If you plan on becoming a homeowner, setting and sticking to a budget is a must. Budgeting will help you save for a down payment on your new home, as well as help set aside money for emergencies or vacation. Whether you’re looking to buy a rent-to-own home with a deposit, a HUD home with low down-payment requirements, or a traditional mortgage; wise money management is a good skill to have early on.
How to start creating a budget:
When starting a budget, the first thing to do is take an inventory of your current financial situation. This will help you see areas where you may be wasting money, as well as get a good idea what your income to debt ratio is:
Step 1: Write down all regular sources of monthly income. You should be looking at income post-tax so you have a realistic idea of what you’re bringing home.
Step 2: Make a list of all monthly bills and their payment requirements. Common areas include:
- Car payment
- Car Insurance
- Other transportation costs such as gas and car maintenance, or fare for public transport if you do not own a car.
- Cell phone plans
- Student or other loan payments
- Current bills and average amounts.
Step 3: Create a budget for unexpected items, such as car repairs, medical bills or other situations you may not predict. A common practice is setting aside 10-15% of the total bill amount in step 2.
Step 4: Determine your savings goal. For example, if you want to own a home in the next 2 years, and the types of homes you want are generally around $300k then it’s a good idea to factor in a minimum of 10% to 15% of that if you want a traditional mortgage. Even if buying HUD or Rent to Own, having more savings in place for unexpected costs is a great idea.
If you know that you want a home in 2 years, and your minimum savings amount for a home in the price range you would like is $30,000, then you need to save $15,000 per year and approximately $1,250 a month.
Take this amount out of your remaining funds after you’ve calculated bill costs. You can split what is leftover between savings for other household and entertainment-related costs and spend the remaining amount on food, entertainment, and other discretionary purchases.
If you stick to this budget, it increases your chance of purchasing a home in the timeframe you’ve set for yourself. We wish you the best of luck on your homeownership journey, and if you have additional advice, please feel free to share it with us in the comments below.