Purchasing your first home can seem daunting. Getting the right advice can help you save the money you need and prepare for the costs of homeownership. Learning about a home warranty provider can help you understand more regarding home warranty and homeownership.
Buying a home means you’ll have new expenses, like mortgage payments and closing costs, as well as ongoing bills. You should also consider a new savings goal to cover home maintenance and repairs.
1. Know Your Affordability
Buying a home is one of the most significant investments most people will ever make. It provides a physical space to call your own and offers potential tax benefits and a long-term financial gain through increased property values.
But there are many factors that can go into determining how much you can afford, including your income and monthly expenses. To help you stay on track, it’s important to understand how mortgage payments fit into your budget before starting your home search.
Most financial professionals recommend spending no more than 25% of your take home pay on housing costs (mortgage principal and interest, property taxes, homeowners insurance, PMI and HOA fees if applicable). A larger down payment can also significantly reduce your required mortgage payment, which can help you buy a more affordable home. Use an affordability calculator to get a realistic idea of how much you can comfortably afford. Then, speak with a mortgage lender to learn more about your options.
2. Make a List of Your Monthly Expenses
Keeping track of the money you spend can be challenging, but it's essential to budgeting success. Start by listing all your regular monthly expenses. Include "fixed expenses," like rent or a mortgage, car payments and debt payments, as well as "flexible expenses" that may change from month to month, such as food, gas and entertainment. You can use an app, budgeting software or even pen and paper to make your list. Also be sure to account for expenses that are billed quarterly, semi annually or yearly, such as insurance and taxes.
Once you have a list of your monthly expenses, subtract them from your net monthly income to see how much money is left over for other things, like saving and paying down debt. Eventually, you'll be able to save for larger purchases, such as a new car or home improvements. You'll also be able to save for emergencies, such as unexpected repairs. These are the types of savings you'll want to prioritize in your budget.
3. Track Your Spending
New homeowners have to take into account additional expenses they didn’t previously pay, like property taxes and insurance. It can also be challenging to
separate “needs” from “wants,” so it’s important to revisit the budget on a regular basis as expenses change and goals evolve.
Using personal finance apps or credit cards that automatically categorize purchases can help you identify themes and determine where your money is going. You might discover those impulse buys at Target or recurring subscription services you never use are costing more than you realize.
Then, you can start making adjustments. It’s important to be realistic when adjusting a budget, so look at three months worth of bank and credit card statements and receipts to get a good idea of what your spending is really like. You may decide you can cut back on some of your "wants" in order to afford a few more “needs”—like an emergency fund or home maintenance savings.
4. Set Goals
Having clear, short- and long-term goals can help you stay on track to meet your financial priorities. This may include creating an emergency fund, paying off debt or saving for retirement. Whether you choose to use a spreadsheet, budgeting app or simple paper and pen, find a method that works for you to clearly document your spending and savings.
For example, you could try the envelope budget approach by placing your expenses into different categories and keeping a running tally. Another option is to keep an electronic record with a free tool like EveryDollar.
Homeownership comes with many new costs that you might not have anticipated, but taking the time to refocus your budget and restructure your savings plan can help you be financially prepared. Regularly reviewing your budget will allow you to spot potential areas of overspending and make adjustments as needed. This is particularly important if you have any unexpected expenses.
