Two Secret Housing Budget Tips

Is your kid looking to move out as soon as they turn 18? Or maybe you’re ready to boot them out of the nest and let them fend for themselves? Have you taught your kid about budgeting and cost planning for housing? Here’s what Papa says: teach your kids to plan on housing expenses of no more than 30% of their monthly income, and also look at the cost of borrowing money.

Kids nowadays see homes getting put up for sale and sold in the same week – often for more than the asking price. The housing market has gone crazy to say the least. I know of kids that think they’ll just get a job at a local restaurant and then buy the $600,000 house down the road. You need to be the voice of reason before they put themselves in financial ruin, and worse yet, never move out of your house.

I’ve recently had this exact heart-to-heart discussion with my 18 year-old son since he is about to graduate and look for his first real job. He thought it would be neat to get a house in our community so that he could be close to home. The bad news is that home prices in my area have more than doubled in the last few years.

The 30% rule

I sat my son down and told him about the 30% rule. The rule (or is it more of a guide?) is that no more than 30% of your monthly income should go towards your rent or house payment. Time for some simple math.

Let’s say their first job will pay them $14 per hour. This is the norm for retail and fast food around where I’m at. That means their yearly income (if they work full time) will be $29,120, and their monthly income will be $2,427.

That might sound like a lot of money to your kid, but the cheap apartments in my area go for about $2,000 per month. At $14 per hour, they are looking at a maximun monthly housing budget of $728 ($2,427 x 30%). This is the time to start thinking about a roommate.

However, if they land an awesome job that pays $20 per hour, then they can afford $1,040 a month on housing expenses. Vocational studies, anyone?

Cost of borrowing money

Once your kid has the 30% budget figured out, now they can figure out how much home they can afford – if they’re looking to buy a house that is. A quick way to do this calculation is to look at how many thousands they will need to borrow and multiply it by 6.

Some more quick math: If you need to borrow $200,000 to buy a house, plan on your monthly housing cost to be about $1,200 ($200,000 x 6 / 1000). This will require an hourly pay of about $23.20 per hour.

When your kid goes for a loan from the bank, make sure they don’t blindly trust what the banks say – their goal is to put you into debt. I had sense enough when I bought my first house that even though the bank approved me for several hundred thousand dollars on a mortgage, I kept to my budget of homes in the $150,000 to $180,000 range.

The trouble here is that if they go beyond the 30% per month rule, they will have issues getting out of a debt pit. It will be incredibly difficult to save enough money in case they have a “rainy day” or if they are trying to save enough to have a down payment on a house. This leads to the dreaded “boomerang effect” where they have no money and come knocking on your door for free room and board.

Have you had these discussions with your kids already? Start approaching these topics once they hit middle school – it will help them with realistic career and life planning. Have you had to learn these lessons the hard way? What other quick tips do you share with your kids?