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Category Archives: Cash Flow and Debt

How Much House Can I Afford? The 28/36 Rule

There are many factors that go into making the decision to buy a home. It’s a substantial financial step, whether it’s your first or fifth home, and your first home is a milestone in every adult’s life. The first step toward home ownership is deciding that buying is right for you vs. renting. Once you’ve set your mind on buying a home, finding out just what you can afford is next.

There’s a common rule in lending called the 28/36 rule, which is essentially a common-sense rule of thumb for figuring out how much debt a person or household should take on. The rule states that your total housing expenses each month shouldn’t exceed 28% of gross income, and total debts shouldn’t exceed 36% of gross income—which includes your mortgage, student loan debt, car loans, etc.

Using the 28/36 rule, you can get ballpark idea of the kind of home you can afford and begin making plans accordingly. Whether you’ve got some saving to do, or you’re pleasantly surprised at how much house you can afford, it’s a helpful piece to work toward buying a home.

The 28/36 rule is a good place to start, but there are a lot of different pieces that factor into how much house you can afford, such as using a physician loan for your home. As with all substantial financial decisions, reviewing the situation with your financial advisor is the best bet. They can look at your plan and give you more practical idea of whether buying a home is in line with your plan.

Curious if buying a home can fit in your current financial plan?

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.
Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs.

“Pay Yourself First” and Other Budgeting Tips

If you want to reach financial independence and achieve other long-term financial goals, I would argue the primary predictor of your success or failure is the way you manage the income jump from training into practice.

Many physicians compare themselves to their peers further along in their careers and assume that they too should buy a huge house, fill it with cool furniture and park two shiny new cars in the driveway to say, “I made it!” Very few clients in my practice went this route. The ones who did had some catching up to do.

For most people—physicians in particular—living on a budget may have negative connotations. It means the end of lattes, no chance at a luxury car, and never any fancy vacations; just paying down student loan debt and investing for some unimaginable future retirement date.

In my practice, that is not how most of my clients live. In fact, I don’t expect my clients to save every penny for the future and miss out on living now; I encourage them to enjoy the above-average income and to spend time doing things they enjoy. Instead, I ask my clients to do one thing: Pay yourself first.

The concept has been around for a long time and it’s simple. Before you spend money on anything else, make a commitment to set aside a percentage of your income or a flat dollar amount. To improve your chance of success, consider the following:

  • Automate your savings. Whatever you choose, percentage or flat amount, set up a monthly draft from your primary checking account to an account or accounts depending on where you plan to save/invest the money.
  • Choose a percentage or amount that will leave extra money in your checking account each month. This is simple psychology: It keeps you from feeling strapped for cash. As your account increases, it has the added benefit of providing additional funds for larger purchases, like a much needed and often overlooked vacation.
  • Reevaluate periodically as income increases or if you receive bonuses for RVU true ups or annual collections. As income increases, most physicians spending increases. Instead, I recommend increasing the percentage or flat dollar amount allocated to saving/investing.

Need help creating a budget that works for you? We can help.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.
Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs.
The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.

Sell or Rent? Making the Most of Your Prior Home

If you’ve made the call to move—whether you’re upgrading, downsizing or simply looking for a change—you need to do something with your previous home. But what do you do? Sell it? Rent it as an income property? Keep it as a second home? In this article, I’m going to try to give you answers to some common questions that may come up when it’s time to move.

  • I’m planning to move to a different area. Should I sell my home or rent it?
    • Generally speaking, I recommend you sell unless doing so would cause you to take a significant loss that could be mitigated by holding the property for a period of time or you want to be a landlord and own a home in an area where you do not live. Real estate is a great investment; however, there are other ways to own real estate that alleviate you of the responsibility of day-to-day management.
  • What are some unique challenges that can accompany renting vs. selling a property?
    • Being a landlord is not for everyone. There are various challenges, including advertising for tenants, handling leases and deposits (In some states interest must be paid on a rental deposit) and the big one, especially if you live far from the property; maintenance. It is advisable to hire a property management firm if the owner does not want to handle these responsibilities; however, it comes at a cost. Another potential negative to renting your property; the tenants are unlikely to treat your former home with the same care you would.
  • Why would renting be advantageous?
    • If you own a property in an area with significant appreciation, renting your property can generate a significant gain long-term. And even in areas where appreciation isn’t significant, if you can generate enough rental income to cover you costs, someone else is paying off your asset for you.

Finally, do not be afraid to take a loss on a property to get out from underneath a mortgage, especially if you do not want to be a landlord or if holding the property as a rental makes it difficult or impossible to obtain a mortgage on a property where you are living next.

The debt on the rental property impacts your debt-to-income ratio, a factor in obtaining a mortgage and banks in general do not consider the rental income in total or at all in their calculation of your ability to pay both mortgages.

It is important to remember that three months—or worse, a year—without a tenant can dramatically increase your monthly expenses and impact your own financial independence goals.

Any plans to move? Are you considering an income property? We can talk through it together and determine how best to put your previous home to use.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.
The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.
Not all Related Services are offered directly from Larson Financial Group, LLC or Larson Financial Securities, LLC but may be available through the Doctors Only network of companies.

Are You Properly Managing Your Debt?

Doctors can end up in unique situations regarding their professional lives. They often enter their high-earning years later in their career than other professions and can have much higher student loan debts. Plus, the cost of opening a practice, along with other expenses like homes or vehicles, can really add up to an intimidating amount of debt. The key to debt management is being proactive.

Planning for the debt that you know is incoming, like student loans, can help you get a start on your savings. Something to consider, though, is exactly how concerned are you with debt?

If debt is causing you a lot of stress or keeping you up at night, you may want to pay it down as quickly as possible. If you’re a little more comfortable with the debt you have, you can work with a financial professional to determine the strategy that works best for you.

A common answer to managing debt is to keep a budget. Budgets can be a great way to track your spending and make sure you have enough set aside to pay your bills and cover other necessary expenses each month. However, budgets may not work for everyone and if you have a busy schedule, setting aside time to balance and monitor your budget may be more difficult than creating the budget itself.

For a doctor in that position, a “pay yourself first” approach may be a better alternative. With this method, you set aside an amount of your income—either a percent or flat dollar amount—to save or invest each month. That leaves you free to spend the remainder guilt-free, as you’ve already put money aside to cover yourself.

Another unique angle doctors have is taking advantage of Public Service Loan Forgiveness (PSLF), which is a strategy whereby your student loan debt could be forgiven a period of working for a government or not-for-profit organization.

There are some caveats to this system. There have been efforts to defund or eliminate it completely, though they’ve been unsuccessful so far. If you’re a doctor pursuing PSLF, it could benefit you to begin or continue saving like the program may not exist in the future. Saving as though you’ll have to pay will help you avoid being blindsided, should something happen to the program.

Whether you’re a debt-managing wizard, you need some help or you’re unsure of the resources available to you, we can talk through your financial plan and make sure you’re on track.

Do you want a second opinion on your debt management strategy?

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.

Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.