A Dream And an Excel Spreadsheet

After spending the last couple of weeks ranting and raving about the follies of governments, bankers, and other events I can not control, let me return to planet earth. There are some things that we can handle with planning, congruent action, and an appropriate feedback control system.

There is a young family. He is an engineer with a stable job. She is a stay at home mom with a toddler. They live in a house that is too small and too far away from dad’s job. A few years ago, when they bought their home, it was the best they could afford. Now mom is growing restive. She wants a house that costs roughly $150,000 more than the value of their current home. She wants it now. That is impossible. While this young family is no longer underwater, they would be lucky to cover what they owe on a first mortgage and a sizable off the books personal loan that allowed them to walk in the door of their current dwelling. It is a source of friction in the marriage. Dad actually wants a new house almost as much as his wife, but he realizes they are in no position to take on the extra debt and expense such a move would entail. By the way, he is right. They have a very respectable rainy day fund for a young couple, but if they used this money for a down payment and closing costs, they would be broke and would still need more money to complete the house purchase. This would be true even under the proverbial rosy scenario. Number 7 from my ten rules for young couples:

Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I suggested setting up a special fund to finance the move, predicting that in five years or so they could be in very good shape to buy that new four bedroom house on the cul-de-sac in a nice little town not too far from here. The developer is offering the houses for sale with a 4% down payment. Given a $400,000 house and $7,000 in closing costs, I suggested a goal of $27,000 (5% down and $7,000 in closing costs). This is pretty optimistic, but by that time there is a good chance that their current home will go up in value and at least the personal loan will be repaid. They might walk with enough equity to cover any unforeseen contingencies.

If they put aside $450 a month at 0% interest, this is a goal they can achieve. A good insured Certificate of Deposit will obviously cut the time. The next question becomes how to squeeze $450 out of their current budget. First of all, I expect they do not have a formal budget. Now might be a good time to start one. Number 5 from my ten rules for young couples:

Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.

Really, I think before a structured budget can be developed, it is necessary to find out where the money is currently going today. They might be surprised. Number 4 from my ten rules for young couples:

When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.

In particular, the amount of money I was throwing into the coffee machine every night (I worked third shift at the time) was truly frightening. I bought a thermos and started making a pot of coffee every night before I left for work.

This is an example of a very achievable goal. This is a goal that is simple to describe (a new house in five years). Both husband and wife see it as desirable, it is believable, and progress towards the goal is measurable. I encourage them to undertake this project and wish them good fortune and early success.

For more on goal setting check out the February 2009 archive for this blog or cut and paste.

http://silvereagleexperiment.blogspot.com/2009/02/setting-goals-with-congruence_23.html