Buying a House
As you continue your life together, establishing roots will become more and more important. The ability to build this into your overall financial plan is considered a top priority.
Your initial thoughts on a home purchase suggest a price in the $250,000 range. We know that median prices in most localities have fallen in the last two years, so it will be important to keep up with trends in your local market as the actual purchase decision approaches.
Regardless of the eventual price tag, your home purchase will require two main funding sources — your down payment and your mortgage. The balance between them will weigh heavily on your overall cash flow planning for the foreseeable future. There are a few items to focus on as you move towards buying a house:
- Debt-to-income ratio: This is one of the major pieces of financial information a lender will look at when approving you for a mortgage, as it measures the relationship between the income you currently have and the debt you currently make payments on.
Your annual income is determined by the tax returns you file each year. Typically a lender will ask for tax returns, from each of you, over a two year period. It is important that you are both reporting your incomes on your annual tax returns, and it is equally important that you are paying down as much of your “other” debt as possible.
Buying a house will have a financial impact on your other goals. For example, Ethan’s decision to start a business, or to stay with his current employer, could have an impact on both your annual income and your debt levels. It will be important to prioritize these goals, and to have in-depth conversations with financial professionals, as you make decisions along the way.
- Mortgage pre-approval: When you get to the point where you are actively searching for your new house, you will need to meet with lenders to get “pre-approved” for your eventual mortgage. This will help you determine how much of your purchase can be financed, and how much you must cover with a down payment. The lender will work with you to determine what Federal programs you may qualify for [i.e. Federal Housing Association (FHA) loan programs], and what those programs may require of you.
Down payment for home purchase: When the home purchase becomes a reality, you will need a source of cash to make the required down payment. Whether you are required to make a 20 percent down payment, or you qualify for a reduced down payment through an FHA program, it will serve you well to begin saving for your down payment today. Based on our cash flow analysis, you should begin putting $350/mo into an account earmarked for your house down payment, and add savings through any bonuses Ethan receives as well.
Planning a Wedding
Your decision on the timing of a wedding brings considerations beyond the financial aspects, but you are right to ask the questions about how to pay for the associated costs. Having a plan in place, and resources to utilize, can mean the difference between a truly enjoyable day and one fraught with anxiety.
You have indicated that you will have some financial support from each of your families. Though without more definite plans, the extent of that support is hard to quantify. Given this uncertainty, it will be difficult to give you defined savings goals/amounts at this point in time. We can, however, develop some policies that may help you along the way.
- Engagement ring purchase: The biggest piece of advice I can give here is to take the rest of your future goals and plans into account when making decisions regarding the engagement ring. I recognize that the financial resources you devote to an engagement ring purchase have as much to do with tradition and personal preference as they do “cost,” but the two don’t have to be at odds. More money spent on an engagement ring may mean utilizing resources designated for actual wedding costs, or a house purchase. You should have an open conversation on the meaning of the engagement ring, and what each of you might be willing (or not willing) to sacrifice at different price points. Given your other financial goals, it may be wise to determine that the purchase of an engagement ring will not add the burden of additional debt payments.
Wedding Planning/Funding: Instead of setting a budget and then looking for the funding solutions, try to work in reverse. Once the engagement is set, have conversations with each of your families about the contributions they can realistically afford. From there, look at your own financial ability to contribute, in relation with your other financial goals. Once a final number is determined you will have a better sense of options available to you.
Owning a Business
Ethan has indicated the desire to own an auto body shop in about five years. Given his current commute and his desire to be closer to home, he hopes to start his business in his hometown. The estimated start-up costs are between $150,000-$200,000 (including real estate and equipment).
Quite frankly, this goal puts stress and pressure on the other two short-term goals (a house and a wedding). In order to make all of them work, you will need to be dedicated to a savings plan that makes use of all of your discretionary income and bonuses. It is very likely you will have to incur outside funding in starting this shop. The best thing you can do today is to begin saving money as aggressively as possible, and pay close attention to your credit ratings to ensure that they are strong enough to allow for debt associated with the house and business.
You should also develop relationships with the small town bankers in your community, and look into Small Business Association requirements for loans in your area. Having as much advanced knowledge of what will be required of you when you seek funding for your shop will protect against last minute surprises.
There are some non-financial things you can do in the next five years, as well. Continue to run the current shop as if it were your own. Pay close attention to all of the minor details involved in ownership, and constantly be developing your own business plan. Continually foster relationships with vendors and suppliers to ensure a smooth transition when you open your shop. And keep your eye on the existing shop in your town to know what is working for that business, and what they could improve on. You will ultimately be competing for the same business, and your name, reputation and quality of work will need to carry your shop in the long-run.