Searching for a new home can be a little daunting. Before you even get started, it is essential that you get preapproved and establish a budget.
Establish Your Starting Point
You should begin the process by making a list of every source of income that you have coming into the home. This includes all paychecks and any savings or retirement that one has. If you received an inheritance or other extra sources of income, include these. If you are fortunate enough to consider paying cash for your home, your only limit is how much you can save and have on hand. Most people, however, cannot make an all-cash offer, so they need to add a mortgage payment to their budget.
Next, note all your monthly expenses. This would include food, utilities, savings, clothing, and other expenses that you pay. If you wish, you can categorize these as housing expenses and not housing expenses. If some of your expenses do not fit into neat little categories, that is okay. Just remember to account for it/them.
Evaluate Your Needs and Wants
You can fit both needs and wants in your budget, and maintain a healthy balance between them both. Needs are expenditures necessary to work and survive. Needs are recurring expenses that use a lot of your income. For example, car insurance, mortgage payments, transportation, insurance, and food are needs because they are essential to live.
Wants make your life more enjoyable but are unnecessary for survival. Wants include taking a trip, seeing a movie or other entertainment, gym memberships, and or designer clothing. However, everyone will not have the same wants and needs. For example, a luxury car can be necessary if your job requires you to transport “high-powered clients”. However, if you are just using your car to drive to and from the office, such an expensive car is unnecessary. Here, the expensive car is a want and not a need.
Prioritize Other Debt Over Extra Mortgage Payments
Because your other debt probably has a higher interest rate than your mortgage, it makes financial sense to pay this debt off first. Most of the time, this includes credit cards, but some auto loans and other loans can have higher interest rates than a mortgage. Even if you are an astute investor and can get 12 percent returns on your money, you are still losing money if you are paying 18 percent interest on your credit cards. We should also consider student loan debts and car loans. Your extra money should go toward the debt with the highest interest rate first.
Cut Discretionary Spending
While groceries, rent, and mortgage payments are necessary, each person has discretionary expenses such as cable television with 500 channels or eating out every night. This kind of expense is not bad, but when you are determining a budget for a new home, spending control is necessary. It may require some sacrifice, but the results will be easy to see on your budget.
Realize that when you are speaking of discretionary items with others and trying to get advice, some people may classify discretionary items as needs instead of wants. This can have a devastating effect on a budget. A discretionary category in your budget is the area most likely to monitor. Some examples of discretionary budget items include hobbies and sports, charitable donations, any miscellaneous category, clothing, and subscriptions to magazines or video subscriptions.
As a Tool, Use the 50/20/30 Budget
The 50/20/30 is an example of a budget used by some to take control of their money. The 50/20/30 rule says that 50 percent of your after-tax income should go towards needs such as mortgage and groceries. It further allots 30 percent of your after-tax income to wants, such as gadgets, sports, and hobbies. The 50/20/30 rule allots 20 percent of after-tax income to savings and investments. However, realize you should consider the house you buy an investment in your life. You may not want to keep it for the rest of your life, but determining a budget for your new home can help you keep it as long as you want.