Budgeting to Buy A House
Asking yourself "how much house can I afford?" Our home buyers guide includes information on how to budget for your home purchase. A household budget is desirable both before you make a Real Estate purchase as well as during your ownership. Preparing a home budget while you are looking at houses allows better focus on mortgage payment goals and how your new house purchase will affect your total expenses. Maintaining a home budget can help prevent possible financial trouble as well as help you save money so you have more funds available for things you need or want.
You will need some time to develop your home budget -- not just five minutes -- but it should not take more than a couple of hours. You can print out a form for developing your home budget from Our Family Place here.
Some items and information you will need in order to develop your home budget include:
- All current monthly loan payments.
- All other monthly expenses (such as child care, dues, etc.).
- Records of variable expenses (for example, utilities, food and car repair) from the last 12 months. This will give you an estimate of your monthly expenditures.
- Records of annual or semi-annual expenses (such as insurance and taxes).
- An estimate of what your new mortgage payment will be. You can estimate that using our mortgage calculator.
- Records of other non-fixed expenses (for example, medical expenditures) for the last year. This will give you an estimate of average expenses of this type.
- Records or an estimate of personal expenses (entertainment, travel, etc.)
- Having a current copy of your credit report can be very helpful. Not only will it reveal any inaccuracies in your credit history, it will also give you a clear picture of not only your total debt but your monthly obligations. You can get a Credit Report, Credit Score & FICO Score here.
Realistic budget assessments. Account for possible increases in the price of certain items (for example, school tuition, insurance and taxes). Look for ways to control your home budget.
Most People Spend 10% More Than They Make! You probably know how much money you made last week, month, and year, but do you know how much you spent? Do you know how much money you have to spend this month? Most people don't know. Most of us spend about 10% more per month than we make. That comes to 1% per month based on the average American income. No wonder the average credit card debt is now so high!
Why is it difficult to track our expenditures? We live in an almost "cashless" culture. We use debit cards, credit cards, automatic deposits, and wire transfers. No wonder it is difficult to track how much we spend!
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How Much House Can I Afford?
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Saving Money
Part of an effective household budget includes saving money on those things you really need. Take an inventory of your needs to see where you can cut a few dollars. Start with the big items first: This is where the most potential for savings is. Move down next to less expensive items. A moderate savings on one big item (house or car) in conjunction with savings on smaller items (food, clothes, etc.) can yield a large reward in your overall budget.
General Home Budget Tips
Distinguish between what you Want and what you Need: It can be costly to mistake wants for needs. Needs are relatively simple to identify -- items that are necessary: Shelter, food, clothing, transportation. Wants are things that enhance or possibly improve your life. A car is a need. Unless it is necessary for your business, a $ 50,000 Sport Utility Vehicle is a want.
Less Is More? We often seem to insist on the biggest and the best, no matter what cost. We buy shirts with designer labels attached. We opt for the dinner at the trendy restaurant when a less expensive meal is just as delicious. Think about where you are spending money to see if there might be savings from just minor changes in habits.
Try before you Buy: Before you buy something, especially large ticket items, borrow, rent or try it out before you take it home. If you determine that it is not something you need before you buy it (and you will on a some items) you will likely find that it is not necessary after! |
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Specific Home Budget Tips
Home Mortgages. Your mortgage payment will be the largest single expense in your budget. Getting the best deal here is important. Not comparing different mortgage loan programs or products could cost thousands of dollars over the term of the mortgage. Think in terms of value for the cost... some lenders will work with you to repair your credit, and take a personal approach, while some will simply take the application and move on. It pays to be loyal to a lender that works with you, provided they are competitive in the costs of the loan. But you get what you pay for.
Cars. The next largest expense is the car(s). Mistakes made in financing your car can often be as costly (on a monthly basis) as mortgage mistakes. Consider the vehicle(s) you presently own. Do you have equity in a car that you no longer use? Could you downsize and save money, not only in monthly payments but also in maintenance, insurance and operating expenses? Are you getting the best deal you can on repairs, maintenance and insurance?
Insurance. Most of us pay our automobile and homeowners insurance premiums by habit, rarely if ever making comparisons. With many families insurance costs could be significantly reduced by some comparison shopping. Here are some hints from the Insurance Information Institute on saving money on your homeowners insurance:
- Be sure to shop around. It may take a little time, but it could save you money. The insurer you select should offer both a fair price and excellent service.
- Raise your deductible. Deductibles on homeowners policies typically start at 0. By increasing your deductible to 0, you could save up to 12%.
- Beef up your home security. You can usually get discounts of at least 5% for a smoke detector, burglar alarm or dead-bolt locks.
- For more tips, see the Saving on Homeowners Insurance section.
For automobile insurance the Insurance Information Institute recommendations include:
- Shop around. Prices for the same coverage can vary by hundreds of dollars from company to company. It pays to shop around. Browse the web, ask your friends, and call the state insurance department for ideas.
- Higher Deductibles. Requesting higher deductibles on collision and comprehensive (fire and theft) coverage can lower your costs materially. Increasing your deductible could reduce your collision and comprehensive costs by as much as 15% to 30%.
- Low Mileage Discounts. Some insurance companies offer discounts to motorists if they drive fewer than some predetermined number of miles a year. Find out if you are eligible.
Food. You need to eat food to live, and the expenses for the average family can be really staggering! Since food is a necessary and recurring expense, just saving, for example, a few dollars a week on your purchases can be significant over the course of a year.
- Plan in advance. By knowing what you need, you will be able to buy in larger quantities (less expensive) and reduce convenience store purchases (more expensive).
- Spend some time clipping and using coupons. Fifty Cents spent for the Sunday newspaper might save you many dollars at the cashier. Organize the coupons so as you write your shopping list you can make a note if you have a coupon.
- Consider store brands or generics. You may find the quality equal to (or better than) the national brand, and generics are generally considerably less costly.
- Buy on sale. This only applies to items that you use on a regular basis.
- Shop at the generally least expensive store. Surveys show that there is sometimes 10-15% difference on identical groceries at different stores in the same area.
Clothing. Many consumer products have actually gone down in price over the last few years (especially computer and electronic items) the cost of clothing has generally gone up. Additionally, a purchase price that used to buy good quality garments now appear to buy low quality clothes. Planning makes it possible to maintain clothing purchase expenses that conform with the family budget.
- Buy separates that coordinate. You can make numerous combinations with a few well matched items. For women, jackets, slacks, skirts and blouses can be mixed and matched to create many different outfits. Plus you can change the look of these outfits with accessories such as jewelry or scarves. Men's clothing offers a wide variety of separates that can be coordinated: blazers, slacks, shirts and ties can all be interchanged to create a versatile wardrobe with a minimum of expense.
- Buy a season ahead. Buy next year's winter clothes at the end of this season and save. The styles won't change that much (if at all) and you will pocket a big difference in the price.
- If you are "hard" on clothes, buy quality. Buying an pair of shoes that will last saves money in the long run instead of having to buy 3 pairs of shoes that don't hold up.
- Stay away from trendy fashions. Stick with the basics. You can always be sure you clothing styles will last from year to year when you buy perennial standbys such as medium length A-line skirts and solid tailored blazers for women or neutral color shirts and tailored to semi-tailored sports coats for men.
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Telephone. In most areas, local phone service is regulated and has a fixed price. The difference in long-distance costs, however, can be huge. By shopping you can often find considerable savings. Switching over is simple -- a pretty good return on time spent!
Travel. Price differences here can be enormous. The difference in costs on the same trip -- same airline, same hotel, same car rental -- between two travelers can run into the thousands of dollars. Take time to shop. Ensure the best possible deal.
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