The news has been abuzz with the so-called “Buffet Rule” for the last few weeks – in fact, it’s shaping up to be one of the biggest economics issues of the year. Although we take no official position on the subject, it’s become a big enough debate that we thought we’d try to present some of the facts. In case you haven’t followed the news closely, here’s a handy roundup on what it is – and why it matters.

So, What’s the Buffet Rule?

The Buffett Rule is a proposed law that would establish a minimum effective tax rate for anyone making over a million dollars. Such individuals, who comprise approximately 0.3 percent of all American taxpayers, would have to pay a 30 perc ent effective income tax on all of their income. Thus, it is similar to the alternative minimum tax, but is meant to act as a replacement for it. Some estimate that the Buffet Rule will create between $50 billion and $160 billion in additional revenues for the federal government over the course of a decade. Whether this would have a significant impact on the budgetary big picture is a topic of debate. For comparison, allowing the Bush tax cuts to expire could raise about $80 billion a year. Other analysts point out additional means of reducing the deficit, such as cutting entitlement spending.

Why Is It Called The “Buffet Rule?”

The Buffet Rule is named after famed investor Warren Buffet. In 2011, Buffet said that he didn’t think it was fair for millionaires to pay a lower effective tax rate than ordinary Americans. He has since then championed what has come to be called the “Buffet Rule,” which is effectively an increase in the minimum tax rate paid by millionaires.

Why Am I Paying More Than Millionaires?

Capital gains — money made from an investment increasing in value between the time of purchase and the time of sale — is taxed differently than ordinary income – often at a lower rate. Since the wealthy often make a large part of their money from investments, they pay taxes differently than income earned from labor. People who earn the majority of their income from working, on the other hand, may pay a higher rate.

Why Are People For It?

Most advocates of the Buffet Rule are for it in the interest of fairness. Some Buffet Rule advocates, say that middle-class Americans paying a greater share of their income in t than the rich was “indefensible.” About half of all Americans think that investments should be taxed in the same manner as income, with over two-thirds of Americans supporting the Buffet Rule as of last month.

Why Are People Against It?

Some call it “class warfare.” Yet others believe it will have a detrimental effect on the American economic recovery, by effectively raising taxes at a time when the economy is already fragile. Some point out that capital gains are taxed differently than income in order to encourage people to invest. On the left, the Buffet Rule has been criticized as not going far enough and not truly being a form of progressive taxation: It merely taxes the very wealthy at the same rate as middle-class Americans, not a substantially higher rate, as under progressive taxation.

So Why Do I Care?

Even if you make less than a million dollars per year, you might still have a stake in the outcome of the bill.  It will possibly affect the overall economy, but it’s not clear precisely how: For example, there was strong economic (and job growth) during periods when the capital gains rates were higher. And its impact on the deficit, wealth distribution, and so forth, remains to be seen. Regardless of where you stand on the Buffet Rule, it is proving to be a pivotal economic debate worth watching.

Nicholas Pell is a freelance writer based out of Hollywood, CA. He makes under a million dollars a year, in case you were wondering. 

Create a sound monthly budget

The first step is creating a sound monthly budget, which is divided into costs and income. With regards to a rental property, costs are made up of fixed costs such as mortgage payments, insurance and taxes. These are costs that do not significantly fluctuate over time. In addition to fixed costs, there are variable costs such as maintenance or emergency expenses, garbage collection and pest control.

Remember, rental income streams aren’t guaranteed

The other half of your budget is comprised of rental income. You should keep in mind that your rental property will not always be occupied, and rental streams are not always guaranteed. Rental properties often need to be renovated between tenants, and some tenants may pay their rent late.

Obtaining security deposits, in addition to carrying out background and credit checks, will ensure that rental income comes in smoothly and with a minimum of gaps. Some insurance policies cover for losses in rental income. Compare your monthly expenses to your estimated monthly income, keeping in mind any breaks in your rental stream. This will give you a clearer picture of your financial standing with regard to your rental investments.

Keep your property in a good state of repair

For many reasons, you should ensure that your property is kept in a good state of repair. Keeping the rental in good order will ensure that the property does not depreciate in value in the long term. Rental properties tend to depreciate faster than that of owner-occupied housing, as tenants have less incentive to preserve the long-term value of the home they live in. Furthermore, ensuring that any structural problems are resolved can prevent any expensive lawsuits brought upon you by your tenants.

Perform routine inspections often

Proper maintenance of your rental property goes hand-in-hand with routine inspections. Many tenants do not report damages or structural failures, often out of fear that they may have to bear that cost. Inspections may also uncover any environmental hazards, such as asbestos, radon or carbon monoxide. By conducting inspections often, either by yourself or by a third party, you can avoid any current or future legal problems while keeping the value of your rental property from falling.

James Green has composed economic research reports on a freelance basis since 2008. Specializing in business and finance, Green possesses a Master of Science in real estate from the University of Aberdeen and a Master of Science in economics from the University of Lund.

Many people today want or need to work part time after they officially retire.

High-interest, low-risk products, which used to provide retirees a nice cushion, are almost nonexistent today, and with people living longer the need for savings intensifies.

Indeed, 60 percent of workers estimated that the total value of their household’s savings and investments (excluding their home and defined benefit plans) is less than $25,000, according to the 2012 Retirement Confidence Survey.The problem is widespread.

“Retirement today is not that of a generation ago. Gone is the day of a company pension, company-paid health care and secure Social Security,” says Ted Sarenski, president and chief executive of Blue Ocean Strategic Capital LLC in Syracuse, N.Y.

“Today’s retiree is faced with self-sufficiency and, as such, needs to work at least part time ‘in retirement’ to have enough money to pay the costs of living that were once paid by someone else,” he says.

Unfortunately, many people decide to retire without really thinking through the decision, then wind up returning to work, says David A. Littell, a professor at The American College who focuses on the financial issues of affording retirement.

This can have dire consequences for your financial security. If you’re considering heading back to the work force or think you might return there eventually, here are five things to consider.

Age and income may reduce your Social Security benefits in the short term.

You can work part time and collect Social Security benefits, too.

But if you retire and begin to receive benefits before you reach what the government considers your “full retirement age,” then your Social Security benefits will be reduced by as much as 30 percent, depending on the year you were born. (The magic age is 66 for people born between 1943 and 1954.)

So for someone born in 1950 and who is retiring this year, a $1,000 monthly benefit would be reduced to $750.

On top of that, if you go back to work prior to full retirement age and earn more than a certain amount ($14,640 in 2012) the Social Security Administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit.

For example, say you start collecting Social Security benefits at age 62. You would be entitled to $9,600 in benefits for the year. Now say you work and earn $22,640 in 2012 ($8,000 over the limit of $14,640). Your Social Security benefits would be reduced by $1 for every $2 you earn above the annual limit, reducing them by $4,000 to $5,600 for the year.

After you reach your full retirement age, it is likely your monthly benefits will go up again.

Using an example from the Social Security Administration’s website, suppose you claim retirement benefits this year at age 62 and your payment is $750 per month. Then, you get a part-time job and have 12 months of benefits withheld. At full retirement age, you’d receive $800 a month (in today’s dollars).

Or, maybe you earn so much money between the ages of 62 and 66 that during those years all benefits are withheld. In that case, you’d get $1,000 a month starting at age 66.

In the short term, however, if you’re counting on a certain level of SSI benefits to supplement the income you’re earning from a part-time job, you’ll need to be aware of the rules.

You can start your SSI benefits as early as 62 or as late as age 70. According to a 2011 report by the Government Accountability Office, 43 percent of people take early retirement benefits at age 62, while almost 73 percent apply for benefits before they reach full retirement age.“On the other hand, if you can afford to live on your earnings and other sources, getting a larger Social Security benefit later can improve long-term retirement security,” says Littell.

There are benefits to waiting longer to collect Social Security, such as delayed retirement credits.

“If you can put off taking your benefits until after full retirement age, the difference over your lifetime is going to be significant,” says Tony S. Keena, a partner and private wealth manager with Estate and Business Planning Group in Altamonte Springs, Fla.

Base your budget on after-tax figures, not before-tax amounts.

Many retirees who take part-time jobs set their budget based on their gross income, but they really should be looking at how much they will keep after taxes. Otherwise, they risk overspending, says Susan Bruno, managing director at Beacon Wealth Consulting in Stamford, Conn.

One common mistake people make is to assume they won’t pay taxes on any SSI benefits. This is not always the case. If you earned other income during the year, from a job or investments, up to 85 percent of your Social Security benefit may be taxable, depending on your tax filing profile, says Bruno.

Social security benefits are taxable as ordinary income for federal purposes. Most states with an income tax follow the federal tax rules and would thus treat the benefits as ordinary income as well. However, there are states, such as Connecticut, that have their own formula.

Considering a foray into the real estate rental market? Make sure you know how to value and price a rental property before you buy. This will ensure that you achieve a reasonable spread with regard to what you’re charging for rent. The spread is the difference between your rental income and the associated costs.

Properties of higher values equate to higher mortgage payments, and this could eat into your spread if you intend to charge rents comparable to the going market rate.

Gauging value by original selling price

A relatively straightforward way to gauge the price of a rental property is by referring to the price for which it was originally sold. This method is suitable when you need to compare prices quickly and have little other information such as rental rates.

If an apartment building was recently purchased for, say, $1 million, and there are 10 units in the building, you could reasonably estimate that each rental property is worth $100,000 each. If you have information regarding a property’s size, you could use the same principle to calculate price per square foot. This will give you a vague idea of a rental property’s value. However, to get a more concrete figure, you need to delve a little deeper.

Gauging value by rental rates

More accurate estimates require knowledge of rental rates. If the property is currently being rented, this is easy. A few simple inquiries to tenants, landlords or real estate agents can reveal the market rates. However, if the property is not being rented, more research is required. Just remember, properties always differ in terms of size and amenities.  If you have no similar properties in the neighborhood around for comparison, adjust the estimated rental rate upward or downward based on the property’s defining characteristics.

The gross rent multiplier

If you’re analyzing residential real estate, a good measure of value is the gross rent multiplier. Divide the price of the property by the gross scheduled income, which is the total amount of rent the property will take in each year. The lower the gross rent multiplier, the better the investment. A gross rent multiplier, of say, 2, will mean that the property will “pay itself off” within two years.

Commercial property

Commercial property tends to be a little more complicated as it involves more maintenance costs. As such, investors tend to use the “cap rate” as a gauge of property value. The net operating income, which is rent minus costs, is divided by the selling price. The higher the cap rate, the better its investment potential.

James Green has composed economic research reports on a freelance basis since 2008. Specializing in business and finance, Green possesses a Master of Science in real estate from the University of Aberdeen and a Master of Science in economics from the University of Lund.

Recent survey data indicates that far too many parents go without life insurance. According to the Genworth Financial LifeJacket Study, 69% of single parents and 45% of married parents lack life insurance coverage. Gregory Fairchild, research project developer and University of Virginia Darden School Professor, said it’s a growing problem because many children have few or no options if they have to deal with the unexpected death of a parent.

Protect your family

The younger the parent, the fewer the assets, and the greater the debt, the more catastrophic it can be for surviving family members when a parent dies without life insurance. What makes things worse, is those who go without life insurance are often the ones who need it the most.

“We find that many single parents are simply too busy – or even too scared – to properly evaluate their life insurance needs,” said Fairchild.

Life insurance is essential for parents because it protects your child’s future in the event of your death. The idea is that should something happen, you don’t want your family to suffer financially. You want your loved ones to know they have enough money to pay the bills and live comfortably.

Joe Pitzl, CFP, of Intelligent Financial Strategies said the last thing you want is for family members to compound their grief by worrying about how they’re going to cover the mortgage or a child’s tuition.”Your family and/or children are relying on your income and if you die without life insurance you can leave your family high and dry,” he says.

Mari Adam of Adam Financial Associates said one of the reasons so many parents go without life insurance is because they don’t want to think about death. It’s an uncomfortable feeling for many to discuss what would happen if they were to perish in a car crash or drop dead from a heart attack.

Others are uninformed and believe that life insurance is expensive. While whole life policies can be prohibitively expensive, Adam said term policies for parents in their 20s and 30s are dirt cheap and can be obtained quickly. ”It’s the one kind of insurance that is actually cheap. I think many people don’t have it because they don’t realize how cheap and easy-to-get term insurance is,” said Adam.

Rates can vary, but for a 30-year-old non-smoker, a $250,000, 20-year policy can be had for as little as $200 per year. That’s only $16 per month to ensure the financial security and future of your spouse and children. Adam recommends that parents avoid expensive whole life insurance and start with a term policy that offers the maximum benefit for the lowest price. Although such policies are often marketed for their “investment” benefits, Adam said you can come out ahead by buying term and investing the difference.

“You can probably talk to someone on the phone for ten minutes and get it done. It’s critical because we’ve seen people who don’t and the kids are put into a horrible situation,” said Adam.

How much do you need?

A common rule of thumb says you should have enough life insurance to cover between six and ten times your annual income. But this also depends on the size of your mortgage, any debts you may have, how many children you have, and your expectations for their future. You should generally factor in the cost of paying off the mortgage, any college tuition and expenses, and a reasonable annual income to cover living expenses for the family.

If you have a spouse, it’s not that he or she will never work again, it’s just that you want to have enough insurance to provide a cushion so that they can continue their lifestyle without your income. You’ll also want to factor in the cost of your own funeral. Because term insurance is to inexpensive, it doesn’t cost much more for additional coverage.

“It’s really cheap, you can get a million dollar policy for not much at all. The cost of obtaining more coverage isn’t much more,” said Adam.

If you don’t want to buy one big policy, another option is to create a “layered” life insurance plan with terms that will cover you for thirty years. The idea is that as you get older, you have more assets to leave behind, so you need less insurance. While you may need $300,000 in coverage when you’re thirty, you may have more than $300,000 in assets by the time you are sixty.

So, by creating a layered policy, you get more insurance in your early years and then less insurance (and saving on premiums) later down the line. Such a plan could include a $100,000 30-year plan, a $100,000 20-year plan and a $100,000 10-year plan. So, in the first ten years you’ll be insured for $300,000; between years eleven and twenty, you’ll be covered for $200,000, and in the last ten years you’ll only be covered for $100,000.

“You project your need based on today and at several breakpoints in the future. It could cut the premiums in half and maybe allow you to afford more coverage earlier on,” said Pitzl.

Craig Guillot is a business and personal finance writer from New Orleans. He covers insurance, investing, real estate, retirement and debt. His work has appeared in such publications and web sites as Entrepreneur, CNNMoney.com, CNBC.com, Bankrate.com and Investor’s Business Daily. He is the author of “Stuff About Money: No BS Financial Advice for Regular People.”

You don’t have to check your values at the door when investing in the market. An increasing number of investors are choosing to put their money to work in companies that not only have a profitable future, but also reflect their values, like those committed to environmental sustainability or ones that give back to the community. But this isn’t charity, it is Socially or Sustainable and Responsible Investing (SRI), and investors still expect and seek a strong return on their money – just one that balances their values with their investment goals.

The Rise of the SRI Fund

The first SRI fund of its kind started in the early 1990s with very few assets. But at the end of 2010 there were over 250 SRI-focused funds for investors to choose from. Funds earmarked for SRI investments now make up around 12%, or $3 trillion, out of the $25.2 trillion invested in the market today, according to The Forum for Sustainable and Responsible Investment (US SIF), a trade group representing SRI funds.

Inside the funds, which are managed by professional money managers, are a collection of companies and investments that comply with a certain SRI cause. They usually follow some sort of environmental, social or corporate governance theme, which are collectively known as ESG issues.

Several of the large money managers offer several SRI products for their clients, ranging from simple passive index funds that track large or small SRI compliant companies, to actively managed funds that invest in companies focused on one of the three main ESG themes. Investors can also put their money in one of a number of exchange traded funds (ETFs) that track SRI compliant companies.

What Does It Mean to Be “SRI Compliant?”

The large funds may be a bit too broad for many investors, money managers screen and add or eliminate companies that normally do not comply with the general idea of what makes up an SRI company, but peoples’ values aren’t usually that simple.

In general, money managers choose to avoid adding companies that deal in things that kill (defense & weapons, landmines & cluster munitions), things that are vices or sins (gambling, pornography, usury, tobacco and alcohol) and very controversial topics (abortion, contraceptives, animal testing, genetic engineering, stem cell research and nuclear power).

They also avoid investing in companies that do business with, or are domiciled in, “rouge” nations like Iran, North Korea, Sudan, Myanmar (Burma), Cuba and Syria. The screening process varies by money many manger so be sure to find out what they are when choosing to invest in a SRI focused fund. One way to find out is to use this handy chart from US SIF.

How SRI Funds Stack Up

So how do these “feel-good” investments actually stack up with the broader market? Well it’s hard to say, given how variegated the funds are based on their various themes, but as a group, they tend to track the S&P 500 index pretty well. There are more than 20 studies that show SRI funds perform basically on par with non-SRI funds. One can review the studies at www.sristudies.org, which is collection of all the major academic studies on SRI investing.

But some SRI themes have been hard hit lately, especially those focusing on alternative energy. Weak natural gas prices and the reduction of government subsidies for alternative energy companies have obliterated funds that focus on wind, solar and geothermal energy start ups. For example, the Calvert Global Alternative Energy Fund A, which invests in wind and solar companies, was down 33% last year. You can review all SRI fund performance on the US SIF website.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati.

Finding the right person to show you the home of your dreams is no easy task. Too many people start looking for a home before they look for a real estate agent. A good agent or Realtor will guide you through the purchasing or selling process from the first viewing to the signing of a contract.

Favor word-of-mouth referrals over advertisements

Friends and family who have worked with a Realtor and had good experiences are some of the best sources for your search.

After you have a few referrals, start checking. Find out how long they’ve been in business, if they have a specialty such as fixer-uppers or high-end homes and if they are registered with the state as agents and registered as Realtors. It is worth noting that all real estate agents are not Realtors. Realtors are a group of real estate agents who hold themselves to a code of ethics enforced by the National Association of Realtors.

Narrow your list of candidates, then have a conversation with each one

Once you’ve narrowed your list of candidates, sit and have a conversation with each of them. Discuss your home desires, your expectations from the real estate agent, current schedule restrictions and price range. Choose an agent that listens to you, asks the right questions and offers information on procedures and issues you may be unaware of.

Be honest with the Realtor you select

Finally, after you have selected the Realtor that meets your needs, make sure you are honest with that person. Disclose your actual price range, your pre-approved mortgage amount, your credit history and any other pertinent details regarding the purchase or sale. Being upfront with your Realtor enables him or her to best represent you in the home purchase or sale process without undue surprises or preventable problems.

Denise Holzer is a freelance writer specializing in personal finance and green living since 2004. A graduate of California State University, her recent work has appeared online at Green Your Apartment and other websites.

These days we hear every conceivable argument about why the bull market will die, or stop, or correct, and by how much, how fast, etc. Among the many triggers discussed, there are EU elections, job creation angst, social media bubbles, fiscal cliffs, solar flares, lunar cycles, lycanthropy (after all, we have seen a record number of investors morphing into bears since ’08), and yes, the specter of the all-powerful price at the pump.

In all seriousness, I’ve talked about the negativity bubble a number of times, and in my view, it’s still thriving.

What we don’t really hear, or hear a lot less of, is what will keep the bull running. Hosts of experts will talk endlessly about earnings growth (yes, guilty as charged, I use that myself), but I don’t see a lot of clear, cohesive work on the macro factors that will drive the need to produce, expand, grow, and compete. I also don’t see market pundits blending those factors into a matrix that compares all the choices in the investment landscape.

I do this every day, so let me share some key variable/themes and how they interplay. When (not if) the bull continues, you’ll have this partial list of key reasons:

Competitive Innovation

To me, this is the ultimate driver of wealth creation and the biggest factor in determining long-term growth of corporate cash flows. What have companies like Caterpillar (CAT), 3M (MMM), Apple (AAPL), IBM (IBM), Google (GOOG), McDonald’s (MCD), and Coca-Cola (KO) done in the last five, 10, and 30 years or more? They’ve assessed, invented, developed, produced, and, ultimately, competed.

US GDP

Last year, I called for a GDP re-acceleration (Q4 delivered 2.8% and Q1 at 2.5%) while ECRI was calling for another recession. Also, early and through the first half of Q1, most economists were in the 1.3-2.0% range. As the quarter progressed, estimates progressively edged higher. While the economy will likely remain lumpy, we are nowhere near those double-dip fears common during mid-last year’s EU scare fest.

Another theme of mine, the “jobs tsunami thesis,” has also been bumpy since early 2011, but it’s still working better than the clarion calls for near-zero job growth. Further, the PMI, LEI, ISM, and Regional Fed surveys increase the odds that economic activity in future quarters will stay in a 2-3% range, rather than the zero line or below.

Very Low Rates

Simply put, the current Fed and global central banks are holding interest rates at levels well below what would normally be considered highly stimulative. Rates could rise 200 bps, and still be at levels where prior Fed easing cycles have stopped at the lows. In my view, this is vastly under-appreciated. Moreover, very little credence is given to the duration of these low rates. This duration effect produces a compounding factor for future stimulus.

Realignment of Consumer Savings Vs. Debt Load

I believe one of the most significant long-term benefits of the real estate bubble popping could be the significant rise in the savings rate. If this holds, the future consumer will continue to shift from spending irrationally to saving rationally. This will pay huge dividends for long-term future consumption, as it amplifies the future wealth effect.

Europe Is in a Recession, So What?

OK, so the EU (or most of it) is in a recession. The key question is: how severe is this recession and how much does it impact the US? However, the net effect of the EU economy on US GDP looks to be materially overstated by many.

First, there’s the simple fact that economic activity in the EU region is already at a lower base. Second, the effect or impact of Europe’s problems on the US GDP is often overstated. A recession in the EU of negative 2.5% would reduce the US GDP “measure” by 0.1%. For example, US GDP of 3.0% would drop to 2.9%. An even steeper decline of 5% in economic activity (which would be massive off the current base) would drop the rate to roughly 2.8%.

(It’s worth noting that at a 7% growth rate, China creates the GDP equivalent of Greece (annual output) in 11 weeks.)

At the end of the day, the raw impact of an EU recession is minor. The only significant factor to consider is whether another dramatic shock in the EU will set off another global banking contagion. While we can’t say this is ever off the table, I think two factors reduce a contagion likelihood. The first would be the aging of the bad debts and losses already taken since 2008; the second is the LTRO (or Long Term Refinancing Operation) and its ability to help EU area banks increase earnings, thus allowing for more retirements of bad debt.

Valuation Expansion

US markets are poised for meaningful valuation expansion. This will be magnified in the growth stock universe, where valuations have essentially dropped to traditional value stock comparables. For some more quick math, if US earnings (on SPX) are $105 and stocks trade at a multi-decade average (50 years) P/E of 14, the value of the index would be 1470.

Now, let’s say the growth stocks trade at a more traditional, but low, PE of, say, 18 (well below the growth that many companies are producing), and the value stocks remain at 14 times. In that case, the index PE would rise to 16. Sixteen times $105 equals 1680.

Bottom line, we haven’t entered the bottom of this range yet. And I don’t think it will stop at the 1470 level.

Competition for Investment Dollars

Let’s look at today’s landscape. Fed funds rate near zero, thus money markets pay nothing. Ten-year Treasuries are at and below 2%. Solid corporations are at 3%. The bull has been running with the ancient metal of kings on his back for between 10-15 years. That high price of gold has to be weighing on him.

We can’t all buy farmland. We can’t all buy five to 10 houses, or more, and turn them into rental properties. We can’t all own and maintain apartment complexes. And none of those higher dollar (and maintenance) alternatives offer day-to-day liquidity.

Therefore, considering all the investment alternatives, stocks are looking more attractive versus all other reasonable investment alternatives.

“7 Reasons Why the Bull Market Will Resume” was written by Sean Udall and provided by Minyanville.com.

No one enjoys being in debt. But no one wants to be without the cash reserves that can mean financial confidence and stability, either. This leads to a bit of a dilemma: do you save first, or pay off debt first?

The best solution will depend on the type of debt you owe as well as the relative amount of savings or investments that you currently have.

Interest rates on debts

It’s good to remember that the interest rates on debts are often higher than the interest rates on savings accounts. This is how banks make a profit. The interest rates on savings will, in fact, often be a few percentage points behind the overnight loan rate set by the federal reserve. Therefore, any savings you may have in your bank will accrue interest more slowly than any outstanding debts.

High interest rate debt

Interest spreads don’t work in your favor, so paying off debts with the highest interest rates should be your highest priority. High-interest debts typically include credit cards. Because interest rates on your most expensive cards are so much higher than the interest rates the banks pay you, simply paying the minimum monthly payments on a credit card debt while saving any remaining disposable income will result in a larger debt-to-savings ratio in the future.

Low-interest debt

Some debts, such as large low-interest debts like mortgages or student loans, may stay with you for some years to come, even if you devote all of your disposable income to repaying them. Saving and investing for the long term may become a higher priority in such circumstances. Having a large savings balance will give you the freedom to pursue new ventures in life, even when you are still repaying old debts. Thus, in some circumstances, the best strategy involves striking a balance between savings and debt management instead of concentrating on only one approach.

To get the best take on what you should do in your situation, you might consider consulting the services of a financial adviser. They can assess the nature of your debts and income, and help you devise the best strategy on savings and debt repayment.

James Green has composed economic research reports on a freelance basis since 2008. Specializing in business and finance, Green possesses a Master of Science in real estate from the University of Aberdeen and a Master of Science in economics from the University of Lund.

Buying a home is a major step in a person’s life. It is often considered to be a significant achievement, a good investment and a celebratory occasion. However, the experience can take a negative turn if the transaction is not handled efficiently, and one of the most important factors that could affect the process is the amount that should be allocated towards your down payment.

Choosing Your Home by Down Payment

If you are able to make a large down payment towards your home purchase, you should consider whether it is wise to do so vs. buying a cheaper house. A large down payment on your dream home could mean larger mortgage payments, while choosing to use that same amount towards a home that is less than what you might consider your dream home could mean smaller mortgage payments and more money available to use to cover other expenses.

For example, Jimmy has long dreamed of living in a gated community in ABC town. He found a home that was selling for $500,000, which required a down payment of at least 20%. Jimmy has excellent credit and is able to secure a mortgage loan at a rate of 4%. Without taking his property tax into consideration, his monthly mortgage payments would be about $1,900 over a 30-year period.

Jimmy also has the option of purchasing a home of the same size in a nearby community for $200,000. This house is significantly cheaper because, while it is the same size as his dream home, it is not in a gated community and it does not include amenities that are available in the gated community such as a pool, tennis court and a golf course. Also, the exterior of this home is not as attractive as his dream home, nor does it have some of the “extras” that makes the home more attractive like crown molding, high beam ceilings, etc.

However, if Jimmy pays down $100,000 on this home, his monthly mortgage payments will be only about $477 assuming the rate remains at 4%. Jimmy’s second choice would leave him with more than $1,400 in monthly disposable income.

Don’t Forget Other Expenses

One of the biggest mistakes that homebuyers make is to overlook their other expenses when calculating how much disposable income they will need each month. You can avoid making such a mistake by ensuring that your budget is up to date and includes all of your monthly expenses, such as utilities, other loan repayments, any car payments and insurance, and property taxes that will be owed on your new home.

If you currently live in a rented property, some of the expenses for home repairs and incidentals such as repairing a pipe to mending a fence might have been handled by the owner of the property. As a homeowner, you would be responsible for covering these items. This means you should consider setting up a rainy day fund for these items. If the availability of financial resources could be an issue, buying a cheaper home might be a better choice.

Other Positives of a Cheaper Home

Buying a cheaper home has other benefits in addition to the possibility of a lower down payment. For example, Jimmy could get a 15-year mortgage instead, and his payment would still be only $739, which is still a lot less than if he buys the more expensive home. Alternatively, Jimmy could pay down the required 20% ($40,000), which would make his payments about $1,180 and leave him with $60,000 to add to his savings or use for other purposes.

Consider, too, that lower monthly payments and more disposable income means being able to add more money to long term savings, such as your retirement nest egg and college funds. Finally, it could mean the difference between being able to stay in your home vs. going into foreclosure if your financial status takes a negative turn.

Alternate Solutions

If you heart is set on a certain type of home, you may still be able to get such a home at a lower price if you shop around. Houses are much cheaper than they were five (or more) years ago because of the status of the housing market, and your options include foreclosed homes as well as builders who are trying desperately to get rid of inventory that has been stagnant for long periods.

The Bottom Line

When deciding how to use your down payment on a home, be sure to consider all the pros and cons so as to help ensure that your dream does not turn into a nightmare. Getting your dream home is great, but being able to cover your expenses and build up your nest egg can be even better.

“Making a Larger Down Payment Vs. Buying a Cheaper House” was written by Andre McNeil and provided by Investopedia.com.