How Much House Can I Afford?

How Much House Can I Afford?

Jan 2021

You’re eyeing center-hall colonials in your neighborhood and dreaming about the garden you want to plant in the backyard and all the holiday celebrations you’ll host. You’ve saved toward this goal and think you’re ready to pull the trigger. But the real question is: How much house can I afford?


Or is it?


Perhaps a better question really is: What else do I want to afford? In other words, do you want to get the most house possible, with little left for a new car — or that European getaway you’ve been learning Italian for? It’s important to take into account your goals and lifestyle as you consider this important decision.


And a huge consideration should be your retirement goals. What will you appreciate more: an extra bedroom, larger yard or an early start to your retirement?


While a house is an asset that can be a savings vehicle and wealth-builder, it’s not especially liquid, flexible or portable. And if the housing market deflates, it can cost you. So, it’s important not to get in over your head.


No Magic Number

Many financial planners advise budgeting no more than 28% of your gross income toward your mortgage and no more than 36% of your income toward all of your debts combined. That mortgage cost includes principal and interest as well as taxes and insurance (PITI).


Another common formula dictates that most people can afford a mortgage of 2 to 2.5 times their annual income. By that guideline, a person earning $60,000 a year would be able to afford about a $120,000 to $180,000 mortgage payment.


Look at the Big Picture

Remember that these are only starting points for making a decision. There are additional costs beyond PITI to keep in mind. HOA dues, maintenance, upgrades (even small improvements add up), commuting costs and school quality all should be considered.


Also, how long a loan do you want? 15 years? 20? 30? With a shorter-term mortgage, you’ll pay more each month but significantly less over the life of the loan — and you’ll get out of debt sooner. But be very careful about using an Adjustable Rate Mortgage (ARM) as the means of affording more house. With mortgage rates at historic lows, they are likely to go up at some point in the future.


Get Some Professional Advice

Finally, review how much you’re currently saving for retirement. Balance that against potential returns from the eventual sale of the home. While houses have generally been good investments historically, it’s very hard to predict values for a particular neighborhood 10 or 20 years in advance. If you think you may want — or need — to move in the near future, you may be rolling the dice. Balance the above factors. Buying a house is committing you to a monthly payment and lifestyle not only for today, but also in the future.


Choose wisely. Run the numbers. Talk to your advisor.



I’ve Depleted My Emergency Fund. Now What?

I’ve Depleted My Emergency Fund. Now What?

Jan 2021

Perhaps you’ve lost a job, faced an illness or have been delt a family crisis that emptied out your emergency fund. What are your next steps?

Take stock of your situation. First of all, stay calm. It’s much harder to make difficult decisions when you’re upset. Try not to panic and seek the support of friends and family — and the advice of a financial advisor. Every situation is different, so there are no hard and fast rules that apply to everyone, but here are some general points to consider as you navigate stormy seas.

If possible, stay current with bills and try not to use credit cards to bail yourself out. And if you must use credit, use the one with the lowest interest rate and try to negotiate an even lower rate with your creditor than what you currently have.

Hit the pause button on spending. Next, enact a short-term spending freeze. No restaurants, no new clothes and no vacation. Nothing non-essential until the crisis passes and you have some money back in your emergency account. Review your budget. Go through every single line item and see what you can reduce, pause or eliminate.


Downgrade cell service, drop online subscriptions and reduce extracurricular activities for kids and yourself. Place your gym membership on hold if you can, and work out at home or outdoors. Plan your meals to lower food costs and use coupons at the grocery (and anywhere else you can). If you have services for your house, pool or lawn put them on hold and go the DIY route when possible.


Talk to your lenders and see if you can negotiate a temporary reduction in payments for your house, car and personal loans. Especially now, many banks and creditors are extending a helping hand to pandemic-impacted clients. You may be able to get a forbearance on your mortgage while you recover financially.


Earn extra money. Sell your surplus clutter to raise some emergency cash fast. If you have extra TVs, furniture, electronics, kids toys, exercise equipment or anything else, post it on letgo, eBay or Facebook Marketplace. Put your proceeds right in the bank.


Can you pick up a side hustle? Sell your writing or graphic design services on Fiverr. You might also find part-time work with one of the companies that are still performing well during COVID-19.


Avoid this if possible. Raiding your 401(k) might sound tempting right about now, but avoid this drastic course of action if you can. While briefly pausing contributions may make sense, taking out large sums can set your retirement goals back for years. And there’s the opportunity cost of not remaining fully invested.


As soon as you’re right side up and paying all your bills again, begin rebuilding your emergency fund — and feel proud of yourself for having prepared for the unexpected in the first place.

Did You Know These 8 Things Are Taxable?

Did You Know These 8 Things Are Taxable?

Jan 2021

Every April, Americans face the often-dreaded ritual of filing their taxes. The prospect of a larger-than-expected tax bill is one common source of anxiety, but so is the possibility of making a mistake that runs the taxpayer afoul of the IRS. Here are some things that many people don’t realize are taxable.

1. Unemployment income. Yes, the unemployment income you receive after a job loss is taxable. And unfortunately, this is one issue that will affect many 2020 taxpayers. You can elect to withhold taxes from your benefits, but if you didn’t realize your unemployment was taxable, you might be in for an unpleasant surprise when you go to file.

2. Gambling winnings. Even when Lady Luck shines upon you, Uncle Sam still wants a piece of the action. Whether your earnings are from online fantasy football or the racetrack, those earnings are, in fact, taxable.

3. Forgiven debt. You may be fortunate to have a creditor forgive your debt, but that goodwill also triggers a tax liability. From the point of view of the IRS (the only one that matters when it comes to taxes), you received income when that debt was forgiven. Therefore, that amount is taxable except under certain conditions, such as a bankruptcy ruling.

4. Social Security. Social Security benefits can be taxable depending on your level of income from other sources. If you want a smaller tax bill, you can elect to withhold taxes from your Social Security or make estimated payments on a quarterly basis.

5. Severance pay. After losing a job, you might be in for a little more bad news. If you receive a compensation package after separating from a job, your severance pay — just like the income you received from your employer — is taxable.

6. Freelance income. If you work a side hustle on Fiver or Upwork to help make ends meet, you’re responsible for taxes on that income just as you are for the money in your company paycheck. However, since most people have taxes withheld from their employee compensation, but not from freelance earnings, you may end up owing more than you expected on this type of income.

7. Profits on a sale. If you sell your rare Claude the Crab Beanie Baby for a profit, then you may be surprised to learn that you owe taxes on the profit you made — even if the sale was to a friend or family member.

8. Awards, prizes and contest winnings. Did you hit the Powerball jackpot or draw the winning ticket at the church raffle? You guessed it — those winnings are taxable in the eyes of the IRS.

Your individual circumstances may impact your tax liabilities, so always consult a qualified tax professional to see what qualifies as income in your case and what tax deductions you might be entitled to.



Five Ways You Can Defeat Debt

Five Ways You Can Defeat Debt

Apr 2021

Debt and the American way of life have become synonymous. From the 1850s when the Singer sewing machine company first introduced installment loans so that more homes could purchase its revolutionary appliance, a rising standard of living and debt have gone hand in hand.

In 2018, less than a quarter of respondents to a Northwestern Mutual survey said they were debt-free. The rest reported debt totaling an average of about $38,000, excluding a home mortgage. Cumulatively, all consumer debt surpassed $14 trillion in the beginning of 2019. For perspective, the GDP of the U.S. in 2019 will be around $21.4 trillion, China’s GDP will be $15.5 trillion and Germany $4.4 trillion. In fact, U.S. consumer debt surpasses the GDP of 8 of the top 10 countries with the largest economies in the world. The largest single category of U.S. consumer debt is mortgages, totaling $9.4 trillion. But that still leaves a chunk of debt rivaling the size of Germany’s whole economy made up of student loans ($1.4 trillion), auto loans ($1.3 trillion), credit cards ($834 billion) and personal loans ($291 billion.)

Debt has clearly become the albatross of the American family budget. And while not all debt is bad, [link to good debt blog] some types of debt can be destructive, nibble away at your finances and give you that “I just can’t get ahead” feeling. High credit balances and low savings can be a one-two punch that prevents you from accumulating sufficient savings to insulate yourself from financial stress.

The road to recovery? Reduce debt. You could just keep making your current payments, but unless your debt is structured in an unusual way, that’s probably the most costly and difficult way to do it in terms of payoff amount and duration.

Once incurred, debt can be mighty hard to get rid of. But here are five ways to overcome those pesky, persistent loan balances.

Snowball Method

Look at your lowest credit balance. Maybe it’s a retail store credit card or a low-balance credit card you don’t use much. Take everything you can scrape together and throw it at that card each month until it’s paid off. Now do that again with the next highest balance, and so on. This is part financial strategy and part behavior modification: By “removing” those payments from your budget, you start building a reserve into your monthly spending habits. And that reserve gets bigger and bigger as you move up to the higher balances. Eventually, you’ll pay off enough of your debt to be able to start diverting some of that reserve into savings. Win!

Avalanche Method

The snowball is highly effective in motivating you to act and keep with the program; however, it may not result in the lowest overall payments. If that’s your goal, and you can stay motivated, consider the avalanche: making minimum payments on all of your debts along with the biggest additional payment you can on the debt that has the highest interest rate, often a credit card. When that’s paid off, do it again with the debt with the next highest interest rate, and keep following that pattern until you pay off your lowest-rate debt. This approach will save more money on interest over time.

Prioritize Bad Debt

If you go into debt to buy a house or get an education in a field that’s going to pay well enough to repay the loan or start a profitable business, that’s good debt. You’re investing money in a way that can help eventually increase your net worth. Bad debt includes money borrowed for things that decrease in value as soon as you buy them or debt taken on for purchases that are beyond your budget. That could include discretionary credit card purchases for nonessential items or a car loan for a vehicle you really can’t afford.

The strategy here is to focus on paying off bad debt first by making more than the minimum payments to get out from under. Often, bad debt carries higher interest rates, so you may also save some interest costs by doing this. But the main benefit is that you’ll feel better by decreasing your bad debt — and be in a better financial position — if you owe money on a house that builds equity and provides a place to live than if you owe money on a new wardrobe that will probably be out of style by next year.

Biweekly Payments

This strategy is simple, straightforward and fiscally sound: Take each of your monthly payments and split them in half. Make one of those payments every other week. Because there are 52 weeks in the year, you’re actually making one additional monthly payment, 13, each year. In addition, you’re lowering your loan balance more rapidly. Both of those things will save you money on interest. This is especially effective when used on longer term obligations like an auto loan, student loan or mortgage.

For example, if you have a 30-year fixed mortgage of $250,000 at 4%, making biweekly payments will save almost $30,000 in interest and retire the loan five years sooner. Even if you only stay in the house for seven years, you’ll still save several thousand in interest while paying down an extra $10,000 in principal, which means more money in your pocket when you sell. It takes discipline to stick to this program, and you have to make sure your lender will allow this and then apply the additional payments correctly, but there are biweekly loan services that can help for a fee.

Balance Transfer/Consolidation

Of the five strategies, this is probably the least desirable, but it can save money without requiring larger payments. If you have credit card debt, you’ve doubtless received offers for consolidation loans or balance-transfer credit cards. The idea is to move balances from higher-interest loans to a loan or card with a lower interest rate. Over time, that can save you money on interest.

However, read the offers carefully: Many have a transfer fee, and that fee can severely limit the amount you save. Also, with balance-transfer credit cards, the introductory “low, low rate” often only lasts a few months to a year. If you can’t substantially pay down that balance before the rate goes up, you’re not making any real progress.

Which One Is Best?

Like diet and exercise, the best debt-reduction strategy is the one you’ll actually follow over the long term. Pick a path that fits your personality, your finances and your lifestyle, and then stick to it and it will — literally — pay off.


What is a Target Date Fund, and Should I Invest in One?

What is a Target Date Fund, and Should I Invest in One?

Apr 2021

Target date funds, or TDFs, have become very popular among investors in recent years. And if you’re opening a new 401(k), this may be an option to consider if you want to minimize the stress of adjusting your retirement strategy as you get older.

In the past, 401(k) participants would have to create their own blend of investments called an asset allocation, typically including an array of stocks, bonds and cash equivalents. Asset allocation should reflect the risk tolerance of the investor as well as the time horizon until the money is needed, usually retirement. Typically, a longer time horizon allows for greater risk, which might translate to a higher proportion of stocks and riskier investments, whereas a shorter time horizon warrants more conservative choices.

That means your investment strategy should include rebalancing the allocation periodically as the retirement or target date draws closer. And this requires monitoring investments and making decisions about what exactly to adjust from time to time.

But what if this could all be done automatically, with no action required on your part?

This is precisely what a target date fund aims to do. The manager of the fund constructs a strategy around a target date at which time the participant is expected to start withdrawing funds. This target date is typically the participant’s retirement date, although it can also be directed toward other needs, like a child’s college fund. The fund manager will periodically reallocate the investment mix, usually annually, to become more conservative as the target date draws closer.

The Upside

Good for hands-off investors. TDFs can be an excellent option for those who tend to avoid managing their investments but still want a steady path to retirement.

SimplicityIn theory, choosing a TDF could be the only investment decision you make, although this strategy may not always be advisable. Be sure to consult a qualified investment advisor.

Less intimidating.If you’re not particularly interesting in learning about different asset classes, mitigating risk and other issues an informed investor should understand, then a TDF offers a way to easily hand those decisions over to a professional.

The Downside

Not amenable to changing goals.If your investment goals suddenly change or you have to retire earlier or later than planned, you could find yourself poorly positioned if your money is invested in a TDF whose target date no longer matches up with your needs.

Potentially more expensive.As TDF’s are actively managed by a fund manager, they typically will have a higher expense ratio than a passively managed fund, such as an index fund — although it may be comparable to other actively managed funds.

Not all TDFs created equal.Different fund managers may manage risk differently. Even if two TDFs share the same target date, that doesn’t mean they will have similar investments. And this is important for a potential investor to understand before making a decision.

If your 401(k) offers a TDF, don’t hesitate to ask your financial advisor how the fund is structured and how often it’s rebalanced. And remember that even though you can “set it and forget it” when it comes to TDFs, you’re not locked in permanently. So do your research and see if this approach might be a good fit for you.


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