Like any area of personal finance, there are no “secrets” to buying a house.

But it does involve thinking different than most other people, who make the biggest purchase of their lives without understanding the true costs. Although I may be aggressive with my asset allocation, I’m conservative when it comes to real estate. That means I urge you to stick by tried-and-true rules, like 20 percent down, 30-year-fixed-rate mortgage, and a total monthly payment representing no more than 30 percent of your gross pay.

If you can’t do that, wait until you’ve saved more. It’s okay to stretch a little, but DON’T stretch beyond what you can actually pay. If you make a poor financial decision up front, you’ll end up struggling — and it can compound and become a bigger problem through the life of the loan.

Don’t let this happen, because it will undo all the hard work you put into other areas of your financial life. If you make a good financial decision when buying, you’ll be in an excellent position. You’ll know exactly how much you’re spending each month on your house, you’ll be in control of your expenses, and you’ll have money to pay your mortgage, invest, take vacations, buy a TV, or whatever else you want to do.

Here are some of the things you need to do to make a sound decision:

1. Check your credit score.

The higher your score, the better the interest rate on your mortgage will be. If your credit score is low, it might be a better decision to delay buying until you can improve your score. Good credit translates into not only a lower total cost, but lower monthly payments.

The table below (reproduced from MyFico.com) shows how interest rates affect your mortgage payment on a thirty-year fixed $216,000 loan:

* APR figures calculated in June 2011

2. Save as much as possible for the down payment.

Traditionally, you had to put 20 percent down. In recent years, people were allowed to put as little as zero down — but it’s becoming all too clear that this was a very bad idea. If you can’t save enough to put 20% down, you have to get something called Private Mortgage Insurance (PMI) which serves as insurance against your defaulting on your mortgage payments.

PMI costs between 1 and 1.25 percent of the mortgage, plus an annual charge. The more you put down, the less PMI you’ll have to pay. If you haven’t been able to save at least 10 percent to put down, stop thinking about buying a house. If you can’t even save 10 percent, how will you afford an expensive mortgage payment, plus maintenance and taxes and insurance and furniture and renovations and…you get the idea. Set a savings goal for a down payment and don’t start looking to buy until you reach it.

3. Calculate the total amount of buying a new house.

Have you ever gone to buy a car or cell phone, only to learn that it’s way more expensive than advertised? I know I have, and most of the time I just bought it anyway because I was already psychologically set on it. But because the numbers are so big when purchasing a house, even small surprises will end up costing you a ton of money. For example, if you stumble across an unexpected cost for $100 per month, would you really cancel the paperwork for a new home? Of course not. But that minor charge would add up to $36,000 over the life of a thirty-year loan — plus the opportunity cost of investing it.

Remember that the closing costs – including all administrative fees and expenses – are usually between 2 and 5 percent of the house price. So on a $200,000 house, that’s $10,000. Keep in mind that ideally the total price shouldn’t be much more than three times your annual gross income. (It’s okay to stretch a little here if you don’t have any debt.) And don’t forget to factor in insurance, taxes, maintenance, and renovations. If all this sounds a little overwhelming, it’s telling you that you need to research this stuff before buying a house. In this particular case, you should ask your parents and other home owners for their surprise costs.

4. Get the most boring, conservative loan possible.

I Like a thirty-year, fixed-rate loan. Yes, you’ll pay more in interest compared with a fifteen-year loan. But thirty-year loans are more flexible because you can ALWAYS pay extra toward your loan and pay it off faster if you want to. But you probably shouldn’t. Consumer Reports simulated what to do with an extra $100 per month, comparing the benefits of prepaying your mortgage versus investing in an index fund that returned 8%. Over a twenty-year period, the fund won 100% of the time. As they said, “…the longer you own your home, the less likely it is that mortgage prepayment will be the better choice.”

5. Don’t forget to check for perks.

The government wants to make it easy for first-time home buyers to purchase a home. Many state and local governments offer benefits to first-time home buyers. Check out HUD’s directory of local homebuying programs in your state. Also, check with your employer, who may also offer special first-time home-buying rates. Ask — it’s worth it. Finally, don’t forget to check with any associations you belong to, including local credit unions and teacher’s associations. You may get access to special lower rates. Hell, even check your Costco membership (they offer special rates for members, too.)

6. Use online services to comparison shop.

You may have heard about Zillow, which is a rich source of data about home prices all over in the United States. Also check out Redfin.com which is disrupting the real estate market by letting home buyers get access to more information — like local tax records — online. You can do your research online and Redfin will send an agent to negotiate for you. They claim an average savings of $14,000. For your homeowner’s insurance, check Insure.com to comparison shop. And don’t forget to call your auto insurance company and ask them for a discounted rate if you give them your homeowner’s insurance business.

Ramit Sethi is the author of the New York Times best-selling book I Will Teach You To Be Rich and runs a blog of the same name with 300,000 monthly readers. Click for a free chapter from his book.

Today, learn a powerful technique for negotiating late fees on your credit card. Nobody’s perfect. Accidents happen, and you might miss a credit card payment at some point. When this happens, you can use this script — tested thousands of times — to get the fees instantly waived. Here’s what to say to immediately beat a late payment:

You: Hi, I noticed I missed a payment, and I wanted to confirm that this won’t affect my credit score.

Credit Card rep: Let me check on that. No, the late fee will be applied, but it won’t affect your credit score.

(Note: If you pay within a few days of your missed bill, it usually won’t be reported to the credit agencies. Call them to be sure.)

You: Thank you! I’m really happy to hear that. Now, about that fee… I understand I was late, but I’d like to have it waived.

Credit Card rep: Why?

You: It was a mistake and it won’t happen again, so I’d like to have the fee removed.

(Note: Always end your sentence with strength. Don’t say, “Can you remove this?” Say, “I’d like to have this removed.”) At this point, you have a better-than-50-percent chance of getting the fee credited to your account. But just in case you get an especially tough rep, here’s what to say.

Credit Card rep: I’m very sorry, but we can’t refund that fee. I can try to get you our latest blah blah marketing pitch blah blah. . . .

You: I’m sorry, but I’ve been a customer for four years and I’d hate for this one fee to drive me away from your service. What can you do to remove the late fee?

Credit Card rep: Hmm…let me check on that. Yes, I was able to remove the fee this time. It’s been credited to your account.

You don’t believe me that it’s that simple? It is. Anyone can do it. Support reps at credit card companies are literally trained to react this way when you say these things to them. It’s their job to retain you, and that includes letting the occasional late payment slide.

Keep in mind that this won’t work forever. If you consistently blow off your payments and gain a reputation as a “problem customer,” no script can save you. But if you’re an overall good customer and sometimes fall back, this will usually get you out of paying.

Here’s what some of my students say:

“I just made two calls, got one late fee reversed with Men’s Wearhouse, and $70 worth of Wells Fargo ATM fees that I racked up while out of the country, wiped out. Took about 10 minutes – $85! That’s a rate of $510 per hour. Got late fees? Make a call to your company and just ask – easy way to save yourself some cash. (And thank you Ramit Sethi.)”

–Anthony Avila

Just got my credit card late fee refunded thanks to @ramit’s advice on negotiating bank fees. His book just paid for itself!

–Lingbo Li

@ramit Followed your advice… Called the bank, $19 in lame service charges wiped… Thanks great tip from the book.

–Josh Bellamy

Give it a shot. With a few minutes, you can get most late fees waived.

Ramit Sethi is the author of the New York Times best-selling book I Will Teach You To Be Rich and runs a blog of the same name with 300,000 monthly readers. Click here to get a free chapter from his book.

photo: Refracted Moments™

You’ve cut back on as much spending as you can reasonably do. You’ve eliminated extra spending on eating out. You’ve got automatic savings. You’ve got a plan to pay off debt. What else can you do?

Earn more money.

There’s a lot of advice out there on how to make more money on the side. Unfortunately, much of it is scammy things like secret SEO tactics or ineffective suggestions like taking surveys in your spare time.

In truth, the best way to actually do it has nothing to do with social media, blogs, or Twitter. It has to do with turning your skills into side income.

What would an extra $1,000/month mean to you? Could you pay off debt faster? Save up enough to quit your job? Take a vacation?

Most of us could turn our existing skills into more money in the next 60 days. And you don’t need to quit your job to start the next Google (GOOG) — you can earn it on the side while keeping your full-time job.

How do you do it? Over the past two years, I’ve been testing a new free course on earning money with thousands of students and I’d like to share some of those techniques with you.

Let’s start by learning how Chris Carter is earning $3,000/month on the side.

Find three clients willing to pay you, no matter how much… or how little

Chris Carter was terrified of pitching clients and negotiating rates. Even though he knows how to do advanced statistical modeling, Chris’s fear of talking to clients kept him from charging what he was worth. So he started by responding to a Craigslist ad looking for someone to do advanced statistical modeling for $15/hour. $15/hour! That’s way lower than he should have actually charged, but he just wanted to prove he could get three people to pay.

Key insight #1: When earning money using your existing skills, your only goal is to get three paying clients. Nothing else matters.

Chris didn’t care about how much his clients were paying him. He just wanted to prove that three people would pay for his services at all.

Once he’d secured those clients, he re-pitched the same client for 15-20 hours per week at $40/hour. Last time I checked up with him he had raised his rate again to $50/hour and is earning thousands per month.

Turn your skills into side income, no matter how niche those skills are

Everyone has skills that someone would pay you for — today. Did you get a good score on your SATs? (SAT tutor.) Are you obsessed with fashion? (Personal stylist.) Are your Powerpoint presentations always the best designed? (Freelance designer.)

I know a young woman who trains cats how to pee from a toilet seat — and she charges $500 per cat.

Key insight #2: If someone can make $500 training cats to pee from a toilet seat, you can certainly earn money on the side using your existing skills.

The Two-Qualifier Method

But who would actually pay you for your services? My so-called “two-qualifier method,” described below, should help you find your first three paying clients. The first question you should ask yourself is, Who are you trying to market to?

The average person’s response will sound something like this: “Well, you know, people who are interested in technology.” Or, “Uh…anyone who uses Facebook!”

Wrong. If you’re not crystal-clear on who you’re targeting, it will be extraordinarily difficult to reach them.

And being specific is key.

Let’s say you like steak. Where would you rather eat dinner? Acme Restaurant, where they serve Indian food, steak, asparagus, spaghetti, and Thai food? Or Jack’s Steak House, which serves only mouth-watering Angus steak served by former butchers?

Of course you’d choose the specialized restaurant. And you’d pay more, too. The same is true for how specifically you target your customer and services.

Key insight #3: Counterintuitively, the more specific you are, the more you can charge.

Targeting the right market isn’t easy. Big companies spend hundreds of millions trying to get it right, and most freelancers are no better off.

Let’s go through a quick example to set the stage. Imagine you’ve just been hired by a company that makes ski jackets and they say, “Help us reach more people.”

The first question that occurs to you is probably, “Who are you trying to reach?”

They say, “Well, anybody. We just want to reach people.” “Oh, OK, well why don’t we just go find a magazine that reaches out to ‘anybody’ and take out an ad?”

What’s wrong with this approach?

1. Customers are smart. If they can see that your ski jacket can be worn by a 16-year old girl, a 78-year-old grandma, and an active 34-year old woman, they will immediately move on. We want products made specifically for us, not products that can be used by anyone.

2. Once you know your specific customer, you can go to where they hang out and let them know about your product. But if your target market is “everybody,” there’s no easy way to reach them.

This is just one example of how going broad will hurt you. If you’re selling your services to EVERYBODY, you’ll actually sell to NOBODY.

There are a variety of ways to begin your targeting, but today’s exercise will walk you through it:

The Two-Qualifier Method takes you from one level — say, tutoring for high-school kids – and layers another qualifier on top of it — say, tutoring for private high school kids. Of course, you can take this a lot further

WHAT MOST PEOPLE DO: “I’m going to tutor math”
WHAT YOU’LL DO: Get more specific using the Two-Qualifier Method.

In essence it looks like this:

[QUALIFIER 1] — [QUALIFIER 2] who need (YOUR SERVICE)

So here are some examples:

* Affluent working parents in the San Francisco Bay area who want (tutoring for their high school kids).

* Small-business companies in the financial services industry who need (copywriting for marketing materials).

* Bloggers with 1,000 to 5,000 subscribers who want to (develop information products).

Now, how does this help you? Let’s say you live in San Francisco and you’ve decided to tutor, and based on this, you know your target from the Two-Qualifier Method is the following:

Affluent working parents in San Francisco who want tutoring for their high school kids. What do you know about this group of people?

You know that they (1) have money, (2) want their kids to be successful, and (3) don’t have a lot of free time. Indeed, they really care about their kids being successful — probably more than they care about anything else in their lives.

They live in San Francisco, so you can already start thinking through your geographic niche. You could find out where these working parents hang out. Do they read mommy blogs, specifically based for the SF area? Do they belong to certain organizations? Where do they shop? Where do they eat? What about the schools where the parents drop their kids off?

And then, of course, you’ve got your offering, which is tutoring for private high school kids. Not all high school kids — private high school kids.

The Two Qualifier Method takes your ideas for targeting your service and structures them in a way that gets you many steps closer to reaching that exact customer. Once you’ve mastered this, you can much more easily pick pricing, marketing methods and all kinds of more advanced work. But, the hard part is really getting in their heads and identifying who your niche is.

Now here’s what you need to do to “Niche It Down” yourself.

Step 1: Make A List

Create a list of ALL the different characteristics and qualifications that your potential customer might have. Start with three.

Step 2: Shape Your Customer Characteristics Pyramid

You’ve listed out all of the characteristics of your potential customer. Now, organize the customer characteristics from Step 1 into a Customer Characteristics Pyramid: What aspects of their identities are most important? What are least important?

Step 3: Define Your Niche With the “Two-Qualifier Method”

Based on the examples above, create your Target Market using the Two-Qualifier Method below:

Remember: [QUALIFIER 1] — [QUALIFIER 2] who need (YOUR SERVICE)

Many of my students struggle to find the right idea, even if they have a target market identified. If you want more help finding the right idea to earn your first $1,000 on the side, I have a free “Idea Generator Tool” to go from “no ideas for earning money” to finding a profitable idea so you can start earning money on the side.

Ramit Sethi is the author of the New York Times bestseller, I Will Teach You To Be Rich.

Today I’m going to show you how to generate an extra $200/month, which you can use for savings, investments, or even spend it on something you love. But I’m going to challenge you to put aside some assumptions:

• Myth #1: We need to track ALL of our spending to save money by keeping a budget. Not true. By focusing on your two biggest discretionary expenses and relentlessly cutting them down, you reduce the Paradox of Choice and limit the overwhelming number of choices we each have every day.
• Myth #2: “There’s no WAY I can save $200/month!” Maybe, maybe not. Many people waste 20-30% of their money without ever knowing where it goes. But even if you can’t save $200, perhaps you can save $150. Or $100. Or $50. The point is not the exact amount, but the process of optimizing your financial system. (And it can be done: Thousands of my readers took the challenge to save $1,000/month.)

Every day, we wake up and have 50 financial to-dos we can tackle. Should we pay off debt or increase our 401(k) contribution? Should we adjust our asset allocation or try to get a side job? Ultimately, those choices become overwhelming and we invariably do the same thing: nothing.

Today, I’m going to show you how to focus on two areas — just two — and relentlessly cut down on them to generate significant savings. While your friends worry about 50 things (like saving a paltry $4 on lattes), I’ll show you the system I use to save hundreds of dollars each month on just a couple of expenses — letting me spend time on the important things in life.

How most people manage their money

We love to believe that more information is always better. But as behavioral psychologists have discovered, more choices are not always better. In fact, they can paralyze us with indecision. Barry Schwartz writes about this in The Paradox of Choice:

…for every ten mutual funds offered by the employer, the rate of participation went down 2%.

There are hundreds of examples in the behavioral-psychology literature of increased choice leading us to paralysis by analysis. This is why humans use stereotypes and heuristics to deal with complexity: because to systematically analyze, consider, and act on every decision we face every day would be overwhelming. This is not about being smart or stupid — it’s about adaptive human behavior.

So, what does this mean for your finances?

It means you should focus on fewer, more important things. And despite the personal-finance “experts” who have cried out for us to keep a budget for the last 50 years — has that ever worked? — I prefer to use techniques that actually work. I recommend you figure out your two biggest discretionary expenses…and then crush them and save hundreds of dollars per month.

I call this The Two-Headed Savings Approach.

The Two-Headed Savings Approach: How to use save $200/month by focusing on LESS

1. Pick the two most important areas that you need to save on. You know what they are — the ones where you overspend and it’s clear you could be spending less. For me, these are (1) eating out and (2) going out.

2. Figure out how much you spend on these areas. If you don’t already have a free Mint account, go there and import your transactions. It will take about 10 minutes to tell you how much you’re spending in any category. Remember — although this is the least-sexy part of the tip, without knowing how much you’re spending, how can you set a target for savings?

3. Pick a savings number that you want to target within 6 months. I recommend you try to reduce the costs by 25% to 33%. Those numbers are guidelines, but I’ve found that range to work well because it allows me to cut costs in a significant way while not completely depriving myself. So if you’re spending $1,000 in one category, cut it to $750. If you’re spending $200, cut it to $150 — over 6 months. Rather than trying to cut 50% of your spending in 1 month, it’s important to set smaller goals and actually achieve them

4. Set up a spending reminder to help you keep track. You can do this the low-tech way or the high-tech way.

Recommended way: If you already use Mint, click “Overview” >> “Add Budget” and enter your target savings number. If you’re over the targeted amount, Mint will automatically notify you.

Low-tech way: But maybe you don’t use Mint — no problem. Just set a calendar reminder for each Sunday to make sure you’re on track. For example, if your target spending on eating out is $375/month, that’s about $94/week. Each Sunday, just log in to make sure you’re roughly on track.

If you are, great!

If not, you know you need to cut spending in the coming week.

This way, you can consistently correct any overspending and hit your target goal.

Example: You want to cut down on eating out

Let’s say your current spending on eating out: $500/month.

Target: I want to save $125 per month, so my spending should eventually be $375/month. ($500 * 0.25 = $125. $500 – $125 = $375)
Month 2: $450/month

Month 3: $420/month

Month 4: $425/month (notice you can still hit your goals even if you don’t consistently go down each month)

Month 5: $385/month

Month 6: $375/month

You’ve just saved $125/month, which is $1,500/year. And that’s just for one head of the Two-Headed Savings Approach. Do the same for eating out, and that’s $3,000 per year. You’re now generating $250/month in cash flow that can be used to invest or save.

Invest that $250/month for 20 years and you’ll end up with around $143,000 cash (run your own calculations). Is it worth it?

The keys to the Two-Headed Savings Approach

• Don’t try to do everything at once. Nobody can manage saving money on 15 categories — you just spread yourself too thin and don’t even make a serious dent in your savings amount. I’d rather save 30% on two areas than 5% on 10.
• Why a 2-headed approach? Why not just one? I learned this from a professor at Stanford, who told me to always be working on two projects at work, so if one stalled, you’d still be moving forward on something else. Sometimes, you may have unexpected expenses come up: If you’re saving on eating out, and a friend comes to visit from out of town, it’s going to be tough to keep your costs down. But if you have two savings tracks going on in parallel, you’ll still be able to make progress on your overall goals. And because you’ve extended the timeline out to 6 months, you’ll probably be able to get back on track.
• Slow down. When people come to me and tell me they’ve cut their spending on clothes from $500/month to $10/month, I just sigh and stare at them, blinking in unwavering hatred. You can’t make rapid behavioral change that stick in such a dramatic way. I’d rather extend it out, slowly, over six months and guarantee that you stick with the savings amount. I’ve written more about this here: Set Smaller Goals, Impress Friends, Get Girls, Lose Weight. You’ll see how you can apply this approach to virtually anything that requires behavioral change.
• Stop feeling guilty! Forget about those $1 bags of Skittles you buy or $4 lattes. By focusing on the Big Wins, you’re saving significant amounts of money. As long as you’re hitting your savings goals, that’s the most important thing. Note: The biggest wins typically come from subscriptions, like cable. If you can cut $30/month off cable, that’s roughly $400/year. (How? Use the A La Carte Method.)
• This is a good example of being goal-oriented. Instead of randomly trying to save on expenses, by setting a goal, your tactics become very clear. If your four friends ask you out to dinner and you’re behind in your savings goals, you can easily say, “Sorry guys, but I’m trying to save money and I’ve got to skip this one. But I can meet you afterwards.” In other words, when it comes to dealing with others, focus on the plan and not the person — and work within the savings system that you’ve created.
• Now that you’re going to be saving $20, $200, or even $1,000/month, make sure you put that money somewhere where you won’t spend it. I recommend you store it in your savings account and consider investing part of it for long-term growth. Whatever you do, don’t leave this new-found money in your checking account.

Lots of people wonder what they would do with a 5% or 10% raise. By implementing this, you’ve just gotten yourself a significant raise. What will you do with the extra cash flow each month?

The Two-Headed Savings Approach is one part of the bulletproof financial system that I outline in my book, I Will Teach You To Be Rich.

Ramit Sethi is the New York Times best-selling author of I Will Teach You To Be Rich. He writes at http://www.iwillteachyoutoberich.com.