Alice was at a crossroads. She was already forty-one years old and figured by this point in her life, she would already own a home, but with graduate student loans still looming, she wasn't sure what made sense for her.
She consulted her trusted colleagues, peers, family, and close friends, but ultimately couldn't figure out what was best for her situation.
She needed a roadmap to take into account her individual needs, income, and financial situation. That's when Alice found me.
STEP 1: FCF (Free Cash Flow)
It was essential to know how much "extra" resources we were working with after Alice paid all her fixed and variable expenses. Here monthly FCF needed to have the following characteristics:
Ability to capture her available funds every pay period and not spend on variable expenses like food, going out, entertainment, gas, groceries.
Consistency: The amount of FCF needed to be the same each month
STEP 2: Fully Funded Emergency Fund
To not impact our FCF, we needed to make sure she had enough money saved in an emergency fund so that if unexpected expenses or an emergency came up, it wouldn't disrupt her FCF. A fully-funded emergency account has six to nine months of FIXED expenses in a savings account.
STEP 3: Amortization Schedule for Student Loans
An amortization schedule breaks down each payment contribution to interest vs. principal. The principal portion of your payment benefits you 100% because it goes towards paying down your balance. The interest portion is the company's profit that loaned you the money from in the first place. The goal of the amortization schedule is to figure out who benefits the most when you make a payment: you or the loan company? Furthermore, you'll want to figure out the total interest you'll have to pay for the life of the loan.
STEP 4: Student Loan Interest Rate
We went shopping to figure out if there were any other providers of student loans who could offer a lower interest rate than the current rate you are paying. The goal was to either cut down the amount of time it would take to pay off student loans or pay it off in the same amount of time but pay less interest.
STEP 5: Other Debt Payments
In a perfect world, you want your mortgage to be the only debt you have. Underwriters of mortgage loans love when prospective home buyers have little to no debt obligations.
STEP 6: Housing Analysis
A housing analysis helps you assess your future purchase based on what you can genuinely afford while still maintaining a comfortable lifestyle. The most common occurrence of new homebuyers is they purchase a home whose mortgage takes up a large percentage of their monthly net income, which puts them in financial strain in the first five years of the home purchase. You also want to assess whether your potential investment could be a rental property in the future and the different scenarios in which you could make positive cash flow. You'd want to know all of these variables before even getting pre-qualified.