House Poor: Don’t Let it Happen to You
Becoming a homeowner is a wonderful opportunity for most people. They’re freed from the bondage of renting and can begin acquiring equity in their new property. Equity that should pay handsome dividends as they get older. But all too often homebuyers – particularly first time homebuyers – mishandle the purchasing process and wind up what’s known as “house poor”. House poor is that state where a disproportionate amount of your monthly income is required to cover house-related expenses. As a result you don’t have money for things like nice vacations, eating out, or even saving money for the kids’ education. Below we’ll discuss the steps you can take to ensure this sorry state doesn’t happen to you.
Making Sure the Best of Times Doesn’t Become the Worst of Times
When you’re house poor you have the house of your dreams but can’t afford much of anything else because you made financial miscalculations in the run-up to purchasing the home. Here are 6 ways to ensure this fate doesn’t befall you.
- Have significant savings before you purchase the house – One of the best ways to avoid becoming house poor is to save aggressively in the years prior to purchasing your home. Once you purchase the house the savings can be used to handle the type of incidental expenses that can plague homeowners and sap their income, leaving them house poor.
- Be realistic about what you can afford – If you overextend yourself a bit on vacation or at Christmas you can usually set things right by just being a cheapskate for a couple of months. When you overextend yourself on a house you’re looking at 30 years before you can set things right. Before you start shopping for a house sit down with a financial planner and determine exactly how much you can realistically afford.
- Don’t underestimate house-related expenses – People often harbor the impression that their house expenses will consist of the mortgage payment and nothing else. They purchase their house with this notion in mind and then the boiler goes. And then the winter sets in and the heating bills begin to mount. Then the property tax bill arrives and the monthly homeowner’s insurance bill and the… well, you get the picture. There are a plethora of expenses related to owning a home. Don’t overlook any of them when you’re calculating the true cost of the home you want to buy.
- Reign in other debt – One of the fastest ways to become house poor is to use your credit cards with abandon. That’s because once you finish making your credit card payments every month all you’re likely to have left is enough to pay the mortgage and other house related expenses. Whereas if you keep your credit card spending to a minimum you’ll have cash available for other things and avoid becoming house poor.
- Be realistic about your income prospects – You assume you’ll always be pulling down a nice income and maybe you will. Or maybe the company you work for will relocate overseas and you won’t be able to go with them. Or maybe you work in an industry that is being impacted by the robotics revolution. Or maybe prefabrication means that framers like yourself are slowly becoming obsolete. Take a cold light of day look at your long term income prospects in order to avoid becoming house poor down the line.
- Avoid lifestyle creep – Once their life has expanded into their new home some folks want to expand other aspects of their lifestyle as well. They start ordering regular food deliveries, make expensive furniture purchases on credit, decide they can’t live without a deck or outdoor kitchen or decide they need a car befitting their new home. It’s okay to maintain the same basic lifestyle you had before. In fact it might be necessary to avoid becoming house poor.
Being house poor is without a doubt both the best of times and the worst of times in that you have your house but can’t afford anything else. Keep the above points in mind and you’ll avoid falling into the house poor trap.