All it takes to achieve your financial goals is a good plan.
When you’re looking for a home, the last thing you want to do is fall in love with a property that’s outside of your price range. But figuring out how much home you can afford involves more than getting pre-approved by the bank. You’ll need an honest look at your income and expenses, and you’ll need a monthly budget to meet your goals.
If you don’t have a budget, now’s the time to create one! Follow the steps below to create a plan that will help you afford your dream home and get you settled in no time!
1. Get the right tools
If your idea of a budget is some old-school paper list of accounts with hard-to-read handwriting, you’ll be pleasantly surprised. There are plenty of apps available to make budgets easier to create and keep track of – and some use challenges inspired by video games to even make the process fun! Pick whatever format you feel most comfortable so you will stick to it for the long term.
2. Start with what you have
It goes without saying that you can’t create a budget until you establish your starting point. For those on a salary pay scale, this may be easy to determine. But for hourly employees or those who work for themselves where income varies, this could be trickier. To find a midpoint, average out the last six months to a year of income and use that figure, or choose the lowest amount earned to give you the worst-case scenario. Only include regular income, and not money from outside jobs or hobbies that you can’t depend on.
3. Break down all your expenses
List your monthly recurring payments like rent, utilities, car payments, etc. But once you’re done with the obvious expenses, it’s time to really find out what you’re really spending. The best way to make sure that you’re not forgetting anything – contributing to the shared coffee fund at work or a regular treat for the kids after school – is to track absolutely all of your expenses for a month. Once you have that total, divide your costs into fixed and variable expenses.
4. Look at the bottom line
With a better understanding of your income and expenses, you can set your budget. Try a plan like a 50/30/20 budget, where 50% of your income goes towards necessities and 30% goes towards savings goals or paying off debt. But don’t forget to budget some of your income to cover a few luxuries, not just needs. Like a diet, if you try to be too restrictive you may find yourself splurging on something big to feel more in control. So factor in some amount like 20% for small comforts or entertainment.
5. Pay yourself first
The problem many people run into is that by the time you’ve paid for everything else – from utilities to your daily coffee – there may not have enough left to add to your savings. So get into the habit of paying yourself first. This doesn’t mean spending money on yourself, but it means prioritizing payments into your savings before you pay anything else. Set aside a certain portion of your income as soon as you get it and transfer that money before you spend anything else to be sure that your financial goals are covered.
6. Check in each week
Keeping track of your budget might take you an hour or more each week, but this will save you a lot of time in the long run. Take the time to review your accounts and see where you are meeting your goals and where you are going beyond your budget. And if you find extra money in your budget, put it to work by adding it to your savings, emergency fund or debt repayment. Not only will this build your discipline, but you will also quickly see your savings add up motivating you to accomplish your goals.
7. Be realistic
Life is full of surprises, so don’t be discouraged when expenses come up that you hadn’t planned for. Instead, make sure you are including enough money in your budget for an emergency fund to cover something like a broken appliance, car repairs, or an unexpected illness. Having a reserve will mean that you can pay what you need without taking on more debt or pushing your goals back even further.
Setting up a budget may seem overwhelming at first, but with a good plan in place, you’ll be well on your way to financial freedom before you know it!
