Most people think of financial security as being comfortable, with little (if any) debt and money left over to invest every month. However, it’s more useful to consider it to be preparation for financial disaster. This article will focus primarily on financial security as it applies to home ownership.
You may be in a two-income household with white collar jobs, a nice home, and well-funded 401(k) plans, but you should never assume this will always be the case. Illness, disability, divorce, job loss, and worse happen to good people every day.
Key Takeaways: Building True Financial Security Through Strategic Home Ownership
- Plan for worst-case scenarios – Financial security means being prepared for job loss, illness, or income reduction, not just current comfort
- Eliminate debt aggressively – Every debt payment is like giving yourself a raise and reduces vulnerability during crises
- Use stricter housing ratios than lenders require – Consider only properties you could qualify for with half your current income, not just what banks approve
- Achieve rental parity before buying – The property must generate enough rental income to cover all expenses (mortgage, taxes, insurance, maintenance, management, vacancies) even with zero personal income
- Factor in hidden costs – Include property management (10%), utilities, landscaping, pool service, umbrella insurance, and realistic maintenance expenses in your calculations
- Choose properties strategically – Consider energy efficiency, system age, neighborhood zoning, and factors that affect both expenses and future marketability to renters
- Invest in your children’s financial education – Teaching kids about money reduces their future dependence on you and strengthens family financial security
- View your home as a financial fortress – The goal is owning property you can retain even in extreme circumstances, with housing costs that remain stable while rents rise around you
As dark as it may seem, planning for financial security should include a few increasingly terrible potential scenarios, no matter how unlikely they may seem. If you own a home, would you be able to hold onto it if half your income vanished overnight, or if you were reduced to working part time for minimum wage and tips? Would you lose your car or be forced to downgrade? What effect would losing a vehicle have on your ability to work or chauffeur the kids? Do you have bedrooms that could be offered for rent, or skills that could be utilized in online contract work?
Get Out of Debt!
Getting out of debt is vital for achieving financial stability and peace of mind. Carrying debt causes stress and can be a crushing weight in the case of an adverse life event. In a very real sense, every debt paid is like giving yourself a raise, and lifts a burden that will only become more damaging in a crisis. If you are unsure where to start, please see our Debt Payoff Methods article.
Be Nice to Your Kids
And perhaps more importantly, don’t be a toxic parent. After all, the roles may be reversed in your sunset years. In the shorter term, ensure your children are educated on the topic of personal finance. Teaching children about budgeting, saving, and investing instills responsible financial habits early on, reducing the likelihood of reliance on you for support later in life.
Don’t Be House Poor
Planning for financial security should start long before your first home purchase, but that purchase plays a crucial role. Typical recommendations for a house payment-to-income ratio are 25-30%, which is a good start. Your lender will have their own underwriting requirements, but those requirements are based solely on your current financial situation and don’t have much padding for unknowns. One excellent option is to make your own requirements that are more stringent than the lender’s—for example, only considering property for which you would qualify with half of your current household income.
Choosing a Home
Besides the obvious, such as crime rates, school districts, and commute times, look at other factors that will either have substantial impact on future expenses or will make the home less desirable to buyers or potential renters. Does it have an awkward layout? Is it located on a busy street? Does the landscaping require an excessive amount of water and maintenance? Consider the home’s energy efficiency, as this can significantly affect utility costs over time. Evaluate the age and condition of major systems like HVAC, plumbing, and electrical. Look into the neighborhood’s zoning laws and future development plans, as these can impact property values.
Rental Parity
In the context of financial security, rental parity means more than having a total payment that is equal to or less than your expenses. It means having a property that you or your family can retain even if your income is reduced to zero. The rent (not ideal top-dollar rent, but actual market rate) needs to cover:
- Mortgage principal, interest, taxes, and insurance. For convenience alone, taxes and insurance should be included in your mortgage payment. Many lenders also require this type of escrow account for investment properties.
- HOA fee, if applicable.
- Any other taxes, such as potential Mello-Roos taxes in California. These are typically levied on homeowners in order to fund neighborhood infrastructure such as sewer lines and storm drains.
- Property management. Even if you plan to manage it yourself, allocate 10% for this.
- Any utilities that are customarily paid by landlords in your area, such as water and waste disposal.
- The cost of an umbrella insurance policy that covers tenants and their guests, especially if the property has a pool.
- Landscape/gardening service. Include this regardless of whether you plan to offer a discount to tenants who perform the work themselves.
- Pool service. If a property is intended to be a rental or will eventually become one, avoid those with a pool. If you want a pool and are unsure whether the property will ever be rented, include this service in your expenses.
- Vacancies. This expense can be minimized by pricing a rental correctly.
- Predicted maintenance costs.
The above list of expenses may be more than you expected, but they need to be considered even if you never suffer an adverse life-changing event.
Maintenance Costs
The cost of maintenance is a complex topic that will be covered in another article—to summarize, it can’t be calculated using a generic percentage of home value, and don’t let anyone convince you that it can. Your true cost greatly depends on the zip code (i.e., labor cost), neighborhood, square footage, lot size, and the condition and quality of things like:
- HVAC
- Major appliances
- Fencing
- Roof
- Solar
- Flooring
- Foundation
- Plumbing
- Electrical
- Irrigation
- Pool surface and pump (if any)
- Hardscape
Whether you’re in the market for your first property or adding to a portfolio of rentals, the amount you have available for the down payment must bring you to rental parity, including all those expenses. If it doesn’t, you’ll either need to find a less expensive property or save for a larger down payment.
With all that done, congratulations! Part of financial security is owning a property that you’ll be able to keep even if you end up living in your car, which isn’t fun to think about, but it’s the sort of worst-case scenario that may eventually keep you awake at night. The great part about home ownership is that the benefits increase with time—you’ll watch your housing expenses remain virtually unchanged (with the possible exception of property taxes) while rent rates around you continue their endless upward trend.
