Where Does Buying A House Fit In The Baby Steps?
Meg wants to know where she can fit "purchasing a house" into the Baby Steps. Dave explains.
QUESTION: Meg on Twitter wants to know where she can fit “purchasing a house” into the Baby Steps. Dave explains.
ANSWER: We call it Baby Step 3(b). Baby Step 1, the very first thing you do after you get current and have your written budget, your first goal is you squeeze every dollar out of your budget and your life until you have $1,000 saved as your beginner emergency fund. Once you’ve done that—and you’re not saving any money anywhere else until you’ve done that—and you’re not paying any extra until you’ve done that, then you start attacking your debts. You list your debts—everything but the home—smallest to largest. You pay minimum payments on everything but the little one, and attack the little one with a vengeance. You work your way through your debts with great focused intensity, living on nothing. Rice and beans, beans and rice. Once you’re debt-free, everything but the house, then you move on to Baby Step 3, which is you’re still not saving or investing. You’re not paying any extra on the house. You’re not saving for college or retirement. We’re going to go back to that $1,000 account and raise it to a fully funded emergency fund of three to six months of expenses. Once you’ve done that, before you start saving for retirement, which is Baby Step 4, or saving for college, which is Baby Step 5, or paying off your home early, which is Baby Step 6, at Baby Step 3(b) is where we’re going to save for a home. “Purchase house” is right there. I would not buy a home while you have debt and no emergency fund. You need to get yourself out of debt and get your emergency fund in place.
A home is a huge financial blessing if you have money. If you don’t have money, it becomes a curse, because the water heater breaks. The heat and air system goes out. The winds blow shingles off the roof. Houses cost money. They’re a good investment, but they cost money to operate these things. You’ve got to be prepared. If you move into a home with three student loans that have been around so long you think they’re a pet, MasterCard, you’ve Discovered bondage and American Excess, and two fleeced car payments with no money, you move into that home, Murphy will move into your spare bedroom and bring his three cousins Broke, Desperate, and Stupid. Don’t do that.
Get yourself cleaned up before you buy a home. Debt-free except for the home and have an emergency fund of three to six months of expenses. That is the route to go.