Step 4: PREPARING A HOUSEHOLD BUDGET

Now that you have decided to buy a home, the next step is to consider how much you can afford. To do this, you need to prepare a budget of all of your monthly expenses. When you do this, you have to take into consideration all of the costs that are involved with owning and maintaining a home. Underestimating the monthly expense to own a home can cause a lot of stress and is a financial headache. There aren’t many things worse than being “house poor”. That is to say, spending so much of your income on housing-related expenses that you struggle to meet other financial obligations. The good news is that you can avoid this by planning ahead and preparing a household budget. A household budget is something you should use every month. A household budget will help you do the following:

• know what price of home you should be looking to buy (i.e. know what you can afford),
• see where you spend money,
• see where you can save,
• find ways to spend less money, and
• make a plan for how to spend and save your money.

Preparing a Household Budget

A household budget is a great tool that helps you plan and keep track of how and when you are spending your money. Start preparing a household budget by gathering your paystubs, bills and bank statements. Take a good look at how you spend your money besides your monthly bills. Do you buy a cup of coffee every day? Do you take your lunch to work or do you eat out for lunch? How much of your TV bill is made up of optional pay-per-view services? When you pay with cash, what are you spending it on? Do you keep receipts? When you have gathered your paystubs, bills and bank statements, do the following:

• List all current, regular, net monthly income for your household.
  • Net income is your take home money, so make sure to account for all of the items that are deducted from your pay checks.
• List all current monthly bills.
• List all of your optional spending items.
• List how much money you put into savings.

Here is a budget template in excel that has been modified for Arizona first time home buyers that you can use.

Budget to Actual Review

After you set your budget, you should review your actual expenses at the end of the month, you will be able to analyze whether or not your budget was realistic. You may need to go back and adjust your budget accordingly. A budget to actual review identifies where you are wasting money and helps you discover opportunities to save. You can use this information to take action to fix your bad spending habits. By taking action, your budget becomes more accurate. Follow these steps:

• If you have accounted for all of your expenses, including your savings, the difference between your projected and actual balance should be $0.00.
• If you come up with a positive number, you may want to consider allocating the extra money toward your debt and/or savings.
• If you come up with a negative number, you are spending more than you make. Review your budget thoroughly to examine where you can trim your expenses.

Why You Should Save Money

Let’s face it, it can be hard to save money. This is especially true when your expenses go up and your income does not. This is another reason why preparing a household budget is so important when you buy a home. You have to know how you can save money. You should have money saved for the following:

• Emergencies – You need to have money for emergencies. No matter how good your budget is, we all have unplanned emergency expenses from time to time.
• Job Changes – If you have to (or choose to) change jobs, you could have a gap in income. This includes if you are at the same job, but your hours (normal or overtime) decrease. You should have money set aside for times when your income is lower than expected.
• Expensive things – Sometimes, we have to pay for expensive things like appliances or major repairs. If you have money saved, you will have more choices as to what you want to buy and you won’t have to go into debt.
• Life goals – Plan and save for your major goals and bucket list items.

It is Expensive to Be House Poor

What does that mean? If you live paycheck to paycheck and start to stretch beyond you means you find yourself paying late fees, deposits on utility accounts and re-connection fees. If your credit score drops, you will find that your cost for some services like auto insurance could go up. What’s more, your credit cards may charge you higher interest rates and cut your credit limits. Here is some friendly advice:

• Try not to use your credit cards. If you have to then 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 will not owe late fees or other charges.
• Keep the money you are saving separate from the money you spend.

Previous Step: TRUE COSTS OF HOME OWNERSHIP

Next Step: MAKE A LIST OF DESIRED HOME FEATURES

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Legal Disclaimer This home buyer series is intended to provide general information regarding the process of how to buy a house in Arizona. 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.