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Narrator: Investing for retirement and saving for a down payment on a home often share the spotlight amongst financial goals. Working on either of them might feel like you have to pause the other, but making progress toward both targets can be doable with some basic financial planning.
It could be as simple as contributing just enough to your employer retirement plan, like a 401(k) or 403(b), to get the full employer match, if offered to you, and putting the rest toward the down payment on the home until you have the target amount.
We at least contribute enough to the 401(k) to get the match, whatever that is, for this time period, while taking the remainder to save for this big down payment, but then once the home is purchased, we’ll take that money we’re saving for down payment and put it back toward retirement or the college goal.
However, there are some planning steps you should address before allocating funds to a down payment.
The other foundational planning principle, before we start saving for a lot of other goals, is paying down high-interest-rate debt. And then make sure we have an emergency reserve account established, because the last thing we want to have happen is you end up losing your job or something interrupts your ability to earn an income. You’re going to have to spend all of that money anyway that you saved for a down payment on a home.
Once you have that solid foundation, any additional savings over your employer match can now be allocated to a home.
If you consider putting less down so that you can buy sooner, be careful not to let your monthly mortgage payment get too high. To keep your budget in check, aim to keep your monthly housing costs to no more than 30% of your income.
Because you don’t want to end up in a situation where—there’s this term called “house poor,” right—where you own a house but your budget is so tight because your mortgage payment is so big of your overall expenses that you don’t have much money to do much else. I wouldn’t just jump into that just because a lender says, “Oh yeah, you can buy this house no problem,” because a lot of times, in my experience, lenders will be willing to lend you more than probably what you should use. So you definitely want to kind of look at the budget first.
So hold true to the principles of your budget. By adjusting these basic levers of time frame, total loan amount, and down payment to your needs and priorities, there’s a good chance you can buy a home without major sacrifices to your retirement.
I have not run a plan yet where a client has such a long time horizon along with big goals like a home purchase and college, in addition to longer-term retirement goals, where they have not been able to achieve that goal. Don’t shy away from it. Don’t think, “Oh, we can’t afford it. We’ll never be able to do all of this.” Let’s just run the financial plan and let it inform that decision, and you might be surprised about what you’re able to accomplish.
To learn more about making a plan to reach your goals, visit Schwab.com/plan.
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