Personal Finance 
12
comments

Playing House: Prepare By Pretending

Email  Print Print  

Tea Party inside a dollhouseWhen we were looking at houses a few years ago, I was paying about $600 a month in rent. I was splitting a $1189 per month, 2-bedroom apartment with a friend and my half was a little less than half. $600 a month in rent is fantastic in the Baltimore-Washington D.C. area and I was thrilled to be able to save up some cash for a house, despite housing prices soaring back then. So, when I started looking, the prospect of paying a $1500 mortgage was downright scary.

That’s when I learned the technique of “pretending” as a way of preparing yourself for major purchases. I should “pretend” I currently have that mortgage and see how it affects my financial situation.

How to Pretend

Step 1. The first step is to determine how much your monthly payment will be. If it’s a car, you’ll want an auto loan calculator. If it’s a house, find a mortgage calculator. We’ll do the mortgage case since it’s a little more complicated. I’m a fan of Dinkytown.net calculators and their mortgage calculator is easy to use. I enter in a mortgage amount of $240,000, a term of 30 years, and my interest rate of 5.750% and find out that my monthly payment is $1,400.57. Not bad right? (one thing to remember, a $240,000 mortgage doesn’t mean a house that costs $240,000, that’s just the mortgage)

Mortgages are just the beginning when it comes to owning a home. Remember to add in property taxes (~$3,000 per year), homeowner’s insurance ($50 per month), homeowners association fees ($30 per month), and an estimate of your utility bills ($100 per month). The “extras” total $430 a month. My true monthly payment is $1,800.57 after all was said and done.

Step 2. Now you’ll want to subtract from that amount anything you currently pay for that will be replaced. In my case, I would subtract my $600 per month rent, my then-current utility bills, and renter’s insurance (I didn’t have renter’s insurance but you might). Going halfies on everything sure made my living expenses cheap, all told I think it cost me around $650 a month to live someplace!

Step 3. Here’s the fun part, could I comfortably come up with $1,180.57 per month to cover the cost of a home? The easiest way to find out was to account for it in my monthly budget. If you don’t have a budget (you should give it a try, here’s a primer on how to budget), then start one on paper with guesses on how much you spend each month. If I could, then I knew that I could handle a $240,000 mortgage. If I couldn’t, then I knew I had to look for a less expensive home.

Step 4. If it feels like you can handle the payment on paper, it’s now time to try it for “pretend.” Start putting the $1,180.57, or whatever that amount is for you, into your savings each month. See how the payment feels. I recommend that I give this a try for at least three months, six months if you want to be sure. The process of buying a home can take months, depending on how analytical and picky you are, so this shouldn’t be too difficult. Plus, there’s really no rush because you’ll be paying for that home for thirty (or fifteen) years, so what’s a few more months?

The beauty of this strategy is that when you are ready to buy a car or a home, the savings you’ve put away so far can go towards closing costs or a sizable down payment!

Have you tried this strategy of “pretending” before?

(Photo: jhritz)

{ 12 comments, please add your thoughts now! }

Related Posts


RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

12 Responses to “Playing House: Prepare By Pretending”

  1. Craig F. says:

    What a great suggestion. I wonder where we would be if people had used this suggestion before 2008?

    My wife and I did something similar when we were considering going from a two income family to a one income family. First, we worked the budget with our new take home pay and then we tried to see if we were willing to live with the sacrifices. Though the ‘pretending’ was inaccurate at some points it gave us a good idea of what life would be like with the new income.

  2. Nicole says:

    I thought my mother had invented this idea! She and my father did this in the early 1980′s when they were planning to buy their first house. She taught me how to do it a year before I decided to buy my house. It was a good learning experience, because I hadn’t realized all the different costs involved in a house beyond the actual mortgage.

    Good article, Jim.

  3. Miranda says:

    We did this as well. It is a great tool. It also works with a car payment. In fact, we keep making our “car payment” even after it is paid off. That way, we’re ready to buy a car with a bigger down payment should it become necessary.

  4. Caitlin says:

    I’ve done this!

    I also really like Miranda’s idea to keep making payments even after you’ve paid off the item! Sort of like the Debt Snowball, only you’re saving instead of paying off debt! Great idea!

  5. Dave says:

    I think this is a great idea. I did something like it prior to buying my house. Since I use quicken regularly, I was able to see the impact of the increases mortgage and property taxes (minus my additional tax liabilities, or course).

    Based on what our normal spending patterns were, I was able to figure out exactly how much mortgage we would be able to afford. Knowing this, my wife and I knew that we would have to make some sacrifices if we wanted to live in a house higher than what I calcualted.

  6. I’ve used this method before, at home and at work. The fancy finance term is a pro forma projection, where you factor certain what-ifs into your expense model. I like Miranda’s idea, too. Cars get old and need to be replaced. It makes perfect sense.

  7. Beth says:

    I like this idea :) I’m aiming to keep my housing costs almost the same moving from an apartment to a condo, so what is or isn’t covered by condo fees will be part of the issue too.

    I think I’m going to try this for my next car and see if I can “pay it off” before I actually buy it.

  8. Patrick says:

    This is a great strategy. It really give you a good idea on how life will be when you do decide to buy a house. It can also unintentionally get a person to save without realizing it :)

  9. Utility bills are only $100 a month in the Baltimore-DC area? And what insurer is charging you only $600/year for homeowner’s coverage? Uhm, unless maybe you live in a condo?

    The tax rate is exorbitant compared to mine, but given the desperate predicament of our city and county governments, no doubt ours will soon match yours. In that case, it sounds like it would be cheaper to live in your part of the country…where salaries are WAY higher than in our right-to-work-(for nothing) state. ;-)

  10. Sort of like paper trading . . . nice approach!

  11. karla (threadbndr) says:

    I did this with my new (to me) car! It gave me enough of a downpayment that I was never upside down and my trade in (barely) covered the taxes.

    It’s good to know that you can easily make the payments. And like Miranda – after this car is paid for, I’m planning to continue to make the payments to myself. From here on out, I’m paying for my cars in CASH. Being able to write out a check for a third of the cost of a new car was so liberating.

  12. Joyful Abode says:

    We “pretend” all the time… with my husband in the military, my job situation is pretty up in the air. We’re about to move for the 4th time in just over 2 years, and I have to start over with work every time.

    So we budget with his income and mine goes to savings that are flexible.

    It’s very much like “pretending” I’ve stopped working due to having a baby (we don’t have kids yet). So when we do have a baby if I need to take some time off, it won’t be much different. Also, I work from home so I’ll be able to stay at home once I start working again.

    We also “pretend” to pay a car payment (our cars are paid off) but really that payment goes into a car savings account so that when we need a new (used, new to us) car we’ll have cash for it.


Please Leave a Reply
Bargaineering Comment Policy


Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2014 by www.Bargaineering.com. All rights reserved.