This article is a continuation of the one I posted on Monday. During our money date we discussed among other things buying a house together in the intermediate term. The financial planning around a decision like this is quite important.
Buying a House and Reaching FI
When you want to reach financial independence, it’s important that you keep your expenses in check. And since housing is the largest expense for most people, this is extremely important to keep down.
Currently we live in my apartment. I bought it roughly three years ago, and it’s nice and affordable in an OK part of the city. For now, the apartment is fine for us to live in. Honestly I don’t see the need to move in the next two or three years, but who knows.
This time frame gives us a nice runway to save up a down payment. That will make sure we keep the mortgage costs down. Now as you know, I’m not a big fan of paying down a mortgage. I even took out an additional mortgage to make use of the relative high property valuations and low interest rates right now.
However I do see the need of becoming mortgage free when I get closer to FI. Looking at the timeline, paying down the mortgage is a winning strategy. I will be 26 next month. My girlfriend turns 25 this year. If we would buy something three years from now, I’ll be 29. Regarding the goal of becoming financial independent at age 40, there will be about a decade left. Paying off a mortgage in ten years is not a small feat (and we don’t have to be 100% mortgage free in ten years). So starting at a point where we can put down roughly 20% on the front-end will help tremendously.
Not only does it reduce the principal amount we’d have to pay back, it also lowers the monthly payment quite a bit, creating more room to make additional payments.
When Girlfriends graduates university we will start saving towards a home purchase. During our money date we did the quick back of the envelope math, and it seems we could both save 500 euros towards this fund every month. That means we get to save 12,000 euros per year which is not an insignificant amount. After three years, we should have saved up 36,000 euros. Depending on the state of the market during that time (we secretly hope for a cool down) that could already be ~10-15% of a smaller single family property.
Of course, the amount I’m able to invest monthly will go down, since I have to allocate money towards the house fund. That’s not a big deal to me, since the house fund will enable us to live for less than we otherwise would have lived.
Also there is a possibility of increasing the amount we save every month or postpone buying a place for another year or two. When our incomes keep rising, we might be able to increase to 600 or 700 per month each. Say we save 500 the first year, 600 the second year, and 700 the third year we accumulate just over 43k. Extending this for another year of 700 per month savings and we’ll have a war chest of 60,000 euros towards a house. Now that’s more like it!
Down Payment Investment Opportunities
Of course it’s not wise to invest money you need in the near term. However, keeping everything in a 0.3% interest savings account will also not do wonders. You can even argue it slows down the accumulation of funds, since inflation outpaces this interest number.
I was triggered by this post from Financial Samurai about investing your down payment money. In the article, Sam gives guidelines on how to invest your money you’re setting aside for a home purchase. In my opinion, this should be part of your financial planning process.
What could be a possibility is creating a very safe investment allocation, with maybe 15% world wide equities, 10% high yield dividend companies, 40% bonds (mix of government and higher yields), 35% cash.
Then even when there’s a large scale recession in the equity markets, of say 40%, the portfolio would only lose 10% of its value due to equities crashing. Hopefully the safe return on bonds and cash will offset some of that, minimising the total downside potential while creating at least some kind of upside potential over saving this much money in cash.
Anyway, these are all still just ideas floating around in my mind. First I have to discuss this stuff with Girlfriend, and then she has to graduate so we can start putting away some serious money towards our future together! That will be the next big step in my journey to FI since I already am putting away money towards the future individually! Sharing this with someone you love must be a wonderful feeling.
On to the next money date!
What would you do? Are there tips and tricks you would like to share? Perhaps your own experiences? Use the form down below!