Step 4: PREPARING A HOUSEHOLD BUDGET
When you have decided to buy a home, the next step is to figure out how much you can afford. To do this, you will need to prepare a budget of your monthly expenses. When you do this, make sure to take into consideration the costs that are involved with owning and maintaining a home. Underestimating monthly expenses can cause a lot of stress and headache. We don’t want you to be “house poor”. That is to say, we don’t want you to spend too much of your income on house-related expenses that you fail to meet other financial obligations. That’s why you should plan ahead and prepare a budget.
A household budget should be a monthly practice.
A few perks of a household budget:
- know the price of homes within your budget (i.e. know what you can afford),
- see where money should be spent,
- see where you can save,
- spend less money, and
- formulate a plan
Preparing the Household Budget
The best way to prepare for a household budget is by gathering paystubs, bills and bank statements. Your monthly expenses will give you insight into how you spend. Do you buy a coffee every morning? Do you eat out for lunch? How much is your internet bill? What are you spending your money one? Do you keep receipts?
After you have gathered paystubs, bills and bank statements, do the following:
- List current, regular, and net monthly income for your household.
- Net income is take home money, so make sure to account for all items deducted from your pay checks.
- List current monthly bills.
- List optional spending items.
- List how much money is in savings.
Budget to Actual Review
After your budget is set, review your actual expenses at the end of the month, and you will know whether or not your budget was realistic. If needed, go back and adjust your budget accordingly. This is to help you identify where money is wasted and where it can be saved.
Follow these steps:
- If all your expenses have been accounted for, including savings, the difference between your projected and actual balance should be $0.
- If there is a positive number, consider allocating the extra money toward debt and/or savings.
- If there is a negative number, you spend more than you make. Review your budget and trim your expenses.
Why Save Money
Let’s face it, it can be hard to save money. This is especially true when expenses go up and income does not, which is just another reason to prepare a budget for home ownership.
Money should be saved for the following:
- Emergencies – No matter the budget, it’s difficult to premeditate emergencies. It’s a smart idea to have money set aside for the worst.
- Career Changes – If you have to (or choose to) change careers, be prepared for an income gap. Even if you are at the same job, if your hours (normal or overtime) decrease, it will be nice to have money set aside for times when your income is lower than expected.
- Expensive things – Such as appliances or major repairs. If you have money saved, you will have more freedom as to what you can buy without worrying about price.
- Life goals – Major goals and bucket list items.
It is Expensive Being House Poor
If you live paycheck to paycheck and stretch beyond your means, you’ll find yourself paying late fees, deposits on utility accounts and re-connection fees. If your credit score drops, services like auto insurance go up. And credit cards may charge you higher interest rates and cut your credit limits.
Last bit of advice:
- Keep credit card use to a minimum. If you have to use them, pay them off as soon as possible, or keep the balance below 30% of the credit limit.
- Pay your bills when they are due. That way, you wont owe late fees or other charges.
- Keep the money you save separate from the money you spend.
Legal Disclaimer
This home buyer series is intended to provide general information regarding the process of how to buy a house in California. It is not intended to provide buyers with legal, accounting or financial advice. You are advised to seek the services of a skilled professional this those fields.
Additionally, this home buyer series does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.