How Much House On A Six Figure Income?

As you know my wife and I have been talking about how much is a wise amount for us to spend on our new home given our financial goals. I found this very interesting discussion on people struggling on six-figure incomes over at FMF. As you read the comments a couple stand out to me.

From commentor JD:

Our income is $101k:
$21k goes to income taxes
$10k goes to church/charity
$23k goes to retirement savings
$5k is property tax, homeowners and car insurance
$10k goes into savings (college, cars, vacation, house prepayment)
$2600/mo --> $32k/yr are our everyday expenses including daycare

We are 30 with 2 kids. We will have our house paid off in 4 years and be able to retire at age 40. It's all about your priorities and what you choose to spend your money on.

Impressive -- the commentor doesn't provide enough details about house price, current assets to determine how they can retire at 40, but the cash flow seems reasonable.

I thought this would be a another yardstick to give me a ballpark. Based on my calculations with lumping property taxes, home & car insurance into everyday expenses I believe we need to keep our everday expenses (PITI, food, gas, insurance, utilities, gifts, etc) to $3000/mo when we get back.

At $3,000/mo we could approximate $1,400-$1,800/mo to PITI and still be making significant progress in our financial goals each year (although not at the rate I am getting used to).

I used this calculator to ballpark what mortgage amount we could get for this:
At the high end of a $1,800 PITI payment we could get a 30yr mortgage for $269k-$284k (6.0%-5.5%)
At the low end at a $1,500 PITI payment we could get a 30yr mortgage for $219k-$232k (6.0%-5.5%)
Add a ~$60k downpayment to these ranges.

$279k-$344k -- so this is the monthly payment range (assuming 5.5%-6.0% rate on mortgage) we could afford to make given our need to have a reasonable amount of remaining free cash each month to spend, save, or invest as desired to reach our financial goals. Obviously the less we spend the quicker we reach our financial goals.

This is a bit more than the $250k I was initially thinking we could reasonably afford. I would prefer to stay at that level, but given the cost of housing in our area I just don't think thats feasable. This rule of thumb is perhaps a more realistic figure for my wife and I to use as we looking for a home that meets our needs. I'm optimistic we could find something in this price range.

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Comments (10)

Why don't you get a $500,000 interest-only mortgage, stop making payments, and hope for a government bailout? That seems to be a common theme these days...

Good luck. I enjoy your blog.

Posted by Mike S | February 29, 2008 7:45 AM

jd:

that's really impressive. no, i am not talking about your exact state in life and your retirement plans (though those are impressive too) - rather, i am talking about how you neatly you set up those numbers.

i've excel sheets galore, but am yet to put up our annual numbers so succinctly for my cfo (f=family here). i'm sure my wife will be impressed it i did that - that's my homework for the weekend now :-).

2mill:

have you tried doing this yourself - not a rough ballpark figure, but actual numbers for, say 2006 or 2007, rounded to the nearest $100?

- s.b.

Posted by some body | February 29, 2008 10:06 AM

Just remember that your 401K and Mortgage Interest have a pretty significant impact on your taxes. Figure that out, and you may be looking at an extra bedroom.

Posted by Dan Isaacs | February 29, 2008 4:30 PM

Not to try to rain on anyone's parade, but even assuming you save $40K per year, and are 30, I dont see how it's possible to retire at age 40 in this day and age.

Even if you saved $40K a year from 20-30, unless there's another part to that story.

Bearing in mind that you need enough $ to bring up two kids, maybe put them through school, and support 2 adults for possibly 40 years each.

I dont buy it.

Posted by Nick | February 29, 2008 7:44 PM

When it comes to buying your own home, have no more than 20% of your Net Worth invested in it at any point in time ... only break this rule if you are buying your first home (BUT, every year assess whether you should balance back to this number).

BTW: 2million and I are not related ;)

Posted by 7million7years | March 2, 2008 5:30 PM

just take your assets, liquidate them if necessary, and invest them in things that give high ROI. for example, if you have $1mm outside of your home, buy some investment property that cash flows, buy a "semi passive" business such as a laundromat or car wash, etc. with this alone, you should be able to easily make $30-50k a year on a $200k or so investment. perhaps not completely retired, but its still nice to make good money working only a few hours a week

Posted by bryan | March 13, 2008 8:24 AM

Not sure your PITI estimates are accurate. For a $284,000 house I calculate $1612 ("P" and "I" only) for 30 year fixed at 5.5% and you have $1800 for all of PITI. So, you feel $188 is enough to cover the property tax and insurance? If so, where do you live? Maybe I need to move there...

Posted by Andrew T | March 27, 2008 5:36 PM

Im assuming 20% down so we would only be financing about $228k for a $284k house.

Posted by 2million | March 31, 2008 3:08 AM

I am going to alert you to one important issue: you may be pulling yourself down into the 15% bracket.
See http://www.fairmark.com/refrence/index.htm
and do some math. $101K gross, $23K (401k?), $10K charity. $7K in two exemptions. Sounds like $61K or less, taxable. If so, you should consider Roth IRAs instead of some of that 401(k) savings. Wherever you land on the mortgage, you should consider trying to use the choice of pre and post tax savings to straddle the 15/25% tax brackets. You can convert regular IRA moneys to top off the 15% bracket at year end, or deposit to regular to get below the 25% bracket. And remember, the mortgage deduction has less impact for you.
Joe

Posted by JoeTaxpayer | April 9, 2008 9:54 PM

Joe -
I'm thinking the $23K for retirement is about 15K in a 401(k) account (pre-tax), and then $8K in two IRA's. So only the 15K would be pre-tax in your calculations.

Posted by Heidi | April 15, 2008 11:41 PM