10 Things to Know Before Applying for a Mortgage

Applying for a Mortgage

Remember our rent vs. buy debate discussed in previous episodes of The Money-Guy Show? While that episode covered the arguments for and against both renting and buying, it didn’t take a deep dive into the actual process of financing a home. Today, Brian and Bo look at the ins and outs of applying for a mortgage and cover what you need to know before you borrow money.

Mortgage financing can be tricky (especially if it’s your first time going through the process), but Brian and Bo share 10 things to know so you can come to the table prepared.

Know What You Need Ahead of Time

It’s important to take inventory of what your house needs are before applying for a mortgage. Otherwise, someone else will fill in that blank for you, and it’s easy to fall for possible traps when you’re not informed.

Mortgage brokers and realtors might suggest you can afford a house that’s around 35% of your salary, for example, (while Brian and Bo suggest keeping it at 28% or less), and they may try and convince you to purchase more house than you actually need.

Vision Plan the Future

The Money Guys return to vision planning, and for good reason. You need to sit down and figure out what you want your future to look like. How long are you planning on staying in this house for? Will the desire to have a family mean you need more space in the future?

What stage of life are you in right now? If you’re close to retirement, you might want to consider a house you can pay off in 15 years so you enter retirement debt-free. If you’re younger, you might be okay with a 30 year mortgage as you’ll have time to pay it off.

Understand Your Down Payment

A down payment of 20% is optimal to avoid private mortgage insurance, of course, and the more you put down the lower your monthly payments will be over the life of your loan. But the guys say that if you have to get creative with your financing, it’s okay to have a lower down payment. PMI, while not an ideal expense, is at least deductible. And if a lower down payment means more cash in your pocket which you can then invest in other ways, that might make more sense for your situation.

What’s the Lock Period?

Underwriting can be a lengthy process when applying for mortgage financing. As such, you want to make sure your rate is locked in longer than you’ll be in underwriting for. Brian recommends looking into a 45 day lock for refinancing, and at least a 60 day lock for purchasing.

What About Points?

Brian briefly touches upon mortgage points, and suggests doing a break-even analysis to judge whether or not paying is worth it. Figure out what you’ll be saving per month, and divide that by what you’d be paying for the points. Then see how long it will take you to recoup the cost.

Plan for Contingencies

You don’t want to end up house-rich and life-poor. You must plan for contingencies (which should be part of your overall vision planning process). Leave yourself with enough breathing room so you can handle any curveballs life throws at you.

Overall, make sure you shop around and get the best rates. Know that most mortgage brokers and realtors aren’t going to be looking out for your best interests — that’s your responsibility. Get information from unbiased third parties, and save as much as you can.

Want to pick up the full 10 things you need to know before applying for a mortgage? Make sure you tune in to this episode of The Money Guy Show!

How to Build and Manage an Emergency Fund

Cash

Imagine this: you’re driving your only vehicle to get to work, and suddenly one of your tires blows out. While inconvenient, you know you can replace one tire. You take your car to the shop, only to learn you need to replace all the tires. (Oh, and you should probably get your brakes done, too.)

Do you have enough cash set aside for small emergencies like this? Or would you put the cost of repairs on your credit card and struggle to pay off the balance before the end of the month?

This particular example may not resonate with you — but the details aren’t as important as the fact that you need to be covered for unexpected expenses like this. You need to know how to build and manage an emergency fund.

What an Emergency Fund Is — and Isn’t

An emergency fund (or emergency savings, or your rainy day fund) consists of cash you put aside you have to cover unplanned expenses and financial emergencies. You can use it to cover something like a flooded basement or to sustain you through a period of unemployment.

Emergency funds are not backup savings to be spent whenever you’ve exhausted your regular budget.

Setting up an emergency fund is imperative, because it’s designed to keep you functioning when an actual emergency strikes. No one wants to deal with that flooded basement, but it’s even more stressful if you’re worried about how you’re going to pay to clean up the mess.

An emergency fund is peace of mind so that you know you can cover the bills, go to work, and take care of your financial obligations without borrowing money or putting expenses on a line of credit.

How Much to Keep in Your Emergency Fund

Don’t let the idea of an emergency fund make you feel overwhelmed. Everyone needs one and anyone can start taking action (even just baby steps) to build a cash cushion.

When creating an emergency fund from scratch, consider how much money you would need if you lost your income temporarily. Your goal should be to save at least one month’s worth of your net pay (which would cover expenses for a month or possibly more if you’re living within or below your means).

If this seems like an impossible sum, remember you can save money in chunks. Start with a small amount and consistently add to your savings each week. Even $10 every Friday adds up over time — and it’s better to have something rather than nothing.

Once you’ve hit your goal of saving up one month’s worth of net pay, set a new goal. Increase your savings goal to 3 to 6 months’ worth of net pay. This will ensure you’re covered if you do happen to run into a major financial emergency, like an unexpected job loss.

Where to Keep Your Emergency Fund

Once you’ve saved up your cash, you need to know where to put it. While you don’t want to use the fund anytime soon, it is important to make sure you have quick access to your money if you need.

When thinking about where to keep your savings, keep in mind three key factors:

  • Liquidity
  • Accessability
  • Low risk

The best places to keep your savings include cash, savings accounts, money market accounts, and high yield savings accounts. All four of these options are liquid, accessible, and low risk. If you have any specific questions, your financial professional can help direct you to the best location for your savings.

It’s not fun to think about what can go wrong, but it’s financially wise to plan for the worst (while expecting the best). Although you may not know exactly what an emergency in your future might look like, you can prepare right now by building an emergency fund. Doing so will help you make financial disasters and unexpected circumstances a little less stressful if they do crop up.

12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!

4 Ways to Avoid Lifestyle Inflation

Lifestyle Inflation

Have you received a raise recently? Come into an unexpected windfall? Wondering what to do with the extra money?

When our paychecks are bigger or our bank accounts are padded, it’s easy to think of all the ways we can spend the extra money:

Oh, I can finally take that trip. I can go out with friends more often — I’m no longer broke! I can treat myself to dinner out because I deserve it.

Suddenly, the temptation to spend is there almost constantly. That’s why it’s important to know how to avoid lifestyle inflation. Use these 4 simple ideas to make sure it doesn’t get the best of you.

Don’t Give into Peer Pressure

The origin of lifestyle inflation comes from wanting to keep up with the Joneses. We don’t feel adequate when we compare ourselves to what others have. But one of the easiest ways to avoid lifestyle inflation is to stop caring about what other people are doing with their money.

If you find yourself getting jealous of what others have, that’s only going to make you feel worse. Letting insecurity take over is a bad idea. (And many are guilty of going into debt for that very reason.)

Instead, look out for yourself. After all, no one cares about your money as much as you do. Is it really worth the price you’re going to pay to try and impress people?

Make a List of Your Priorities

Along with not caring what others are buying, you should make a list of your own financial priorities. This will make focusing on your needs much easier, and will help you to avoid succumbing to lifestyle inflation when everyone else is.

When making a list of your priorities, think about what you truly want in life. What brings you joy? What do you feel good about spending your money on?

If you’re having a hard time thinking of things, try an opposite approach and come up with a list of things that have given you buyer’s remorse. You’ll know to stay away from those purchases!

Also, think about things you’ve gotten jealous of recently. Did a friend post a picture of their new car on Facebook? Are you envious of a friend who’s currently on vacation in Hawaii? Did you feel down when a family member mentioned getting a brand new, huge house?

Go through these things and question why you’re jealous. Is it because society says we need these things? Is it because you’re upset your friends can “afford” it, but you can’t? Do you really have a desire for any of these things?

It’s okay to be jealous for a moment, but you should be able to take a step back and rationalize. Your possessions don’t equal what you’re worth. Never feel like you’re “below” people because of what they own and what you don’t.

At the end of the day, lifestyle inflation reflects the rampant consumerism in our society. It’s perfectly okay to step away from it and not get sucked in!

Be Realistic About Purchases

Make another list of the pros and cons of all the purchases you’ve been contemplating recently. We’re going to take a realistic approach to lifestyle inflation for a second.

Let’s use the classic example of a new car. Lots of people want new cars. They don’t have half as many problems as older ones, they’re shiny, they have that “new car smell,” and they have a bunch of upgraded features older cars don’t have.

Dig a little deeper. Realize that new cars come with a lot of added expenses that might not make the purchase look so attractive anymore.

For example, your car insurance premium will likely go up. Two, you’ll have a car payment to deal with. This means less money available in your budget. Three, if the price isn’t rolled into your purchase, you’ll be paying DMV fees to register your car. Four, if you finance your car and make minimum payments, you’re going to end up paying more than the initial price due to interest.

Do you sense lifestyle inflation creeping up on you? When you “upgrade” in life, you’re not only paying the (higher) base price for something, you’re also paying for all the additional stuff that comes with it.

Practice Delayed Gratification and Gratitude

One of the easiest ways to combat lifestyle inflation is to wait things out. By making these lists, you’re forcing yourself to think through your purchases, and you’re also practicing delayed gratification. It’s a good habit to have, as you won’t have to worry about impulse spending again!

Another way to care less about what others are doing? Be grateful for what you have. That doesn’t mean don’t work hard toward your goals, or to stay stagnant. Just be grateful for the current situation you’re in.

Even when things seem bad, you’re still reading this. You have access to the internet, to food, to water, and to shelter. Gratitude can give you the perspective you need to realize that spending on all these things is inconsequential.

Are You Ready to Avoid Lifestyle Inflation?

Overall, sticking to your guns will make it easier to avoid lifestyle inflation. We don’t need nearly as much as we’re led to believe.

Always question your purchases. Make decisions for yourself, and don’t let the actions of others influence you. Remain grateful for what you have in life. Avoiding lifestyle inflation will be a cinch.