Purchasing & Selling your home the right way and investments are closely related. If you purchase and/or sell your home the right way—you will have money left over to do investing outside of your retirement accounts.
As mentioned throughout this site—prior to purchasing your home—you should have a six month emergency fund or other “compensating factors” at work—that will have you in a strong financial position.
Be sure that you are fully covered INSURANCE wise—that means life, home, auto, umbrella liability, health, disability and long-term care—have all been addressed—at or before—the time of your home purchase.
Your INVESTMENTS outside of RETIREMENT prior to purchasing your home is not critical at the time of purchase—however, you should have a solid amount of discretionary income left over after the purchase of your home.
However, it is critical that you know your TAX situation—and improve upon it—prior to purchasing your home—if at all possible.
That means that you should be taking home most of your potential tax refund on a monthly basis by adjusting your withholding—so that you get a smaller refund (that will also protect you against tax fraud where someone uses your information and gets the refund that was owed to you—and therefore delays your tax refund) on your Federal and State Income Taxes—if that applies to you.
If you have kid’s and/or you anticipate having EDUCATIONAL expenses in the future—for you, your spouse—or your kid's—it is important that you take a look at saving for the expenses, however, it may not be critical that you have a plan in place—prior to purchasing your home.
It would really depend on the time horizon and the expected cost of the educational expenses in the future—as well as in-state versus out-of-state tuition and a host of other specific factors unique to your situation.
Let’s assume that you are currently age 29 and your spouse is age 27—and you have two kids age 5 and 7—and you are saving 20% annually with a 5% match on your 401k.
You are also saving $10,000 per year on ROTH IRA’S to further fund your retirement—one for you and one for your spouse—and you currently have a balance of $110,000 in total in all of your retirement accounts.
As for your ESTATE PLANNING & WILLS you should analyze and update them on an annual basis—if needed—as life changes can have a positive or negative effect—on your ESTATE PLANNING & WILLS.
If your NET WORTH or INCOME is not at a high level—you may not need ESTATE PLANNING at this time! However, you and your spouse—should still have a separate WILL that spells out your intentions and wishes—should one—or both of you—transition unexpectedly.
Investor Success Tips
At this time we are making the assumption that you have properly” assessed your financial situation” and have a six to twelve month emergency fund, you are adequately insured, your tax situation is at a level that benefits you the most, you have an educational savings plan in place—or anticipate starting one—and you and your spouse have updated your will.
You are now ready to invest outside of your RETIREMENT accounts—you save 20% annually with a 5% match on your 401k and $10,000 (maximum contribution allowed—2012 TAX YEAR) per year on ROTH IRA’S—for you and your spouse.
You are currently renting a home at $1,500 per month. You and your spouse have saved $60,000 for the down payment on your home and still have a 12 month emergency fund ($24,000)—based on your current monthly bills.
Your income is $80,000 per year—and your spouse’s income is $40,000. You have no outstanding credit card or revolving debt—nor do you have any outstanding car loans or installment debt.
At this time you are now “Ready, Willing And Able” To Invest
We will now look at the more common investment vehicles that are available to you when investing outside of your retirement accounts.
Savings: CD’s, Money Market Mutual Funds & Money Market Accounts
Checking Accounts: Various Types—Debit Card usually tied to this account
Bonds: Tax—Tax Free—Corporate—Municipal
Stocks: Various Sectors
Mutual Funds: Various Sectors
Exchange Traded Funds: Various Sectors
REIT’S: Real Estate Investment Trust
You decide that your first investment outside of retirement and excluding the emergency fund—will be in the form of a home for you and your family.
Because you have everything in place to make your home purchase enjoyable—you should be in a great position for home ownership!
Many financial planners do not see your personal home as an investment, however if you do it right—it can be an investment.
By purchasing a property where you can live at your means—or preferably—below your means you will have MORE money left over to invest outside of retirement—or invest MORE toward your retirement.
Therefore—from my perspective—properly purchasing your home is an investment—in you, your future and your family’s future—and I have successfully recommended this strategy with many of my past client’s.
In addition, the potential is there for the property to appreciate at a level higher than that of inflation—and at the time you decide to sell—you could possibly see a large “tax free” gain—if you make the proper purchase—and subsequent sell within certain parameters.
Furthermore you have to live somewhere anyway!
The key is to purchase in a neighborhood that you are comfortable in and has strong schools, purchase at a price that will leave you with high discretionary income and gives you the best chance to enjoy life, and save in—and outside of your retirement accounts.
Once you have the retirement projections that you and your spouse feel are adequate for your retirement years—you would then be ready to invest outside of your retirement accounts.
By having your future retirement accounts in place—and targeted amounts that you will need in the future relatively certain—investing outside of your retirement accounts ( whether it be real estate or any of the financial vehicles listed above) will be less stressful—in fact, you should feel comfortable and good about doing it!
By being in such strong financial investing position—your mindset(s) should be:
If we lost everything "outside of our retirement accounts and emergency fund"—we would still have a great life—and our retirement years would be enjoyable—and our kids educational—and other expenses "still" would be taken care of.
In addition, you would be enjoying life along the way—as you can meet all of your living expenses quite easily—and you have discretionary income available—that allows you to live at a level that is comfortable for you and your family—and in line with the lifestyle that you desire.
The theory behind this type of strategy is that you should be able to lose all that you invest outside of your retirement and emergency fund—and still be set financially—(reach your target) in your retirement years—and also have your and your families future educational and other goals met—on a consistent basis.
If you like to purchase a car every several years or so—these expenses should also be met with your discretionary income that you have on a monthly—or annual basis.
In actual practice we know that the odds that you would lose all that you invest outside of retirement would be very low (unless you were to choose highly speculative investment vehicles)—however if you did—you would still be in a great position—because you have your financial house “in order.”
If you decide to invest conservatively outside of retirement with money market accounts or CD’s—that would be appropriate—if that is what you were comfortable with.
As long as the amounts invested outside of retirement does not affect your monthly living conditions or emergency fund—it would be appropriate for you to invest a certain amount each month outside of retirement.
If you are conservative in your investment philosophy—you could also choose to invest in riskier or more exotic type investments—if you chose to do so.
By having your financial house “in order”—you would be in position to do that—and a loss would not "materially" affect your living conditions—and that of your family's.
Other Key Investment Points:
In the above illustration the couple makes $120,000 annually with 25% ($30,000) going towards taxes and health insurance—and 20% ($24,000 ) going towards their retirement.
Assuming they both worked until age 60—they would have over 30 years of investment earnings within their retirement accounts (retirement contributions alone would be over a million dollars—and with earnings they could have a "nest egg" of several million dollars to enjoy during their retirement years).
They have $66,000 left over (after payment of taxes, health insurance and retirement contributions) to live off of in a 12 month period or $5,500 per month.
By purchasing a home with a total monthly payment of $1,500 (just over 27% of their monthly income)—after taxes, health insurance and retirement contributions—they would be in a "winning lifetime position" by purchasing a home well below their means.
They have $5,500 left over (disposable income)—on a monthly basis for their mortgage, electric, gas, food, maintenance and other common monthly expenses. Assuming their monthly expenses total $3,500—that would leave them with $2,000 in discretionary income—that they could spend—or save (INVEST)—any way that they liked.
The above situation is a great position for them to be in. They are in position to do a number of positive financial maneuvers.
They could accumulate rapid savings rather quickly to increase their emergency fund, invest risky if they so chose to, take the kinds of vacations that they want to take—and not be limited in their choices due to finances, purchase an investment property—or reach many other goals that they may have for their family.
What It All Means
The point of this discussion is that the home purchaser's and investors listed above are in total control of there financial lives. They are not floating along being pulled in different directions by "MURPHY."
They know that they have a bright and prosperous future—and it will show in their daily behavior and the manner in which they approach life. They have an inner peace within—and it is largely due to the "choices" that they made.
Contrast the above scenario of a family in the same scenario—but they purchase a property with a payment of $3,000 per month—and they are carrying revolving and installment debt.
Although on the surface it may appear that they are doing exceedingly well—life could possibly be miserable for them.
Basically, Proper Purchasing and Proper Investing IS highly correlated—and the success or failure in your financial life—could depend on the choices that you make prior to, while—and after your home purchase.
This cannot be “overstated”—as I have seen many who try to enjoy life by putting the horse before the cart—(making financial decisions in the wrong order)—fall victim to unfortunate financial conditions—that could have easily been avoided—had they made the proper choice—at the proper time.
What You Can Do Now
Whether you—and your spouse earn six figures—or just enough to get by on—you can start on a path to achieve the success that you desire—just as the couple above did. You must start where you are at—and not procrastinate!
If you earn $40,000 per year and your spouse earns $20,000 per year—just apply the same general concepts—and you will be on your way to success—at the level that you desire.
Likewise—if you earn even more—say $160,000 per year and your spouse earns $80,000 per year—you would again apply the same general concepts—and you will be on your way to success—at the level that you desire.
Why Action Is All That Really Matters
You must take action today—by doing so—a brighter future can definitely—be on the way!
You no longer have an excuse—if you take action now—navigating this site effectively—will show you how!
It is imperative that you have the mental working knowledge—to make good decisions and good choices—when it comes to your credit and finances. By properly navigating this site—at this time—you will put yourself in position—to do just that!