Q: I’ve noticed that you’re helping people out with saving for a down payment. I came up with an idea to help me start a savings plan that is apart from my 401(k), and it’s worked wonderfully.
By taking a look at my every day expenses, I tried to figure out a dollar amount that I needed to have in my account to cover my regular bills plus an extra few hundred dollars for unusual purchases or small emergencies.
I wanted to maintain this number every month in the account. Once I got to that point, everything extra was deemed “savings”. On payday, I had my check deposited to the account. Anything over the magic number was then transferred into a different savings account.
Having a credit union or bank that gave me internet access to my accounts made it easy to transfer over the extra balance each month.
I’ve found that watching my savings account balance grow as a result of these one-way transfers of cash has become a powerful motivator for saving. So even though I’m paying my bills first and myself second, I know that I’m (1) taking care of expenses and (2) spending less recklessly because I’ve become quite mindful (and fond) of the increasing balance in my once negligible savings.
Once the balance in my savings account is big enough, I’m going to switch the funds to an investment account so that the balance can grow even faster. I hope some of your readers find this suggestion useful.
A: I think your suggestion is grand, especially if you have the willpower to avoid dipping into the savings account for any reason. Congratulations on making a great start on saving above and beyond your 401(k).
When you decide to move your savings into a more active investment, consider investing in a cheap index fund. They’re easy to own, and you can continue to contribute to your index fund at any time. Best of all, you’ll do better than 85 percent of all managed mutual funds.
Q: I wonder if you can suggest any resources for my situation. My wife and I currently live in a co-op, where we have made good friends over the last 2 years.
We are exploring the idea of buying a 2-family house together, since the single family market is so overpriced right now. What are the potential pitfalls?
A: Even though you know this family pretty well, you probably don’t know what goes behind their closed doors. But if it’s just you and them living in a two-family building, you’re going to find out fairly quickly.
Before you make this move, you and this other family have to come to terms with issues like location, insurance, who is going to handle the daily maintenance (gardening and snow-removal, for example) and special maintenance, like a new roof. You might find that your idea of maintaining property is very different from your neighbor’s.
If you’re buying this building as partners with the idea of converting it later into separate ownership (like a condo), then you should have an attorney draw up a partnership agreement that spells out these issues and others, like what happens if one family decides to sell.
Buying together means you’ll be linking your financial and social lives together, which can work out beautifully or terribly, and rarely somewhere in between. Can you trust this family to live up to their mortgage and maintenance obligations? If not, the lender won’t care. The company will simply come after you, and possibly ruin your credit.
Finally, make sure you find a real estate agent who can help you and this other family determine what is most important (wants vs. needs) while considering issues like schools, crime, and potential for price appreciation.
I hope this turns out the way you planned. Personally, I think you’re walking into the lion’s den.
Jan. 19, 2009.
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