Upgrading in House

Rita has a big family in a small space and wants to know the best way to move up in house.

QUESTION: Rita in New York and her family of six are debt-free. They live in a 1,040-square-foot home and would like to move. She wants to know if they should buy a new home if they will have to go into debt, and if they should move her husband's barbershop business into the home. Dave suggests separating business and family, and he reviews three options for buying a new home.

Dave's ANSWER: Let's separate the business idea from this and just go rent something. It's not expensive to rent the amount of space he's talking about. Let's try that and get his barbershop going. A few hundred bucks here and there is not going to be his deal breaker as far as the rent goes. The location might be the deal breaker. It might mess him up just going to the wrong location if he's just trying to get something in his house.

I would keep those separate from a business perspective for those reasons. One, location is a big deal. Two, it's not going to be a very expensive part of his business plan–a little bit of rent for that small footprint.

Now your house, with six people and 1,040 square feet, that's a lot of people in there! You make $130,000 a year and finally have it paid off. You have three options here.

One is to stay there and save your money until you move up and can pay cash. That's a reasonable option. Number two is that I don't yell at people for taking out mortgages. I don't borrow money. My wife, Sharon, and I would have to do one of these three options here, but taking out a small mortgage would not be something we would do because we simply do not believe in borrowing money. We will not do it for anything.

But as long as you take out a mortgage that is on a 15-year fixed-rate note where the payments are less than a fourth of your take-home pay, it's within the realm of reasonable, and you'll be able to get it paid off pretty quick, especially when the barber shop takes off and starts making some money. It's not an unreasonable thing to move up $100,000 here. That's reasonable within the Dave Ramsey guidelines. But to be fair, since I don't borrow money, I wouldn't personally do that.

The third option is what we did when our kids were little. They were in Christian schools that were expensive. To save money, we chose to move to a county where the schools were the best in Tennessee in terms of scores and so forth. We're in Nashville and there are more Baptists than people, so the community is very Christian. We were just fine with a public schools setting there, and they flourished in that setting.

But we didn't borrow for that. We sold our house, and we rented to be in that county for two years while we saved up our money to buy. That would be an option. You could sell the house and rent something inexpensively in the area, maybe a little bigger place. You'd still have a very small payment and you could use that time to save like crazy and add to the nest egg that came out of the sale of your house until you are ready to buy. That's an option if the 1,000 square feet is driving you nuts.

But, mathematically, the fastest way to be debt-free and move would be to stay where you are and save. But there is more involved here. You have six people and 1,040 square feet. Mathematics won't work if you all kill each other!

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