How to Budget Your Way to Home Ownership in the DC Metro Area
Here, we talk to Lionel about how to budget effectively and put homeownership in reach while you're young — even here in the Washington, D.C. metro area!
When did you decide to buy a house?
Heather and I started planning about 18 to 24 months ago. We knew this was a major purchase and we wanted to do it right. Initially, our goal was to save enough so that we could put 20% down towards our home - to avoid paying for a PMI (Private Mortgage Insurance). This was a big stretch, especially in the D.C. area and suburbs - as you know, homes are very expensive here - but we knew it was possible.
What do you mean by ‘doing it right’?
It means a lot of things. First, whether you are naturally an organized and disciplined person or not, this is one of the instances in your life when you have to get your ducks in a row. Know what your must-haves and your deal-breakers are. Then you have to decide what your house budget is (set a range), start saving accordingly (plan to have money left for emergencies after closing), avoid spending frivolously and work at getting your credit score as high as possible.
Second, do your homework. Don’t be clueless. Heather and I went to several ‘first time home buyer’ seminars and it was very eye opening. For example, we learned the importance of working with a local lender versus a major bank.
Did you reach your savings goal?
We didn't quite get there. We were planning to buy in the fall of 2017 but an opportunity presented itself in February; we loved the house, it met our wants and requirements and we couldn't pass on it. Nonetheless, we still were able to put 10+% down, more than $30K.
How did you do it in less than 2 years?
I am a fervent advocate of living by a budget. I talk heavily about it in my book Money-Smart Millennials and I also show how to set up one.
First, Heather and I evaluated our finances and we figured out exactly the minimum we could live on comfortably. Besides our regular charitable donations and tithe, we saved every bit of what was left including unexpected income like tax returns, job bonuses, etc. We obviously still enjoyed ourselves and had fun travelling and eating out but we did it conservatively. You have to make a few sacrifices during this period.
Second, you have to plan. It won’t happen by accident. You have to take time to review your budget and track your progress and if you’re not getting close to your goal as fast as you can, it’s ok to delay a little bit. This process shouldn’t be careless. You have to be honest with yourself and accountable to the other person if you’re doing this as a couple.
Finally, find ways to increase your income. This is 2017, who said you can only have one source of income? Especially for millennials, you have an advantage and that is a lot of energy. Go for it! In the entrepreneurship section of Money-Smart Millennials, I’ve suggested a few ways to diversify and increase your income. This year, Heather and I filed our taxes with three 1099s and four W-2s. How cool is that!? You have to be creative and hustle. As I said earlier, this process of purchasing your first home will require some sacrifices.
Any final thought?
For all the millennials out there - and even for the older generation - buying a house is a good investment but only when it is done at the right time. If you’re not ready financially, don’t rush into it. You may be able to make the mortgage payment but it is not worth the stress if you have to live paycheck to paycheck with no savings. Don’t try to keep up with the Joneses. I guarantee you, if you plan, do your homework and find the right lender and agent, it will be an exciting, stress-free and fun adventure. Most importantly, you will move into the home that is meant for you.
For more solid advice, check out "Money-Smart Millennials: How to Be Financially Stable in Your Twenties and Early Thirties."