How much should remain in liquid savings after buying a home

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How much should remain in liquid savings after buying a home

Postby Paddington79 » Sun Sep 01, 2013 10:12 am

The Paddingtons are ready to pounce on the housing market. We live in a HCOL and prices are creeping ever higher.
About us: early thirties, one kid (another in the offing), renting for a very good price right now, HHI $175k less a graduate school loan of 50k which we're trying to chip away at heavily.

We've been pre-approved with great credit up to 500k or so, but we're more comfortable looking at homes or condos in the 4's.

We have $130,000 in a liquid savings account earmarked for our home. Obviously we do not want to drain it.

My question: How much should we hope to keep in savings after making a home purchase? Complicating factor is that part of our income comes from our own business. Income has been steady for the past four-five years, but I suppose anything can change, so we want a buffer. Then again anybody can lose a job at any time too - but still. We would rather be conservative.

My thinking:
Put down 90-95k on house, probably end up spending 100k after closing costs and incidental expenses and leave 30k in savings. However, seeing that # dwindle from 130 to 30 scares me - but we need the 20 percent dp for best rate.

What would you do? Thanks.
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Re: How much should remain in liquid savings after buying a

Postby Texas hold em71 » Sun Sep 01, 2013 10:16 am

Would that 30 be your emergency fund or do you have a separate fund for that?
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Re: How much should remain in liquid savings after buying a

Postby Paddington79 » Sun Sep 01, 2013 10:17 am

The $30k would be earmarked as emergency fund. We have separate funds for retirement/college savings/etc.
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Re: How much should remain in liquid savings after buying a

Postby b4nash » Sun Sep 01, 2013 10:25 am

How much are your living expenses per month? I would want at least three months of living expenses set aside.
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Re: How much should remain in liquid savings after buying a

Postby stan1 » Sun Sep 01, 2013 10:31 am

I would put 20% down at your ages which leaves money for the costs that come up when you move into a new house. I also would not buy a "starter" house/condo that you only plan to live in for a few years (especially if you would want to move for better schools or would outgrow a condo which places an "urgency" on moving at a future date). Transaction costs of buying/selling are too high. If the business does very well you can always pay down the loan in the future.
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Re: How much should remain in liquid savings after buying a

Postby BrandonBogle » Sun Sep 01, 2013 10:34 am

How much do you have in taxable that could be liquidated if the $30k would be drained. And as another poster alluded to, how much would this balance last you based on your monthly expenses.

The following may be a good read: Placing cash needs in a tax-advantaged account
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Re: How much should remain in liquid savings after buying a

Postby RNJ » Sun Sep 01, 2013 11:25 am

I don't have a direct "this is what you should do" kind of response. But something Larry Swedroe writes about, which I have found valuable, may be helpful in how you think about how much you keep in liquid or low-risk, easily accessible investments.

The questions he poses are (I'm paraphrasing): Is your income more stock-like or more bond-like? How correlated is your income to the stock market and/or economic cycles? If one's income has more stock-like characteristics - sensitive to economic cycles, more volatile - one should tend towards a more conservative AA and, in your case, keep more of an emergency stash in highly liquid investments. If the reverse is true (LS often uses the examples of the tenured professor or a physician) and one's income is more bond-like, one might be able to afford taking on a bit more risk (if there is a need).

Part of the thinking is that if your business is sensitive to economic cycles, the risk to your income will show up at the same moment that your portfolio is taking a hit, leaving you with a need to sell riskier assets (i.e., stocks, longer-term bonds) low to meet expenses. As a parent and longtime homeowner, I can tell you that these risks will show up at precisely the time your water heater needs replacing and your child needs braces.

Good luck.
Last edited by RNJ on Sun Sep 01, 2013 12:53 pm, edited 2 times in total.
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Re: How much should remain in liquid savings after buying a

Postby Texas hold em71 » Sun Sep 01, 2013 11:29 am

I don't think you get much benefit from putting down 25 percent versus 20. Put the minimum down you need to get out of PMI and get a decent rate. Bank the rest. You can always pay extra toward the mortgage as things move along. You should do the math on the emergency fund because your 3-6 month number may change when you get a mortgage, HO insurance and property taxes.

I hate debt more than the average person, but even I will tell you to keep some liquidity for the unexpected.
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Re: How much should remain in liquid savings after buying a

Postby BrandonBogle » Sun Sep 01, 2013 11:55 am

Texas hold em71 wrote:I don't think you get much benefit from putting down 25 percent versus 20. Put the minimum down you need to get out of PMI and get a decent rate. Bank the rest.


Op said...

Paddington79 wrote:but we need the 20 percent dp for best rate.


So I'm confused. Did I miss something? I would agree to not pay more than 20 percent.
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Re: How much should remain in liquid savings after buying a

Postby Texas hold em71 » Sun Sep 01, 2013 12:16 pm

Depends on other incidental costs he referred to.

450,000 times 20 percent is 90 k. He is planning to drain 100k. So there is 10k of incidental costs or extra down payment there that would make the 30,000 emer fund 40,000. Closing costs should not be that high.

I am saying don't put the incidental 10,000 in a down payment that you can't access unless you know 30,000 is an acceptable emergency fund,
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Re: How much should remain in liquid savings after buying a

Postby DiscoBunny1979 » Sun Sep 01, 2013 12:20 pm

Paddington79 wrote:The Paddingtons are ready to pounce on the housing market. We live in a HCOL and prices are creeping ever higher.
About us: early thirties, one kid (another in the offing), renting for a very good price right now, HHI $175k less a graduate school loan of 50k which we're trying to chip away at heavily.

----------

Are your car(s) paid for, and have you considered you might need a new 'family' car once the addition to the family occurs? Which HCOL area are you talking about and are the homes in your price range 30-40 years old, or are they newer construction? This makes a big difference in terms of what kind of 'house fund' you should have in addition to 'emergency fund'. In the OP's HCOL area is there a lot of pressure to keep up with neighbors in terms of social work environment, neighborhood of choice, or eating out and entertainment - that people might ask have you ever eaten there, or seen that movie, or like where I use to work, pressure to not buy American made cars, so that everyone drove something with a foreign logo.
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Re: How much should remain in liquid savings after buying a

Postby Grt2bOutdoors » Sun Sep 01, 2013 12:43 pm

Six to twelve months of PITI and necessary living expenses.
New homebuyers will be astounded with the incidental expenses associated with the purchase of a home. I know I'm astounded when I hear these posts about a family of 4 or 5 buying a home and only keeping 3 months of expenses available for anything that may come up. I guess alot of folks get a rush from living on the edge. Closing costs of $5K with a home costing $500K is almost non-existent, try closer to $10-$15K. Unless you like having your neighbors watching your every move and gauging from homes in my neighborhood you will need window treatments or blinds for at least 10 windows - $$. Then, hopefully you don't buy too much house or you will find a need to fill that space with furniture - $$$. Along with that, comes a jungle gym for junior - $. A landscaper or maybe a pool cleaner - $ to $$.

In other words, if you put down a $100K, that $30K may not go as far as you think.
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Re: How much should remain in liquid savings after buying a

Postby jsl11 » Sun Sep 01, 2013 2:19 pm

Keep in mind that there can be a lot of unplanned expenses when you buy a new home. Does the house need repairs? Do you want/need to do redecorating? New window coverings? New carpeting or flooring? Does the kitchen need remodeling? New Furniture? New roof? New landscaping? Purchase of lawn and garden equipment?The list goes on and on. Then there are things like paying the mover and other incidentals. There is no way you can judge what these costs will be in advance because they depend greatly on the particular house you buy. Therefore, it is a good idea to buy less house than you can "afford". You can also expect these expenses to depend on the age of the house. The older the structure, the more repairs and improvements you will want to make. Of course some of these expenses can be scheduled for the future. However, others will need to be done before you move in, or shortly after.
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Re: How much should remain in liquid savings after buying a

Postby jebmke » Sun Sep 01, 2013 2:39 pm

jsl11 wrote:Keep in mind that there can be a lot of unplanned expenses when you buy a new home.

I always budgeted about 10% of the total house price for these. Then it tapers off (except for the reserves for capital items like roof, furnace replacement ...........).
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Re: How much should remain in liquid savings after buying a

Postby Cyclone » Sun Sep 01, 2013 6:51 pm

The Fannie Mae underwriting guidelines generally require six months of loan payments in reserve, so that is what most lenders are going to look for.
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Re: How much should remain in liquid savings after buying a

Postby scubadiver » Mon Sep 02, 2013 10:23 pm

You're right to be scared. A reserve of $30K is not sufficient given your expenses. I would shoot for about twice that.

Don't want to be a downer. You're doing well. Be patent and save up the additional $$$. DON'T rush to a decision because of fears about interest rates. No one knows what's going to happen with them anymore now than they did a year ago.
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Re: How much should remain in liquid savings after buying a

Postby Dandy » Tue Sep 03, 2013 9:59 am

you are right to have some concern. If it is your first house, especially if it is not new, you will probably be surprised at how much it costs to furnish and maintain. If you moved from apartment living you may have to buy lawn mowers, rakes, snow shovels, garbage cans, tools, paint, seed fertilizer etc - every time you want to do something you don't have the tools. If something major happens e.g. leaky roof, faulty heating or even major car or health expense you want to have a bit of cash in reserve.

Many of us didn't have much of a cushion when we bought our first house. Go slow on the discretionary spending until you get a handle on expenses.
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Re: How much should remain in liquid savings after buying a

Postby barnaclebob » Tue Sep 03, 2013 10:56 am

The wife and I were left with about $2500 in our bank account with no other taxable investments the month after we bought our house. However we were saving about 4k a month (50% of take home) at that time so the risk was if something big happened within the first 6 months or so. That risk wasnt great enough in my opinion to delay buying our house.

I would say that if your bank account balance is going up significantly, say maybe at least half a months expenses every month and your jobs are relatively stable then you are probably safe.
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Re: How much should remain in liquid savings after buying a

Postby BrandonBogle » Tue Sep 03, 2013 12:30 pm

barnaclebob wrote:The wife and I were left with about $2500 in our bank account with no other taxable investments the month after we bought our house. However we were saving about 4k a month (50% of take home) at that time so the risk was if something big happened within the first 6 months or so. That risk wasnt great enough in my opinion to delay buying our house.

I would say that if your bank account balance is going up significantly, say maybe at least half a months expenses every month and your jobs are relatively stable then you are probably safe.


It was similar with my current house. Went down to $40 in my bank account. But I was still putting in enough to max out my 401k and Roth and put some back into the emergency funds. I also had enough in my taxable to pay for half the house. So I wasn't worried about "cashflow" basically for those six months. If anything happened, I could also pull the funds from elsewhere.

To the Op, one thing was I found a house I loved, was in good shape, but needed some updating. So slowly we've been doing things. First removing the popcorn ceilings before moving in, then furnishing one room at a time, then redoing the master bathroom, then replacing the water line that burst. Recently we've done landscaping and now are about to start on one of the extra bathrooms and tackle flooring. We've been in the house three years and I'm still making changes, but I'm not tapping into savings nor stopping our lives.
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Re: How much should remain in liquid savings after buying a

Postby FinancialDave » Tue Sep 03, 2013 12:56 pm

I would never recommend buying a house more than twice your annual Salary, which is more like $350k. $400k is maybe a the very top end of the range. Just because you live in a HCOL area that is NO excuse for going beyond common sense. Also just because the bank will qualify you for something does not make it right - have we learned nothing over the last 6 years?

As a new home owner you need a much bigger EF, especially during the first couple of years -- so more like 8 months of your take home. You will spend some of it to make the house a home and the rest needs to be a big cushion against a sudden loss of a portion of your income. Larger EF is especially important if you violate rule #1 above!

Good Luck.

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Re: How much should remain in liquid savings after buying a

Postby stan1 » Tue Sep 03, 2013 1:53 pm

BrandonBogle wrote: To the Op, one thing was I found a house I loved, was in good shape, but needed some updating. So slowly we've been doing things. First removing the popcorn ceilings before moving in, then furnishing one room at a time, then redoing the master bathroom, then replacing the water line that burst. Recently we've done landscaping and now are about to start on one of the extra bathrooms and tackle flooring. We've been in the house three years and I'm still making changes, but I'm not tapping into savings nor stopping our lives.


Nice idea if you can find a house like this, but these houses are increasingly hard to find in many locations.
The "investors"/flippers buy them before they are put into the MLS.
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Re: How much should remain in liquid savings after buying a

Postby BrandonBogle » Tue Sep 03, 2013 2:41 pm

stan1 wrote:
BrandonBogle wrote: To the Op, one thing was I found a house I loved, was in good shape, but needed some updating. So slowly we've been doing things. First removing the popcorn ceilings before moving in, then furnishing one room at a time, then redoing the master bathroom, then replacing the water line that burst. Recently we've done landscaping and now are about to start on one of the extra bathrooms and tackle flooring. We've been in the house three years and I'm still making changes, but I'm not tapping into savings nor stopping our lives.


Nice idea if you can find a house like this, but these houses are increasingly hard to find in many locations.
The "investors"/flippers buy them before they are put into the MLS.


Pretty much everything about this house has been fortunate for me.

But if the Op cannot find something like this, at least they can try to not do everything at once. For instance, if moving from apartment living to this house, they need not furnish it beyond their current belongs quickly. That can give them the change to build back up their savings.
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Re: How much should remain in liquid savings after buying a

Postby investor1 » Tue Sep 03, 2013 4:29 pm

Your liquid funds should include the following:
1. Your current month's expenses.
2. You emergency fund. At least six months expenses.
3. Short-medium term savings. Savings to buy the random things you need or want. Savings to buy your next car. Savings to fix the current one. Savings for home repairs, etc. Some people are willing to risk some of this money and put it into investments. That's fine, just follow your risk tolerance.

Add to that whatever size buffer you want for your business. I don't know if you were referring to operating expenses here or just ensuring you can pay your non-business bills if the business revenue dies down. If the latter, bump the EF from six months to twelve or more.
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Re: How much should remain in liquid savings after buying a

Postby kenyan » Tue Sep 03, 2013 5:22 pm

We recently moved to a new house in a HCOL area, our first, and our life situation is not too different from yours (couple years older, second kid is already here). The amount we had left over after DP + closing/moving costs was about 1.5 years of PITI. Using Redfin to purchase has helped to defray a lot of the startup costs ($5500 nontaxable refund in our case), but they are significant as others have described. We even had our first repair - one week after moving in, the garage door opener broke. It all adds up.

We also had been renting fairly cheaply until a year before our purchase; the increase in rent from moving to a bigger/more expensive place (coupled with the housing bubble burst) finally made purchasing a reasonably attractive option.

Don't buy a place just because you think prices and/or interest rates are going up. Don't buy a place as a starter house that won't fit your family/lifestyle for more than a few years. Compare renting the equivalent to the various costs of homeownership - it's a more important comparison than (IMO) overly conservative rules of thumb in HCOL areas (levied by those in LCOL areas) such as 2x income or 15-year PITI < one week net pay. Stay conservative, though - 20% DP is required, and if you are at risk of job/income loss, don't count on presumed house price appreciation to bail you out.

The reduction in our liquid savings was a tough pill to swallow, as you imagine. House equity is not nearly so fun.
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