Where Do I Begin?
"How Do I Save Money?" is the most common money question I hear. We live in a world where everything we have is at our finger tips; online shopping, concert tickets, trips etc... Maybe you're thinking "I don't have a problem with online shopping but every time I get started saving my car needs work, the fridge went out, I had a medical bill, or another unforeseen expense." This was my problem every time I had some extra cash accumulating my car always needed work or a credit card bill came in always keeping my balance at zero. I just needed to make more money right? I started reading, listening to hundreds of hours of podcasts and audio-books, and networking to learn how to save.
The following are the most important tips I have learned on saving money:
OPEN A SEPARATE ACCOUNT FOR SAVINGS
It sounds cliche, but having a separate bank account just for savings that you DO NOT TOUCH is a CRUCIAL step towards building savings. If you have a problem where you keep dipping into your savings open an account at another bank that you cannot access by card. You don't have to save $500 a month but just get started. Start putting away a certain amount every week/2 weeks/ or month, it can be $50 a month just get started. Once you get started you will be encouraged by the growing savings and start to put more away.
You can automate your savings account to automatically withdraw from your account. This can go towards your investments, 401k, or to your savings account.
START PAYING YOURSELF FIRST! I read this in Rich Dad Poor Dad and it is in many other finance books as well. This one I struggled with the most, I am someone who paid their bills as soon as they come in. Once I started "paying myself first" my savings stopped getting hit because of bills. The idea is that you pay yourself first instead of paying your bills first. Most people pay their bills first then whatever tiny amount is left goes into their savings. Pay yourself first put simply is adding to your savings first. It forces you to get creative.
If your goal is to save $500/mo and you make $1500/mo but have $1500 in bills:
$1500 (Monthly Income) - $500 (Savings) - $1500 (Bills) = -$500 (YOU'RE IN THE HOLE $500)
The bill collector needs to get paid right? This is where the creativity starts you need to ask yourself how you're going to get the $500. You need to start making extra money to pay that $500. Get a side job, create a side hustle, UBER if you have too; that bill collector needs to get paid after all. This will force you to get creative at generating income. Next month you'll find ways to reduce your spending to meet your savings goal.
REDUCING YOUR SPENDING and AVOID THE STORES
I always think it's crazy how whenever I go in a store there are always one or two things I need. Even if I didn't go to the store for those things example: a new jacket for exercising (it's a health investment), something for the house, or a new book (educational investment I can justify). The point is my life was content before I went in the store and now the store is telling me I need this item. These little purchases add up and they're vampires on your savings. Avoid going to the stores all together whatever that may be for you. Stop the weekly clothing store, home decor store, video game store, whatever your "I'm just looking" trip may be. It's going to be hard for the first week or two but after awhile you won't even notice it.
Now the hard part, try dropping your Amazon subscription. I had a prime subscription and the monthly cost for me wasn't the problem. I kept purchasing things monthly even weekly with Amazon and guess what I thought I NEEDED all of those things. It's conveinant and you get many perks with it but this is a HUGE VAMPIRE of your savings. These little purchases combined with your weekly store trips are where you're non existant savings are going.
REDUCE YOUR GROCERY BILL This one is actually really easy and it is something that will benefit your health and your wealth!
First plan your shopping trips, I get my groceries delivered through InstaCart for a 5-8$ charge.
1. This planned shopping trip usually results in getting the same food and avoiding over spending.
2. Planning when I will shop reduces my decision fatigue throughout the week. Before I planned my shopping trips I would run out of food at random points in the week. This led to me buy lunch or eat out and waste money I didn't have to. No longer do I have to worry about when I will go shopping or running out of food. An additional benefit to this has been cooking more. My girlfriend loves to cook and we enjoy trying new recipes together. I'm spending less money eating out and have found a new hobby I never thought I'd enjoy.
If you're a person or family that uses a lot of produce go to a farmers market first. You can usually get a lot more produce for a fraction of the price of normal stores. Costco is also a good place to get produce for a low price; however, it is usually more than I can use and a lot goes to waste. For regular groceries I shop at Aldi which I found has the lowest prices. Most are their generic brands which are just the same as the regular brand names.
Our weekly grocery bill for 2 people?
$20.00 @ the Farmers Market
$50.00 @ Aldi
$70.00 or $35.00 each, not bad right!
When thinking about reducing expenses the go to ideas are getting rid of subscriptions, reduce shopping, maybe cable etc....
Housing accounts for Most of our budget each month and yet no one really addresses how to reduce this expense. This is seen as a fact of life expense that we can't change. THIS IS THE MOST IMPORTANT EXPENSE TO REDUCE in my opinion. So how do you reduce your housing expense? My favorite way is through house hacking, a term coined by Brandon Turner @ Biggerpockets.com however he did not invent this trick. House hacking is simply the idea of buying a house you will live in and rent the additional rooms out to pay the mortgage or even make money. Don't think you could buy a house? People do not understand how achievable this is.
My first house I bought for 237,000 with a 10k sellers assist that went towards the closing costs.
My cash out of pocket on this deal: 13k (I will go into this deal in another post but I used an FHA Loan and put 3.5% down)
I got the house rented out and basically covered all of my mortgage and utilities. Reducing my housing expense: I was previously living in someone's house hack and paying $575.00 a month. Which is cheap for rent but now that rent was saved and used to buy my next deal.
Today many people have student loans, rent, and now a car loan. America needs to get out from under these loans that dry out bank accounts every month. One of the first steps to getting out of the loan life style is by not having a car loan.
Do you need a car?
If you live in a big city the chances are that you can work in that city and take public transit to work everyday. If you can avoid having a car do it, not only will you save yourself from a car loan, but also:
According to Consumer Expenditures in 2017, released in September 2018 by the U.S. Department of Labor's U.S. Bureau of Labor Statistics, the average vehicle costs $9,576 per year to own and operate. The breakdown of the figure comes to $4,054 for purchasing the vehicle, $1,968 in gasoline and motor oil expenses, and $3,554 in other vehicle-related costs. (Investopedia)
If you need a car (most of us do):
If you need a car which most of us do you can still find other ways to cut expenses. Don't buy a new car if you can avoid it. Today most people get out of college fresh with loans and the first thing they do is buy a new car. It is staple of adulthood: graduate from college, buy a new car, put on Instagram and get congratulated for a week, then pay the loans for 5 years (WITH INTEREST).
had this debate with myself, should I get a brand new Ford? It's only 20k and the payments would be around 300/mo (289 on 5% interest) that's not bad right? However what if you could buy a used car for $6,000, maybe a ten year old Honda? Sure it won't be as nice and you may have some intial maintenance to take care of but guess what all cars have maintenance. If you hustle you should be either to buy that car cash or pay it off within a year.
20k with a $2,000 down payment 5% interest
= $289.00 / mo for 6 years.
All in cost after taxes and interest less the down payment
$6,000 with $1,000 for upfront maintenance all in $7,000.
Paid off 1 year after purchase.
5 Years without a 289 payment
= $17,340 in savings
That's more than the down payment on my first house and it's not that hard to do, it's just about being intentional with your money!
If you are feeling overwhelmed on whether to do all of these or none at all just start with one. Start small with a separate bank account and paying yourself first a small amount even $20.00 a month. Once you get that down maybe try another money saving method each month to add to your savings and it will compound from there!
The Ten Easy Steps!
Process Summary in Order
Disclaimer: This is based off my personal experience. Any one seeking legal, tax, mortgage, and or inspection advice should contact the appropriate party before moving forward.
Thinking about buying your first house but have no idea where to start? Then this post is for your, I bought my first house not long ago and had no idea where to start, loan products, how the process works, do I have to be handy, do you need $40,000, what kind of inspection do I need? I will answer all these questions and more in the below post!
Getting Started, Know What You Want!
,Where do you even start in what seems to be a herculean task? I think a good place is finding out what type of property you are looking for, neighborhood, price, and sqft.
For me this was easy because I always had planned on moving to a certain neighborhood since I was in high school. You may have other priorities though do you want to be close to your job, hiking trails, need a driveway, whatever it may be do you research.
Price - What Can You Afford?
This can be tricky. When you get your pre-approval you will probably get a high number you never knew you could afford. For my second loan I got pre-approved for a high number which I ended up only spending half that amount. You don't have to spend the whole amount you get pre-approved for. Pick a target of how much you want to spend each month on housing and does that include utilites/maintenace?
What goes into your monthly payment:
Principle - The portion of the house you're paying for each month.
Interest - The interest rate based off the interest rates at the time and the principal amount of the loan.
Taxes - What you pay each month for schools, trash, we all know what taxes are.
Insurance - Your home owner insurance.
PMI - If you put down less than 20% you will most likely have to pay PMI. It is mortgage insurance and can be costly. My first loan I did a 3.5% FHA and it had PMI.
Once you are ready to start looking at houses you will need to find a realtor to let you into the houses you want to see. The realtor will also negotiate on your behalf and take care of most of the paper work. Finding a good realtor is really like finding anyone to work with; word of mouth is probably best and someone in your community probably knows a good one. In addition your realtor is a guide but do not expect them to do all the work. You should know your market better than anyone as you are investing hundreds of thousands of dollars in this. Generally I looked on Zillow, Redfin, and Trulia every night for hours. I would send my realtor properties I wanted to see. The houses that met my criteria I put in an offer usually day off. I know they are a good deal for that market and if I wait I could lose out.
Looking at houses is an emotional process but it can be fun. Just know that if a property falls through due to a bad inspection or you get out bid it's a learning experience and you will find the right property! I lost two properties due to bad inspection and I was crushed but I ended up finding even better ones.
What to look for?
When I look at houses I look the structure, location, and the mechanics of the house.
For me being in walking distance to the main part of town was important. This was part of the reason I was moving to this area, I wanted to be close to the action. What do you want out of your location? Do you have kids and want to be close to schools or the park? This is really a personal question.
I tend to buy homes that are average either 3 bedroom/4 bedroom homes. No 2 bedroom or 5+ bedroom homes. Reason being is that if I ever want to resell the house I don't know many people in the market for a 2 bedroom or 5 bedroom house. Also I think 3br/4br is the sweet spot for rental properties. I stray away from wierd layouts also. One home I saw marketed the house as a 4br but you had to walk through one bedroom to get to another. Things like this will hurt your resale value in my opinion.
This is a universal thing that everyone should be looking at. If you buy a house that has structural issues you can be in hot water. No need to fear though, here are some tips: Hairline cracks seem to be common in old homes and I haven't found them to be an issue but definitely consult your inspector if you see them. Soft spots in the floor could be a sign that there is water/termite damage. My buddy had soft spots in his bathroom and it led to a whole bathroom gut and renovation. I also ended up redoing my bathroom do to water damage which I didn't know about. The repair wasn't as bad as I thought and I did most of the work myself with the help of some friends.
When I enter the house I'm looking at all of the pipes to see if there is any mold or water damage. You are going to want to check all of the bathrooms, kitchen, and radiator hookups if that applies.
THE BASEMENT: is the most important room in the house to inspect in my opinion.
Beams - if they look soft it could be a sign of termite damage. Termite damage if treated can fix the problem and should be retreated every ten years.
Pipes - again take a close look at them. If you have cast iron sewage/drainage realize they will probably crack and repairs can be $5,000-$15,000. However pipes can be insured through insurance or through other private programs like American Water Resources.
Water damage, if you see mold most likely you have a damp basement. Installing a sump pump or dehumidifier can solve this issue.
Electric - Make sure your panel is up to code, there are certain panels that are fire hazards and should be replaced before purchasing. Look out for knob and tube electric, this is something found in older homes but it can be a fire hazard and may make the home harder to sell down the road.
Furnace/Water Heater: Ask if they have been recently serviced and are in working order. A furnace replacement can be around $3,500.
Fixer Upper/Or Move In Ready?
Again personal preference. My friends and family all said to buy a move in ready place, but I found a great house that was 30k below market but it needed work. I'm handy right so why not? Well we did the inspection and it was awful. I just wanted to do a deal and almost closed on that property. If I had I would probably still be fixing it up today and never have bought more properties. In my opionion I would go move in ready on the first one, trust me once you move in you will find alot of things that need fixing. If you have the capital and want to do a flip go for it but I did not at the time.
When you move into a house you will find a lot that needs fixing that is a cost of home ownership. Don't get discouraged this happens to everyone!
Loans: There are a lot of loans but I will only cover a few that I have seen commonly used. This is brief overview so please consult a mortgage company for more detail.
Conventional Loan - This is normal 20% down mortgage with no PMI attached.
Conventional Loan with PMI - You can do a conventional loan with PMI. This is usually a down payment of 5-20% and the PMI will fall off once you reach 20% equity in the property.
FHA - Federal Housing Administration Loan which I used on my first deal. The loan allows you to put down 3.5%. When you put down less then 15-20% you will pay PMI (Private Mortgage Insurance).
203K Loan - This is an extension of the FHA loan that includes money for renovations. You will have to get detailed quotes from contractors, timeline of money draws, and cannot do the work yourself. Longer closing time.
Fixed Rate: Fixed rate loan means the interest rate of the loan will not change for the life of the loan.
ARM (Adjustable Rate Mortgage) - The interest rate of the mortgage adjust with market conditions. As the market is unpredictable this can be risky especially since interest rates are low right now (2019).
Life of the loan - this is how long you plan to pay the loan. The longer the lower the payments generally, loans can generally go to thirty years. Thirty year loans are what I do on my properties, I always have the choice to make extra principal payments.
Looking for a mortgage company:
I'd recommend looking for someone who is responsive and returns your calls quickly. Again reach out to your network and find recommendations from people you know. Your realtor should also have an in house mortgage person.
What paper work do you need? (Again each case is different this is what I needed)
-W2's and two months of pay stubs / If self employed you will need two years of income history.
-Two Months of bank records and if there are cash deposits expect to explain where that came from.
-Two years of tax returns
-Copy of your license or photo id
Insurance: You don't have to buy a house to figure out what the insurance price will be. If you find a property you like in the right area I would get three insurance quotes on it. Prices can vary widely by zip code. At closing my mortgage rep said he was jealous, he lives blocks away but technically in a different zip code. His insurance cost is double what I pay due to that zip code change. AREA MATTERS so check it out before hand!
Appraisal and Inspection
Inspection - You will have to find someone to inspect your home. A good inspector will spend hours going over your house and I recommend being there if you can. This will teach you about homes and their working parts / flaws. Generally they will check all of the visible things, under cabinets, basement, roof, and outside. They should run the appliances, make sure the heat works, and test the outlets. For me I always pay extra and get a termite/radon test. A general inspection in my area is $450.00 with the addition termite/radon it's around $615.00. An inspection will happen after you have an accepted offer and the property is "under contract".
Concessions - If your inspector find serious problems with the house you can ask the buyer to fix them or to give you a credit at closing. Things I have asked for have been fixing water damage, fixing electrical meter where water was leaking in, and fixing cracked pipes.
Appraisal - The bank will make you pay for an appraisal before closing and in my area this costs around $450 which should come off of your closing costs. Generally there is also a $150 application fee from the bank that will come off at closing as well. The appraisal is to determine the homes value matches the offer you made. Basically if you are offering $300,000 and the appraiser is sent to make certain the property is worth $300,000.
Title: Before closing your realtor should have you sign up for title insurance. They should have a company that they work with. The title company ensures that you have clean title basically the person selling the home actually owns it and there is are no liens or taxes pending that you will inherit.