Financial advice for 27 year old

[recycler]

My Salary: 80k per year
Wifes(25 years old) Salary: 65k per year
Savings account: 175k
my 401k: 35k
wife 401k: 15k
Condo Value: 315k
Mortgage on condo: 210k

My goal is to buy a house for around 1 million dollars in 5 years. Should I put the 175k I have in a 5 year CD? Stock market? Any suggestions?

I'm also trying to decide if its better to sell or rent out my condo when I buy the house.
I figure I will need about 250k for down payment and other expenses when its time to buy the house.

[CalisFinancialGuru]

Seems like you and your wife have a decent amount of money to work with. I would say that there is too much money in savings that could be earning much more money in other investment vehicles. Do you have an IRA? If not I would consider looking into opening one one for you and one for you wife and funding them with the $5,000 max each/year.I would also consider looking into using some of that money to invest in other real estates. A big chunk would also be well invested in the stock market, especially with the low stock prices there now. I can understand your desire to move into a house but why $1M? Is this because of the area you want to move to? If you plan to live near the condo still then keeping and renting it could work out in your favor. Otherwise you would have to have someone nearby for you to take care of any problems that arise with the tenants. Also many condo complexes have owner occupancy rules so you will want to look into that as well. Good luck!

[littleroc02us]

My Salary: 80k per year
Wifes(25 years old) Salary: 65k per year
Savings account: 175k
my 401k: 35k
wife 401k: 15k
Condo Value: 315k
Mortgage on condo: 210k

My goal is to buy a house for around 1 million dollars in 5 years. Should I put the 175k I have in a 5 year CD? Stock market? Any suggestions?

I'm also trying to decide if its better to sell or rent out my condo when I buy the house.
I figure I will need about 250k for down payment and other expenses when its time to buy the house.

That's great and everything to have goals, but for someone with your income level you don't have any retirement.

[scfr]

1. For money you know you will need in 5 years, a CD is a good option. According to Bankrate, EverBank is offering 2.61% on a 5yr Jumbo CD. I suggest calling around to all your local banks and try to find something better than that. The best rates aren't always published on the internet. When you get in to "jumbo CD territory" it really pays to rate shop. An extra 0.5% on $150K means an extra $750 per year. (Don't put all your savings in a CD. Keep some out for your emergency fund.)

2. If you decide you will sell the condo when you buy the house, an alternative would be to pay down your current mortgage. You could either aim to have the entire mortgage paid off by the time you plan to buy the house, or you could work towards having the $250K in equity when that time comes. Whether or not this makes sense depends on the interest rate you are paying on the mortgage.

3. You are off to a good start financially, and I applaud you for saving as much as you have at your age. You have laid the groundwork for living a secure & comfortable life, all the way through retirement.

4. Having said that, I too suggest that you reexamine your desire to purchase a $1M house. What is the reason for that? Where would a $1M house fit in with your overall financial goals, including retirement savings? Is putting that much in to a home really in your best interest? Could you be happy with a home that costs a little bit less? I'm not saying don't buy a $1M house, I'm just suggesting you step back and see what impact that would have on other areas of yoru financial life. If you have not already done so, I suggest you read a book like "The Millionaire Next Door."

For what it's worth, I have owned homes in areas where house prices are moderately high (Seattle) and moderately low (Austin). I have house shopped in areas are truly high (San Diego, New York, Hawaii). I get it that in some parts of the US you just have to pay more for a house. I also understand the desire to have a nice, comfortable house. By my standards, a "nice" house can be had just about anywhere in the US for well under $1M. But for all we here at SA know, you plan to have your parents & your wife's parents move in with you, plus you plan on having a bunch of kids, so you really need a big house. If you decide that a $1M house makes sense for you and your wife, then go for it. But please think about what it would mean to you long-term if you were to buy a less expensive house.

Good luck with whatever you decide to do.

[disneysteve]

My Salary: 80k per year
Wifes(25 years old) Salary: 65k per year

My goal is to buy a house for around 1 million dollars in 5 years.

Do you anticipate a tremendous increase in your household income? If not, how do you expect to afford a $1 million house? You earn $145,000. Rule of thumb is to spend no more than 2.5 to 3 times income. That maxes you at about $435,000, not even half of what you are talking about.

[bjl584]

My Salary: 80k per year
Wifes(25 years old) Salary: 65k per year
Savings account: 175k
my 401k: 35k
wife 401k: 15k
Condo Value: 315k
Mortgage on condo: 210k

My goal is to buy a house for around 1 million dollars in 5 years. Should I put the 175k I have in a 5 year CD? Stock market? Any suggestions?

I'm also trying to decide if its better to sell or rent out my condo when I buy the house.
I figure I will need about 250k for down payment and other expenses when its time to buy the house.

Why do want/need a $1M dollar house? That would probably be a very nice house, but have you budgeted for the taxes on a place like like? The upkeep? Furnishings? You run the risk of being house poor and having nothing left over for savings, retitement, or anything else.

How long have you been living in your current condo, and is it necessary for you to move in the near future? It may be better for you to stay put for now and build some more equity in the place, continue saving, and beef up your retirement accounts.

[recycler]

Do you anticipate a tremendous increase in your household income? If not, how do you expect to afford a $1 million house? You earn $145,000. Rule of thumb is to spend no more than 2.5 to 3 times income. That maxes you at about $435,000, not even half of what you are talking about.

I live in a high cost area where 1 million will get you a 2500 sqft house at most. 2.5 to 3 times our income seems very conservative with the low interest rates we have right now. My wife and I make about $8000 a month after taxes and other deductions. I assume that will likely go up to 9000 or 10000 a month in 5 years when we're ready to buy.

a mortgage on 800k (200k down payment) with 4.75% interest would be about 4150, property tax about 1000, insurance 100.
The total payment would be about 5250, that would still leave us with almost 3000-5000 per month to spend on maintenance, utilities, food, vacation, etc...

[disneysteve]

I assume that will likely go up to 9000 or 10000 a month in 5 years when we're ready to buy.

a mortgage on 800k (200k down payment) with 4.75% interest would be about 4150, property tax about 1000, insurance 100.

That gives you a mortgage payment of at least 42% of your income (based on 10K) and a total housing cost of 52% of income. That is way out of line with what you can afford. I would seriously reconsider your plan.

Shoot for a budget that is 50% needs, 30% wants and 20% savings. If you put yourself in a situation where more than 50% is going just to your house, you will find yourself in serious trouble down the line. Food, utilities, gas, medical care and other needs will likely put that category up to 60 or 70% of income, leaving very little if anything for savings.

Instead of planning on going $800,000 into debt, start looking at ways to start building wealth and a secure financial future.

[snshijuptr]

You are definitely retirement poor. Open up a Roth or Traditional IRA right now for both you and your wife and contribute the maximum for 2010 & 2011 ($20,000 Total). Then up your 401k retirement contributions to 15%.

Now you have $155,000 (after IRA contributions). Is this money your Emergency Fund? You should have around 6 months expenses set aside. These should be in a liquid, FDIC insured account (savings, CD, etc).

Now you have probably $50,000+ leftover. With this money, please think about what you are looking for in your next home and why. It is unnerving that you are set on $1M for a home without much justification. I live in Southern California, and I would never want one of the $1M homes. The upkeep is ridiculous. I can't handle the idea of cleaning a $1M house! Now if $1M is just a nice round number you picked out of the air, I would encourage you to look closely at the market and how you live. Find a target house and budget as if you were buying that house.

[scfr]

I live in a high cost area where 1 million will get you a 2500 sqft house at most.

Have you considered the possibility of moving some place where houses aren't so expensive?

[littleroc02us]

I live in a high cost area where 1 million will get you a 2500 sqft house at most. 2.5 to 3 times our income seems very conservative with the low interest rates we have right now. My wife and I make about $8000 a month after taxes and other deductions. I assume that will likely go up to 9000 or 10000 a month in 5 years when we're ready to buy.

a mortgage on 800k (200k down payment) with 4.75% interest would be about 4150, property tax about 1000, insurance 100.
The total payment would be about 5250, that would still leave us with almost 3000-5000 per month to spend on maintenance, utilities, food, vacation, etc...

I personally don't think it is wise to spend 50% of your income on housing. Save for a bigger down payment if this is the route you must take.

[jpg7n16]

I live in a high cost area where 1 million will get you a 2500 sqft house at most. 2.5 to 3 times our income seems very conservative with the low interest rates we have right now.

What does that have to do with what your finances are able to afford?

I really don't care what the houses in your area cost, I only care about what houses in your area you can afford. And that is found by sticking to the recommended 28% MAX of monthly income going to housing expenses. (I really like the rule of thumb DisneySteve posted of 2.5-3x your salary) Your goal puts you at 50%, so my advice would be to change your goal. (1mil home = 6.9x your salary)


If houses are by definition very expensive today, that just increases the liklihood that tomorrow prices will fall.

---------------------------------------

As an aside, there is a world of difference between your financial picture in 30 years if you: (assumptions: home value grows at 3%/year, investments return 8%/year)

a) buy a $1 million home today, 20% down, 4.75% rate = $4,173.18/month. Invest $0/month cash available.

At the end of 30 years, you would have a home worth $1,806,111, and investments worth $0. Total: $1,806,111

b) buy a $450,000 home today, 20% down, 4.75% rate = $1,877.93/month. Invest $2,295.25/month cash available due to lower mortgage.

At the end of 30 years, you would have a home worth $722,444, and investments worth $3,420,745. Total: $4,143,189


By lowering the price of your home, and investing the difference, you can have a net worth $2.3 million higher in 30 years.

[disneysteve]

What does that have to do with what your finances are able to afford?

I really don't care what the houses in your area cost, I only care about what houses in your area you can afford.

Exactly. This is what OP doesn't seem to be grasping.

In another thread, someone posted that the average income in their town was 70K and the average home was 600K (I think those were the numbers). What does that mean? It means that most people shouldn't be buying homes - they should be renting.

Same goes for this scenario. If it costs $1 million to buy a "decent" home and you only earn $150,000, then you don't buy a home. Don't be swayed by what everyone else is doing - they're all wrong.

[rj.phila]

first off, sorry, but i agree with the statements above. your plan, frankly, looks like a kamikaze mission to me numbers-wise. lose a job or two and you will be underwater FAST. also, and i say this with respect:

My goal is to buy a house for around 1 million dollars in 5 years.

using this kind of language might have been an inaccuracy on your part, but if not, i think its a seriously flawed means of looking at things. a much more prudent statement IMO would be "my goal is to buy a house that suits us, for as cheap as possible, and up to what we can really afford".

best of luck. i'd suggest you look at whats sensible $ wise, and then try to find a good candidate in housing, not the other way around.

[recycler]

Thanks everyone for the advice so far.

I don't like the 2.5-3X rule because it doesn't take interest rates into consideration.
As an example borrowing 500k at 10% will cost 4387 per month. While at 5% it will be only 2684. I believe when this rule first originated rates were much higher than they are today. I like the 28% of gross income rule a lot better.

I will estimate that my+wife income will increase from 145k to 170k in 5 years (3% raise per year average). That will allow me to spend about $4000 a month on housing using the 28% rule. That will allow me to buy a house for about $800k if I can put 200k down. Mortgage is 600k at 4.75% 30 year = $3130 per month, $800 in tax, $100 in insurance. Total will be about 4k per month. So 1 million is probably too much, but what about an 800k house?