As I write tonight I am faced with a quandary. I know that many of you have gone back and read my early blogs on setting up a budget and have a budget in place, but I also know that there is a lot of information there if you haven’t already read them. When my book is completed I will have an easy solution to this dilemma. I will simply say, go read chapter “whatever” in my book 🙂 However, my blog is not as concise as my book will one day be, so… for today I am going to summarize setting up a budget. Please keep in mind that if this is the budget that you are going to use for bill paying and as a road map to your finances, then you are going to need to invest a little more time in setting it up. It’s not hard and it really is so worth any effort you put into it. Setting up a budget will literally pay you back every month in saved income!
So to do a thorough job on the budget please refer to the following blogs:
To determine your monthly expenses read the following-
Expense Categories – Finding the Holes
Average Spending – Learning for Life
Managing Bills that Vary – Changing Seasons
Infrequent Bills and Expenses – A Plan for the Infrequent
To determine your monthly income read the following according to your income, although I recommend everyone read the blog “Simplicity” as it explains a lot-
Salary/Monthly paycheck – Simplicity
Hourly Wage/Weekly paycheck – By the Hour
Bi-Weekly – Every Other Friday
Commision – Feast or Famine , Finally Breathing
Self-Employed – Your Business , The Power of Percentages
Examples of varying income scenarios – Weekly, Salary and Commission
And then to actually make your budget and put your plan into action read these-
My Budgeting Plan – A Plan to Stop Juggling
How to Balance – Finding Balance
How to Use a Budget? – Directions for the Journey
However, for this topic of using your budget to determine what kind of mortgage you can afford, I am going to simplify the budgeting plan into it’s basics. Which is: take your monthly income (after taxes) and then subtract all of your monthly expenses (rent, insurance, groceries, eating out, entertainment, savings, giving, utilities,… everything!).
Then for the purpose of determining what size house payment you can afford you need to look realistically at your utility bills. In an apartment, your water bill will be minimal, but in a house that bill will double, triple, or even more depending on the house size and the size of your yard. The other two bills that will increase exponentially are your gas/heating bill and your electricity bill. Again, as you increase square footage that bill will increase as well. So if your apartment is 900sq ft. and your new home is 1800 sq ft then you should double your budget for electricity and your gas bill as well. So many people forget to take this into account in their plans for purchasing a new home and it can affect your budget by hundred’s of dollars! I have many people talk about the shock of paying their first utility bill in their new home. It may not seem like a big deal on this side, but it can quickly make your new home feel like a noose around your neck.
So having adjusted your utilities in your budget you can now look at your surplus (how much money you have left over). If there isn’t any surplus, then your new mortgage payment cannot exceed what you are currently paying in rent. If you are in the “red” meaning that you are spending more than what you have in income, then you need to make adjustments to your budget just to continue down this process or you will wind up in serious debt. You can adjust your budget by decreasing what you spend in entertainment, or getting rid of cable TV, or selling a vehicle to get rid of the payment. At this point it is a matter of what are you willing to do to own your own home?
But if you have a surplus then add this to your current rent payment and you should have a very good idea of the kind of payment that you can afford to make on your mortgage. By looking at your payment in this honest and very practical way, you will be sure that once you get into your beautiful new home you can still afford to live your life. As many people are discovering, it is so much worse to get into your “dream” home only to loose it to foreclosure because you can’t afford to live there, than to stay where you are and save for an affordable first home. The best financial future for you and your family starts with being honest with your current financial situation even if that means buying a smaller home, and nothing brings financial honesty like a budget 🙂
Happy budgeting and I will see you tomorrow.