Dear Dave: I’ve been trying to save cash to buy a home, but things always seem to come up that eat away at my savings. I have $130,000 set aside, plus an emergency fund, and I make $120,000 a year. I’m debt-free and renting right now, but eventually I’d like to buy a house in the $300,000 range. I really hate the idea of owing the bank money, so would you advise continuing to save and pay cash, or is it OK to make a big down payment and take out a small mortgage?
Dear Megan: I love your idea, but right now you have more of a dream than a plan. You’ll need $170,000 to go from $130,000 in savings to $300,000, right? So, let’s start planning.
If you save $60,000 a year, it would take you a little less than three years to get there. If you set aside $40,000 a year, it would take a little more than four years. A little division — just divide $170,000 by the amount you want to save each year — and you’ve got the beginnings of plan. A dream is a good place to start, but I want you to develop this into a plan that focuses on a goal. Break this down, and figure out how to achieve it.
I see three ways to achieve this home ownership goal. One, you do the long division math and save like crazy for however many years it takes to save up $170,000. The second is to put $130,000 down on a $300,000 home, and take out a $170,000, 15-year fixed rate mortgage. This is the only kind of debt I don’t beat up people for having. The good news is, with your income, you could probably pay it off in half that time.
A third possibility is to buy a $130,000 house. Write a check for a nice, modest home now, and in five years — saving wildly the whole time, since you’ll have no house payments — move up and pay cash for a $300,000 home.
If I’m in your shoes, that’s what I’m doing!
Dear Dave: I’ve noticed that the younger you are, the less expensive life insurance can be. I’m 32, and I’m still paying off my student loans. With this in mind, what’s the best age to get term life insurance, and what does it cover?
Dear Kalina: Simply put, term life insurance covers death. Having student loans doesn’t really matter when it comes to life insurance, either. If you have a family — or someone who is dependent on your income — you need 10 to 12 times your yearly income in a good, level term insurance policy. If you make $50,000 a year, that means you need a term life insurance policy with $500,000 to $600,000 worth of coverage. If you don’t have a family or dependents, I’d recommend a simple burial policy of $10,000 to $20,000 to cover any final expenses.
Either of these would be very inexpensive for someone your age. Keep in mind that life insurance becomes costlier as you get older. The reason? Statistically speaking, the older you are the more likely you are to die. It’s not a fun thought, but it’s the truth.
Life insurance, or at least a burial policy if you’re single and have no dependents, isn’t one of the Baby Steps in my plan. But in your case, it’s a go-get-it-now adult responsibility kind of thing!