For years, buying a house has been part of the “American dream”. The yard, the fence, the mortgage, all of it signal to the world that you’ve made it. It’s something to strive for, something we should all work hard for and be proud to achieve.
Or is it? Home ownership certainly has its benefits. I’ve written on here before that my wife and I would like to buy a house someday, hopefully sooner rather than later. But that article was really all about the reasons why we haven’t bought yet. Most of it came down to short-term uncertainty and the likelihood of losing money if we had to sell within a few years.
But there are other considerations as well. A recent Marketplace Money podcast discussed some of the issues around home ownership, and one particular segment caught my attention. They had a representative from the Federal Reserve on the show and he mentioned that he thought many people, particularly those with low incomes, should focus on other financial priorities before buying a house. I thought this was an excellent point, one I agree with whole-heartedly. In fact, I think it applies to most people, not just those with low-incomes, and I think it’s particularly true for new parents.
So today I want to run through my thoughts on where buying a house should be prioritized among all the different financial considerations you have as you start your financial journey.
What are the real goals of personal finance?
We spend a lot of time talking about money and how to manage it, but we spend a lot less time talking about why. Why should we care about investing or living within our means anyways? These things aren’t important in and of themselves. They have to be part of a larger purpose.
For me, good financial management really comes down to the pursuit of two goals:
First and foremost, I want to build a secure base for me and my family. I want to make sure that my children especially always have the financial resources to live their lives without worrying about basic things like food and shelter.
Once we’ve got the security we need, the next pursuit is freedom. Financial freedom means different things to different people, but to me it’s simply the ability to live your life the way you choose without money holding you back. It means being able to choose your work or where you live based on what makes you happy, not what you need financially. It means building your days around what you love, not what has to be done to pay the bills. You don’t have to be rich to be financially free, but you have to have the resources to support the lifestyle you desire.
Does buying a house fit those goals?
With security and freedom as our overarching financial goals, how does buying a house fit in? Well, it doesn’t do much for security, at least in the short-term. The first 5-10 years likely leave you less secure as you take on a large amount of debt and the additional costs and responsibilities of property taxes, insurance and maintenance. Unlike with renting, you really can’t just walk away if your circumstances change. If you lose a job and all of a sudden can’t afford the house, you’re in a tough position. Even if you’re able to sell, you’ve paid a lot in closing costs for both the purchase and sale and are possibly looking at a significant loss. From a short-term perspective, buying a home would seem to decrease your financial security.
Over a longer period of time, buying a house can facilitate both the goals of security and freedom. Owning a home outright decreases your expenses, which can give you more flexibility when it comes to income and can make it easier to weather any difficult financial situations, such as losing a job. But it also somewhat decreases flexibility, as being tied to a home may make it more difficult to pursue an exciting opportunity in a different part of the world. That’s a trade-off that may or may not matter to you.
What should be prioritized before buying a house?
Given our goals for security first and freedom second, what might we want to prioritize over owning a home? Let’s run through them here.
Emergency fund: Building up a Stage 1 emergency fund should be one of your first financial priorities, if not the first. It’s the bedrock of financial security for your family. I also believe that building a Stage 2 emergency fund, with 6 months or more of expenses in a savings account, should be prioritized ahead of buying a house. These emergency reserves become especially important when you’ve made a huge financial commitment like purchasing a home.
Life/disability/liability insurance: Good insurance is another bedrock of financial security. I love insurance because it allows me to make sure that my family will have financial resources even if the worst were to happen. As a parent, it’s an absolute must that you get enough life insurance to cover your needs. Long-term disability insurance is an invaluable resource for parents and non-parents alike, as is liability insurance (part of both your auto and homeowner/renter’s policies). If you’re not adequately insured, you’re not ready to take on the additional burden of a house.
Estate planning: Basic estate planning is relatively simple. I cover the important stuff here. No one likes to think about their own death, but if you want to make sure your children are put with the guardians of your choosing and that your money is used properly for their benefit, you have to take the time to get this done.
Saving to spend accounts: At its core, the idea of saving to spend accounts revolves around that fact that we all have irregular but expected expenses in our lives, like car maintenance and home repairs. Rather than scrambling to find money when these things come up, you can set aside monthly amounts into savings accounts for each different need so that you already have the money available when it’s needed. Many online banks make it very easy to manage these multiple accounts as one (Ally Bank is the one I use). We should all be prepared for the everyday curveballs life throws our way, so I consider this to be one of the foundational steps of building financial security.
Debt: Before you sign on for a mortgage, what kind of debt are you already dealing with? If you’ve had trouble managing debt to this point, taking on more probably shouldn’t be at the top of your list of to-dos. Not all debt is bad, but take a hard look at your current situation and think strongly about paying down any burdensome debt before buying a house.
Retirement: Whether you’re looking for early retirement or the traditional one starting at 65, we all know that we need to be saving now. It’s common knowledge that the earlier you start, the easier it is. There’s a lot of advice out there on how much you should be saving, how you should invest, what company you should invest with, etc. The fact of the matter is that no matter how you do it, tomorrow will get here sooner than you think and it couldn’t be more important to get yourself on track now. Use a simple tool to figure out how much you should be saving and then use one of the many simple but effective investment strategies available to you. Building a solid retirement plan fulfills both of our main goals.
College savings: I don’t think this is a must, but a plan for college savings should at least be considered before buying a house. It certainly doesn’t have to be either/or, but would you rather have the biggest house on the block or be able to pay for a significant portion of your children’s education? We likely won’t have college 100% figured out before we buy a house, but we’ll have strongly considered the trade-offs and made a decision that reflects our chosen priorities as best as possible.
There are a lot of positives to buying a house, many of them having nothing to do with money. It’s certainly a worthy goal if it fits into your vision for your ideal life. But don’t assume that owning a home is a signal that you’ve “made it”. There are many other financial stepping stones that will do more to bring you closer to the goals of security and freedom. Keep those at the forefront as you map out your future.
Photo courtesy of Nana B Agyei