How to Achieve a Healthy Debt to Income Ratio

Of all the New Year’s resolutions, getting your finances in order is among the most popular goals there are. A challenge we all face when it comes to managing money, however, is setting priorities.

For some people eradicating debt and obtaining financial freedom are their primary goals. Others prefer to stick to the minimum credit card payments and put any extra money toward investing. If your investments earn a higher return on investment (ROI) than your debts cost, it’s a sound decision.

Usually financial priorities come down to personal preference. But when planning to buy a lake home, particularly if it will not be a primary residence, there are other factors to consider.

Debt-to-Income Ratios

Your debt-to-income ratio is all of your monthly debts and obligations divided by your gross monthly income.

When you apply for a mortgage, lenders will go through all of your finances with a fine-toothed comb. Your debt ratio is the “number one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed”, according to the Consumer Financial Protection Bureau.

So let’s say each month you pay $1,000 for your mortgage, $300 for the car insurance and $500 for everything else. That’d make your monthly debt $1,800. If you bring home $5,500 each month, your debt-to-income (DTI) would be 33 percent.

Forty-three percent is typically the highest ratio that will qualify for a loan. Lenders, however, prefer to see a debt-to-income ratio lower than 36 percent, with no more than 28 percent of the debt going toward your mortgage.

So when managing money, it’s important to be prepared for what the lenders will be most inclined to approve. That means reducing debt should be your main priority if you see a lake home in your future.

Moving Toward Financial Freedom 

The average U.S. household has $8,284 in credit card debt, according to a 2018 report by Fortune magazine. If debt is standing between you and your dream home, here are some strategies to get things back on track. 

Create a budget so you can take inventory of your finances and differentiate your needs from your wants. Before you can pull yourself out of a deep debt hole, you have to stop making it deeper and claim more control over your purchases. 

This might mean fewer daily lunches with coworkers, as those meals can add up pretty quickly. If you spend $10 on lunch every weekday, that’s $200 a month.

One effective tactic is the debt snowball method, when you pay off debts in order from lowest to highest balance. The idea is to get one balance paid off rather quickly and use the extra money available to begin paying off the next balance. Over time, each debt you pay off builds momentum for paying off the next one, like a snowball grows as it rolls downhill. To make a meaningful and timely dent in your debt, pay considerably more than you’re required to each month. If possible, pay more than twice the minimum amount due.

Debt consolidation is also an effective option for millions of Americans. This works best for those who have debt scattered in different places, all with various interest rates. Consolidating all your debt into one new loan is likely to reduce the interest rates on some of your older debts.

Try to put work bonuses, money from side gigs, or the repayment of a personal loan toward your balances. It’s important to resist the urge to blow extra cash on non-essentials rather than retiring debt that is accumulating interest.

But paying bills doesn’t have to be seen as a punishment or as embracing austerity. Each time you reach a debt payoff milestone treat yourself in a small but meaningful way. Have a cheat day on your diet or enjoy an affordable indulgence, like a massage or a special dinner. Anything is fine, as long as you don’t put it on your credit card.

A big part of wrangling in out-of-control debt is self-discipline. Paying off looming balances often requires sacrifices and lifestyle changes now in exchange for a healthier DTI in the long run.

It’ll all be worth it when you’re lounging in an Adirondack chair with a cold drink as you take in the view of your new waterfront home. After all, what’s the American dream if you don’t have to work for it?

The Hidden Costs of Keeping A Lake Home: Tips for First-time Buyers

Lake house cabin waterfront lakefront home

Before purchasing your dream house, you may have looked into the hidden costs of buying a lake home.

Now that you’re moved in, you might be wondering what it’s going to cost to keep the place in tip-top shape.

You will run into several smaller, and occasionally larger, costs when maintaining your lake home. These add up, and the bottom line can catch many first-time homebuyers by surprise.

Here are some of the most common hidden costs of keeping a lake home.

Home Repairs

Lake homes are often located on gorgeous plots of land, with stunning views of the water and the natural surroundings.

Because of this, lake homes often absorb far more damage from the elements. The wind and rain, the lake itself, even the trees around your property can contribute to these hidden costs.

On average, lake homes require more frequent repairs and maintenance. Common repairs and their causes:

  • Damage due to wind and storms
  • Roof or structural damage due to falling tree limbs
  • Foundation issues due to fluctuating water tables
  • Siding replacement due to wind damage
  • Mildew due to high moisture content in the air
  • Damage due to wildfires (most common in western states)
  • Flood damage

The Great Outdoors

Photo courtesy of Walton Architecture & Engineering.

Remember that you are responsible for the entire property you own, not just the house itself! Lawn upkeep, landscaping, tree trimming, and other costs can be a hefty responsibility.

For homes with forests or large trees nearby, tree trimming is a must.

Limbs overhanging your property or power lines could do serious damage. Spending a few hundred dollars to have a professional remove any overhanging limbs can save you tens of thousands of dollars in damage.

Don’t forget the shoreline.

If you own a waterfront property, you may be responsible for the seawall. This structure protects your property line from erosion. Repair estimates vary, but installation can cost more than $100 per linear foot.

If this is not your primary residence, you will need to hire someone to mow the lawn regularly. Your neighbors won’t appreciate having an overgrown field next door!

Many lake properties are also located on hills or steep inclines, too. Don’t assume that your push mower will always do the job.

Home Improvements

Once you have bought your lake home, chances are you want to customize it. Plans to improve the property are often made before it’s even been selected.

If you have your heart set on any of these improvements in the first few years, be sure to calculate that into your long-term budget.

Many first-time lake home buyers neglect to include these in their budget when shopping for a lake home, even if they fully intend to install them.

  • Deck
  • Hot tub
  • Barbecue grill
  • Swimming pool
  • Garden
  • Guesthouse
  • Firepit
  • Energy-efficient windows/lighting

Be sure that any improvements are permitted by local laws and regulations, too. Many lakes require special construction permits. Also, be sure to look into how to find the right contractor for the job, if you won’t be the one completing the projects.

Docks

Photo courtesy of Shiflet Group Architects.

The average wooden boat dock lasts roughly 20-25 years.

Repairs may only cost a few hundred dollars, but replacement can cost several thousand. Factors such as climate, size, and water depth factor into this cost.

If you plan on owning your lake home long-term and have a dock, chances are it will need to be replaced eventually.

This process will accelerate if your lake freezes over in the winter, too. Freezing and thawing over several years will inevitably deteriorate any material.

Two of Everything

For people who have a lake home as their secondary residence, there is what we like to call the “two of everything” cost. For everything you keep at home, you will need at least one more set for your lake home.

Buyers rarely budget for this, but it adds up incredibly fast. Don’t fall into the trap of assuming that you’ll just ferry everything from your primary residence to the lake home every time, either.

  • Furniture
  • Appliances
  • Cookware and dinnerware
  • Sheets, linens, and towels
  • Decorations
  • Tools
  • Toiletries
  • Cleaning supplies
  • Children’s toys

This is also true for utilities.

Remember, owning a second home means having two power bills, two telephone bills, two water bills, etc.  These can often rival a car (or mortgage) payment if you aren’t careful! Be sure to budget for this.

Many experts highly recommend a security system for any secondary residence. Houses that are not lived in full-time are especially vulnerable to break-ins.

Even if you visit every weekend, having a security system in place can give you great peace of mind.

Having a security system can give you real peace of mind, if you go weeks, or even months, without visiting your lake home.

Guests

Guests can be the most noticeable, if not the biggest, cost of owning a lake home! This can include your extended family, your neighbors, friends, coworkers… anyone you invite over to enjoy your beautiful new lake home!

Lake homes can serve as the perfect getaway for you and your loved ones.

The hidden costs of playing host can add up quickly, though. Especially for a large lake house.

For large gatherings, don’t be afraid to ask guests to chip in food, beverages or other supplies. This can help offset what would otherwise be a huge cost.

It is difficult to estimate many of these costs in advance. Still, if you spend a little time on them, they can give you a much better idea of your budget.

You will be much better prepared to not just buy your lake home, but to enjoy it for years to come.

For more advice on purchasing a lake home, read “Hidden Costs of Buying A Lake Home: Tips for First-time Buyers“.

Financially Preparing for Retirement

Depending how close you are to retirement you may be just starting to think about saving. Or you may be thinking that it is too late to start. First, it is never too late to start but, the earlier you start, the better opportunities that may be available for you.

You may see yourself cruising the lake on your pontoon boat or reading on your dock, but to reach that point takes plenty of planning.

Set a Goal and Stick to It!

saving for retirementMost people spend more time planning trips to the grocery store than they do their own retirement. There is a way to find out how much you should be saving for retirement.

Websites such as ChoosetoSave.org will help you get in the right track to financially planning for retirement. Make sure you have all your paperwork ready for calculation so you can get an accurate account of where you stand financially.

What does Retirement Mean to you?

It is extremely important to make sure you have a plan. Most individuals have no idea what they are retiring to and how they are going to survive. You must first figure out what your plans are after you retire.

What kind of lifestyle do you want to live? A condo on the lake or in a gated community on the golf course? Or maybe you would be happy with a little 1 bedroom fishing shack? The cost to lake retirement can vary greatly and it’s best to know what you want well in advance.

Get your Debt under Control

DebtNow is the time to start paying off loans and debt. Do not apply for credit you simply do not need and stay away from high-interest credit cards and loans.

Hire a Financial Advisor

Now is not the time to assume you have everything financially under control. It is time to talk to a professional. Make sure you have all the right investments and everything is headed in the right direction.

See if your advisor can recommend any other retirement plans such as an annuity or an IRA. It depends on what your current situation is but consulting a professional will make a big difference in the choices you make.

Retirement is no Laughing Matter

Only you can decide how you want to live and what you want to do with your retirement. Those are decisions not even a financial advisor can answer for you. Once you decide on a solid plan, you can then begin planning financially for retirement. Start early and keep your finances in order. Watch your credit score and keep your debt under control. These are all things that will heavily impact how much you will get to enjoy your retirement.