How Much Debt Is Too Much to Take on When Buying a Home?

In this edition of "Bank of Dad," we answer questions about first-time home buying and the right amount of money to spend on birthday presents.

by Daniel Kurt
Geo Barnett for Fatherly

We rent our place and want to buy a home but it would put us hugely in debt. Should we? — Steven, Atlanta

A lot of people are scared of taking on debt. And in general, that’s an admirable impulse. But debt can actually be healthy if it helps you achieve your long-term goals.

While that usually can’t be said of credit card balances, for example, a mortgage very often fits into this category. Home ownership gives your family stability, not to mention the opportunity to build equity over the long haul (assuming you plan to be in the home for a decent stretch of time).

Rather than focusing on how much debt you’re racking up, the question you should focus on is whether you can afford the payments. The general rule is that homeowners should spend no more than 30 percent of their gross income on housing, including mortgage payments, homeowners insurance, and utilities. Those without other debt can typically divert closer to 40 percent without over-burdening their budget.

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As long as you fit that criteria, don’t let the thought of a mortgage scare you. Some parents want a yard or the ability to put down roots in a specific school district – benefits that are often easier to achieve through homeownership. Other people are happy renting, and that’s fine, too.

For what it’s worth, the vast majority of Americans assume significant debt in order to buy their homes. According to ATTOM Data Solutions, the average down payment in the second quarter of this year was only $19,900, or 7.6 percent of the median home price. You’re certainly not alone if you go in the red.

How much should I spend on my kids’ birthdays? Is there any secret formula? — Keith, Akron, OH

Every parent wants to see a huge smile on their child’s face when their birthday rolls around. But if your budget is constrained – and that’s most of us – you don’t need to send your daughter and 30 of her closest friends to a Taylor Swift concert to be a success. Nor should you feel compelled to buy your son the iPhone X he’s been fawning over.

These days, pricey birthday bashes are pretty commonplace, which can put a lot of pressure on parents to follow suit. A survey last year by T. Rowe Price found that 29 percent of parents spend $300 or more on parties and gifts for each child. If your savings account isn’t exactly bursting at the seams, it can be tough to part with that much cash.

In my mind, it’s perfectly okay to cap your budget at $100, or even less, if that’s all you can truly afford. Every time my kids’ wish list gets bigger than my wallet, I use the opportunity to remind them that money is a finite resource for parents. That’s not a concept that comes naturally to them – it has to be learned. Plus, every time you plan a blowout party or give them a big-ticket gift, it sets up the expectation for something similar the next year.

I’ve found that the best celebrations are the most creative – and often least expensive – ones. My daughter recently went to a birthday celebration where the kids went from station to station painting and making jewelry. Not a budget-buster, but it was a huge hit. I remember taking my son to a party where the parents set up a commando-style obstacle course in the backyard. It gave the boys a chance to blow off steam with their buddies, and they had a great time in the process.

You don’t need to invite a mob of people in order to make the day special, either. Keeping the invite list to three or four close friends can really help keep the price tag in check. And if each one brings a small present, your kid might not miss it if your only gift to them is the party itself.