Household formation can mean a lot of different things to a lot of different people. It can take a literal meaning to explain how people are taking up mortgage to have a house. This still remains to be one of the items that are high up on the dream list of every American. But taking on a mortgage loan is easier said than done.
The down payment alone is already a big challenge to people who dreams of having a house of their own. The ideal equity on the house is at 20% but there are some government support that allows borrowers to put in down payments lower than that. After you have passed the hurdle of a down payment, household formation means monthly mortgage payments that can undoubtedly become one of the biggest expense items in your budget.
WSJ.com shared that there has been an approximately 70% decrease in households in the country. This means a lot of young consumers are not buying homes for them or their family. This market situation can snowball and affect a lot of other items in the country’s economy. Home purchase is a starting point for a lot of consumer actions.
This is why for some, household formation can mean tying the knot and getting married. But as Huffingtonpost.com shares, marriage rate is at 31.1 compared to 92.3 in 1920. This is a sharp decline and could have a lot of reasons why people are putting off marriage or deciding to totally remain single all their life.
Some may be too preoccupied in rising from a low income family and feel that marriage will just steer them away from their financial plans. There are others that see household formation as having kids or adding kids which can add more cost items to their budget. Household formation can be a lot of things but one thing is certain, there are things that are keeping people away from pursuing these life goals.
Barriers in household formation
There are a few different financial considerations that can hold a person back from pursuing household formation. One thing is that it is not as simple as buying a new pair of shoes and when the time comes that you do not like it anymore, you can put it up for sale or just hand it down to another relative.
Here are some of the most common financial barriers consumer face when trying to decide if they will go on and proceed with household formation or not.
- Debt can hold you down. As finances play a vital role in the decision to pursue household formation, debt is on top of the list. Although it can help, It is not as easy as creating a budget worksheet to try and see how they can start buying a house or even getting married. These are not only big expenses but continuing ones at that. Once they decide to go ahead with their plans of household formation, it affects their budget for a very long time.
- Student loans can make you think twice. Student loans are usually the culprit when young consumers put off financial decisions in life including household formation. Buffalonews.com points out that the total student loan debt is now at $1.3 trillion. This is being shared by about 40 million people in the country and keeps consumers, especially the young ones in pursuing financial dreams. High student loan debts can make borrowers think twice whether to get a mortgage loan or continue to rent because of the price difference and the flexibility of renting. There are also some couples who prefer to put off their wedding until they have paid off their student loans. For married couples, they postpone having kids until their loans are paid off.
- Low income can prevent you from settling down. Aside from having mountains of debt, one obstacle in household formation is having a low income. It can be from underemployment or even unemployment but having a low income can definitely affect how you move forward with your finances. It is definitely a struggle to try and think of bigger purchases when your income is just enough or at times insufficient to cover your expenses.
- Excessive lifestyle will play an important role. Household formation may not seem to be a big obstacle with your income but you need to look at your lifestyle as well. It is possible that you have an excessive lifestyle that completely negates whatever you are earning. And adding more expenses to your budget might not be feasible because your expenses overshoot your income. This is not a conducive budget to even think about household formation.
How to fix your finances
It is not impossible to save even with low income but this is easier said than done. Here are a few things you can consider to help make household formation a little easier on your budget.
- Increase income. This is the first step in helping you proceed with household formation because the higher your income, the easier it is to dispense it. It goes without saying that it is hard to plan for expenses when your income cannot cover the whole ride. If you are currently holding a job, understanding how to get an increase in your pay is a good start. You can check with HR or even your immediate supervisor on the process and requirements for getting ahead in your field. You can also look at turning your hobbies into a profitable venture. If you love to bake for your family, why not try to get orders and bake over the weekend for family and friends. You can even put up a website to market your services to other people and start taking orders.
- Cut down on expenses. This is one financial move that best complements the increase in your income because it can double the effects of your financial efforts in preparing for household formation. As you increase your income and lower down your expenses, it can bring you closer to your financial goals. Looking at your budget and checking what items you can live without or just lessen the cost can make wonders in freeing up some dollar in your budget.
- Build up emergency fund. This might seem to be an unnecessary step in preparing for bigger expenses in household formation but you need to look into it. One of the main roles of an emergency fund is to prevent you from getting into more debt in the future. The bigger your emergency fund is, the more months it can cover in case you get into financial problems in the future. Otherwise, one busted tire can leave you charging on your card instead of your emergency fund saving the day.
- Aggressively pay down debt. As soon as you have a solid emergency fund, you can now start aggressively paying down your debt may it be student loans or credit card debt or even payday loans. As your debt payments decrease, you can increase the amount that you are putting into savings to prepare for mortgage, wedding or even having another child.
You can prepare for household formation by understanding potential hindrances and knowing how to address these financial obstacles. Household formation is not an easy step in going forward with your plans but with your finances in order, you can find that it is not totally impossible to achieve.