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If the down payment will deplete your emergency fund, you're not ready to buy a house.
- You're probably not ready to buy a house if you're planning to use your emergency fund as a down payment, according to Jill Schlesinger, a certified financial planner and business news analyst for CBS.
- An emergency fund is usually your first line of defense against debt, and being a homeowner won't render you immune to unexpected expenses such as job loss, a medical emergency, or family crisis.
- Even those who can afford a down payment without draining their emergency fund should consider whether buying or renting is better suited to their lifestyle.
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Getting married or having a baby may feel like the ideal time to buy your first house, but these events could be false signs that you're financially ready to be a homeowner.
On a recent episode of NPR's The Indicator from Planet Money, Jill Schlesinger, a certified financial planner and business news analyst for CBS, said conventional ideas around homebuying - that real estate always appreciates or you're wasting money if you rent - hold little merit in today's economy.
"I think too many people are plunging into buying without really thinking about, what is the effect long-term?" said Schlesinger, who is the author of the recent release, "Dumb Things Smart People Do With Their Money." She said emotions often cloud decision-making around homebuying and cause people to ignore the true costs of owning.
"When you decide you think you want to buy, you may be surprised to find out that it costs a lot of money to get into the place where you want to be," Schlesinger said. "That may require you to put down all of your liquid assets into this house down payment and leave you what we like to call 'house poor.'"
In other words, Schlesinger continued, if the down payment will deplete your emergency fund, you're not ready to be a homeowner. While the best place to keep both an emergency fund and down payment fund is in a high-yield savings or money-market account, the two should be separate.
An emergency fund is usually your first line of defense against debt, and being a homeowner won't render you immune to unexpected expenses such as job loss, a medical emergency, or family crisis. Moreover, owning a home can come with various unforeseen expenses itself, and not having a cash cushion can lead to fearful decision-making, or "scarcity mode," Schlesinger said.
"The plan kind of is a great way to look at those emotions and keep you on track. So when you're feeling freaked out, you go back to the plan. You say, 'OK. Right. I don't have to worry that much because we put 20% down. We've got a year of expenses in the bank,'" Schlesinger said.
Still, even those who can afford a down payment without draining their emergency fund should think about whether a owning a home is right for their lifestyle, Schlesinger said, and not whether it's the right thing to do because societal norms tell us to.
"There are times in your life where renting is so much more appealing, it's almost a silly conversation," Schlesinger said. "Rent is not throwing money out the window. Rent is buying opportunity. It's buying flexibility."
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