Jaime from Eventual Millionaire interviewed me. Check out the interview (you can even download the podcast) here!
I have two house-related rules of thumb:
1. never have more than 20% of your Net Worth tied up as equity in your house (i.e. borrow the rest)
2. Don’t let your mortgage payments be more than 25% of your Net Income (i.e. after tax)
Ryan questions the first of these:
Regarding the first tip, I”m assuming you are referring to not using more than 20% of your net worth as a down payment, correct? Because as time goes by, your equity should grow, and it wouldn’t make sense for most people to withdraw equity from their home value.
As I explained to Ryan, I think it makes great sense for “most people” to withdraw equity from their homes … but, only for the purposes of investing
My overarching rule of thumb is to always have 75% of your net worth in investments.
The remaining 25% can typically be:
20% in your house
2.5% in your car
2.5% in your other possessions
[AJC: by “in” your house/car/possessions, I mean “in the current value of the equity that you hold”; so it’s a good idea to reevaluate yearly e.g. using tools like Zillow or an MLS search tool to check the current value of your house and Kelly’s Blue Book to check the current value of your car and a finger in the wind – or eBay / Craig’s List – for your possessions, etc.]
Since you can only buy a shoebox (literally) for 20% of Net Worth, if you’re a typical person just entering the workforce … don’t sweat it: just apply these rules AFTER you have bought your first house/car/TV/etc.
Then, if you abide by these simple rules, they will stop you from buying more too soon AND from over-investing your hard-come-by Net Worth in ‘stuff’ 🙂