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How Millennials Can Purchase a Home While Paying Down Debt

Millennials are changing the cultural and societal landscape of the United States, from what we look for in an employer, to the way we use technology and communicate with our peers. Although there are many differences among generations (see our recent article on Gen Xers), one common theme remains — the desire for the “American Dream.”

With that dream comes homeownership. There is a common misconception that millennials aren’t interested in purchasing a home, but that largely couldn’t be further from the truth.

Purchasing your own home sounds great, but is it feasible? In a nationwide survey of about 24,000 renters, Apartment List found that 80% of millennial renters want to purchase a house or condo but face a huge obstacle: affordability. Millennials are faced with high levels of student debt, so saving for a down payment and purchasing your first home can be daunting.  

That raises the question, how does a millennial balance purchasing a home amid a high level of student loan debt?

Start With the End in Mind

First, you will need to determine how much home you can afford. As a general rule of thumb, total debt payments should not exceed 36% of your gross monthly income (not net). Total debt payments include things like consumer debt, housing debt, personal loans and student loans.

If you know the sum of your monthly debt payments, you can determine how much of your monthly budget you can afford to spend on your housing cost to keep the total debt percentage under 36% of your gross income. For example, let’s say you make $42,000 per year ($3,500 per month). Your monthly debt payments should not exceed $1,260. Now let’s say your monthly student loan payments are $200 per month, and you have no other outstanding debt. You hypothetically can afford $1,060 in total housing costs.

To get a sense for how much home you can afford, this mortgage calculator by Zillow allows you to input different home values, down payments and interest rates to get a rough estimate on the price of home you can likely afford and see how it compares to your monthly housing cost budget.

Consider the Additional Expenses

In addition to saving for the down payment, it’s important to consider the additional expenses that you may incur while moving, or during your first few months in the home. Moving expenses can vary significantly depending on which state you live in or are moving to, and whether the move is local or long-distance.

According to Updater, the average cost for a local move ranges from about $350 for a one-bedroom apartment to $1,500 for a four-bedroom home, and the average price for long-distance moves ranges from about $1,050 for a one-bedroom apartment to $5,000 for a four-bedroom home.

In addition to moving expenses, there could be additional expenses for furnishing your new home. Take inventory of the furniture you have and decide if you will need or want any new furniture for your home and add an estimated total expense for furniture to your overall savings goal. Pro-tip: When you relocate and change your address, the U.S. Postal Service typically sends you coupons for various companies offering discounts to relocators. Take the savings where you can get them!

Determine a Time Frame

Now that you have an idea of what amount of down payment may be needed to purchase your future home, as well as any needed additional expenses for moving or furnishings, set a realistic time frame for when you would like the purchase to happen. Subtract any funds you may already have set aside for the home purchase and calculate how much more you will need to save to meet your goal. After you have a time frame in mind and the total amount needed, you can determine the amount you should be saving each month (or year).

Start Saving and Stay Focused

Now for the challenging part — start saving and stay focused! There are tools that can help make staying on track easier. I find setting up an automatic transfer from my checking account each month seems to work best for me to stay on track with my savings goal.

If you have been having a difficult time finding the funds to save, try brainstorming a few ways to cut back or reduce a few expenses in your life. Maybe that means planning a long-weekend trip or a “staycation” instead of a weeklong stay in the Caribbean, or maybe it means you have to say no to your friend who asks you to go to out to dinner for the fourth time this week. Figure out which expenses you want to splurge on, and which expenses you’re willing to compromise on.

Even small changes to your spending habits can make a significant impact to the success of your savings goal. Remember to stay focused and remind yourself why you are saving. Think about how rewarding it will be to sign on the dotted line when purchasing your very first home!

If you are interested in learning more about strategies to help you plan for your financial future, connect with us.

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How Millennials Can Purchase a Home While Paying Down Debt

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
McKenna Girtz
McKenna Girtz

Associate Advisor

McKenna Girtz is an Associate Advisor with Wipfli Financial Advisors, LLC, based in the Twin Cities.

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How Millennials Can Purchase a Home While Paying Down Debt

time to read: 3 min