* I recently answered these questions for a young friend in the military and thought others may find the information useful.
”Do you have any tips on saving for a house while paying for an apartment? Or is it better to go straight to a house? I feel like I’m throwing money away renting.”
This will be a bit long but I want to give you a solid answer because many people are in the same place.
First I don’t think rent is throwing money away depending on your situation. If I remember correctly you’re not in CA anymore but here, 100k of household income can still qualify you for low-income subsidies.
With the cost of housing being so high many people are taking housing payments up to 45% of their income. In this case, I definitely don’t think it’s a good idea. Housing should be no more than 35% of your after-tax income and I would love to see under 25%. 45% will make you house poor.
Renting can be great if you’re low on cash savings or simply don’t want to deal with the hassle. Buying can have big benefits as well but there are also higher costs. You have to pay for all repairs, taxes, and there are no guarantees it will go up in value. In fact, most home values barely keep up with inflation. You also need cash savings in case something breaks.
But long-term, owning typically wins.
The other challenge with buying is that if you’re young and have the potential to move a lot, the fees to sell and buy another house can add up and seriously hurt any gains you’ve made. And no you shouldn’t move out of state and keep the rental. 🤣
To answer your question about saving for a house while renting, if your goal is to own, this is how I would recommend approaching it.
Take your household income (for both spouses if married) after taxes, but not including any retirement contributions and figure out what about 25% of that number is. Then use this calculator
It will tell you the mortgage amount you can afford based on that payment.
Once you know that, if you can buy in your area then that’s great. Keep in mind you’ll need money for a down payment and also closing costs. There are many down payment assistance programs as well. But you will still need something saved because they usually make you pay some fees and/or have reserves.
So how do you save?
1. Create monthly budget.
2. See how much is left over.
3. Estimate how long you need to save to at least have 5% down of the property you want.
4. If it will take too long, get the cheapest rental you can stand and lower your costs short term until you can hit your goal.
5. If it will still take too long start a side business/get another higher paying job.
6. Also look for down payment assistance programs for first time buyers to help you hit your goal. There are many.
If you ever need more help I’m always here. For younger folks I’m happy to do one off coaching sessions to help you get started and get a basic plan in place.
*hopefully if you stumble on this blog post while browsing the inter webs, it helps you out.