Money Mommy

Stuff your mom should have taught you, but didn't…

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Month: May 2020

Can I afford that?

The American Dream: Own your own home. Buy a car. Take a dream vacation. But can you afford it?

It’s very easy to figure out. Do you play to buy a house, a vacation home, a car, a new roof on credit? Decide how much your monthly payment will be. Let’s say you want to buy a car and you are willing to pay $500 per month. Okay. Let’s take that $500 for a test drive. Before you buy that car, start putting $500 away each month in a separate account. Do this for 6 months. Do NOT touch this money. Remember, if you had actually bought the car, that money would be gone anyway. Take stock at the end of these 6 months. Were you able to put that money away each month? Are you willing to continue paying $500 until your car is paid off? If the answer to both questions is yes, then you can afford the car payments. Don’t forget to include gas and maintenance in your new budget.

Want to buy a house? Same steps. Figure out how much your monthly mortgage payment could be. For illustrative purposes, we’ll assume $1,000. Start putting that money aside each month. If you are currently paying rent in the amount of $500, you can add that amount to your available monthly mortgage calculations. Because this is such a long-time investment, I would encourage a full year of putting this amount aside. At the end of the year, it will be time to take stock. Are you able to meet a mortgage of $1,500 per month. Don’t forget insurance and property taxes should be included in your mortgage calculations along with principal and interest payments. Also, your housing budget also cover utilities and maintenance of your new house.

If, after this exercise, you feel that your purchase is affordable then it’s time to purchase. What to do with the money you have saved? It can be used for a down payment. It can be kept as your 6 month emergency fund. It can be a combination of both. When Marie bought her first home, she had saved up $10,000 more than needed for the closing costs. After much consideration, she opted to keep it for an emergency fund rather than immediately paying down the mortgage. Two months after moving in, she was laid off. It took another three months to find a new job. Meanwhile, she was able to make her mortgage payments using her savings. She did not enjoy seeing her savings diminish, but her lender received her monthly payments, her credit remained good, and there was no worry about late payments.

How about new shoes or a great vacation? Again, put that money aside to see if its in your budget. If, after 6 months of savings, you haven’t saved up enough to cover this consumer want, you can’t afford it!