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Are we prepared to settle down in one area for at least 4 years?  

First, why 4 years? 
Basic rule of thumb in real estate is that you will not get your money back out of a house unless you live there for AT LEAST 4 years before selling.  This could be more or less depending on what region the house is in, but in our area I felt like 4 years was a fine estimate. 

But do you have to sell the house to move? 
No, no you don't.  We have the option to rent out the house, make some income off it, and move if we choose to.  However, if we wanted to sell it and be done with it, we need to hold on to it for 4 years.  The decision to rent the house out or sell it after 4 years is very complicated.  We probably will not decide until a year before moving what we are going to do with the house.

We both work in the area that we bought our house in and we like the neighborhood, but it is still important to consider school districts, taxes, crime, and access to roads, parks, and shopping when choosing a location. 

The better the school district, the higher the taxes (generally) but the easier the home will be to sell.  The more access to parks, shopping and roads, and the less crime, the easier it will be to sell as well, and the value will appreciate more quickly.  We considered all of these things, except we were not planning on having a baby, so we disregarded school districts....our bad:-(  The school district we ended up with is a middle-of-the-road school, but we are slightly nervous about it because crime moved closer to our neighborhood when the recession hit.  I believe (hope) that everything will improve over the next 4-5 years.

Regardless of whether the school district improves, we do not want our child in school in the city.  But, she won't be going to school until she is 5, so we're covered there :-)

Short post today.......
 
 
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Happy Monday!

Who else had a crazy week last week?  I did, that's for sure!  Check out the posts that helped me make it through :-)

Cat, at Budget Blonde wrote Five Things I Learned From Getting My First Car.  My favorite: Don't Trade it in it if was free!

Making Sense of Cents posted an Ask the Reader post - What percentage is housing in your budget?  Go an check out what everyone spends on housing - you know you want to :-)

Jacob over at Cash Cow Couple posted Why Do People Invest in Stocks or Anything Else?  As usual, he boils it down!

The Simple Dollar always has about a billion posts I could include in my favorites, but I narrowed it down to one this week: Crazy.  Best takeaway - When life gets crazy, accept imperfection!

Mr. 1500 is fantastic as usual in SpongeSister SpendyPants - Anyone have a sibling like this?

Check 'em out!  You won't regret it!

 
 
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Get to know me, and you will know that there are two thing that I cannot live without:  My shows, and Amazon!  is anyone else as addicted to Amazon as I am?

At any rate, when I was a sophmore in college, Amazon offered it's Amazon Student Membership for free!  With it, you got FREE 2-day shipping, so of course I signed up!  I didn't really think anything of it after I graduated college, until The Big Guy and I became dissatisfied with the combination of Hulu Plus and Netflix we were using.  We refuse to pay for Satellite TV because of the cost, the contracts, and the availability of free TV just about everywhere!

Right on cue, Amazon send me an email with a promotion code for half of Amazon Prime because I am an Amazon Student member!  Normally this service costs $79 per year, and provides free 2-day shipping on many products, e-book lending and discounts, and a truly exciting feature, free access to many Amazon Instant Videos!  Because of my Amazon Student Membership, Amazon was offering the Amazon Prime Membership for $39 per year!

Well, my brain went into overtime, calculating the savings:
Service
Satellite TV
Netflix & Hulu Plus
Amazon Prime 
Cost/Month
$120.00
$15.98
$3.25
Cost/Year
$1,440.00
$191.76
$39.00
So, by switching to Amazon Prime, we are saving:

98% over the cost of Satellite TV - or $1,401.00 annually!
80% over the cost of Hulu Plus and Netflix - or $152.76 annually!


Even if you just up and pay the $79 per year for Amazon Prime, you are still saving:

95% over the cost of Satellite TV - or $1,361.00 annually!
59% over the cost of Hulu Plus and Netflix - or $112.76 annually!

How about show availability?
To be honest, we have never been hooked on shows found on the pricier satellite TV networks.  We usually prefer the more networked shows, and we have always been open to browsing the list of free shows and getting hooked on a new one!  However, if you cannot live without your Game of Thrones or Real Housewives, this may not be for you, as there are still quite a few shows that it costs to watch, even for Prime Members.

And, what about the streaming quality?
Virtually every show and movie is available in HD, so as long as your internet connection is up to par, there should be no video quality issues.  We have had the Amazon Instant Video Server go down on us once, and it was resolved within an hour!

Overall, I love Amazon Prime!  I earn tons of Amazon gift cards through Swagbucks, so the free 2-day shipping is wonderful!  The Instant Video selection is just enough to keep us entertained when we want to be, but doesn't have enough available so keep us from more productive things!  And, you cannot beat the cost! 

Tomorrow, I will be posting on how I got a $50.00 box of diapers for FREE from Amazon because of all of the benefits of Amazon Prime!
 
 
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How much should we spend on our house?

Just last week I released our "balance sheet" and budget.  ( You can see that here.)  If you haven't sat down and looked at your finances that way, you should.....like yesterday!  One of the biggest things we had decide before we even started looking at homes was how much we could afford to spend.  While we rented, we were spending $650 per month in rent, so we knew we could comfortably afford that much per month.  We also had $5,000 for a down payment and closing costs.  I have heard that you should never spend more than 3x your annual salary on a house, so for us, that would be $75,000 x 3 = $225,000.

However, I then used Bankrate.com's Mortgage Calculator to find out the payment - $1,042.01 per month.  That is just the principle and interest and does not include taxes, insurance, PMI, or other miscellaneous fees!

Also, on that $225K house, the down payment required (at 3.5%) would be $7,875.00 - more than our $5,000 budget for down payment AND closing costs!

So a $225,000 house was out.
"The Experts" say that your monthly debt obligations (mortgage, credit card payments, car payments, and other loan payments) should not exceed 35% of your monthly take-home pay.  Our take-home pay per month is approximately $4,500.00, giving us $1,575.00 for all debt obligations.  Minus car payments, we have about $800.00 for a house payment.

An $800.00 per month house payment will buy us a $170,000 house.  That same house would also put our 3.5% down payment at $5,950.00, which is more than budgeted.  Frankly though, we could swing it and make it happen pretty easily.

HOWEVER...

The Big Guy and I had no desire to purchase a home that was at the top of our budget unless it was absolutely necessary.  We were willing to buy a house that needed some (if not quite a bit) of TLC :-), which puts the price of the houses we decided to look at much lower than our maximum budget.

Here is what you need to consider when deciding how much to spend:

1) How much money to do we have available for a down payment and closing costs?
2) Using the 35% rule, how much house payment per month can we afford?
3) MOST IMPORTANT - how much do you feel comfortable spending?  If any of the above amounts seem too high, it is ok to go lower :-)
 
 
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Sometimes it seems like other bloggers are on the same page as I am!  Love this!

I don't know if you noticed, but on our balance sheet, we have a personal loan that is a loan from a family member.  This post seemed especially relevant right now:
Ask the Readers: Do you every lend money to friends/family?

I love Johnny Moneyseed's take on paying of the mortgage early: Paying off your mortgage early is still silly!

Congratulations to Girl Meets Debt on her ENGAGEMENT! Mrs. Modest Money

Renting Isn't a Throwaway at The Simple Dollar

Did My Lender Pull a Bait and Switch? Over at Budget Blonde, Cat explains why your quoted mortgage rate may not be the same as the rate you actually get.

The downside of being a landlord at Club Thrifty: Being a Landlord: It's Not All Puppies and Cupcakes!

Aaaannnnnnd, This Week's Wins & Losses over at Budgets are Sexy!

Ok, so there is a definite theme to what I found interesting this week...

ENJOY :-)
 
 
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Are we financially prepared to buy a home?

Ha.

I think buying a home is somewhat similar to having a baby....you are never really prepared.  Generally when preparing to buy a home, you need several things:

A 20% down payment (there are exceptions to this).
Money for closing and moving costs.
A credit score that will allow you to take out a mortgage.

Down Payment
First, the 20% down payment.  Kind of daunting, right?  When purchasing a $150,000 home, the down payment would work out to $30,000.  Wow, that's a lot of dough!  Typically lenders require a 20% down payment, but there are exceptions to this such as FHA Mortgages and other specialized zero or low down payment mortgage programs.  A traditional mortgage requires the 20% down payment, but your credit score must be up to snuff (see the credit score explanation below), and the lenders are more picky about the condition of the house.

With an FHA mortgage, the route that we chose to go, the lender only requires a 3.5% down payment.  If purchasing  a $150,000 house, the down payment would only be $5,250, a difference of $24,750 from a traditional mortgage!!  There are, however, downsides to an FHA loan.  The main one that I was concerned with was Private Mortgage Insurance, or PMI.  Lenders require this on any loan with a down payment of less than 20%, and since you pay it each month, the costs can really add up over the life of a mortgage

Just for kicks, I used Good Mortgage.com's PMI calculator to show how the cost of PMI adds up over the life of a loan!  I plugged in variables for a $150,000 home, with down payment amount of 3.5%.  The PMI worked out to:

$138.75 per month
$1,665.00 per year!
$49,950.00 over a 30 year loan!!!!!
Good Mortgage PMI Calculator
Seriously, what could you do with an extra $1,600 per year?????  That's like a vacation!

In spite of the PMI, we decided to go with an FHA mortgage because we wanted the extra cash for repairing the house, the purchase price was so stinking low, because an FHA lender is less strict about the condition of the house, and because we will have this house paid off in 7 years, cutting $38,295.00 off of the PMI cost!  Score One for the Retired by 40 family!

Closing & Moving Costs
A lot of people overlook closing costs when figuring the cost of buying a home, but the reality is that they can be quite significant.  Most of the time, closing costs run 3-5% of the purchase price of the home.  For example, in our $150,000 home purchase scenario:

3% - $4,500
4% - $6,000
5% - $7,500

To me, that is a lot of money on top of the down payment and the costs still to come!

Moving costs are also significant, but depending upon the move, can be cut down drastically.  A cross-country move can cost a couple thousand dollars up to ten thousand, but choosing how you move can put you on the lower or higher end of the spectrum.

If you are only moving down the block or within a couple hours of your current home, moving costs can be even less!  In our case, we were moving an hour away, so The Big Guy rallied all of his friends with trucks and trailers, we paid for gas and fed them lunch, and they were happy.  The entire move cost us about $400!  Plus, his friends like to hustle, so we were completely moved into the new house in 4 hours!  Can you believe that?

Then, because there were these big, ugly bushes in front of the house, his friends stuck around and pulled them out with their manly trucks!  Do we have the best friends, or what :-)

Credit Score
Well, I could write on credit scores for days, and maybe I will sometime, but for now since this post is getting a little long, I'll be quick:

To take out a traditional mortgage (20% down, no PMI), your credit score has to be 650 or greater.  They will not even consider you for a traditional mortgage if its less.  Realistically, though, scores of 680 or less applying for a traditional mortgage will get significantly higher interest rates if they are even approved.

An FHA Mortgage (3.5% down, has PMI) has less stringent standards.  The minimum score is 500, although credit scores of 500-570 have to put 10% down on the home.  Credit scores below 620 have higher interest and PMI rates, and anything above 620 qualifies for the good interest rates and easier application process.

The reality is that credit scores are a complicated thing that I'm not even going to try to explain today.  Paying your bills on time, paying credit cards off every month, and no being overextended on payments will generally lead to a higher score.  Most people should try for a traditional mortgage because of the money they will save, but in some cases, like ours, an FHA mortgage was totally the way to go!

What do you think?  Did we make the right decision going with an FHA Mortgage?  How about thoughts on the cost of buying a home?
 
 
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Ok, maybe not this house.....But still, we bought a house and we're only 22!

Not that it was easy...Here is how it went down:

The area that I live in was hit really hard by "the recession".....what this meant for us is that foreclosed houses were (and still are) abundant!  I'm talking houses that sold for $250,000 in 2008 are now being foreclosed on and sold for $45k-$125k.  Big, nice houses in good neighborhoods with quiet roads out front and big backyards!  What a deal, right?

Something like that.

It is a buyer's market, for sure, but we had several things to consider:
1) Were we prepared to settle down in one area for at least 4 years?
2) Were we financially prepared to buy a home?
3) How much to spend?
4) How much work are we willing to do to the house?
5) What area do we want to be in?

I'll talk about the first questions today, and the other questions will follow.  I don't claim to know everything, or even nearly enough, but these questions were what was important to us when looking for a house!

Are we prepared to settle down in one area for at least 4 years?  First, why 4 years?  Basic rule of thumb in real estate is that you will not get your money back out of a house unless you live there for AT LEAST 4 years before selling.  This could be more or less depending on what region the house is in, but in our area I felt like 4 years was a fine estimate. 

But do you have to sell the house to move?  No, no you don't.  We have the option to rent out the house, make some income off it, and move if we choose to.  However, if we wanted to sell it and be done with it, we need to hold on to it for 4 years.

We both work in the area that we eventually bought in and we like the neighborhood, but it is important to considers school districts, taxes, crime, and access to roads, parks, and shopping when choosing a location.  The better the school district, the higher the taxes (generally) but the easier the home will be to sell.  The more access, and the less crime, the easier it will be to sell as well, and the value will appreciate more quickly.  We considered all of these things, except we were not planning on having a baby, so we disregarded school districts.  Now, the school district we ended up with is a middle-of-the-road school, but we are slightly nervous about it because crime moved closer to our neighborhood when the recession hit.  I believe (hope) that everything will improve over the next 4-5 years.

Regardless of whether the school district improves, we do not want our child in school in the city.  But, she won't be going to school until she is 5, so we're covered there :-)

Bottom line, we want to give ourselves enough time in the house to either sell it and get our money (or more) back out of it, or live in it long enough to get it ready to rent.....4 years minimum.  Obviously, we decided we were ready!
 
 
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.....aaaaannd here goes our balance sheet.
ASSETS
House
2011 Ford Focus
2013 Chevy Cruze
1994 Toyota Truck
Savings Accounts
Investments
TOTAL
CURRENT VALUE
$125,000.00
$11,566.00
$16,722.00
$2,970.00
$595.00
$385.93
$157,238.93
The house value is based on the most recent appraisal, and should go up as the market in our area improves - I hope!  I won't tell you what we bought it for until later, but let me tell you it was a steal!  Oh, and the car values are from Kelly Blue book, which I realize can be off, but it is probably the most accurate source of values that I am capable of using.  Seriously, have you tried to determine a car's value from private party listings before?  Its terrible, to say the least...

We used to have quite a bit more in savings, seeing as we were working towards buying a house, but, closing costs, down payment, and $7,000 in repairs kind of decimated our savings....some days it seems like you take one  step forward, and then two steps back.  At least we own a house now, right?

Overall, considering we are 22 and just bought a house, I feel good about our assets.  Does that make me crazy?

However, with a baby on the way in 2 months, and my maternity leave being unpaid, there is an income gap that we need to fill by having it in savings before I leave work....oh the stress :-)

Now for the hard stuff:
LIABILITIES
Credit Card 1
Credit Card 2
Auto Loan 1
Auto Loan 2
Personal Loan
Student Loans
Mortgage
TOTAL
CURRENT AMOUNT
$644.80
$1,836.77
$11.635.35
$22,852.61
$11,304.00
$15,400.00
$42,615.23
$106,288.76
INTEREST RATE
0.00%
8.24
2.90%
4.90%
0.00%
0.00%
3.75%

Ugh......really?

So, we're looking at a net worth of $50,950.17.

Ugh. 

I can't say that enough times. 

Right now, my focus is paying down the Personal Loan that we have.  Yes, I know, its at 0.00% interest, but it is a loan from a relative, and I don't want it sitting out there, coming between us.  Money coming between family is a story I have heard too many times.  Currently, we are paying $500 a month toward the personal loan balance, which means that it will be paid off in 23 months, or July 2015.  We plan to put 40% of our tax return towards it as well, which would have it paid off in 16-18 months YIPPEE!  Even though looking at it this way makes the payoff seem a long ways away, its really  not that long.

So what does our situation look like month-to-month?  Here it is, folks:
INCOME:
EXPENSES:

MORTGAGE
UTILITIES
PHONE
INTERNET
VEHICLE PAYMENTS
AUTO INSURANCE
FUEL
HEALTH INSURANCE
DOCTOR
LIFE INSURANCE
GROCERIES
PET FOOD/SUPPLIES
CLOTHING
DINING OUT
HAIRCUT
HOBBIES/THE BIG GUY
HOBBIES/ME
SAVINGS
CREDIT CARDS (MINIMUMS)
PERSONAL LOAN PAYMENT

TOTAL

$4,360.00

$575.00
$222.00
$50.00
$40.00
$832.00
$144.00
$300.00
$222.00
$50.00
$31.33
$400.00
$80.00
$50.00
$100.00
$20.00
$50.00
$50.00
$180.00 (matched by employer)
$100.00
$500.00

$3,996.33
$363.67 Left over
When I look at this, there are so many ways that I could criticize myself...I could cut The Big Guy's hair and save the $20 per month, but I am terrible at cutting hair even after many attempts, and he has to have a certain haircut because of being enlisted....but still, I should probably learn....More on this to come:-)

I could cut down on eating out, but we love to eat out so much!  Let see, what else?  Some categories like doctor and clothing are revolving accounts that we do not necessarily use every month, but I like to keep in the budget so we have them to use :-)

We are working on it....but it is frustrating.  I'm sure others are in the same position!

 
 
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Right about now, I am asking myself this over and over again.  Oops!  Maybe I should have thought about that before I started typing away!

I suppose the right way to start off would be to tell you a bit about myself ;-)  I am a twenty-something female living in the Midwest (how boring is that!), who just graduated college with a Bachelor's Degree in Accounting in December, and landed her dream job doing accounting for a large corporation.  Don't judge me, ok?  I like numbers, thrive on finance, and am a perfectionist, so accounting is perfect for me!  I am married, have two very active dogs, and one very unplanned baby on the way!  The Big Guy (as I will refer to my husband from now on), is in the National Guard, working on his Bachelor's Degree, works a full-time job, and still finds time to keep me happy!  Did I mention he is my best friend?

I guess that baby was what spurred this whole thing...  I have always been a personal finance geek, but kept pushing goals onto the back burner.  Finding out I was pregnant made me  FREAK!  Like, literally, "Oh my god I was never planning on having kids ever especially not 9 months after I graduate college!" craziness!  The inevitability of this baby made me think long and hard about how prepared we were for the future.  The Big Guy and I got married when we were 19...I was still in college, and he worked full-time to support me while I finished my degree.  When I graduated, I was lucky enough to land a job in accounting with a large corporation, and then found out  mere MONTH LATER that I was pregnant.  Not good.  Well, its good, but not too....  Anyway, I like to think that we were in better shape than our other recently graduated twenty-something married peers, but definitely not in good enough financial shape to be ready for a baby. 

So, we bought a house - something we were going to do anyway - but we moved up the timetable for buying a house and closed in April on a big, 4 bedroom ranch with a full basement that, when finished, would double the floor space!  It had been unoccupied for several years (more on this to come !!!) so we put about $7,000 into it before we even moved in, and I think it looks great!  There will be a blog post coming soon for the whole house journey, and how we scored a house for 1/3 of its market value!

After moving into the new house, I took stock of our situation, and while it wasn't terrible, I wasn't great either...  It is the typical situation of too much debt and not enough savings, but through it all I could see that it WAS possible for us to build up enough wealth to be financially independent by age 40.  Whats more, we could do it WITHOUT killing ourselves. All it would take was a little discipline and thought!

So I guess what I am trying to say is that is that this blog is motivation for me to put all of our finances out there, the good, the bad, and the ugly alike, because knowing that someone - anyone is seeing them motivates me to make our situation better and better...

What is the plan, then?????  The first post will detail our current financial situation - and I mean DETAIL, baby!   I am an accountant, therefore I love detail.  This will establish the starting point of my journey to be Retired by 40!