Money Management

If a home is barely within budget, you may be tempted to overspend to buy it. Check out a few big reasons why that’s a really bad idea. 

For many people, buying a house now feels like an impossible dream. The median sale price for houses in the United States hit $431,000 in the third quarter of 2023. And while mortgage rates have come down from recent highs, they are still far above what they were during the pandemic and in the years before it.

If you’re hoping to become a homeowner but doing so would be just a little bit over your budget, you may feel tempted to try to stretch to purchase a property. Unfortunately, If you’d end up spending more than about 30% of your income on housing costs — or even if you’d end up simply spending more than you feel comfortable with — this is a really bad idea for a few key reasons.

1. You’re making a very long commitment when you get a mortgage

The reality is, a mortgage is typically going to be paid off over 30 years. That is a very long time. While you might be able to scrimp and save for a few months to afford a purchase that’s a little bit out of budget, it’s going to be difficult or impossible to do that for decades.

While you may decide you can stretch to buy in hopes that your income will go up in the future, there’s no guarantee that will happen any time soon. Unless you have a very clear reason to believe your salary will jump up dramatically (such as because you’re finishing a medical residency or an advanced degree), you can’t assume your future self will be able to solve the mistake your current self is making by overcommitting.

If you do think your income is going to provide you the funds to buy a house later, why not just wait until that happens and it’s a sure thing?

2. The consequences of not making mortgage payments could be very bad

There’s another really important reason not to stretch to buy a house. The consequences of not being able to afford it are really bad. Say, for example, you miss some mortgage payments. You could find yourself getting foreclosed on. Because of the fees and added costs of foreclosure, you could owe the mortgage lender a lot more than your loan amount. And you could lose most or all of what you put into your house.

Foreclosures also stay on your credit report for seven years, so during that whole time, borrowing money in any form could be difficult and expensive.

Even if you do manage to avoid foreclosure, you could find yourself constantly stressed about this potential fate — which is no way to live your life for decades.

3. Other important financial goals could be compromised

Finally, if you stretch to buy a house and make yourself house-poor, you may not have the money to save for emergencies, save for retirement, or do anything else you need to set yourself up for a secure future.

If you miss decades of retirement savings because you can’t afford to invest due to your housing payments, you will not have the money you need for a comfortable retirement. It will be too late to catch up.

To avoid this, make sure you’re buying a house that’s definitely within your budget — and wait until you can make that happen. You can scale down your needs for a home, work on increasing your income, or save more so you can borrow less if you want to get into a house sooner without causing a whole lot of financial consequences you could really regret.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Many people think it takes $1 million to be wealthy. Attaining that goal may be more doable than you’d think. Read on to learn more. 

These days, a lot of people are struggling with their finances in the wake of lingering inflation. So it’s not so shocking to learn that only 14% of Americans consider themselves wealthy, according to recent data from Edelman Financial Engines.

What’s a little more surprising, however, is that 2 in 3 Americans believe they need $1 million or more to feel wealthy. That’s up from 57% last year.

At first, the idea of attaining a net worth of $1 million might seem laughable. But it may be more doable than you’d think.

How to get to $1 million

Getting your net worth (which is your total assets minus your total debts) to $1 million isn’t easy, and it’s not the sort of thing you can expect to happen in a year or two. But you may be surprised at how easy it can be to eventually be worth $1 million.

Let’s say you make an effort to save $500 a month this year, and at the end of 2024, you invest $6,000 in the stock market. Over the past 50 years, the market’s annual return has averaged 10%. If you can earn that same return on your $6,000, your portfolio will be worth around $437,000 in 45 years.

Meanwhile, let’s say you buy a home this year for $250,000. In 45 years from now, at which point it’ll likely be paid off, it may be worth $600,000. So if you take a $600,000 home that’s free and clear of a mortgage and add its value to your $437,000 investment portfolio, you’ll have passed $1 million — eventually.

Focus on what it takes to be financially set now

The above example illustrates that getting to a net worth of $1 million is doable even if you’re only a moderate earner. But also, you’ll see that it could take a really long time to get to the $1 million mark. So rather than focus on that, think about what it’ll take to be financially comfortable in the near term.

This doesn’t mean you should neglect your retirement savings. It’s still a good idea to consistently fund an IRA or 401(k) plan. Rather, instead of just focusing on an eventual goal — and one that involves getting to a pretty high number — think about the amount of money or savings it will take for you to feel good about your finances now.

Maybe having a $10,000 savings account cushion gives you peace of mind and allows you to spend on different things with less worry. Or maybe you need $15,000 in savings to feel as if you can do things like go out to eat at nice restaurants and take vacations without feeling guilty.

Also, think about what it costs to be you for a month based on your essential bills. If that number is $3,000, aim to save a $9,000 emergency fund at a minimum so you’re protected in case you lose your job.

It’s not totally shocking to learn that most Americans say it takes $1 million to feel wealthy. After all, that’s a large number, and it’s sort of a classic number that’s used a lot to signify wealth. But the reality is that you might get to a great place financially with a lot less money to your name.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Having your homeowners insurance canceled is a stressful situation that’s becoming more common due to climate change. Learn how to protect your home and money. 

Most people might not know this, but if you buy a house that needs repairs — and you’re not careful — your homeowners insurance can get canceled. My wife and I recently bought a 100-year-old house. It was a bit of a fixer upper! In fact, the back entry to the house had rotten siding and collapsing fascia, and a damaged wood-framed window that needed to be ripped out and replaced.

We knew about these repairs when we bought the house. We were already hiring contractors to fix the problems. But one month after moving in to our fixer-upper, we got a letter from our homeowners insurance company notifying us of some shocking news: our home had failed its home insurance inspection.

The inspector’s report said that the rotten siding and damaged entryway constituted “serious structural issues related to safety,” and — even worse — that our policy was going to be canceled in 30 days. We were suddenly left scrambling to find a solution so we could keep our homeowners insurance, and, well, our house.

How could this happen? Can insurance companies really just cancel your homeowners insurance policy? Yes, they can. Let’s look at a few reasons why homeowners insurance policies get canceled, and how you can prevent this from happening to you.

Why homeowners insurance gets canceled

Homeowners insurance is part of everyday life and often every month’s mortgage payment for anyone who’s ever bought a house. It helps protect you in case of disasters like fire or extreme weather events. Some homeowners insurance policies can also protect you from theft or legal liabilities, like if someone slips on your sidewalk and sues you for negligence.

Unfortunately, with the rise of climate change, extreme weather events are becoming more frequent. More homes are getting destroyed by wildfires, hurricanes, and other natural disasters, and just like the cost of car insurance, homeowners insurance companies‘ costs are skyrocketing. Sometimes the insurance companies respond to this cost crunch by canceling policies, or even leaving the state.

In the state of California, State Farm made headlines in May 2023 when it announced that it would no longer offer new homeowners insurance policies in the Golden State. Florida has also seen major insurance companies leave the state, and Florida homeowners now pay an average of more than $4,200 per year for homeowners insurance, compared to the national average of $1,700, according to data cited by Newsweek.

As the costs of home repairs increase, and as natural disasters get more frequent, we’re likely to see a continued rise in the costs of homeowners insurance. Some homeowners will find themselves facing uncomfortable choices about how much house (and insurance) they can actually afford. Others will find themselves in the predicament I was in — getting a day-ruining cancellation letter.

What to do if your insurance company cancels your homeowners policy

According to the Consumer Financial Protection Bureau (CFPB), if your homeowners insurance company cancels your policy, you have options:

Start by calling your insurance company to ask for an explanation, and ask if there’s anything you can do to fix the situation.Shop around for a new homeowners insurance policy from other insurance companies. (But be aware that if you have a serious problem with your home, other insurers are likely to raise the same red flags as your previous insurance company.)If other people in your area are having trouble getting insurance because of frequent natural disasters or wildfire risks, contact your state’s insurance department or insurance commissioner. Find out which insurance companies are still offering new policies where you live.Try to get a FAIR plan. Most states offer special homeowners insurance to people who can’t get it from private companies. These are called Fair Access to Insurance Requirements (FAIR) plans, also known as “insurers of last resort.” But know that this last-resort insurance is likely to be higher-cost and lower-coverage than you might prefer. For example, the California FAIR plan covers fire, but not other residential property insurance coverages like theft or liability.

My wife and I were lucky: we were able to fix our homeowners insurance situation at step one, without having to shop around for a new policy.

A happy ending: How we got our homeowners insurance back

Nothing gets me motivated like an insurance cancellation letter. We called our insurance company to ask for more details. We explained that we were aware of the problems mentioned in the home insurance inspection report, and we were working to fix them.

Fortunately, the customer service person said that we could keep our insurance as long as we showed proof that we were in the process of repairing the house. We sent an email to our insurance company with written records of our contractors’ price quotes and repair project start dates. Even though our home repairs hadn’t happened yet, they were on the schedule — and that was good enough to satisfy our insurance company’s concerns.

It all worked out in the end. Our homeowners insurance policy was not canceled; we got to keep living in our house, we did not have to switch insurance companies or pay a higher premium, and our contractors did a great job of fixing, replacing, and repainting everything. We sent photos of the finished project to our insurance company, and we haven’t had any other issues since.

Bottom line: If your home fails a home insurance inspection, you could be at risk for having your policy canceled. Other homeowners might lose insurance coverage due to higher risks of natural disasters where they live. Remember that you have rights and options; try to find a solution or switch to a new insurance company.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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