Where Should Buying a House Fit in Your Financial Priorities?
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
I would put priorities in a different order but you have them all covered here. I bought a flat with all my college savings and rented it to create my first source of passive income. Real estate is high up my list but it doesn’t have to be my main residence.
I’m really talking about a personal residence here, not a rental. A rental is definitely a different question, though I think from a security standpoint many of the points here still apply. The main difference the way I see it is that a rental could be part of your retirement planning.
Since all of our ducks are in a row, we are looking to buy again when we move. In fact, we’re looking at 12 houses today (I think 12!). Buying a home is definitely the right thing for us but we have to find the perfect house. If our house sells before we buy something, we’ll move into an apartment until we find a house we love. I don’t want to get stuck in the wrong house!
I hope you found at least one you liked! I think your patient approach is a good one. It’s such a big financial commitment that it makes sense to take your time with it. Better to have something you love later than something that’s just eh now, especially when it costs a couple hundred thousand dollars.
Love this, Matt! Consumers have always been told by the “experts” that buying your own home should be at the top of your financial “to-do” list. I think people are finally starting to figure out that this is not always the best idea.
Thanks Laurie. It can be a great option in the right circumstances, but definitely needs to be evaluated as part of a comprehensive plan. It’s not the sure thing it’s been made out to be.
Really thought provoking post Matt. From a family protection point of view, buying your own home with a mortgage might give the illusion of protection, but ultimately, it’s just a large debt. It might feel rather morbid, but the best way to prioritize is to ask yourself, “if I died now, what would my family be left with?”
This mindset pushes items such as an emergency fund, life insurance, estate planning to the top of the list. Real estate does have a place, but as Pauline mentions, it doesn’t have to be your main residence. Properties which you rent out would at least provide your family with additional cash flow.
“if I died now, what would my family be left with?” Couldn’t agree more with this mindset. It should really be the top financial question for every single parent. Yes it’s morbid but it’s so important.
I do agree that rentals are a different question, mostly in that they can factor into retirement and help with current income. This post was really about a primary residence.
I want to buy a home in the near future but I am concentrated on meeting all of my savings goals first. I know that I’ll likely live in the area I’m at now for the rest of my life so having to sell the home in a few years wouldn’t be an issue. However, I just can’t see taking on a mortgage until I have all of my financial ducks in a row.
Sounds like you’re doing exactly what I’m talking about here: evaluating your purchase decision within the context of your larger goals. It will likely be a good decision for you at some point, but I think it’s smart to make sure you feel good about the other ares of your finances before taking the plunge.
Great post Matt. My wife and I bought our first house when we were only 23. It has worked well for the 7 years we have been in it, but now I wonder what we want to do next. We plan on selling this house next year because we want to raise our son in a better neighborhood and school district. That being said, buying another house scares me a little bit.
Is it the financial commitment that scares you? Or just the importance of the decision? I would be scared too, mostly because it would be by far the biggest purchase of my life and I would feel pressure to get it right. But I think your reasons for wanting to move are definitely something all parents can identify with. Those are definitely at the top of the non-financial considerations of a purchase.
Great post Matt! Very timely for me as this has definitely been on my mind lately. After going over the above checklist of priorities, I do think that it is time. The only issue is that living in a high cost of living area makes buying a place very difficult.
I feel you on that one. Boston isn’t quite New York but it certainly isn’t cheap. It can be a little disheartening looking at the prices around here.
If you don’t have kids, I wouldn’t put estate planning or insurance that high on the list, but I can see how having dependents changes your responsibilities.
I think another thing that needs to be prioritized (or at least understood) before buying a house is your time. Homeownership (at least the non-condo kind) just seems to take more time. Whether it’s mowing the grass, DIY-ing repairs, or even having to take the occasional afternoon off work to meet a handyman at home for a repair, it takes time. I can’t imagine how I would have done it all when I was working 100+ hours at the office every week at my old job.
I’ll still place insurance and estate planning on the list, but not in the same sense that a couple with children would place them. I’d make sure that you are each other’s beneficiaries on everything, that you have the DPA and the HCP in place….that type of estate planning. As for insurance, I’d still worry about disability and long term care events. Catastrophic illnesses and disabilities can ruin it for the other member of the “team.”
What Joe said, with the addition of liability insurance to the list of things non-parents still need to consider.
I like your point about time. That’s something I hadn’t thought about but completely agree with. There’s no passing off of responsibility when you own. Or if you do you have to pay for it. On a side note, 100+ hours? That’s crazy! What were you doing, investment banking?
Great post Matt! If all perspective 1st time home buyers read and digested your advice they would avoid a lot of financially trouble down the road.
Thanks a lot Kyle. I certainly hope some of them do.
Since we’re delaying buying a house until we move to our “forever city,” we will have all these components in place before buying (except for some of the ones you only need after reproducing, if we haven’t yet). I think that’s a major advantage to figuring our finances out in a place we wouldn’t consider buying, because we might have jumped into a house too soon otherwise.
Sounds like you guys set yourselves up nicely. Not being sure where we want to live has definitely kept us from buying as well. While the uncertainty is frustrating and both of us would like to settle down, it is nice in its own way to live without the pressure of feeling like you have to buy. Makes it easier to focus on the other priorities, as you say.
Good post Matt! I think too many of us as Americans fall for the myth that having a house is THE way to go in terms of achievement and building wealth. Can it be a good thing? Certainly! Is it a must? Not at all, if it’s not right for you. We had most of the things you listed covered but wish we could go back and put more down on the purchase we made seven years ago.
Completely agree. Home ownership is great in many circumstances and troublesome in others. As with anything else, it’s so important to evaluate it based off your own personal situation, not what it feels like everyone else is doing.
Nice post Matt! I think as long as you are conservative with the house you buy, it can still accomplish the goals of security and freedom. I know the whole “house as an investment” thing took a hit during the recession, but it is still a part of my long term strategy. I know the numbers don’t make sense, but we stopped our retirement savings temporarily while we saved for a down payment for our house.
I definitely agree that over the long-term home ownership is a good thing. It definitely saves money over renting if you live in the same house for long enough and are conservative with your purchase, like you say. I wouldn’t personally stop retirement savings to buy a house, but every situation is different.
You stuck the landing on that post, brother.
Here’s my take from working with hundreds of families on their plans over the years: if you recognize that security and freedom will be impacted by purchasing a home and it’s still a huge goal of yours…..then go for it. For some clients, buying a home was their #1 priority. So, as an advisor, I’d have to tell them the “cost” of that goal to their other long term goals and then make sure they develop the cash reserve, pay down debt, etc. to get ready for the home…..
Totally agree. We’re all grown-ups here with the right to make decisions based on our life ambitions. Not everything has to be strictly financial. But you should do so with a full awareness of the trade-offs, and with the resources to be able to handle the potential consequences.
I like the way you put security and financial freedom as priorities. Really, I think that many people simply don’t think of priorities and think of living a lifestyle they dream of. Generally, that includes a house. Plus, keeping up with what friends and peers are doing is something that many can’t stop for whatever reason.
While I’ve been through the home buying process, I do think that it’s not a required rite of passage for someone at a young age. There are tradeoffs, and no guarantee that you’ll get your money back. Not saying it’s a bad thing obviously (I think it’s good on balance), but people need to be careful as we’ve learned in the last 5 years or so.
I definitely think that many people think of home ownership as a “rite of passage” as opposed to one of many options when it comes to building a life for you and your family. As soon as something becomes a required part of your life, you stop making decisions that actually fit your priorities and instead make them on arbitrary rules. That’s not a good route to take.
I like the thought process here Matt! We hadn’t done any estate planning, considered retirement, bought any life insurance or started funding college before we bought our first home. We didn’t have any children at that time and who thinks about retirement when they are 25, right? 🙂 Those kids came soon thereafter and we quickly realized, “Hey we gotta grow up and do all this stuff.”
Haha, I think your path is similar to many people. It’s amazing how much that first child changes your whole perspective on things.
Wow I must be tired. I could have sworn I just posted a comment but maybe I was just thinking about it and not actually writing and posting it. Anyway, I think one thing that is tough for people is the fact that rent can easily be more expensive than a mortgage. Plus, if you are paying a mortgage you are at least building some sort of equity versus zero when you rent. This makes owning a house very appealing to twenty-somethings. It does leave out all the costs that can come up – your water heater breaks, your sewer backs up (haha happened to us, thankfully we only lost time and sanity in the process, everything was covered by the city), or some other issue. You could argue if you are single that the mortgage would no doubt be higher than rent, but if you get a four bedroom house and rent out three rooms to friends, you could arguably pay $0 in mortgage or even make money (doing the math on our house if I was single and rented out the other rooms and shared the house I’d make some $ on it). There’s a reason it’s appealing is what I’m saying, which I guess you probably wouldn’t argue haha. Kind of went on a tangent there. Did I mention I’m tired? 😛
Haha, DC everybody! I’m with you here. I certainly don’t think there’s an answer that works 100% of the time. My 26 year old brother-in-law bought a house a few years and has been renting rooms out ever since. He’s paid only a fraction of his mortgage over those years, so that’s a very realistic option and potentially a very attractive one. I also think you’re spot on that people don’t consider the costs of ownership above the mortgage payment, like taxes, insurance, maintenance, and as Mrs. Pop brought up time. Without those, renting can look like a scam. With them it can start looking pretty good.
Owning a house is definitely one of my goals. I definitely agree with setting up an emergency fund. It’s one thing to be able to pay a monthly mortgage and bills as well but we can never tell what might happen. Having an emergency fund is a good way to have you covered. Sometimes people just focus on the goal and neglect the preparation that is needed in order to achieve their goals. As with any other financial decision buying a house needs a lot of planning and setting of priorities.
Purchasing a home is one of our goals. I think it can be an important part of a long-term financial strategy. But you’re absolutely right that you need to be prepared for what it entails. If you go in blindly there’s a high probability of getting hurt.
Great post Matt. I don’t think most people would agree with you that retirement should be prioritized above owning a home, but I do. I think you should at least get started with retirement savings first.
Thanks Ross. I completely agree.
I agree with you Matt on where to prioritize your funds when considering a house except for the college part. Kids can get financial aid and scholarships, with the rising home prices it could cost you in the future. I live in Hawaii where home prices are the highest in the country, we bought a house where we rent downstairs out. Rents double every 20 years, how do you retire if you never control that cost.
I agree that you don’t have to have college fully funded before buying a house. I hope that was clear in my explanation. Though I don’t agree that you should be scared of rising home prices. Prices will always fluctuate up and down but in general will basically just track inflation. You should make a decision based on whether the price you can get now fits into your overall financial plan, not where you think prices are going.
With that said, you’re absolutely right that locking in a fixed housing cost can be an advantage. That’s a big reason why we would like to purchase in the near future.
This is a great post and one I have strong opinions about. As a homeowner with a free and clear property, I’m VERY happy I took this path, but I absolutely agree that it’s not a good choice for everyone. However, to me it’s more about timing than anything else.
I love your priorities list–it really gives a person something to think about before jumping into a big purchase (really of any sort). Like other commenters here, I think homeownership is so important for a multitude of reasons, here are just few:
1. While there is no free place to live, a free and clear property is likely the least expensive option.
2. If you fall on hard times, you have the option to rent out a portion of your home or property to offset expenses. There are options to having a stranger in your house: rent out half of your garage to someone wanting to store a boat or boxes. If you have the space, rent out the side of your home to someone with a motorhome who needs a place to store it. You get the idea…
3. The value of your home could be the asset you use to pay for your long-term care if you live long enough to need that service near the end of your life. I’ll be posting this week on my feelings about long-term life insurance and having a home to use as an asset is a key to NOT being ripped off!
4. Unless you’re a wanderer by nature, there’s nothing better than the feeling of having a home base that’s yours. Even if you wander, you can rent out the home for a year or two at a time while you’re out on an adventure. Just be careful not to upgrade the home to a point that you worry about it being damaged while you’re gone.
I could go on, but I’ve hogged up too much space already! Thanks for the great post, as always, Matt!
Thanks Ree. I agree with all of your points. I think that owning your home can be an important part of your long-term financial plans, I just think it needs to be made in context with your overall goals and other financial priorities. Too many people just assume that it’s the most important financial step and I don’t think that’s the case. But there are certainly many reasons it can be helpful, and you do a good job of outlining some of them here. As you say, for me it’s mostly an issue of timing.
I believe you shouldn’t buy a house unless you can actually afford it. Too many people want to buy a house because other people say they should but then it turns into a disaster. Know that the market can go sour on you and your house is not an asset-it is a place to live. I love my house but it has certainly caused me my fair share of headaches.
Love your statement about a house simply being a place to live. I think there are many people who assume it’s an investment because that’s what they’ve heard, but don’t really understand what that means. I personally view a primary residence as simply one way to consume shelter. It can be the less expensive option over a long period of time, but it’s not an investment in the way that the stock market is.
I have to weigh in here and give thumbs up to Debt and the Girl! I think Robert Kiyosaki hit the nail on the head when he said if it costs money to own, it’s a liability. My home, even though it’s paid for, is still a liability because there are still carrying costs.
However, it will become an asset as soon as I either rent it or sell it. But unless you’re an adult child living off your parents, no one lives for free!
Why can’t a house be both? Many financial assets are evaluated as performing or non performing…houses can be looked at the same way – either they perform financially for you or not. Yes, they are four walls and a roof, and a place to live…but you must factor in financial upside or downside when considering a purchase.
Over the long term your housing value should basically track inflation. In the meantime you’re spending a lot of money to own it. When you sell it you may or may not truly come out ahead depending on the value at the time of sale and what you decide to do for your next housing situation.
You can call it an investment if you want. You just shouldn’t expect it to be a very good one.
This is why I’m against making it easier to get a mortgage. Not everyone is ready for he commitment that a house carries. You have to learn how to get your financial life in order first. When you are successful at this, saving 20% for a down payment becomes much easier. If you can’t save 20% for a down payment then you aren’t ready to own a home.
I’m not sure that it’s a hard and fast rule that you need 20% down to be ready to own a home, but I absolutely agree with the sentiment that you need to be accustomed to saving money and building a secure financial base.
Really great post. I love the WHY question. So many first-time buyers buy a house simply because it’s the next step and social pressures.
I think that understanding the why behind any decision, whether it’s buying a house or really anything in your life, is key.
Great post. About a year ago I was considering buying a house, only to be deterred by my debt. I’m glad I didn’t follow through, I have a lot more funds to go towards debt now and was able to find super cheap rent anyway! I think a big problem is that people see a house as debt-less because it builds equity and can often times be more cost efficient than renting. However, thats not always the right situation, and it sure it debt! I see it as only ‘good debt’ if you can really make a lot of extra payments on it, and its within your means. I think you made a lot of great points that said just that!
Thanks a lot! Buying a house can definitely be a great decision in the right situations, but I think many people simply assume it’s a good decision because that’s what they’ve been told all their lives. It sounds like you were smart enough to take a look at your own situation and make the decision that was right for you. Nice work!