Part four of our “First-Time Homebuyers Series” continues today with another post from John Foxworthy.
So you’ve found the perfect home, got an accepted offer, and made it to closing. Here are a few steps you can take to make sure your dream home doesn’t turn into a financial nightmare.
Build your liquid cash reserves
We usually recommend keeping three to six months of your salary as a cash reserve. This reserve can be used to keep you afloat in the event that your income is interrupted. If you should lose a job or need to take a medical leave, this fund will be there to pay your mortgage, auto and home insurance, and utilities. It can also be used for emergencies like a car repair or an unexpected medical expense.
Set money aside for future home repairs
This fund should be kept separate from your liquid cash reserve, which is designed for income replacement. As the homeowner, you will be responsible for any expenses associated with the home so it makes sense to have a fund in place. At some point, a major repair like a furnace, water heater, or a roof will be needed. You should set up an automatic transfer every pay period to a separate “home repairs” account in order to start building up some cash.
Adjust your budget
Purchasing a home is one of the biggest financial transitions that a person will make in their lives. It goes without saying that you will probably need to make a significant adjustment to your budget. If you did your homework to make sure you were purchasing a home that was within your means, you shouldn’t need to change your lifestyle too much. However, it is a great time to look at your spending patterns and see where you can be more efficient and effective with your income and saving plans. You can use a financial software program like Mint.com or Quicken to do it yourself, or it might make sense to talk to a financial professional who can help you with a more customized cash flow plan. Stick with an independent firm that offers fee-based financial planning and coaching.
Do your protection planning
Whether we like it or not, sometimes things don’t go as planned. Accidents happen, people get hurt or sick and can’t work, and sometimes they even die prematurely. Before owning a home, these risks were important, but they become more important now that you have a significant liability associated with your mortgage. Fortunately, there are tools that allow us to mitigate the risk of premature death or disability. Life insurance can ensure that a partner or spouse doesn’t lose the home. You should get enough low cost term insurance to cover your mortgage, debts, and salary for at least a year, but that is just a starting point.
In addition to that, your chances of becoming disabled are greater than your chances of dying. According to LIMRA, an industry research organization, about one in three Americans entering the workforce today will experience a disability before they retire. Disability insurance can offer a layer of security and financial protection for the whole family. You probably carry some form of disability insurance through your employer, but if you don’t, it may make sense to contact a financial planner who can help you explore your options.
Invest for retirement
A new house can drain your cash flow, and it sometimes makes sense to delay your retirement savings for a few months or more. As soon as you can afford it, it is important to resume investing for your retirement plan at work or to open an account if you don’t already have one. Time is on your side and the magic of compounding makes it more valuable to save now rather than waiting to play catch up down the road. Even if you can’t save much, every little bit helps and can grow substantially over the rest of your working years.
Congratulations on taking the first steps toward financial security. Some of the wealthiest retired people that I know started out by purchasing and paying off their own home. A home can be an appreciating asset that can become the cornerstone of your financial balance sheet for years to come.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice and financial planning offered through The Mahara Group DBA Mahara Wealth Partners, a registered investment advisor. The Mahara Group and Mahara Wealth Partners are separate entities from LPL Financial.