How to Effectively Prepare a Budget Before Buying a Home
When you're preparing to buy a home, it's critical to have a realistic idea of what you can afford. This means taking a close look at your income and expenses to create a budget that reflects your true financial picture. In this episode of MRE Scoop, Lincon talks through the steps you’ll need to take to prepare a budget, so you know how much you can safely borrow when you approach the bank for a loan.
This is incredibly important at the moment as interest rates are going up, as Lincon says “the banks are going to make things very difficult.” So be prepared and very aware of your income, expenses and how much you would like or need to save.
Below are Lincon’s four tips to help you set a budget and goals for purchasing a new home.
1. Record your income
The first step in creating a budget for your mortgage is to track your income. Get a piece of paper, write down every source of income you receive in a month, as well as the amount. This includes things like your salary, interest from investments, or rental income. At the end of the month, add up all of the amounts to get your total income for that month.
Another way to track your income is to use a budgeting app or spreadsheet. This can be helpful if you want to see a more detailed picture of where your money is coming from and being spent each month. Simply enter your income and expenses into the budgeting tool, which will do the math for you.
2. Record your expenses
The next step is to list all of your regular monthly expenses, and this list is probably a lot longer than you think! It’s everything you spend on, from rent or mortgage payments, utility bills, food costs, medical and insurance payments, car expenses (including gas, insurance, and tolls), student loan payments, credit card payments, child care costs… and the list goes on and on.. Small expenses can add up. And you will also have unexpected payments such as needing to make repairs to your car or home, or needing to buy medicine, or school or sports items for the kids. Write it all down, and know where your money is going every month.
3. Record your recreational expenses
This includes entertainment, dinners out, hobbies, and holidays. By knowing how much you're spending on these activities, you can better allocate your funds and ensure that you're not overspending. Tracking your recreational spending can also help you identify areas where you can cut back, which can free up more money for other expenses or savings goals. Start by evaluating your recreational spending for the past month or two and then begin tracking it going forward.. From there, you can start to make adjustments to maybe cut back on your “wants” and start saving for that new home.
4. Adjust your savings goals
Once you have a clear understanding of your spending and saving habits, you can set financial goals for yourself. For many people, there is a difference for how much they would LIKE to save, versus how much they are actually saving each month. Whatever your goal may be, set that amount and do everything you can to keep to it.
5. Adjust your budget
Once you have your savings goals set, it's imperative to stay disciplined and motivated. You may need to adjust your budget from time to time. However, doing so will help keep you on track and financially stable as you move closer to purchasing a home. Saving up for a down payment can take time, but if you stick to your savings goals, you'll reach your goal in no time.
Creating a budget may seem like a daunting task, but it doesn't have to be. By taking some time to sit down and map out your income and expenses, you can get a better idea of where your money is being spent. This will enable you to know how much you can realistically afford to spend on a new home.
Not sure where to start? Our team at MRE can help. We'll work with you to map out your income and expenses and create a budget that fits your needs. Contact us today to get started.