The following is a question I was recently asked. Please feel free to comment if you like my logic or if you have other ideas. As always, thanks for reading.
Q: Joe, I am in the process of selling my house and purchasing another house. With the $60,000 I will clear from the sale of my house, I need $25,000 for a down payment on the new house. My question is this: should I apply the remaining $35,000 toward the purchase of my new house or is there something else I should be doing with that money?
A: The good thing about using all of the money toward the purchase price of the house is that you are insuring that it all goes toward debt reduction. However, there may be some better uses of this $35,000. You need to ask yourself the following questions:
1. Does my new house need any essential repairs?
If you need insulation, for example, you should hold back enough of that $35,000 to pay for it.
2. What other debt do I have?
If you have car debt, credit card debt or other debt, this is a great opportunity for you to get them out of your life, but I want to wave a huge yellow warning flag: If you don’t clearly understand why you created this debt in the first place, it will return. This is an opportunity to plan a budget and take control of your finances, but don’t pay off debt unless you are committed to never borrowing money again.
3. How large is my emergency fund?
You should have a minimum of three to six months of your expenses set aside for emergencies. If, for example, you lost your job, this fund would tide you over until you are back on your feet again. Without the emergency fund you could experience the nightmare of new debt and possible foreclosure. Make sure you have an emergency fund in place.
This could be an opportunity to take control of your finances. No debt payments (except for your house) and a great emergency fund are definitely steps in the right direction.