So, you’ve just poured your life savings into a new house. Between the down payment, closing costs, mortgage payments, taxes and insurance, you hardly have anything left for new furniture, and fancy restaurant dinners may have to wait.
Although you might be strapped at the moment, buying a home can be a great financial decision for its investment value, the tax benefits and the sense of pride ownership can bring. Here are five steps you can take to get back on track financially and protect your investment.
1. Build a contingency fund
Most financial experts suggest having the equivalent of three to six months of your salary in savings. That way, if you lose your job or anything else interrupts your employment, you can cover your basic expenses such as mortgage payments, auto and home insurance and utilities.
2. Set aside money for unexpected home repairs
This is different from a contingency fund, which is designed to cover day-to-day bills and expenses. What happens when you need to fix something major in your house, such as the heating system or the roof?
“You should have money set aside to handle unexpected expenses,” says Andy Tilp, president of Trillium Valley Financial Planning in Sherwood, Oregon.
Tilp recommends setting aside 2% of the value of your home in an emergency fund in case a major repair is needed. On a $300,000 home, that would be $6,000.
3. Buy life insurance
A house is likely your biggest investment and the place your family calls home. A homeowner’s life insurance can ensure that a spouse or family doesn’t lose the home, says Johanna Fox Turner, a partner at Milestones Financial Planning in Mayfield, Kentucky.
“You should get enough term life insurance to cover your mortgage, debts and salary for at least one year. And this is just a starting point,” Fox Turner says. “If you die, your spouse may need to stay out of the workforce for a year to take care of the kids.”
If you already have life insurance, now is a good time to re-evaluate whether you have enough, and compare term life insurance quotes if you don’t.
4. Buy disability insurance
Although only 29% of working Americans have disability insurance, about one in three Americans entering the workforce today will become disabled before they retire, according to LIMRA, an industry research organization.
“Your chances of becoming disabled are greater than your chances of dying,” Tilp says. “Who is going to pay your mortgage if you become disabled?”
Disability insurance can offer a layer of security and financial protection for the whole family, he says.
According to LIMRA, people typically believe disabilities are caused by major accidents or injuries. In fact, only 9% of disabilities are caused by one-time accidents. Most disabilities are brought on by chronic conditions, and one out of four are caused by common disorders such as back problems, joint pain and muscle pain.
5. Invest for retirement
After shoring up your savings and insurance, set your sights on retirement savings through a company-sponsored 401(k) or a traditional or Roth IRA.
A new house can drain your cash flow, and it’s understandable if you neglect your retirement savings for a few months or more. But as soon as you can afford it, it’s important to resume investing for retirement or to open an account if you don’t have one. The magic of compounding interest makes your dollars far more valuable now than they will be if you try to catch up years down the road.
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