Why You Should Understand Your Own Finances

Yesterday, I posted this article discussing how much house a person can really afford. My take? Play it safe.

While working on the article, though, I had a discussion with Sarah about our experience with buying a home. We talked about our meetings with the loan officer at the credit union, some of the more memorable houses we looked at, and a few other things.

One particular aspect of our home search that came up was the widely varying offers that different financial institutions gave us. Our credit union – the one we ended up using – preapproved us for a mortgage up to $180,000. At the same time, though, another bank preapproved us for a mortgage up to $325,000.

Given that situation, we could have gone with the offer from the bank and bought a tremendous home. We looked at several homes in the $250,000 to $300,000 range and actually fell in love with one of them.

However, we ended up “playing it safe.” We stuck with the credit union and ended up in a home that was significantly less than our $180,000 limit.

It would have been very, very easy to believe the bank that said that we could afford $325,000 worth of home. After all, they’re the bank. They would be the experts on assessing what we could afford, right?

Unfortunately, the housing bubble showed us that such “common sense” really doesn’t work. Bankers will often choose to issue loans – and choose to not issue loans – for reasons that have little to do with your personal finances.

You should never completely rely on someone else’s assessment on what you can afford or not afford. Everyone else on Earth has conflicts of interest (although some have far fewer than others).

Instead, you should rely on yourself. That, of course, requires that you spend time figuring out your financial situation and understanding the ins and outs of how and why to invest.

The more you know, the better you’re able to make financial decisions. Even more important, you’re the only person out there who is capable of making non-conflicted decisions for yourself. You can be your own best financial advisor.

So, back to our housing decision. What made us decide to reject the $325,000 offer and the beautiful home we fell in love with?

We trusted ourselves. We sat down, looked at our financial situation realistically and without anyone else who might have conflicts of interest, and we realized that we really couldn’t afford the house we had fallen in love with, which had a sticker price of around $270,000.

Instead, we ended up in a home that we paid more than $100,000 less for. Sure, it’s not as big or as “nice” as the other one. The yard is smaller. The kitchen is way smaller.

On the other hand, that smaller house is completely paid off. If we had jumped into that bigger house, we’d likely still be paying it off. With that bigger house, I probably would have not felt secure enough to make a major career shift just a year or so later.

We didn’t listen to the banker. We gathered the evidence, listened to each other, and figured out the right way for us to go, and we haven’t regretted it for a second.

The moment you allow someone else to make financial decisions for you is the moment you allow factors that have nothing to do with you run your financial life. You should never, ever let that happen.

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