term “self directed IRA”. You can do it without taking the money out of its tax-deferred status, you just need to really know what you’re doing.

  43. Jackie says:

    Q4. Homebrewing doesn’t equate to craft brewing. Don’t do anything until you’ve at least spend a few years working in a craft brewery (and I don’t mean as a waiter in the pub). Better yet, get a degree in brewing.

  44. “Despite a traumatic marriage, coming from a poor family, and no education, my mom was good with money and managed to provide for me fairly well, for which I am grateful.”

    Another reader asked “what has changed?” to make Roger’s mom unable to cope. Please consider that what has changed is that she finally hit the wall. His mother may be suffering from serious depression and/or PTSD (especially if “traumatic marriage” is code for “abuse”).
    Think of it: She came from nothing, had no education, got into a terrible marriage and yet held it all together for the sake of her child. She kept putting one foot in front of the other no matter how hard each day was.
    Then came the layoff. That may have been the trigger: When the routine of her life disappeared, she could no longer hold the depression/whatever at bay. There was no more form to her days. She suddenly had time not just to acknowledge how awful she felt, but was being told by everyone “just go get another job” — as though it were that simple these days even for people with a lot of education.
    Roger, your mom can no longer cope. And clearly she needs help.
    Seven years ago, I *was* your mom: Adrift after finally breaking free of an awful marriage, finally able to acknowledge everything that was gnawing at me. After about a year of false starts (and intensive therapy) I went to a local community college and diffidently asked how one would go about getting an education. My world began to change at that moment, although some of the hardest work of my life still lay ahead.
    No, it’s not your job to fix her life. But you’ve certainly been willing to draft off that life, haven’t you? Being “grateful” for what she went through so that you could succeed isn’t enough. You live at home so that YOU can save money and you mention that “giving” her money is enabling her. Um, son, you SHOULD be giving her money, in the form of payment for rent, utilities and food.
    If pursuing financial independence is really so important to you, why haven’t you looked for that second job and planned to bank every dime of it?
    And if you think YOU’RE stressed, worrying about your future, imagine how it must have felt to be young, uneducated and stressed every minute of every day with fear that you and your little boy would be out on the street. Of never being able to have nice things for yourself because your son needed new shoes or school fees. Of going to work when you felt sick and spending evenings not resting but either (a) getting things done that you couldn’t do during the day or (b) wondering how to make your money stretch.
    I could go on. But I hope you see my point.
    Right now you’re fixed on your own needs, which is as it should be: You need to think about your future. But kindly think about your PAST, and all that your mom went through so that you could grow up and get an education and a job in your field, however low-paying (do you know how many people would LOVE to have jobs in their fields?). And think about getting your mom some help. Spend a little time looking for programs that offer help on a sliding scale. If there’s a community college, drop by and describe your mom’s situation — there may be a program that will offer either job training or an AA degree that will give her the chance to learn to think of herself as a person, not just “Roger’s mom” or “that failure who got laid off.”
    Put a different way: What would you be doing with your life if your mom were not there? How would you manage rent, utilities, food and laundry plus payments on $50k without a home base?
    Again: I am NOT saying that you must live at home and care for her until she dies. (In another era, that IS what would have been expected of you.) But you owe her more than “tough love” or, god forbid, “letting her hit rock bottom.” That may yet happen — but you owe her at least a serious, loving attempt at helping her find her way.

  45. getagrip says:

    Q5 Some good advice on this but as it reads to me the bottom line is your mother does not want you to leave. No matter what you do, no matter how rational you or she appear to be, emotionally she does not want you to leave and the fact that you may go could be a root cause for a lot of her actions. She may not even realize it, and is likely depressed at the thought of being left alone. Of course you have to be the judge of if that’s a valid concern since we’re not seeing anything near to the full picture.

    Q1 Why are you in love with the “house”? Really, it’s a thing? I’d love a Porche 911, I’ve test driven them, but at the same time I realize getting one would be a lot of effort, cost, etc. which really isn’t a need. Given where you currently are, and that there is just the two of you, why is the house you’re in so small? Is it too small because you’re filling it with “stuff”? Is it too small by your wealthy families standards? You may want to think about that a bit to understand why you want a new place. I can appreciate wanting more, and there is nothing wrong with it provided you can afford it, but given what you’ve stated, Trent is spot on. If this is something you want then start working hard for it. I only hope it’s worth it for you in the end.

  46. Laura says:

    Q1 –

    Relax. Those houses will still be there in 10 years or whenever you can actually afford them (which is not going to be in 3-5 years). If they all get bought now, so what? People will move or want something else and resell them. You can buy them then, when you have the means to do so.

    I think you’re missing out on an opportunity right now, but it’s NOT a new house. It’s your education. Go to school already! You’re only 20. You have a fiance who can help support you, and you don’t have kids or a career. You also sound like you actually like books and learning. It’s great that you like the library – so do something good for yourself and get a degree for doing it! I know 2 years sounds like a big difference between 18 and 20, but it is better than waiting 5, 10, 20 years. Don’t miss out.

  47. jim says:

    Q1 Erica – No. Sorry no you really can’t afford a $600K+ house. You’d have to save >$20k a year just to pile up a downpayment and then the payments alone would probably be over half your income not to mention higher utility and other costs. What happens if your husband loses his job or is seriously injured? No job is guaranteed. Whats wrong with your current house? Don’t think of a house as an ‘investment’ even in the good Seattle market. Thats what lead many people to lose everything in the past few years.

    Q7 Michelle : If you have enough in the HSA to cover your expenses then you could cut back to lower your HSA contributions. Its probably better for you to be fully funding your 401k or Roth than to put extra money into the HSA. But if you’re already saving lots for retirement and looking for another place to dodge some taxes then an HSA is OK place to put spare money. Also keep in mind that you can use that HSA money for stuff like vision, dental or other misc out of pocket health related expenses.

    Q9 Lydia – Dont’ cash in the IRA early. You’ll pay 10% extra penalty to cash out the IRA before retirement age. Better to keep the money in the IRA and then pull it out when you’re retired to avoid the penalty.

  48. Karla says:

    @Donna Freedman

    Thanks for weighing in on this with your usual thoughtfulness and thoroughness. When I read this question, I thought of you and your story so I’m pleased to see your comment here. I hope your success and suggestions will be useful and uplifting to Roger and his mother.

  49. Diane says:

    Sam: Whether or not your wife has incorporated she is in fact operating a business right now (it’s not in quotes – it is a real business, and not a “business”). Any income needs to be reported – and that all income less all expenses.

    Her time, or any idea of “wage” she pays herself is not a factor. That is not a business expense and is NOT deductible unless she decides to take the expense and trouble to become a C-corp and have the C-corp pay her a salary. For a sole proprietorship or an LLC her wage to herself is not a business expense. Forget any idea about what her time is worth, or minimum wage or the rest of it. Gross income gets reported, Legitimate business expenses get reported, and the difference is what she pays tax on. If that means she ends up working for $1/hour, then so be it. The IRS doesn’t care what she thinks she “should” be paid.

  50. Diane says:

    Q1: Bad, bad, bad idea.

    A mortgage like that will REQUIRE upwards of a $200K income for the indefinite future, and even then will not allow for much in savings. If either of you think you might ever want to stay home with kids for a year or two; or change careers to work at something less profitable; or take a leave of absence to take care of ailing relatives; or simply have a financial cushion to weather getting injured or laid off – you will not be able to do so without losing or selling the house.

    As a reality check, I live in a 1200 sf house, and some days it feels way too big for me. And 2 people can’t live in 1500 sf? And my mortgage, while large ($375K) is nowhere near what you are considering, yet 50% of my spending goes to my house (mortgage, maintenance, utilities, etc). Your plan is not sensible.

  51. AK says:

    Q1 – Listen to everyone’s advice! Even if you somehow manage to get a loan, make a down payment, cover closing costs and other initial expenses, plan to be spending a lot of time in your home bc there’s no way you’d be able ever be able to keep up with the Joneses in social activities for a very long time…if ever.

    Q4 – There’s a lot more to opening a small bar and restaurant than just having a passion and ability for homebrewing. I was an employee at two different start-up restaurants/cafes and saw the behind-the-scenes details that many people never know. I’d advise you to do some serious research, self-education and formal education on owning a restaurant. Find a bar/restaurant similar to one you want to open and ask to shadow the owner/manager for a while to get a realistic idea of what it really means to commit to a bar/restaurant business.

  52. jim says:

    The 2x income rule for a home price seems to work best for median income and median home prices. Say you make $60k a year then that would mean you should be able to afford a house around $150k which is fairly reasonable for many parts of the country.

    But the more income you make the easier it is to afford a more expensive house. Say you make $120k then it shouldn’t be a stretch to afford a $400k or $500k house.

    But there are several variables like the interest rate on teh mortgage, tax rates, and downpayment level that make these rule of thumbs just vague ballpark things that don’t work well for everyone.

  53. jim says:

    I guess I should say that a $400k-500k house MAY NOT necessarily a stretch at $120k income. It might or might not be depending on mortgage % rates, taxes etc and your other debts. etc.

  54. lurker carl says:

    Question #6 – Establish your own accounts to build up your FICO score. Check your company policy for card usage, purchases unrelated to the job may be grounds for dismissal.

  55. Wes says:

    Q4:

    I share your passion for homebrewing, but I would encourage you to take a good look at the Craft Beer market before you go all in. The market share of craft beer has been increasing dramatically since the nineties, and there are literally thousands of breweries that have popped up just recently. Many of them are great. Many of them, however, aren’t. The upward trend would be a great wave to catch if it continues, but the presence of sub-par craft beer on the market (being sold at the same prices as the good stuff) suggests that this beer renaissance may be a big foamy bubble that’s going to burst as soon as the novelty of craft beer wears off.

    I realize that you are more interested in a brew pub, which has a different spot in the economy than a packaging brewery (I don’t know if you live in a state that lets you do both or not), but if the beer market crashes, the brewpubs will feel it too.

    That said, you might not be in it for the money, and just scraping by with a brewpub would make you happy. If so, go for it. However, if this idea is based mostly on passion and less on making money or starting a business, I would suggest you just stick to homebrewing, or maybe think about opening a homebrewing store in your area.

  56. Rob says:

    Re: Q1.
    It states that she ‘owns’ her current house. What’s the oustanding mortgage/value of that?
    If she owns (gift from the rich parents maybe?) a $300K house that’s paid off (or will be in 5 years) the situation changes drastically.

    Q8:
    In Australia you could class that as a “hobby income” and not pay tax on it.

  57. Thomas says:

    #4 Matthew – For sure, get a job at a brew pub for a year. Then another… You’ve got 6 years to immerse yourself before you’re debt-free. A part-time job is the perfect ticket to not only free education, but they’ll pay you!

    I used to dream of owning a bike shop. I worked at a shop in college for a couple years. No thanks! It was a great education and I learned myself right out of that passion. I learned it just wasn’t for me. My hobby was bike racing, but making a hobby my living took some fun out of it.

    Working in a brewpub might teach you that you’d rather focus just on the brewing and nix the food and hospitality end of things. Good luck!

  58. ellie says:

    I love the comments, but can barely read them anymore on the gray/green background. Anybody else have this problem or is it just my eyes?

  59. DeeBee says:

    @Trent Regarding your initial comment: This is why libraries and librarians are so important, and why parents should fight for their children’s schools to retain licensed school librarians on staff. It’s why all citizens should fight for libraries to stay open regardless of the economic recession. These days, Google and other search engines have made people accept what is fast and “good enough” instead of what is most accurate. Information literacy is a critical skill for everyone in the 21st century.

    DeeBee

  60. Courtney20 says:

    Rob #56 – pretty unlikely, since she’s asking if it’s possible to save up for a 20% down-payment in 5 years. If they had substantial equity in the current house the down-payment wouldn’t be an issue.

  61. SwingCheese says:

    My husband, my son, my father-in-law, and I are currently living comfortably in our first house. It’s about 900 sq. ft. That being said, we’re currently saving up for a down payment on a home that is larger – we’re aiming for between 1200-1500 ft. I realize that I grew up in a small house (800 sq. ft.). I understand that people base their comfort level on how they were raised. BUT: I cannot believe that Q1 is busy trying to figure out how to buy a house that is so far outside of her price range while she is unemployed, based on a hypothetical future employment level, although she has no formal education beyond high school. Expect the best, but prepare for the worst, kiddo.

  62. spaces says:

    Q1, Erica, I’m assuming you’re not a troll (although you and that I-make-+300k-and-am-under-30 guy from a recent mailbag sure sound like trolls to me).

    “Budget” refers to what you can afford. Not what you think you should be able to afford. And certainly not what you think you deserve.

    My spouse and I both officed at home for years in our 1100 square foot cottage. We had plenty of space. If you don’t have enough space, consider streamlining your life and having less stuff.

    And I haven’t read all the comments on this so it might have been said already … You need to educate yourself about job security for software engineers. The job market is brutal out there, wages are pretty flat, and more and more positions are being outsourced to other countries every month. There is no reason to believe a software engineer’s position is secure, and every reason to proceed with financial plans with extreme caution.

    Perhaps instead of looking at houses that would carry a $6000 a month payment, you should be getting an education so that you might someday earn more than $2000 a month.

  63. con says:

    Q#1 – Erica – I think this question must surely be a joke. Get real.

    1. She says “They’re the perfect size for us, and the perfect life style for us.” What lifestyle are you getting from a larger house that you don’t have now? A lifestyle of showing it off? Or more than likely, a lifestyle that will be much more subpar than the one you have now.

    2. “I had to work full time out of high school school so college was not an option for me.” Then you go on to say “my family has never been very good when it came to financial advice since money was never a problem with us (I grew up with a very wealthy family where everything was provided. My parents never thought to explain to me how much work managing that money was.)”

    If your family was THAT wealthy, why did you have to work right out of high school and college was not an option? I am not getting it.

    IF the question is even real, girl, you need to stop living in a fantasy world. Otherwise, I wish you the best and hope you can afford your fantasy. I suppose it could be done if you guys really really buckled down and things went your way. Good luck!

  64. con says:

    One more thing regarding #1 – Erica. Again, if this is a serious question, I don’t mean to be rude. Read most of the above comments and take their advice. You’ll probably be glad you did. You’re young and I know when I was young I had grand ideas of living in a tropical climate and making a living selling my paintings. I should have tried it as I got older but it was very silly of me to think that could happen when I was 18 with my means. You should strive for what you want but you are so young and have so much time for that later. Be smart now.

  65. Golfing Girl says:

    Q1: I am very confused how a wealthy family would not ensure that their daughter would get some form of higher education and would someday make a decent salary ($17-$20K in a high cost of living area is at the poverty level in my opinion).
    1500 square feet is MORE THAN ENOUGH space for two people. I cannot fathom how you are looking at a $600K house when you are unemployed and not remotely interested in finding a job making more than minimum wage. And there are no guarantees in life–your future husband’s salary is not guaranteed. If you both had good jobs, I would say maybe, but with one income, your priority should be setting up an emergency fund ASAP since you only have 1 source of reliable income.

  66. JJ says:

    I’ll chime in with everyone else here on Q1. The poster needs a serious reality check.

    60 years ago, the average single-family home was under 1000 square feet. About 40 years ago, it was still under the size of your current home.

    Despite this, people lived in them, had children (sometimes lots of children), and basically lived their lives just fine.

    The house I’m in right now, for example, was originally around 950 sq ft when it was built in 1952. One single solitary bathroom too. I met the first owners once. They raised a daughter in it and had very fond memories of living there. No complaints at all.

    (Oh, and houses back then weren’t mortgaged to the gills either. Something else to think about.)

    JJ

  67. Scotty says:

    Regarding Q4/Brewing, there’s a few good videos on youtube about a guy who visit’s small craft breweries in the states. The first thing he asks most of them is ‘what advice would you give someone who wants to start their own brewery…’. The answer is always to do with learning to run a business, and nothing to do with beer. And these are all people like you – starting from being somone who loves homebrewing. They all say “brewing beer – that’s the easy part”.

    I love to homebrew as well, so I definitely see where you’re coming from. Definitely take the time to learn as much about brewing as possible, but also about business. I’ve seen many businesses fail, not because the owner was not good at their trade or craft, but because they couldn’t properly run a business.

    Also, having been on many, many brewery tours myself, many brewmasters all seem to have similar advice about the beer itself – learn how to make a good beer, and make it consistently. They also mention that there’s a lot of differences between brewing at home and at a brewery. Whilst the basic process is the same, one guy I talked to said it’s like building a car. You can be a pro mechanic who’s an expert at building hotrods in a garage, but that virtually nothing to do with how a car gets built in a factory. Same goes for brewing.

    Follow your dreams, but do it smartly. Don’t assume that because you’re an expert homebrewer you know craft brewing.

  68. AnnJo says:

    Erica,

    I agree completely with Trent and everyone else that the house you are looking at is way out of your price range now and almost surely in the next few years.

    I wonder if your reasons for looking at a move are ego-driven and not reality-driven. You say you come from a wealthy family, but they seem to have cut you off after high school. Maybe there’s a little of wanting to prove to them how well you’re doing by buying an extravagant home. Whatever the reasons, you need to lead with your head and not your heart on this, and asking Trent for advice and following it is a good start.

    Run some numbers: Since you won’t have a strong (20%) downpayment even in five years given your own lack of earnings and your boyfriend’s lack of savings to date, you won’t get the best interest rates. Say you get 6%, your monthly mortgage payment would be about $3,600 BEFORE property taxes (figure about 1 to 1.3% of house value per year for that, or another $600/mo in property taxes) and insurance and any homeowner’s association dues and nearly double the utilities you’re currently paying and maintenance and repairs and yard-care. Just the mortgage and property taxes alone would suck up $50,000 a year.

    You didn’t mention other debt, but your boyfriend may have student loans and there may be car loans now or in the future.

    And don’t assume you would have income from a rentable “mother-in-law apartment” in your basement. Many planned communities have strict homeowner’s associations and forbid such rentals.

    Not to mention that, in the Seattle area, if your boyfriend bought his current house in the last three or four years (I seriously doubt you bought it together since you would have a credit score if you were on the mortgage), he’s underwater on his mortgage unless he put a huge amount down, and he may have trouble selling it anytime soon. In the suburbs of Seattle, house prices are generally still falling and there’s lots of inventory.

    Erica, my best advice is to stop looking at things you don’t need and can’t afford until you DO need them and CAN afford them. You have a roomy house to live in and no current financial worries. You’re better off than 90% of the world’s population and at least 50% of the country’s population and should be very content with your circumstances, but you will make yourself discontented and resentful if you keep on “shopping on Rodeo Drive on a Penney’s budget.”

    But if you still think it’s doable, there’s a simple experiment. Calculate what your monthly expenses would be on the house you want (mortgage, taxes, insurance & homeowner’s association), subtract your current expenses for those things and put the difference in a savings account each month for 12 months, and see what it’s like to live that way. If you can do it with no problems, you can handle the debt load, and you’ll have a good beginning on saving for your down payment; all you have to do is keep it up for a few years. If you find you have to pull so much as $1 out of that savings before your test period is done, well, you just saved yourselves from foreclosure and/or bankruptcy.

  69. Pattie, RN says:

    Late to the game….did we ever find out if “Erica” was a troll? If not, she is surely an example of the attitude that caused the mortgage crisis. Let’s see, they “need” a bigger house, she has no education, job, or skills, the boyfriend has not yet signed that marriage license, however he IS in a competative field. There is nothing wrong with the townhome at all except that it is “too small” for two people….and my favorite, the new house is SURE to MAKE money for them!!

    Maybe this letter got lost in the mail and was ACTUALLY written in 2002!! What a hoot~~

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