Basic info about me:
- ~40 years old
- Live in the US
- Married, with five kids
- Have $20k in savings.
- Have $110k in a 401k (was more before the recent crash, but I'm assuming/hoping that will bounce back up eventually).
- Base salary is $105k, annual bonus is usually ~$10k
- Wife's salary is $16k (she could make more, but this is her dream job and we live comfortably)
- Current mortgage balance $110k, on a house worth around $170k (so $60k equity).
- Current mortgage balance $85k on an empty lot we've bought (explained below).
- Owe $20k on our minivan.
- No other debts (just the mortgages and the van).
We're currently living in a 1700 sq ft house. With several kids all growing up, and some hitting teen years, it's getting more cramped than we'd like. Wife and I have been looking at buying some land to build on. We found a large piece of land that we love, and purchased it, and are in conversations with a builder to build a house. The house we are considering building will cost ~$290k to build, so when combined with the cost of the land ($85k), we'll be looking at about a $375k mortgage. We plan to sell our current house as soon as we can move into the new house, and expect about a $50k profit from it, which will drop our balance down to $325k.
This has all been coming together over the last 6 months or so. I've been a bit uneasy about it, because $325k is a LOT of money to me, but always telling myself "Eh, it's the next step in life, and we can afford the payments."
Whenever I google "how much house can I afford", I find multitudes of housing/budget calculators that all tell me I "can afford" $400k – $500k of house based on income and debt/income ratio. I put "can afford" in quotes because I've always been skeptical of online budget calculators/estimates. This is partly because my wife and I have so many kids, and it feels like many "rules of thumb" go out the window for us, because we're not a typical family. But I don't know what else to base my assumptions off of. Everything I read says around 25% of gross monthly income is an acceptable limit for housing. But by that logic, we could even go up to $500k on a 30 year mortgage.
However those numbers seem absolutely insane to me. I did not grow up wealthy, but we were comfortable, probably average middle-class. My first house with my wife was $80k, which we fixed up and sold for a small profit. Our current house is worth $170. Each time we've bought a house, I remember thinking at the time "omg this is SO much money" but we've never had trouble paying our bills or putting money into my 401k. But I really wonder when is it TOO much?
We're planning on this being our "forever house". In talking to the builder and making designs for the house, we're trying to get plenty of space for the kids to finish growing up, while not having a huge excess of space after they move out (don't want to retire in a mansion).
Bottom line: Am I crazy for considering buying a $325k house with an income of ~$130k and five kids to support? The debt calculators say it's well within their "acceptable" margins, but I still can't shake the feeling that that's well over a quarter-million dollars!
Thanks for any help!
One half of this millennial couple is cheap, the other doesn't believe in budgets at all
It’s like clockwork. When a 37-year-old HVAC technician we’ll call Rick is plugging away at piecing together a new system, the push notifications on his phone come in rapid succession: Boom, boom, boom. Rick, who earned $185,000 in 2019, receives an alert each time his wife, a 31-year-old stay-at-home mom we’ll call Leslie swipes his credit card. On cue, Rick’s Apple Watch will send him a follow-up notification: This one simply says, “breathe.”
Sometimes, it’s hard for Rick to remember when he knows he earned $8,900 in a recent month and he and his wife spent all but $1,050 of it.
It sounds like something out of the 1950s sitcom the Honeymooners, with Rick and Leslie living out an episode that’s been updated for the modern era. For them, friction over money isn’t an old-fashioned cliché, it’s at the centre of their relationship.
Rick earns $51.67 per hour and regularly works 60-hour weeks to generate the income his family needs to live its current lifestyle — one where they can afford to have two condos, spend more than $10,000 per year on vacations and spoil their kids. Leslie usually does most of the spending.
They say opposites attract and that seems to be the case here. Rick sees himself as frugal — he’s a penny-pincher working those long hours because he’s concerned they won’t be there forever. Naturally, he wants to be on a budget.
There’s just one problem.
“(Leslie) doesn’t believe in budgets,” Rick said.
Leslie won’t think twice about spending on food or shopping, especially if it’s for her children. She doesn’t believe her husband when he brings up the need to save.
“He wants to save money because he’s cheap not because he actually needs to save money,” Leslie said. Rick, she says, earns enough money to make watching what they spend an irrelevant exercise.
“I wouldn’t say I don’t believe in a budget, I just don’t understand a budget,” she said. “I feel a budget is for people who don’t have money. I feel (Rick) makes a substantial amount of money and it doesn’t apply to me.”
Whenever Rick floats the idea that Leslie should be spending less money, she fires back and says that any extra savings should come from his expenses and not hers, particularly when it comes to money he spent on alcohol ($450), eating out ($101) or new clothing, like a shirt from Nordstrom ($121). It’s almost insulting to Leslie when he suggests that she reduce the grocery budget by shopping at a discount grocer.
“If money is as tight as you make it seem, why are you spending it on yourself?” Leslie asks.
Meanwhile, Leslie spent more than $1,000 on groceries and treats like ice cream and candy for her kids. More than half the shopping expenses were hers — mostly in toys and clothes, again for her kids.
Inevitably, a discussion around budgeting will lead to Rick suggesting that Leslie goes back to work. Rick suspects she might be able to earn around $50,000 as an administrative assistant.
I asked Leslie if she’d consider that change.
“I refuse,” she said. “I have zero desire to get … a good job or a career, because I need to be there for my kids.”
Leslie had two complicated childbirths and grew very close to her children because of it. One of them is also autistic and needs extra attention and she doesn’t trust a babysitter to do the job.
There’s only one work scenario she’ll entertain and it’s outside Toronto.
Leslie wants Rick to sell the two condos he owns — the family lives in one and he holds the other as an investment property — so they can move to a house in Stoney Creek, Ont. Her parents live there and own a mom-and-pop shop in the community. She wouldn’t mind working 20 hours per week with them close by to help with the kids.
She’s at her “breaking point” living in her current home, a 1,000 sq. ft. condo with a 200 sq. ft balcony, and doesn’t see the use of Rick owning a second property. But Rick won’t budge on selling that second condo. He wants to keep it as an investment even if it’s not currently generating additional income for the family.
It’s clear Rick and Leslie aren’t going to agree on either a budget or their housing situation so I asked Nicola Wealth financial planner Ron Haik to weigh in.
This story is about compromise, Haik said, and so the only solution that’s going to work is one that won’t be ideal for either one of them. To start, they’ll have to implement a budget because even the wealthiest Canadians need them.
“It’s not about how much you make,” said Haik, disagreeing with Leslie. “It’s not even about how you much spend. It comes down to how much you can save. That’s your discipline.”
But most of what’s being cut will come from Rick’s side of the equation. Haik lowered the alcohol expenditures to a maximum of $360 per month, down from $460 and the eating out expenses to $280 from $337. Shopping will also be trimmed down to $900 per month.
The budget he drew up is for the couple to follow once they move to a $1.3-million home in Stoney Creek. That will mean that Rick will have to sell both of his condos, Haik said — financially, that’s the best move considering that the investment property isn’t generating income.
Haik suspects Rick will net about $600,000 from the sales that he could then combine with the $70,000 in his TFSA to fund a down payment. In order to afford higher housing expenses, which he estimates could be around $3,582 per month, and live the same lifestyle, Leslie will have to go back to work, at least for 20 hours per week.
“This is about give and take,” Haik said. “There’s only one other scenario (where they can afford a house) and that’s Rick working 60 hours a week forever. That’s not good for anybody, health wise.”
If Leslie could earn slightly more than $2,000 per month, Haik said, that would allow Rick to lower his hours to 50 per week and for their income to still reach a combined $10,627. Leslie’s salary would also be more than enough to offset child care, which Haik estimated would cost about $1,550 per month.
The fact that Haik sided with neither Rick nor Leslie appeared to work just as he said it would. Both were happy with the result.
“I was completely delusional,” Leslie admitted about her spending. Knowing that finding a job would mean allowing her to get her dream house next to her parents also changed her former hard stance. Now, she’ll consider it, she said.
“The compromise is fair,” Rick said. “I don’t see how else we can get there unless both of us are making compromises and pulling in the same direction.”
5 Tips for Building a Side Business
You’ve probably noticed that people are embracing entrepreneurship like never before. Due to the widespread availability of technological business tools, there’s never been a better time to become your own boss. With an internet connection and a smart-phone or laptop, you can work from just about anywhere on the planet.
If you’ve been dreaming of quitting your day job to start a business, you might be wondering if taking such a big leap is worth it.
While there’s nothing wrong with holding down a W-2 job and getting a steady paycheck, having income from your own business comes with many upsides. But if you’ve been dreaming of quitting your day job to start a business, you might be wondering if taking such a big leap is worth it.
The good news is that there are incremental ways to become self-employed that are stable and reduce your risk, instead of plunging abruptly into a precarious financial position. In this chapter excerpt from Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, you’ll learn practical strategies for building a solo business while keeping the security of a regular job.
Tips for building a business on the side
Becoming your own boss may seem glamorous from the outside, but it can have stressful pitfalls, such as little pay, no insurance benefits, and unpredictable clients. However, you can avoid or minimize some of the downsides by maintaining a reliable day job while you grow your solo business.
Having the security of a job and the excitement of becoming a solopreneur gives you lots of upside with much less risk. A steady paycheck may give you the confidence you need to take business risks—such as buying more advertising, equipment, or software—that will make your venture more profitable.
Having the security of a job and the excitement of becoming a solopreneur gives you lots of upside with much less risk.
Aside from maintaining a reliable income stream, being both an employee and an entrepreneur can make you a better worker. In my experience, growing a side business also builds skills and experiences that make you more effective at your regular job. You may even find your side hustle revives an appreciation for your day job. There’s a lot to like about having a salary, benefits, and other perks, after all.
Whether you decide to be both an employee and your own boss for weeks or years, it will take some juggling to manage successfully. Here are five tips to face your career fears responsibly and prepare for the future by adding entrepreneurship to your resume on the side.
Here’s What You Need To Know About Becoming A Cosigner
Are you thinking about becoming a cosigner for someone? Have you ever been asked to cosign on a loan before?
Many people have been asked to cosign loans for family members and even friends. However, many people do not understand the full cosigner meaning, and becoming a cosigner is never something you should do unless you completely understand what it means.
If someone asks you to cosign a loan for them, you might be hesitant to say yes at first. You also might not want to offend the person or make them mad.
Whatever you may be thinking, I want you to fully understand what you are getting yourself into.
Becoming a cosigner can actually turn into a big financial mistake if you do it without really thinking it through.
Okay, now some of you may think that I’m a mean person for saying that, but I’ve heard many stories from people who’ve had their credit wrecked, have been stuck paying a loan for someone else, and even had their relationships ruined.
All of that from cosigning a loan.
Perhaps you have cosigned before and it went fine, or you know a friend of a friend who has done it. Perhaps you think that things won’t go bad for you or that you are hurting the person by not cosigning for them.
But, I want you to be careful before becoming a cosigner. I’m saying this to help you!
No matter how well you think you know someone, mixing money and relationships can change things. What you may have thought was a wonderful friendship or family relationship can turn into a nightmare.
It may seem very innocent – you’re just helping a good friend or relative get a loan.
Really, if it was that simple, I’d tell everyone to do it. But, becoming a cosigner is a major financial decision that you need to seriously think about before agreeing to.
Before you cosign a mortgage or another type of loan for someone, it is always wise to be 100% positive of what cosigning a loan actually means and how it may affect your relationship with the person getting the loan.
Surprisingly, many people don’t know exactly what happens when they agree to being a cosigner. Many people just think that all you’re doing is helping a person get approved, but that’s not just it.
Sorry to break it to you, but the bank, landlord, etc., does not care if the applicant has a friend with a good credit history.
There’s more that comes with being a cosigner.
As the cosigner, what’s actually happening is that you are taking on the full responsibility of the debt if the original applicant is unable to pay.
And, that happens more often than you might think.
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According to a survey I found on CreditCards.com, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. This is a HUGE percentage of cosigners, so please keep that in mind.
Other statistics I found about becoming a cosigner include:
- 28% of cosigners saw a drop in their credit score because the person that they cosigned on a loan for paid their loan late or skipped a payment.
- 26% of cosigners said that cosigning damaged the relationship with the person that they cosigned a loan for.
- 90% of private student loan borrowers who applied for cosigner release were rejected. So, if you think that you are going to cosign for a loan and then remove yourself from the loan later, that is much more difficult than you probably think. Stat from Consumer Financial Protection Bureau)
So, who is finding cosigners for loans?
According to the survey mentioned above, 45% of cosigners are cosigning for their child or stepchild. And 21% of cosigners are cosigning for a friend.
The rest is a mixture of cosigning for spouses/partners and parents.
Today, I am going to answer common questions about becoming a cosigner for a loan.
What to know about becoming a cosigner.
What is a cosigner?
If you’ve been asked to become a cosigner on a loan, you may not know what that fully entails.
A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved.
A cosigner may be needed for different things such as a:
- Car loan
- Student loan
- Apartment or other type of rental home
Here’s an example of when someone may want a cosigner: if your child wants to buy a car but doesn’t have a long enough credit history to be approved for the car loan. Your child may ask you to cosign their loan so the lender takes your credit score and financial information into account. This improves your child’s chances of being approved.
Other reasons you might be asked to be a cosigner is if the borrower doesn’t have a high enough credit score or doesn’t make enough money to pay the loan (that is a red flag right there).
However, as a cosigner, you are agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, having credit report damage, and more.
In that example I gave, the parent would be responsible for the car loan if their child could no longer make their payments. Not only that, if the child for some reason refused to make payments (I’ve heard of situations like this), the parent would be responsible.
Remember, like I stated above, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay.
And in some circumstances, even if the borrower files bankruptcy, while their other loans might be discharged, the cosigner may still be responsible for paying the cosigned loan.
How does a co signer work?
Here’s what happens when you agree to become a cosigner for a friend or family member.
You will start by giving your personal information to the bank or lender. This is information like bank statements, tax returns, paycheck stubs, and so on.
You will also have to complete the loan application, and once you agree with all of the loan terms, then you sign it.
But, becoming a cosigner doesn’t mean that you will own or have partial ownership of the vehicle, house, or whatever else you are cosigning for. It does mean that you are taking full financial responsibility and promising to pay the loan yourself if the borrower does not pay.
Becoming a cosigner is nothing to take lightly.
Does cosigning hurt your credit? Will it prevent you from future loans?
Becoming a cosigner can hurt your credit score and prevent you from future loans in some circumstances.
- If the person doesn’t pay the monthly payments on time, then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
- As a cosigner, you are increasing your debt-to-income ratio. So, even if your friend/family member pays every single bill on time, a lender will still see this as YOUR debt. Unfortunately, this may prevent them from approving your loan because they will think you have too much debt on your plate.
If you might be buying something soon that will need financing (house, car, etc.), you should think long and hard before you decide to be a cosigner on someone else’s loan.
Can cosigning a loan hurt a relationship?
Unfortunately, many cosigning relationships go sour.
I have heard many stories where someone cosigned a loan for someone else and then didn’t talk to them for years or even decades because of a falling out of some sort.
I have always been a firm believer that money and relationships do not mix well.
If you are going to cosign or lend money to someone, then you should consider it a gift because there is a chance that you will never see that money again.
Can you remove yourself from a loan as a cosigner?
Remember the statistic above – 90% of private student loan borrowers who applied for cosigner release were rejected.
There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.
The loan would have to be refinanced to take yourself off the loan, and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.
Plus, there are instances in which refinancing is impossible because of the value decreasing, the economy changing, a person’s financial situation getting worse, and so on.
So, while the original borrower may be okay with getting you off of the loan and refinancing, it’s still up to the lender whether or not they will refinance the loan.
How do I protect myself as a cosigner?
There is no guarantee that becoming a cosigner is going to work out, but if you’re determined to do it, you will want to know both of these two things for sure:
- That you can trust the person you are cosigning for.
- That YOU can make the payment.
Many people who are thinking about becoming a cosigner may not think about that last one, but it is just as important as the first one. Being stuck with the loan payment would be awful, but not being able to make the payment could cause you to go into serious debt and destroy your credit.
You may be certain you won’t be stuck making the payment, but you don’t want to be stuck in a bad financial situation.
Should I cosign a loan?
Even though those cosigning horror stories are real cautionary tales, most people don’t believe they would ever happen to them.
However, don’t you think most (if not all) cosigners felt the same way in the beginning?
It’s up to each person to decide if they will cosign, and you should never feel forced to do it. However, I want you to remember that if you cosign, then you should make sure that you can afford to make the monthly payment.
You never know, one day those payments are being made and everything is going well. The original borrower may be a great person, but then they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.
Then, what if something happens to you and you can’t make those payments either? Unfortunately, being unprepared and not really knowing what you are getting into can turn into a disastrous situation.
Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences are before going into something that can negatively impact your life. It’s always better to be prepared!
Is it a bad idea to cosign for someone?
Cosigning a loan doesn’t always have to be a bad thing.
However, I want you to remember that there is a chance that you will be on the hook for the loan.
So, if you cosign, whether that be for a car, mortgage, apartment, student loan, or something else, you should make sure that you can afford the payment as well. Because, there is a chance that you may have to pay it one day.
Everyone has a different situation, and ultimately, you have to do what’s right for you.
What do you think of becoming a cosigner for a mortgage or other type of loan? Would you ever do it?
The post Here’s What You Need To Know About Becoming A Cosigner appeared first on Making Sense Of Cents.
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