This just in from the mailbag: "As a 26-year-old with loans from grad school, how am I ever going to be able to round up enough money to buy my own place in a few years?"
Good question, 26-year-old. First, look around and realize you're not alone -- check out Tamara Draut's book Strapped to get a picture of how much student loan debt your generation is shouldering. But you still want your answer, so realize that to buy your own place, you will need three things: a down payment, the ability to get a reasonable loan rate, and the ability to make monthly payments.
Let's look at each one separately:
A DOWN PAYMENT
During the end of the housing boom (or "bubble," if you must) 43% of all first-time buyers put no money down whatsoever. So clearly many people think this is a 'skippable' step.
But I wouldn't advise it. If you are so strapped by current obligations that you can't save any money, don't buy a home. I believe that I am the only Realtor who says this, but: there's no shame in renting.
If you do want to get a down payment, the obvious source is from a generation whose homes have already appreciated -- your dad, or your Aunt Bess, can give you $12,000 tax free every year.
If you're like me, and your mom's answer to "Can I have a down payment?" is "take a hike" -- then try to save a little money into your 401(k) plan. First, this is money that you'll need for retirement, which is arguably a more important personal finance goal than buying a home; but secondly, you could borrow against it to buy your home if you needed to.
If you can save 3% of your salary for five years into your 401(k), when you're 31 (trust me, still a baby) you'll have thousands of dollars you can tap into.
THE ABILITY TO GET A REASONABLE LOAN RATE
Mortgage rates are determined by your credit score, usually using a formula devleoped by Fair, Isaac & Co., so it's often known as your FICO score.
There are entire books written about how to improve your FICO score (and an entire chapter in mine) but the three key steps are these:
1) Pay your bills on time. If you're going to be 30 days late, it will hurt your rep, so pay bills when due. If you're consistently late, you need to get some organization and/or a roommate.
2) Don't have too many sources of debt. You want to get one or two credit cards, maybe a department store card, and you've got your student loans. Manage those debts responsibly, and make those relationships last. Opening ten credit accounts all over town, and then closing them again, will hurt your credit score.
3) Check your credit report. You can't get your FICO score for free, but you can often see an unscored version of your credit report for free, or at least for a nominal charge. Make sure there aren't mistakes on it, because in five years, any confusion between you, John Doe, struggling to establish a good credit record, and John D'Oh with the bad credit record will come and bite you. Try to always use the same form of your name, too: if you use your middle initial, always use your middle initial.
THE ABILITY TO MAKE MONTHLY PAYMENTS
The good news: the amount of money you're making now won't be the amount of money you make in five years. I can almost guarantee it.
The bad news is, I can't tell you what amount of money you will make.
In general, try to work hard in your chosen field, so that with five years' more expertise under your wing, you'll make more money. Meet as many people as possible, because you never know who will end up hiring you in five years. When you get your first raise, try to funnel some of that money into savings, despite the temptation to spend it on new clothes or a couch. And be very nice to your dates, in case one of them turns out to be The One; marriage or partnership will double your housing needs, but it will also double your income.