Money Management

Don’t buy a house without checking out this advice from Ramsey first. 

Buying a house is one of the biggest financial decisions you will make during your lifetime. You absolutely should not move forward with making this purchase before you take some crucial steps to ensure you are ready.

Finance expert Dave Ramsey has identified one of those steps that you need to take. Here’s what it is, along with some advice on how to check it off your to-do list.

Don’t buy a house without following this Ramsey advice

According to Ramsey, figuring out exactly how much house you can afford is a crucial step you need to take before moving forward with any home purchase.

“You absolutely have to know how much house you can really afford,” Ramsey said. “Commit to staying within that budget no matter what—don’t cave to the pressure to buy because you’re tired of watching competitors pluck good homes off the market.”

While Ramsey acknowledged that it can be frustrating to wait for a home that’s actually within your budget, he said it’s crucial to stick to your spending limits so “your home is a blessing instead of a big, honking headache of a mortgage payment you can’t afford!”

How to follow Ramsey’s advice

It may seem like the easiest way to follow Ramsey’s suggestion is to go to a mortgage lender and let them tell you what amount you can borrow. You can provide your financial documents and get pre-approved for a loan up to a certain amount based on your income and the current level of debt you have.

You shouldn’t do that, though. That’s because the bank may be willing to lend you more than you really should spend, especially if you have good credit and not a lot of debt. Banks want to make the largest loan that they think you’re likely to pay back, and they aren’t necessarily concerned about whether your big loan will affect anything else you want to do with your money.

Make your housing payment work within your budget

You should do your own calculations for how large of a mortgage payment you can comfortably fit into your budget. And don’t assume your mortgage payment can be the same size as your rent check and that you’ll have plenty of money left over since there are additional costs you’ll owe as a homeowner that you didn’t face as a renter (such as home maintenance costs).

Ramsey recommends aiming to keep your housing payment below 25% of your take-home pay, and that’s a good guideline to start with when trying to figure out how much house is within your budget. But even this approach may not work for you if you have lots of other goals to achieve, such as retiring early.

Ultimately, you should consider the big picture of your situation and the amount you’re willing to devote each month to housing while still doing the other things you want. Then, work backward from there and decide how big of a house you can buy that will give you the desired mortgage payment — or an even smaller one.

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It’s important to celebrate your wins, rather than just lamenting your losses. 

Sometimes it feels as if all I’ve ever done with money is make mistakes. I stayed in a low-paying career for far too long (in my defense, I enjoyed much of the work itself, and I also felt good about working for nonprofits). I bought a house for the wrong reasons and at the wrong time in my life. I carried a lot of debt for a long time. Whenever I get down on myself, though, I try to remember my financial wins, and be grateful for them. These are the money moves I’m most glad to have made.

1. Pursuing higher education

I always loved school when I was a kid, and it was a foregone conclusion that I would be going on to college after high school. My plan had long been to pursue a doctoral degree, and ultimately, that didn’t come to pass for several reasons (namely, I was burned out by the second year of my Master’s, and in my academic field, getting a doctorate was no greater guarantee of finding a job than a Master’s was). But I did complete six years of higher education and two degrees.

Earning them was hard work and not cheap, but investing in myself this way gave me the ability to get hired by history museums in my old career. I also gained the research and communication skills necessary to successfully transition to my current career as a writer and editor. Warren Buffett was right when he said in 2022, “The best investment by far is anything that develops yourself, and it’s not taxed at all.”

2. Being a renter most of my adult life

My one and only experience with homeownership ended in a short sale, which isn’t usually what you want when you buy a home. Other than the two years I spent in that house, I’ve rented apartments and houses in several different states. Being a renter gave me the flexibility to move as necessary (extremely often, thanks to my old career and general life circumstances), and not have to worry about selling a house and taking on that stress on top of uprooting my life to relocate. While I am hoping to become a homeowner again, potentially next year, I’ve made my peace with renting. It comes with some pretty good perks, after all.

3. Maintaining my old car

I bought my current car almost 14 years ago. It was shiny and new back then, and now it’s definitely broken in. But I’ve done all I can to keep it running well, including regular and surprise maintenance that has sometimes cost me more money than I wanted to spend. It’s been worth it to fix this car, which is paid off and inexpensive to run and keep insured. And at this stage of my life, as a fully remote worker who is actively saving money for a future home purchase, I don’t need or want anything newer.

4. Paying my bills on time

I’m proud of my perfect payment record from the last decade. In the wake of getting laid off and being unable to afford my mortgage payments (which led to the short sale), I was laser focused on repairing my credit, and I made a concerted effort to pay every bill on time, every month. This had a positive effect, and despite carrying a significant amount of debt until last year, my credit score was still over 700. Payment history makes up 35% of your credit score, so if you struggle with making on-time credit card payments (or for any other bill), it’s worth buckling down and improving.

Getting better with money is a journey, not a destination, and while I’ve improved my finances significantly in the last year, I know I have room to be even better. All these moves were definitely winners, though.

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How much house do you really need? 

For many people, owning a home comprises a big part of the American Dream. This isn’t so surprising, especially if you’ve long been a renter and want to put down longer-term roots somewhere (and are a reluctant moving expert). You might also want more space at home, which may be a likelier prospect for you as a homeowner, especially if you’re able to buy a newer home.

American home sizes have fluctuated in recent years, but are on the rise as more people work from home as a result of the COVID-19 pandemic. Data from the National Association of Home Builders (NAHB) found that for Q4 2021, the average size of a new single-family home was 2,537 square feet, with the median size at 2,312 square feet. Finance guru Ramit Sethi believes a desire for a larger house isn’t a purely practical consideration, however.

Ramit Sethi’s position

Sethi recently noted on Twitter that while people may say they want a larger home to have more space for say, a home office, in reality, many people want a big home because they believe that’s what successful people have. In short, it’s a classic example of “keeping up with the Joneses.” While buying bigger isn’t bad in and of itself, it’s worth thinking about what you truly need from a home before rushing to get a mortgage. Here’s why aiming for a larger home regardless of your finances or needs can cost you.

A bigger home = bigger expenses

You may not have considered how much a larger home can magnify some of the costs of homeownership. It pays to really consider all of these potential expenses before rushing to make an offer on that 2,500 square foot home so you can get out of your 1,250 square foot rental.

Likely a larger mortgage and higher taxes

Starting with the mortgage, you could be looking at a larger one to pay for your dream home. Currently, rates on 30-year fixed-rate mortgages are above 6%, so you’ll be looking at expensive interest on top of the larger principal cost for that house. A larger home could also be assessed at a higher value, resulting in higher property taxes.

More money to clean, maintain, and power

Not only will you be paying for the home itself, as a homeowner, you’ll be responsible for cleaning and maintaining the larger space. While spending more time cleaning your home may not seem to cost you money, it will cost you time, which could translate to money. If the time you spend cleaning is time you’d normally be working, you’ll lose out on income.

And when it comes to repairs and maintenance, a larger home could translate to more expensive problems. For example, if you need a new roof, a larger one will cost more. Plus, you’ll be looking at higher utility costs to heat and cool your giant home.

More space to fill

Finally, if you buy a larger home and transition from a smaller space, you’ll likely find that your existing furniture isn’t enough to fill the space. It’ll be easy to talk yourself into spending more money to fill that space with more stuff — a larger couch, or a dining table that seats eight instead of your current one that only seats four.

Consider your needs and wants before looking at homes

It’s okay to aspire to think bigger if you’re looking to become a homeowner. I’m hoping to do so myself in the not-too-distant future. And while I know I want a few hundred more square feet than my current apartment, I’ve also thought long and hard about my actual needs and wants. I work from home, and so a dedicated room for a home office is a major priority for me and my livelihood. I like to cook and entertain, so a large kitchen is on my list.

Your needs and wants are likely different from mine, so I encourage you to sit down and make a list, and take into consideration the needs of any people who live with you as well. Discuss those needs with your real estate agent, so they can be mindful of showing you homes that meet your size preferences. Don’t fall into the trap of thinking a bigger home makes you look more successful, because struggling to keep up with the cost of a large house will definitely change your mind on that.

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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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Ever wonder why you can’t afford a new car? 

Want to buy a car? Well, there is finally some good news, as the cost of new cars is going down and the supply of cars is starting to increase. The bad news? Prices are still near an all-time high, making them more unaffordable for Americans. On top of rising prices, higher interest rates and insurance, taxes, gas, and repairs can quickly add up. Wages are still stagnant, making it difficult to save enough money for a down payment. Even if the purchase is possible, paying off the loan may still be a struggle. Here are the details.

The price of new cars has skyrocketed

The prices for new cars have risen exponentially since the start of the COVID-19 pandemic, hitting an all-time high in December 2022, of $49,507. Prices dropped this past month to $49,388 — down 0.6%, but still 5.9% higher than a year ago. Prices are not increasing as fast as they did a year ago, but it is difficult for the average American household to afford a new car.

The price of a new car in January of 2020 was $37,851. This means the price of new cars has increased by 30% in just three years! Prices skyrocketed due to high demand and limited supply. Car manufacturers were forced to cut back production due to the global shortage of microchips. And supply chain issues and high inflation are affecting prices as well.

Rising interest rates make it harder to afford a car loan

Another factor making it harder for people to buy a new car is the Federal Reserve’s interest rate hikes. The Fed has increased interest rates from 0.25% to 4.5% in less than a year, making the rate hikes the fastest cycle in history. This makes it more difficult to get approved for car loans as well as making them more expensive when you do get approved.

Average auto loan interest rates have increased from 4.52% prior to the rate hikes to 6.55%, representing a 45% increase in less than a year. This means that even if you are able to secure an auto loan, you will be paying more in interest than you would have last year. A $45,000 car loan today would cost you an extra $2,500 in interest over the same loan a year ago.

Gas prices and insurance premiums are also increasing

In addition to higher prices and higher interest rates on car loans, many people are also facing higher gas prices and insurance premiums. The average price per gallon of gasoline has increased significantly since the start of the pandemic — from around $1.91 in April 2020 to $3.40 in 2023.

This means that even after purchasing your vehicle, there will still be even higher additional costs associated with owning and operating it. Insurance rates have also been increasing steadily over recent years due to higher replacement costs, higher car prices, and a rise in the number of car accidents. The average annual cost of an auto insurance policy has increased 15%, from $2,640 in 2021 to $3,017 in 2023.

For many people, buying a new car just isn’t feasible due to rising prices, higher interest rates on loans, and increasing gas and insurance costs. Many can’t afford a car without making some major sacrifices or taking on significant debt — something that most people are unwilling or unable to do right now. While the prices of new cars are not rising as fast as they were, new cars are still at an all-time high, making them out of reach for the average American.

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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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