I’ve touted the benefits of living in Iowa before, but one of the biggest benefits of all is the wonderful housing market. I was able to get a 2000+ square foot home, built less than ten years ago, for less than $200,000. This success makes me never even want to consider living in an expensive housing market like many of my readers do.
Given that, one of my readers wrote to me with an interesting take on the dichotomy between his expensive housing market and my relatively cheap one:
I live in Cambridge, MA, and the amount of home that you can get for $150,000 or even $250,000 is basically low to nonexistent. A quick MLS search turns up the cheapest single-family home in my city for $339,000. There is a one-bedroom, 427 square foot condo listed for as low as $179,000, which is the lowest-priced listing. So the question I thought you might have some interesting insight into is this: how can those of us who live in higher-priced areas and have children work toward home ownership, assuming that we don’t want to uproot our kids and take them away from their families and out of their schools?
I have been following your blog long enough to know that you live in a cheaper, more rural area, but I think that this might actually allow you to have insight and perspective about this situation that I might not have.
The obvious question that this article brings about is if I were living in a truly expensive housing market, like San Francisco or Cambridge, what would I do without moving away? Here’s my gameplan for anyone living in this situation.
First, get over yourself. Check your ego at the door. Right. Now. This might seem almost arrogant advice, but it’s true. Many of the things you will have to do now will be things that you might not even consider yourself doing. I had to go through an enormous ego check a while back when my son was born and I realized that I needed to be getting my financial house in order. Just check your preconceptions at the door and don’t just say “No, no, that doesn’t work for me” unless you’ve actually given it an earnest shot.
Find the cheapest housing you can possibly stand. My wife and son and I have lived in a crackerbox apartment for the last few years in order to save up for a down payment and to have some cash for the things we would want when we move. My first reaction to the apartment when we walked in was “Over my dead body,” but the more I thought about it and looked at it, the more I realized that I could make this work for a while. If we had been living somewhere more expensive, we would still be stuck in a tiny apartment instead of moving on up to the figurative East Side.
Learn and practice frugality in every dimension of your life You may think it’s silly to spend time doing something that saves only a dollar or two, but just keep doing it in every dimension of your life and that cash seriously adds up. Pick up The Complete Tightwad Gazette (never mind the cheeky name) and study it. Install CFLs in every light socket. Take public transportation everywhere. Find free entertainment (if you live in a hot housing market, likely there are tons of interesting cultural activities around). Use the library instead of the bookstore.
Build a cash emergency fund. I would build a few months’ worth of salary in a cash emergency fund in a high-yield savings account. This way, if something bad happens, you aren’t dropping it on the credit card and causing yourself to lose ground on your progress. Once you reach three months or so, let it sit there and let the interest build – only tap it when the only other option is to hit the credit card. Build this emergency fund first before you do anything else and if you do need to hit it, make sure it is built back up before moving on.
Pay off all of your debts before you do anything else. That housing payment is going to be a monster, so you need to be rid of all debts so you can focus on that big debt that is coming. Don’t pay attention to advice about leveraging low interest rates – you’re going to need every penny you can get each month when you move and a required payment of any kind isn’t going to help. Get rid of them now before you even start saving. The most cost-effective way is to start with the highest interest debt you have and throw every possible spare penny at it.
NOW start saving. With no debts, a cheap lifestyle, and an emergency fund in place, you should be able to sock a huge chunk of change away each month. I would put it in a diverse portfolio of four or five low-cost index funds – I’m a huge fan of Vanguard’s offerings. Just keep building up.
Keep yourself motivated. My wife and I window-shopped for houses constantly. We would look at every house for sale and discuss its merits. We saved pictures of houses we liked and put them up everywhere for motivation. This (plus the constant presence of our son) made us constantly realize why we were making hard choices.
Define clear metrics I really found that having a clear progress bar made it easier to keep track of where we were at. I would fill in a percent of the bar each time I saved up that matching amount. To do this, you need to know the approximate price of the house you would buy and also have a good idea of the monthly payment you could actually afford – this will show you how much of the house’s cost you can actually swing on a mortgage. Save for the difference between the two plus about $20,000 (so you can furnish the home – trust me, you’re going to really want to when you move). Then, each time you save 1% of that amount, you can mark it off on your progress bar. For us, thankfully, we knew we could afford the monthly expenses of a house – our goal was just the down payment and a wad of cash to furnish the house after the move.
Keep your nose clean The best way to do this is to eliminate all but your oldest credit card and only use that for occasional online purchases, which you pay off immediately (never, ever let a balance carry over). This keeps your credit nice and healthy so that when you go to get the loan, you’ll be in good shape to get a good rate.
Good luck! From my perspective, you’re going to need it!