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Buy a home, or save

Chris Farrell Aug 13, 2010

Question: Hi there, I’m a college student about to graduate soon and head off to graduate school. I haven’t ever thought about investing because I don’t make much- I have a few thousand dollars saved, and my student loans (around 8k) are deferred until I graduate from grad school. Grad school will pay a small stipend that I expect to leave me with 2 or 3 thousand in the black per year.

I recently wondered whether I should not just have everything in a savings account after a friend of mine said she was thinking of buying a house. Granted, she’s worked for 2 years now, but I was surprised she could afford a house. I’ve always thought that saving, spending wisely, and not having credit card debt was about all I could do with the small amount of money I have. Should I be doing something else? Pointers to appropriate readings would also be appreciated. Thanks, Bob, San Francisco, CA

Answer: Well, I don’t know the details of your friend and you would need a lot more information to have a sense of her home purchase. But I can address your circumstances.

First, a major lesson of the recent real estate boom and bust cycle is that buying a home is too risky an investment with no to little money down. Period.

I would add that you shouldn’t buy if you don’t have an adequate income to safely meet the mortgage payments and pay for the home’s upkeep. What’s more, even if you met all those conditions you would have to live in the home for at least 5 years to see a return on investment. A home is expensive.

Second, and far more important, you’re about to make a huge investment in your future: Graduate school. It’s a big investment that hopefully will pay off over your lifetime. That’s enough of a financial and career risk to take at the moment.

For now, would spend my time working on your degree and continue with your money sense: Avoid credit card debt, spend wisely, and save what you can. You’ll be in a good financial position when you get your degree.

What to read? I would recommend my own book; The New Frugality. I think it addresses many of the issues you raise.

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