Are You Ready for Tomorrow?
Financial planning is all about reaching goals. One goal my wife and I have is to someday own a few acres outside the city to build our forever home and finally be done with moving – if you know us, you know we have moved a lot all over the country. We are ready to settle down and be content with a home built for us.
We wanted to know what to expect and what to start planning for, so we spoke to a home builder, a banker, and a realtor. We learned that we are much farther away than we had originally anticipated. The home builder quoted us an amount slightly under $400,000, not including the land. Land is currently anywhere from $50,000 to $100,000 or more. We want to stay closer to the lower price, of course. The bank told us that we need 35% down for the land and at the very least 5% down for the construction/home loan which is structured as a bridge loan so that we can stay in our current home until the new one is built and then everything converts to a traditional mortgage when we sell our existing home and move into the new one. In addition to the minimum 5% down, we would have to have a reserve of at least 6-12 months of term payments.
With all of that, we didn’t have to do much mental calculating to know that we had some planning to do to get to the point where we could afford to do all of this. This got me thinking about how this is a perfect opportunity for financial planning to play a role. We know where we want to be, we know the approximate cost, we just need to know how to get there – a perfect planning scenario.
While thinking about this goal, it also struck me that this is a great opportunity to consider market cycles. The real estate market will correct itself at some point. All markets (in a free market system) go through cycles. From growth to peak to contraction to trough and back to growth, the cycle does what they do and repeats. So, I know that somewhere down the line the land and home construction may be cheaper than it is today. If we start to save today, and bide our time until the market corrects, or until we have all the funds needed to purchase regardless of the market, we can act perhaps sooner, rather than later. Imagine that we are planning to have the funds available in 10 years. We start to save today on a regular monthly basis the required amount. Then in five years, the market drops, and everything is now cheaper than before. We may be at a point whereby we could have shaved time off our savings due to the market correction. There are a lot more intricacies involved, such as risk mitigation because when the real estate market drops, most likely the stock market is dropping too; therefore, we need to make sure we have been saving in investments that are somewhat protected by a stock market correction as well. We never want to have to sell at a loss and lose the opportunity to recover.
The point of this is to say that its due to planning – knowing where we want to be, and ultimately deciding how to get there, that we can strike when the opportunity arises. Without planning, it may be that we never are able to realize our goal, or it may be that we must wait longer to reach that goal.
I found an African Proverb that sums this up. It states, “For tomorrow belongs to the people who prepare for it today.” This seems to neatly embodies my entire career as a financial planner.
I’d like to know what it is that you want to do tomorrow that needs preparation for today?