### Archives For January 2007

If you are thinking about buying a house, either for the first time or upgrading, it is a good idea to calculate how much of a mortgage payment can you afford. It’s best to calculate these numbers BEFORE you start looking for a house. Otherwise, you run the risk of clouding your judgment or wasting your time looking at houses you can’t afford. So, how do we calculate how much we can afford? It’s not a hard calculation but it does require you to be honest with yourself.

I got this step-by-step calculation out of Suze Orman’s The Road to Wealth, which I think is Suze’s best book. I’m not a big Suze Orman fan but some of the stuff she says makes a lot of sense.

STEP 1 – Figure Out Your Net Income

This is your income minus:

• taxes
• Social Security withholding
• retirement contributions
• and anything else that is taken directly out of your check

For this example, we’ll assume that your monthly NET income is \$4,500.

STEP 2 – Add Up Your Monthly Payments on ALL Your Debt

These items can include the following:

• student loans
• car payments
• credit card payments

NOTE: do not include your rent or current mortgage payment.

If this number is MORE THAN 30% of your net income (or \$1,350 using the \$4,500 from above), STOP! You have too much debt! Your first priority should be to pay down your current debts so that you can better afford a mortgage payment in the future. I think this is prudent advice.

STEP 3 – Add Up ALL Your Monthly Living Expenses

Be sure to include EVERYTHING (even items that are marked savings). Be honest with yourself. If it’s something you pay once a year, divide it by 12 to get the monthly amount.

NOTE: Again, do not include your rent or current mortgage payment.

Subtract your monthly expenses from your net income (found in STEP 1). What’s left over is the MAXIMUM amount that you can afford to spend on your mortgage payment (including property taxes, homeowner’s insurance, maintenance, PMI, and any other hidden costs that come with home ownership.)

Keep in mind that this formula does not include any tax benefits that might be available to you via income tax deductions. It would be beneficial for you to sit down with your tax consultant or your tax software and run the numbers to see what type of deductions you might be able to get. Any deductions will lower your monthly costs of homeownership.

Whatever you do, DO NOT rely on the mortgage lender/broker to tell you what you can or can’t afford. Trust me, most of them are not looking out for your best interest. They want to sell you a loan and make as much money as possible. Yes, there are some qualifications involved in getting a loan, but I know from experience that lenders will lend you more than you might be comfortable with.

What if you’re not ready for a mortgage payment? Don’t sweat it. Pay down your debts, save up some money, and have patience.

Here’s today’s Question of the Day:

What percentage of your monthly net income goes to pay your monthly rent or mortgage payment?

Be sure to include property taxes, insurance, and PMI. I also would include any home-equity loan payments.

I just ran our numbers and it came to 16%. WOO HOO! My wife and I have been “talking” about moving into a nicer house. I’m not that excited about it. My fear is that we would buy too much house and pay too much and put ourselves in a bind. We did that when we bought this house and I don’t want to ever go through that again.

Now it’s your turn to weigh in.

I remember seeing a periodic table of Dow Jones Total Market Index sector returns a few years ago but now I can’t find it anywhere. So, I decided to build my own. I downloaded all the historical data from DJIndexes.com, computed the total returns in Excel, ranked the returns for each year, and converted my findings into this PDF (which you can click on to view in a new window):

Here are some interesting facts I found after conducting my research:

• Had you been able to invest \$10,000 in each sector* on January 2, 1992 and left it alone over the last 15 years, the account would have been worth \$478,353 on December 29, 2006. This would have given you an average total return of 10.9984%.

• Had you been able to invest \$10,000 in each sector on January 2, 1992 and rebalanced at the end of each year, so that each sector always stayed at 10% for the next year, the account would have grown to \$518,264 for an annualized return of 11.5929%.

• The best performing sector over the last 15 years was Financials with an annualized return of 15.36%, followed by Oil & Gas at 14.27%.

• The worst performing sector over the same time period was Telecommunications with an annualized return of just 6.56%.

The cool thing about the Dow Jones Total Market Index is that investors can invest in each sector or the total index itself via exchange-traded funds through iShares. In fact, my next little project will be to analyze the ETFs for the DJ Total Market Index to see how they compare with the index itself.

*NOTE: It is important to note that I am analyzing the actual index. That means no management expenses or trading fees have been deducted from these results.

Here’s your assignment for today:

Take this risk tolerance quiz and report back here with your score. NOTE: If the website doesn’t load the first time, try again.

I scored and 87 which doesn’t surprise me at all. An 87 puts me in “Above-Average Risk Tolerance” category:

Individuals scoring in the upper end of this range have significantly greater tolerance than those at the lower end, but people in both situations should put stocks and stock funds at the core of their portfolios.

Here’s an interesting blog I came across over the weekend. It’s called The Kingsland Report and it is written by a retired (I believe) broadcast journalist. He posts all sorts of short, interesting pieces about business and investing. Anyway, we exchanged a few emails over the weekend and I thought I would mention his blog to you.

Oh, and this post cracked me up.

This week’s Blog of the Week goes to The Tao of Making Money, a blog written by a graduate student (I’m not sure which discipline). I enjoy reading blogs by people in different phases of life. Not all readers are in their mid-30s with kids and a mortgage. Therefore, it is cool to read blogs from people who are facing different circumstances such as finishing college and starting a career. I only wish blogging had been around when I was in college. I would probably be a different person than I am now.

So, if you get a chance, stop by The Tao of Making Money.

Fellow Bloggers (if you’re not a blogger, you can ignore this post):

If you have linked to AllFinancialMatters, could you please check and make sure you are using the new URL (http://AllFinancialMatters.com)? The old URL still works but I’m trying to phase it out. Also, if you have linked to specific pages in the past, and it’s not too much trouble, could you also change the first part of the URL to the new URL? For example:

One of the popular entries I have done was the How to…Personal Finance Edition. The OLD URL looked like this:

http://allthingsfinancialblog.com/2006/09/11/how-to-personal-finance-edition/

The new URL should look like this:

http://allfinancialmatters.com/2006/09/11/how-to-personal-finance-edition/

One last thing,…

If you subscribe to my feed, make sure you are using this feed URL:

http://feeds.feedburner.com/AllFinancialMatters

Thanks for your help!