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Budgeting to Afford Homeownership
Sometimes even seasoned home owners neglect to recognize the cost of home ownership. Credit cards and lines of credit can enable one to keep up with payments to maintain a home; however the net worth from holding the property is not growing at the same rate as the credit usage is ensuing. Without a budget in place coupled with access to multiple credit lines, a home owner could find themselves in a negative net worth after years of homeownership. Money management is key to increase net worth over time. New home owners and seasoned ones alike, let’s take a look at the costs of home ownership and budgeting. The categories below are to be paid from one’s monthly income. Credit should not be used to cover any of the following.
- Mortgage: Principal & Interest Payments
- Property Taxes
- Condo Fees
- Utilities
The list above is what your bank takes into consideration prior to approving your mortgage. The bank will base the affordability on your gross income (income before tax deductions). Add to the above your other monthly costs, such as;
- Home Owners Insurance
- Home Maintenance
- Groceries
- Car Lease or Loan
- Car Insurance
- Gas
- Car Maintenance (such as oil changes)
- Licensing
- Cable
- Internet
- Cell Phone
- Home Phone
- Child Support
- Alimony
- Life Insurance, Disability Insurance
- Medical / Dental
- Personal Items
- Entertainment
- Dining/Restaurants
- Coffee Shops
- Charitable Donations
- Clothing
- Child care
Some costs are not monthly, such as car maintenance. To create a budget, calculate the yearly cost and divide by 12. Example, 4 oil changes at $100/visit is $400 per year and is a monthly average of $33.33. It is important to include these regular costs, such as oil changes, which are not monthly. They will arise and if not planned for can easily be put on a credit card.
Once the monthly costs are calculated, compare it with your net earnings (income after tax deductions) and create a budget. When the budget is being created, one may see a need to cut back, or cut out some expenses all together. All non-fixed expenses can be tweaked if necessary.
In the list above, there are 2 very important categories missing.
- Savings
- Debt Repayment
Determining how much should be put away each month, and the type of account, or investment to make use of is an extremely important decision, not to be taken lightly. I highly recommend, no matter one’s net worth, meeting with an advisor at your bank to create a smart investment plan to meet short and long term goals.
Debt repayment/management is as important as savings. There are multiple strategies, or solutions if needed, and again, one should consult with a professional for a full assessment and advisory on best course of action. One thing to be strongly cautioned on; if a consolidation is up for consideration, it will only make sense if the accounts being consolidated are not used again. The new payment from the consolidated loan should be manageable in the monthly budget created, AND the cost of borrowing should not be higher than the current debt situation.
Knowing how much a home costs combined with one’s lifestyle costs gives financial power to setup a budget. A budget puts money into focus, curbs overspending, and enables a person to pay down debt, save & grow net worth.
