Now that you’ve evaluated your income and spending, examined your debt load, it is time to look at how well you are protecting your assets through savings and insurance. Buying a home is a pretty big under taking. Make sure you’ll be able to do more than just own a building. Make sure you can own a home.
Are You Actively Saving?
Who’s tired of hearing “pay yourself first”? What the heck does it really mean? If you’ve read any financial guru’s guide, pay yourself first is one of the most common mantras. It sounds simple, but it is more than just paying yourself, it is protecting yourself. Paying yourself first is part of making yourself truly self sufficient. If your car’s transmission gives out or you have to travel for an unexpected family emergency, can you go and pay cash without a second thought? If you can’t, this is not your time to buy a house. Here are the major savings goals you should be working on and have accomplished prior to buying a house:
1. Emergency Savings: 6-9 months of Gottas and Havetas.
2. Retirement Savings: Actively contributing to an IRA, 401(k), or related plan.
3. Down Payment Savings: Most lenders are requiring 20% down. 20% on $200K? $40,000…no small potatoes there.
4. College Savings: Dead last priority. Save yourselves so your kids don’t have to save you. They have the benefit of student loans; there isn’t such a thing as a retirement loan. Nobody wants to be a boomerang parent. If you’ve got your emergency savings set aside to cover 6 months, are actively contributing to your retirement account, and have the money you need for a down payment, then by all means save away (but for a public in-state school, right…don’t worry, we’ll talk about it later.)
Are You Adequately Insured?
So your savings are in check. How about your insurance? Are you adequately covered? Life insurance planning is a bit tricky and everybody’s got an opinion on it. I personally prefer the lower cost of a term life policy; I’d rather do my investing myself through mutual funds. Term life policies are much more affordable for the younger set. I’m 30, and we pay $14.96/month for a 20 year/$250K policy. The younger you nab your policy, the easier it is to be insured and the cheaper it is to stay insured. If you’re going to buy a house, you definitely want to ensure that you’re covered. Military families enjoy the benefit of SGLI and FGLI, you can read more about these by checking out my post on military spouses and insurance.
How much insurance do you need? That’s a tricky question. I’m no estate planning expert, but I can provide the barest bones. Typically you want your insurance to cover your debt obligations and cost of memorializing you. So, add up your liabilities (debts), estimate about $20K for end of life stuff (really, I know you don’t want to think about this, but neither does your family), and if you will leave behind a spouse or kids, figure out how much you financially need to provide to help support them in your absence (not forever, but long enough to provide a cushion to get them back on their feet).
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