Does the 25% Rule Include Bonuses, Extra Pay, or Just Include Base Pay?

Summary

In this insightful discussion, Dakota seeks advice on whether to include bonuses and extra pay when considering the 25% rule for first-time home buying. The host emphasizes the importance of being conservative in financial planning, advocating for a focus on base income while recognizing the potential benefits of factoring in additional earnings if they're highly probable. They introduce the '3D plan' concept—dream, down, and dooo plans—to encourage comprehensive preparation for varying financial scenarios, ultimately stressing the necessity of having a clear strategy to navigate the complexities of homeownership in today's market.

Takeaways

• 😀 It's important for first-time homebuyers to consider affordability seriously before making a purchase.
• 😀 The 25% rule for housing expenses should ideally focus on base pay rather than including variable income like bonuses.
• 😀 Being conservative in income estimates helps avoid financial strain after purchasing a home.
• 😀 Including likely bonuses can be acceptable if they are built into the compensation structure and have a high probability of being received.
• 😀 Homebuyers should create multiple financial plans: a dream plan, a down-to plan, and a dooo plan to prepare for different scenarios.
• 😀 The dream plan assumes everything goes perfectly, including receiving all expected bonuses.
• 😀 The down-to plan anticipates some variability in income, preparing for years where bonuses may not be received.
• 😀 The dooo plan prepares for worst-case scenarios, ensuring homebuyers have strategies for potential financial difficulties.
• 😀 Making informed decisions and having backup plans can help mitigate risks associated with homeownership.
• 😀 Buyers should not let the fear of making a wrong decision paralyze them; instead, they should face their financial situation head-on.

Q & A

What is the 25% rule mentioned in the discussion?

The 25% rule suggests that individuals should aim to spend no more than 25% of their gross income on housing costs.

Should Dakota and their fiancé include bonuses and extra pay in their gross income when considering the 25% rule?

While it's advisable to be conservative and primarily consider base pay, including bonuses and extra pay can be acceptable if they are highly probable and realistic.

What is the importance of being conservative in financial planning for buying a home?

Being conservative helps ensure that individuals do not overextend themselves financially, making it more likely they can sustain their mortgage payments without stress.

Why does the speaker caution against aggressive income assumptions?

Aggressive income assumptions can lead to unsustainable financial pressure, as individuals might have to maintain a demanding work pace to meet their obligations.

What alternative down payment percentages does the speaker suggest for first-time homebuyers?

The speaker suggests that most first-time homebuyers put down 3% to 5%, rather than the traditional 20%.

What are the three plans mentioned for financial planning?

The three plans are: the 'dream' plan (everything goes right), the 'down toe' plan (some things go wrong), and the 'doooo' plan (everything goes wrong).

What does the 'doooo' plan entail?

The 'doooo' plan involves preparing for worst-case scenarios where finances may not work out, requiring additional work or significant lifestyle changes.

How should individuals react if their financial situation doesn't go as planned?

They should evaluate their options, potentially consider additional income sources, or reassess their spending and financial commitments.

What does the speaker imply about the nature of home affordability in recent years?

The speaker notes that home affordability has decreased in recent years compared to historical standards, making thoughtful financial planning more critical.

What mindset should Dakota and their fiancé adopt regarding their home buying process?

They should approach the process thoughtfully, balancing optimism about potential income with realistic expectations about financial stability.