Are you thinking of buying a house, but aren’t sure if you can afford it?
It’s time to budget.
Many people groan when they hear the word ‘budget’, but there’s power in knowing how much money you have and how much you can afford. Often we think we have more than we thought. Sometimes it’s the opposite, and we hold ourselves back, thinking we can’t afford it.
Before you apply for a mortgage, we urge you to create a budget so you can see what housing payment you can comfortably afford.
Use these simple steps and start your budget.
Get to Know your Spending
This is tough. It’s time to get intimate with your spending. Be honest with yourself as there’s no sense in hiding it. Pull out your bank and credit card statements from the last few months and categorize your spending.
Use categories such as housing, utilities, food, clothing, and entertainment. Don’t forget about those variable expenses that creep up at the worst times (bi-annual insurance payments, real estate taxes, holiday gifts, etc.) You can break it down further too, based on your specific spending patterns.
Know your Income and Assets
Now track your regular income and assets. Write it down.
Your assets include:
- Money in your checking and savings accounts
- Retirement savings
- Taxable investments (stocks, bonds, etc.)
- Real estate investments
Your income should include all regular and irregular income. If you have any passive income, annualize it for budgeting purposes.
Create your Budget
Once you know your liabilities, assets, and income, create a budget. But first, you must choose a type.
Here are a few of our favorites:
- Zero Based Budget – Every dollar gets a ‘job.’ You will have $0 left at the end of the month, but not because you’re broke, but because you put every dollar to work either paying your bills, covering your ‘wants,’ or saving money in an emergency fund, retirement account, or taxable investments.
- Envelope Budget – If operating on cash keeps you more accountable, this is a great choice. Create envelopes for each category you spend (housing, utilities, food, entertainment, etc.) and place the budgeted amount in each envelope. Once you spend the allotted amount, you stop spending in that category. This works great for those ‘want’ categories or categories you found that you overspend consistently.
- 50/30/20 Budget – Many people love this one because it’s easy. You budget 50 percent of your income for your necessities. Housing, food, and clothing are a few examples. 30 percent of your income covers your wants or anything unnecessary and the remaining 20 percent covers your debt repayments and savings.
Budgeting empowers you. It also helps you see how much home you can afford. Taking on a mortgage payment doesn’t seem as scary when you know what you have available. Get honest with yourself about your finances and see where you can cut back if you’re ready to make your home ownership dreams come true.
