Stockpile [money questions]

[rebeccmeister]

I'm wondering about two general rules-of-thumb. These are pretty recent concepts for me because up until the current postdoc position I really didn't have the luxury of considering them (see: student loans, non-unionized postdocs, grad school underpayment).

1. What proportion of one's income should one be attempting to sock away into savings, and into what sorts of categories should one consider allocating the sockings? The different places where I have postdoc'd have offered various random flavors of retirement accounts, which I am mostly ignoring for now. I'm currently socking slightly over 10 percent but I wonder if I should do more and scrutinize my frills.

2. How much avocado toast should one forego in order to make a house down payment? (in case you don't understand the reference) In other words, what proportion of a house's price should one have on hand for a down payment, generally speaking?

Two weeks ago, I went over to the house across the street, which had a "for sale" sign up. The asking price made for an interesting thought experiment: if I allocated my entire current salary to house payments and there was no interest involved whatsoever, it would still take 13 years to pay for it. It's a "cozy" 3 bedroom, 1 bath place. Granted, this is in El Cerrito, and we're experiencing another national housing price crescendo.

Comments

[bluepapercup]

Would you be interested in chatting with my lovely spouse about these topics? He's super knowledgeable and also wise.

[rebeccmeister]

D'awwww, thank you for the offer! At this stage, I think the general rules of thumb noted by other commenters are at about the level of detail that I need. So I think I should be all right for the time being. However! I will keep this offer in mind for sometime in the next couple of years, and if I'm lucky I might even manage to have the chat in person (I'm overdue for a New England visit, you see!). :^) <3

[bluepapercup]

Okay! :) I knew nothing about buying houses and figured I'd never have the money for one like, ever but I've learned a lot since we decided to buy our condo. Stu had already bought and sold two previous houses. We went with the 20% downpayment (like everyone else recommends).

We are happy to host you ANYTIME BTW!

[rebeccmeister]

Yeah, I don't really anticipate having enough savings to buy a house in the immediate future, but now that I actually have some savings for once in my life, I thought it might be useful to get a bit of perspective on how to manage what I've got so far. And maybe some day in the next decade or so I might actually have an adequately stable job and enough savings to make the notion a reality.

[moodyduck]

Posted this on LJ out of habit, but it's probably better here:

Generally you want 20% for a down payment in order to avoid having to pay extra for mortgage insurance that most lenders would require. I'm also guessing that having that much makes it easier to get a loan and get a better interest rate since you've then demonstrated to the lender that you are able to manage money well enough/are paid well enough to get to that point. And of course bigger down payments = smaller monthly payments and less overall interest to pay.

Do you have an IRA?

[randomdreams]

If you can show that you have a fair amount in savings, that'll also help get a lower interest rate. Any evidence that you'll be unlikely to default will help.
They're also likely to be nervous if your mortgage payment exceeds about 1/3 of your income.

[rebeccmeister]

Yeah, and I would think they SHOULD be nervous. That's where I'm still thinking, "Yeah...I'm not yet near the realm where I quite have the resources to buy a house." But if I at least have an idea as to where I am, and what it would take to get there, that counts for something!

[rebeccmeister]

Thanks for re-posting here! I'm still checking LJ but it's easier to be a bit more consolidated.

Y'know, I should probably open an IRA as a starting point.

I'm hearing the 20% from a couple people, so that sounds like a good rule of thumb for me to keep in mind. And of course you just went through the whole house-buying adventure and thus have good up-to-date information. Thank you!

[moodyduck]

Nice thing about IRAs is that they are yours and you don't have to jump through any hoops or pay any taxes when you change employers. If your employer matches retirement contributions into their plan, you should do it if possible because that is basically free money. Then you can roll it into an IRA when you leave. If your employer doesn't match, I would stick with an IRA and if you max that out, save in a good mutual fund. Then you can access it without penalty if you need it earlier, but not plan on using it for everyday things.

I max out my employer contributions, max out my IRA (except maybe this year because house), and then save extra into a mutual fund. As a postdoc I didn't save the extra because I didn't have it.

[annikusrex]

I agree re 20% (because of PMI). I think the only exception would be if you knew your income was about to shoot up but you wanted to get into a housing market sooner than later. Then you could pay extra to principal and get to 20% and get rid of PMI after your income went up. (This is a thing, getting rid of PMI.)

Socking away: You should do as much as you can in a tax-advantaged way. So if you're working with an IRA (either Roth or traditional), $5,500 per year. I would recommend Roth for you since a) it's more flexible (you can take out what you put in [not earnings] without penalty for any reason), and b) your income might be taxed at a higher rate in retirement. Then sock away other savings in cash accounts on top of that--whatever you can.