The whole value of the dime is knowing what to do with it.
Ralph Waldo Emerson (1803-1882)
The most frequently asked questions I get from my students (especially the boys) are related to personal finance or financial literacy. As someone who’s pretty passionate about finances, I figured it would be fun if I started to share my knowledge and experience and created a place for students to come and learn financial literacy.
This wasn’t something I planned on doing for a while, but Katie approached me with an idea for collaboration so I figured this would be a good starting point.
The article is written by Katie, but I chime in with a few thought of my own after CM:
Written by Katie Conroy of advicemind.com
Right now, low-interest rates are extremely appealing to many hopeful home buyers. However, we aren’t all in a solid enough position to buy a house right now. Debt is extremely common, and many of us would prefer not to take on more before reducing what we already have. Plus, credit scores aren’t exactly known for treating people with a ton of debt kindly.
Fortunately, there’s a lot that can be done to make debt more manageable. There’s no reason that debt has to stand in the way of homeownership. Here are some tips to inspire savvy debt management and strong financial decisions in the months leading up to buying a home:
Get Informed
When it comes to any financial endeavor, knowledge is our very best asset. Credit scores, though an imperfect representation of someone’s full financial health, are an excellent starting point when it comes to building this knowledge. There are plenty of sites online that give free access to credit scores. With this information, we can come to better understand our starting position, and make wise choices about how to proceed.
Remember, bad credit does not necessarily mean buying a house is off the table. It can mean that we need to take steps to improve our scores or look into alternative lending options. For example, there are plenty of loan programs out there designed to help those with small down payments or poor credit scores be able to buy a home. Looking into these programs and figuring out the available options can help make the next steps clearer.
CM: If possible, I say plan on doing whatever you can to boosting your credit score. Buying a home is a big-ticket purchase, often the most expensive things most people buy in their life. I suggest shooting for the bottom of the highest tier (at least 800), this should qualify you for the best rates. If that is too far away, a 670 would get the job done in most places. Planning for massive purchases can save us thousands down the line.
Boost Monthly Payments
One simple way we can put ourselves in a better position for home buying is to reduce that debt load. Paying more into the principal of a loan comes with a number of benefits. It can make monthly payments smaller, improve credit scores, and reduce the amount of interest that gets added back into the principal over time.
Plus, taking this extra load on is great practice for homeownership. Although the monthly payment for a loan itself is often less than rent in the same area, that’s not the only thing that contributes to month-to-month costs for homeowners. Insurance, taxes, and utilities can mean that owning a home costs as much — or sometimes, more — than renting. When we pay more out on our debt, we practice living with higher payments and less extra spending to go around. This puts us in a far stronger position when it comes to managing finances down the road.
Make a Clear, Actionable Plan
When it comes to any major undertaking, our best roadmap is a clear, detailed plan with actionable steps to guide our path. The first step is taking a clear look at our current financial situation, including all income sources, savings, and debts owed. Next, it’s figuring out exactly how much we can manage to put each month toward shifting those balances in our favor. Then, we have to ask ourselves the hard questions, such as, “Can I commit to this? Is it feasible? Is it what I really want?”
Once these questions have been answered, we’ll have a solid direction in which we can move. Homeownership is one of life’s most exciting milestones, and debt shouldn’t have to stand in its way. Increase payments, boost savings, and do the work necessary to make this dream come true.
CM: This is so true. Nothing works without a plan. Trust me, I’ve tried to make it work. My favorite financial plan is known to many as Conscious Spending, made popular by Ramit Sethi. This plan involves spending extravagantly on what I love and cutting spending intensely on everything I don’t care for. This prevents me from spending any money on unnecessary things. After practicing conscious spending for about a year, I saved more money and lived more of my “rich life” than I ever thought possible. This plan may not work for everyone, but it works great for me. Having a plan is crucial, we just need to find which plans work best for us.