When is the right time to buy a car and/or a house?

Question

I am a 24 years old young IT professional. Since I don't have addictions to anything including drinking, I mostly save a lot (around 50% of my income after tax like $15-$25k a year). Currently I drive a 1991 model car, pay more than a grand on school loan per month. I will finish the loan with in a year. However, I don't want to wait till my 30's or $40's to buy my dream car or live in my own house. It's because I want to enjoy my life while I am young while doing my work hard. I believe one of the use of money is to buy affordable things (not expensive ones) which makes you happy. Right?

I have also in mind to be a business owner in IT field in the next 3-5 years and may be get married after 5 years as well. I believe I am not going to have kids in the next 10 years.

In my area the new car I am looking costs b/n $17k-$21k (I dont mind if it new or used car mileage less than 20k) and houses cost around $200k. Since, I don't enjoy living with roommates that much, if I buy a house, my girlfriend and I will be the only one who will be living. So 2 bed room is enough for me. I also have a good credit so that it is not going to be hard for me to get credit approvals if I wanted to.

Based on your experience what do you suggest me? I was looking for to buy the car with in the next 6 months but the house can wait 2 years or so.

Thanks

Answer 1

Buy a house when you can, but keep driving your current car until it dies. In ten years' time, a house should be worth more than you paid for it, while a new car will be worth next to nothing. And research shows that buying possessions like cars doesn't actually make you happier, even though you think it will.

Answer 2

Buying a house is often more emotional than financial. Which makes that kind of advice tough to offer. Staying with the finance side -

• Will you be buying the house on your own, or with your girlfriend, so looking at combined income?
• What is the cost of the house you are hoping to buy, +/-20%? (i.e. no idea where you are, are houses of the size you want $200K, $400K, etc.?)
• Do you and girlfriend have a sufficient 20% down payment for the target house?
• Is your income enough to cover the mortgage of the house you'd like? Otherwise, a higher down payment may be needed.

You wrote "2 bedrooms is enough for me." Is it enough for your girlfriend/fiancee? Is she on the same schedule for kids as you are? 2 bedrooms means that with just one child you are less able to host a guest and the second child will need to share the bedroom. Nothing wrong with that, just making sure you are aware of these things. If the long term plan is to move to a new house, a ten year horizon for the second house sounds good to me.

I'll make one brief comment on rent vs buy - it's easy to buy too big and discover you are paying for rooms you don't use. I have a house I'll be glad to get rid of when our daughter goes off to college. A dining room and formal living room go unused save for 3 or 4 days a year. It already sounds like you'll avoid this mistake.

Your question - the right time - when you are ready, with the downpayment, income, and desire to do so. You should at least have a feeling you plan to stay there for a time, else the cost of buying/selling would exceed any potential gain.

Answer 3

Obviously, the best thing financially would be to continue using your present car, unless it impacts you financially on a regular basis. For example, maintenance or breakdowns impacting your ability to work. An unreliable car also impacts your freedom, for example preventing you from taking road-trips you might want to take or taking up free time with maintenance. Give thought to what it is about your present car that you dislike, both to determine the value you gain from a new car and what's most important to you.

Anytime you buy a car, you generally lose thousands of dollars simply driving it off the lot. This is the profit which goes to dealers, salespeople, etc... and not part of the actual value of the car. Cars also depreciate over time, with most of the depreciation happening in the first few years of operation. Many of the newer model cars have additional expenses. (For example, replacement $200 keys or electronic systems that can only be repaired at special facilities.)

In addition, if you have insurance (other than the minimum third-party required by law), consider the rate increases and add up the long-term impact of that. Imagine you had invested that money instead at 8% interest over the lifetime of the car. If you don't have insurance, consider what you would do in the unfortunate situation where you were at fault in a collision. Could you afford to lose your investment? Even with safe responsible driving, there is always the potential for road/weather conditions or mechanical failures.

If you determine there is sufficient value to be gained from changing vehicles, I would recommend that you buy a vehicle with history from someone privately, doing appropriate background checks and consulting friends or family who know about vehicles and can provide feedback. Do research into the models which interest you ahead of time, read online reviews. Every vehicle generally has known advantages and disadvantages which can take years to discover, so buying an older vehicle gives you the advantage of knowing what to expect.

I would say there is probably a reasonable middle ground between using a 1991 vehicle you don't like (that's as old as you are) and getting a relatively new model. Look at what you value in the vehicle, consider all the costs, and find the balance that works best for you. Vehicles from 2000-2005 years are quite affordable and still 10-15 years newer than your car.

Answer 4

My recommendation is to pay off your student loans as quickly as possible. It sounds like you're already doing this but don't incur any other large debts until you have this taken care of.

I'd also recommend not buying a car, especially an expensive one, on credit or lease either. Back during the dotcom boom I and many friends bought or leased expensive cars only to lose them or struggle paying for them when the bottom dropped out. A car instantly depreciates and it's quite rare for them to ever gain value again. Stick with reliable, older, used cars that you can purchase for cash. If you do borrow for a car, shop around for the best deal and avoid 3+ year terms if at all possible. Don't lease unless you have a business structure where this might create a clear financial advantage.

Avoid credit cards as much as possible although if you do plan to buy a house with a mortgage you'll need to maintain some credit history. If you have the discipline to keep your balance small and paid down you can use a credit card to build credit history. However, these things can quickly get out of hand and you'll wonder why you suddenly owe $10K, $20K or even more on them so be very careful with them.

As for the house (speaking of US markets here), save up for at least a 20% down payment if you can. Based on what you said, this would be about $20-25K. This will give you a lot more flexibility to take advantage of deals that might come your way, even if you don't put it all into the house. "Stretching" to buy a house that's too expensive can quickly lead to financial ruin.

As for house size, I recommend purchasing a 4 bedroom house even if you aren't planning on kids right away. It will resell better and you'll appreciate having the extra space for storage, home office, hobbies, etc. Also, life has a way of changing your plans for having kids and such.