Are You House Poor?

Being house poor means you’re spending the majority of your income on housing expenses. Whether you rent or own, you shouldn’t be spending more than 30 percent of your monthly income on your mortgage or rent, utilities, insurance, and any other costs that may accrue month-to-month. If you are, you may be considered house poor. 

Buying a house a little out of budget to not properly planning your monthly spending can be stressful. If you are in this position, there are a few ways to readjust your budget and work towards getting back on track. For those of you looking for ways to get out of being house poor, or to avoid it altogether, we’ve got a couple of tips.

How Does This Happen?

Purchasing a house with a white picket fence is the American Dream. Yet, 17 million homeowners become house poor from doing just that. Those who are in this situation may have bought a house their wallets couldn’t handle or they may have cut too deep into debt from buying unnecessary luxury items. Either way, not being able to afford the roof over your head can cause a headache.

There are many benefits to homeownership including more privacy, investing in an asset that typically increases in value, tax-deductible interest, and the list goes on. 89 percent of millennials would rather own a house than rent, meaning some may rush to sign home loan documents rather than another lease agreement year after year. 

How to Prevent Being House Poor

Most people consider buying a house a large investment. For most, your house payment is what takes the majority of your paycheck. Due to this, if there was anything that were to threaten your main source of income, you may not have as much wiggle room to splurge on luxury purchases as you used to. Whether you’re considering purchasing a house or are already house poor, there are some ways to go about getting out of it. 

1. Don’t Just Say “Yes” to Buying a House. When looking at houses you’re interested in use a home loan affordability calculator to see if it makes sense. Don’t say “yes” to a house more than two and a half times your total gross salary. Even if you think you may earn a raise soon, it may be of your best interest not to spend what you don’t have.
2. Opt for a Fixed Interest Rate. Fixed rates make budgeting easy and you don’t have to worry about higher, or lower issued payments in the future.
3. Be Sure You Want to Stay for a While. Consider renting unless you plan on staying in the same place for at least five to seven years. Home investments normally start to turn a profit around five to seven years, meaning if you sell too early, you may end up having to pay more than you spent.
4. Know Your Budget. Avoid living anywhere that exceeds 30 percent of your income (including water, gas, electric, and cable) to have a comfortable budget to save and splurge every month.
5. Save for Any Rain Days. Always put away at least one percent of your overall house mortgage per year. For example, your house costs $300,000, save $3,000 a year, or $250 each month.

What to Do If You’re House Poor

Sometimes life gets ahead of you and suddenly you’re spending more than you would like on housing expenses. You may need some extra motivation to get back on track or you may need to brainstorm other options for earning a couple of extra dollars during your free time. 

Limit Other Expenses

First, start by limiting your expenses. Cut down on dinner’s out on the town and opt for an at-home dinner date, avoid your favorite coffee shop that has delicious five-dollar coffees, and cancel some of your unneeded subscriptions. If that doesn’t do the trick, have a family staycation instead of going to a resort, or think about trading in your vehicle for a less expensive option.

Get Another Job

Whether you’re currently unemployed or already have a full-time job, start considering other income options. Look at open positions that pay more, learn new skills to negotiate a raise, or take on a side-hustle to earn money in your free time. 

Consider Cutting Into Your Savings

As a last resort, you could seek a financial advisor to examine all of your options. You could consider relying on your savings or other assets to get through the tough times. A general rule of thumb is to always have at least six times your monthly expenses in savings. Even though this takes a while to accrue, you may have a little saved up. If you need to dip into your savings, be as frugal as possible to make your funds go farther.

Weigh Other Asset Options

If you have other assets you don’t use regularly, contemplate selling them to make a profit. Whether those assets are a motorcycle you only take out in the summer, an extra car you barely use, a boat, or a jet ski, once your finances get back on track, you can always repurchase similar items. 

Most of us see homeownership as a success or financial goal. Yet, if you haven’t successfully planned your finances, it can be anything but that. Being stressed about paying your bills month after month has a tremendous effect on your mental and physical health, not to mention your work performance and relationships. 

Before taking the leap into purchasing your own home, or signing the lease to an overpriced apartment, crunch numbers to understand your budget and what you can truly afford. Waiting to live in the house or apartment of your dreams will be just that much sweeter when you’re able to afford all the luxurious extras that go along with it. 

Sources: Fox Business | CNBC | U.S. Bureau of Statistics | Inc. | LendKey