Question: I’m 24yo and a couple of month into my first job out of college in a hcol city. I’m making 80k a year and I’m saving 2k/month into my HYSA and 29% of my paycheck into my 401k. FYI I’m quite literally cutting costs as much as possible while disregarding my mental health for the sake of financial independence given the grim outlook of our economy.
This may sound like a fantasy but I’d like to be able to afford a down payment on a $1mm+ house at 30yo, but no matter how much I crunch the numbers the math isn’t mathing.
I live at home to save on rent but I’m not sure how long I’ll be able to live at home. Will most likely have to move out in 1-2 years as my entire family will be relocating out of state.
20% down on a $1mm house is $200k excluding taxes and closing costs, and I genuinely don’t know how this will happen (most if not all “decent” houses in my area are $800k+, otherwise the place looks like a psychiatric ward).
For the ppl out here who have started in a similar situation as me or has experience in this area, I would genuinely appreciate any advice you have.
Answer: Understanding the Challenges of Saving for a Home in a High-Cost-of-Living City
Hello! First, congratulations on securing your first job out of college and taking proactive steps toward financial independence. Saving diligently and contributing significantly to your 401(k) at 24 years old is commendable. I understand your desire to own a home in a high-cost-of-living (HCOL) city, and it's natural to feel overwhelmed when the numbers don't seem to add up. Let's explore your situation and consider some factors that might help you navigate this challenge.
Current Financial Snapshot
- Age: 24 years old
- Annual Income: \$80,000
- Monthly Income (Gross): Approximately \$6,667
- Monthly Savings:
- 401(k) Contribution: 29% of paycheck
- Annual Contribution: \$23,200 (approximately)
- High-Yield Savings Account (HYSA): \$2,000 per month
- Living Situation: Living at home (rent-free), but may need to move out in 1–2 years due to family relocation
- Expenses: Minimizing costs significantly, potentially at the expense of mental health
Challenges in Reaching Your Goal
1. Saving for a \$200,000 Down Payment in Six Years
- Total Savings Needed: \$200,000 (excluding taxes and closing costs)
- Time Frame: 6 years (by age 30)
- Monthly Savings Required: Approximately \$2,778 (\$200,000 ÷ 72 months)
Current Monthly Savings Toward Down Payment: \$2,000
- Shortfall: \$778 per month
2. Income Constraints
Net Income After 401(k) Contributions:
- Gross Monthly Income: \$6,667
- 401(k) Contribution (29%): \$1,933
- Estimated Taxes (Assuming 22% Federal, plus state and other taxes): Approximately \$1,000–\$1,200
- Net Monthly Income After Taxes and 401(k): Approximately \$3,500–\$3,700
Remaining Funds After Savings: If you save \$2,000 per month, you have about \$1,500–\$1,700 for all other expenses.
3. Potential Need to Pay Rent Soon
- Impact on Savings: Moving out and paying rent will significantly reduce your ability to save \$2,000 per month.
Considerations and Strategies
1. Reevaluate the Timeline and Goals
- Adjust Expectations: Owning a \$1 million home by age 30 may not be feasible given your current income and savings rate.
- Alternative Price Points: Consider looking at homes in a lower price range or in different neighborhoods or nearby cities with lower costs.
2. Explore Ways to Increase Income
Career Advancement:
- Seek Promotions: Excel in your current role to position yourself for raises and promotions.
- Further Education or Certifications: Invest in skills that can boost your earning potential.
Side Hustles or Freelance Work:
- Leverage Skills: Offer freelance services related to your profession or hobbies.
- Gig Economy: Consider part-time work that fits your schedule.
3. Optimize Savings and Investments
Balance Retirement and Savings Goals:
- 401(k) Contributions: While contributing 29% is excellent for retirement, you might consider adjusting this temporarily to free up cash for your down payment. However, be cautious not to reduce it below any employer match thresholds.
High-Yield Savings Account:
- Interest Rates: Ensure your HYSA offers a competitive interest rate to maximize growth.
- Consider Certificates of Deposit (CDs): For a portion of your savings that you won't need immediately, CDs might offer higher interest rates.
4. Investigate First-Time Homebuyer Programs
Lower Down Payment Options:
- FHA Loans: Require as little as 3.5% down but may include mortgage insurance premiums.
- Conventional Loans: Some programs allow for 5% or 10% down payments.
- State and Local Programs: Many areas offer assistance programs for first-time buyers.
Consider the Trade-Offs:
- Mortgage Insurance: Lower down payments often require private mortgage insurance (PMI), increasing monthly payments.
- Higher Monthly Payments: Smaller down payments mean larger loans and higher monthly obligations.
5. Plan for Future Housing Expenses
Renting vs. Buying:
- Short-Term Renting: If purchasing a home isn't feasible soon, plan for renting when your family relocates.
- Budget for Rent: Research rental costs in your area to adjust your budget accordingly.
6. Prioritize Mental Health and Well-Being
Sustainable Living:
- Avoid Burnout: Extreme cost-cutting can lead to stress and negatively impact your health and job performance.
- Balance: Allocate a reasonable amount for leisure and self-care within your budget.
Sample Budget Adjustment
Scenario: Adjusting 401(k) Contributions to 15%
- New 401(k) Contribution: 15% of \$80,000 = \$12,000 per year (\$1,000 per month)
- Additional Take-Home Pay: Approximately \$933 more per month
Allocate Additional Funds to:
- Increase Down Payment Savings: Boost monthly savings closer to the required \$2,778
- Cover Future Rent Expenses: Prepare for upcoming housing costs
Considerations:
- Impact on Retirement Savings: Reducing contributions may affect long-term retirement goals. Weigh this against the importance of your homeownership goal.
Long-Term Perspective
1. Home Affordability Relative to Income
General Guideline: Traditional advice suggests keeping your home purchase price to no more than 3–4 times your annual income.
- For \$80,000 Income: Affordable home price range is \$240,000–\$320,000
- At \$1 million Home: This is 12.5 times your annual income
Implication: Purchasing a \$1 million home may lead to financial strain due to high mortgage payments relative to income.
2. Future Income Growth
Potential Salary Increases: If you anticipate significant income growth, this could improve affordability.
Plan Accordingly: Base your home purchase on your projected income only if increases are highly probable.
Alternative Paths to Homeownership
1. Consider a Starter Home
Lower-Priced Property: Purchase a more affordable home or condo as your first property.
Build Equity: Over time, property appreciation and mortgage payments increase your equity.
Upgrade Later: Use the equity and savings to move into a more expensive home in the future.
2. Partner with Others
Co-Buying: Consider purchasing a property with a trusted friend or family member to share costs.
Legal Considerations: Ensure proper agreements are in place to protect all parties.
3. Relocate to a More Affordable Area
Cost-Benefit Analysis: Weigh the benefits of staying in a HCOL city against the potential financial advantages of moving to a lower-cost area.
Career Opportunities: Ensure that employment prospects remain strong if considering relocation.
Final Thoughts
Achieving the goal of owning a \$1 million home by age 30 on an \$80,000 salary is challenging, especially in a high-cost-of-living city. It's important to set realistic goals that align with your financial situation while also considering your well-being.