New York native Erica Horne, 35, wonders how she will continue to make ends meet now that she is a homeowner. After searching for four years to find a property she could afford, the New York state teacher finally hit the housing jackpot in June when she was selected through a low- to medium-income homebuyer program to purchase a one-bedroom co-op in the Bronx for only $67,000. Purchasing a co-op is generally cheaper than buying a condo or home, because the buyer does not own a piece of real estate. Instead, the buyer owns shares in the co-op corporation that owns the building.
Horne grew up in Harlem and says gentrification made her housing search “laughable†because she couldn’t afford to purchase any properties. “I could be in a poor neighborhood and right across the street from me the places would be $800,000 to $1 million. Then I saw lotteries available for people with medium incomes, and that’s how I got the co-op,†explains Horne who is single, has no children, and earns an annual salary of $52,000.
Since graduating from Buffalo State College in 1999, Horne has been living at home with her parents and paying them rent. In recent years, while living at home, she was able to save at least $400 per month and accumulated savings of more than $10,000. Less than a month after purchasing her home, Horne’s savings has decreased to only $1,300 after making a 10% down payment and paying closing costs. She worries, however, that the $400 she had been socking away each month will be devoured by expenses such as utilities and furnishing the house.
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Horne’s estimated payments from the closing documents say she will pay $1,000 per month now on mortgage, maintenance, and insurance for her new co-op–a few hundred dollars more than she was paying in rent. “Now I feel like I need to earn more money because I am going to be paying more,†Horne says.
Her next goal is to learn how to invest in stocks and start the process of building an investment portfolio. Currently, Horne’s only investment account is her employer’s pension retirement account. As a teacher in New York state, Horne is required to contribute to the state’s retirement plan and has amassed $9,000 during her eight years on the job. Her contribution to the plan is 3%.
Horne’s debt is made up of a revolving credit card balance of less than $200 and a student loan balance of $1,400. The new homeowner had plans of paying off those accounts this year but now realizes that may not happen with the home purchase.
The Advice
Black Enterprise and advisers Dawn Brown, a senior financial adviser at Altfest Personal Wealth Management, and Harrine Freeman, CEO of H.E. Freeman Enterprises, agree that Horne needs to create a budget and effectively manage her new expenses before making any major purchases or paying off the remainder of her debt.
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– Create a budget. Brown cautions that Horne is in a good position but she must be very shrewd with her next financial steps. “She’s in flux because she closed on her apartment but she hasn’t moved in yet,†Brown says. “She got this really good deal with a $67,000 purchase price and her debt is only $1,400 which is not really a problem. She has a 4.1% rate on her mortgage, which is unbelievably low,†says Brown. However, experts agree that Horne must keep track of all expenses and make cash payments for any new homeowner items such as furniture. “She can use free services such as Mint.com to track spending and use online banking to pay bills and track
monthly payments. Mint.com also imports your bank financial data which makes it easier to create a budget,†says Freeman. “I recommend she delay any major furniture expenses. It’s the easiest way to get into debt by buying such items on credit cards. She should pay cash and buy furnishings in stages instead,†adds Freeman.– Build an emergency fund. Horne’s savings is now depleted, so Brown and Freeman agree she should rebuild her emergency fund to at least six months of expenses, taking into account the purchase of her home. “She should put at least $400 a month in a savings account,†Freeman recommends. “She should move all the money in her savings account to a higher interest savings account such as ING, Ally Bank, Capital One, or Discover Bank,†adds Freeman.
Brown adds that “she should put her savings in a money market or someplace she can’t touch it so easily, although money markets aren’t paying so much right now. It is still better in a separate account or a short-term CD so you don’t have access to it so easily.†Brown and Freeman agree that Horne should use the $2,000 contest winnings toward her emergency fund.
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– Become educated about finance.
Brown says that Horne should educate herself about the financial planning process, and advises visiting www.cfp.net/learn, a website that offers financial literacy information and a listing of certified financial planners, or www.nypl.org/financialliteracynow for local resources. Horne should also speak with the retirement plan representative at her job to learn more about investment options through her employer. Freeman also suggests that Horne enroll in a financial literacy course.– Start investing for retirement. “She should invest in her work retirement plan first and see how the money grows before she goes to IRAs or brokerage accounts,†says Brown. With 30 plus years to plan for retirement, Horne can afford to be aggressive. Brown recommends that she place 10% of her salary in her employer’s retirement plan every year for the next 30 years. Assuming a salary increase of 3.5% every year and an asset allocation of 65% in equities and 35% in fixed income, with an investment return of 5%, Brown estimates that Horne would have $544,000 after 30 years.
According to Freeman’s projections, Horne would have approximately $50,000 in her retirement account to date if she had been following this model of investing 10% of her income since she began her job.