Fun Math Rules for Homeownership
There are some easy ways to remember how to handle your money so that you can become a homeowner, prosper as a homeowner, and ultimately, sell your home at a profit.
The 50/20/30 rule. Your spending can be divided into three categories - Needs, Wants, and Savings. Allocate 50% of your after-tax income for needs such as food, rent, etc. Wants are things you can live without that make life easier or more enjoyable but should be no more than 30% of your budget. Twenty percent should go into savings and investments like IRAs or 401Ks.
The Rule of 72. This formula offers insight into how long any investment will take to double its return. If your home appreciates at 3% annually, it should double in value in 24 years. If you purchased at $400K and paid off your mortgage, you’ll have $800K in equity, enough to retire comfortably just from owning a home.
The Pareto Principle. Roughly 80% of outcomes are due to 20% of causes. To improve your budget, reduce the 20% of costs that are eating up 80% of your outgo, such as eating out.
The Law of Probability. Probability is guessing the number of ways en event can occur by dividing the total number of all possible event occurrences into the event. Event A is buying a home with the options of occupying, selling or leasing your home to others as options. What’s the probability you’ll remain in your home? The answer is 30%.