The toughest personal finance choices are those where your heart wrestles with your mind. Justin wrote because he’s found a great place to live, but it’s just on the edge of what he can afford. He wants help deciding what to do:

I’ve been renting for the past two years (and several years before that in college). My roommate recently bought a place, and that’s thrown me into the hunt for new housing. Either I buy a place, or find a place to rent alone. After an extremely bad experience, I refuse to room with a stranger.

I’ve found a condo with an awesome location and a near-perfect floor plan for my tastes. The place is being short-sold (sold for less than the current mortgage amount). I can probably fetch it for $195,000, though the decision is in the bank’s hands about what to accept. They are already sitting on an offer of $190,000, so there is a lot of time-pressure here. Other condos in the same building even are going for $240,000+. I know that intrinsically this is a great deal, and that I won’t find better in this price range.

Here’s the question: When I work out a monthly budget, including every cost I can think of, the final numbers are really tight. I worked out the budget with the assumption that I keep my current 401k contribution rate of 20%. I know I can’t keep up that rate forever, but at what point do I lower it? Is something like this worth lowering the contribution rate by 5% to give some wiggle room? Or is this simply a sign that I’m outside my price range?

A few things to consider: I have no debt. I have an emergency fund of $6000 established. Beyond that, I have about $6500 between savings and bonds to play with. The plan is for most of that to go to deduction points on the mortgage to get a nice rate. I do have other possibilities at a lower price range, but they aren’t as nice in location nor floor plan.

What’s the best course of action here?

Buying a home can be scary. It’s a huge commitment in time and cash. And as many people have learned over the past few years, what seems affordable on paper can be unworkable in the real world.

Still, it sounds as if Justin has a good handle on his finances. He’s been saving at a phenomenal rate. If I were in his situation, I’d probably be willing to accept the 5% reduction in 401k contributions in order to pick up a great deal on a home. There are two things for Justin to consider:

  • If he does purchase the condo and lower his 401k contributions, he should consider bumping these back to 20% the next time he receives a salary increase.
  • If his situation is appropriate, he might also find it profitable to ask for a raise now. If this ploy is successful, he might not have to lower his 401k contributions at all.

This isn’t a decision to be made lightly. A high housing payment can really put the squeeze on your monthly cash-flow, making life miserable. When Kris and I bought our current house, things were tight for a year or so. Now that I’ve reduced me debt, my cash-flow has improved. The housing payment is no longer oppressive, which means I’m less tense about my financial situation.