Cheat Sheet Q&A: Setting all of your financial priorities:
Today's entry: I love the morning show. This is now how I get my news since I am busy working and going to school at night. Just curious on your opinion in my pursuit to escape the Rat Race...
If you had $10-15,000 at age 27 (with 20k in student loans for a 4yr degree, living at home, making under 40k a yr) would you:
1. Start investing in 401k/IRA+ diversifying in additional stocks ---while---renting an apartment? (Or).
2. Buy a home/rental property to live in while renting it out + activate a 401k/IRA plan? (Putting investing in additional stocks on the back burner when possible).
Bottom Line:This was a Facebook submission that I'm excited about addressing because it ties many important financial concepts together. You're also asking all of the right questions. So here's how I'd tackle the priorities and decision making:
1. Ensure that if you have a 401k you're contributing enough to at least hit the maximum employer match (if one exists).
2. Provided that you plan to remain in the same area for a minimum of 3 years I'd seek to buy a home. You'll likely find that it's cheaper than renting anyway and you'll be building home equity and will have fixed costs in the face of ever rising interest rent rates. There are programs that allow you buy with as little as 3% down.
If you can put 20% down however - you should do so to avoid having to pay for mortgage insurance. If you can't put 20% down and obtain a conventional mortgage,seek to obtain a non-FHA mortgage with the percentage of money you do have to put down (based on your guidance it's likely going to be less than 20%) as you'll be able to eventually drop the mortgage insurance once you do have 20%+ home equity. With an FHA mortgage you can only get rid of mortgage insurance when you payoff the mortgage. This will save you many thousands of dollars over time.
3. Going forward I'd take a third of free cash flow and apply it to paying down your debt ( starting with whatever has the highest interest rate first - regardless of loan type - student loan, mortgage, car, credit card,etc.), a third towards investing (aside from your company sponsored 401k program) this is where an IRA in addition to your 401k is a good idea and a third you set aside for extras like vacations, unexpected expenses etc.
Long term financial success can seem complicated but it doesn't have to be. The most common path towards financial freedom comes from this simple combination:
- Own your home
- Investing stocks
Payoff all debt
- Hopefully that's helpful & here's to your long term financial success!
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