Whether you are planning to buy a home or you are already in the buying process, managing your money is the first step to success. Smart investors create a budget that covers mortgage and other expenses, as well as improvements, entertainment, and unexpected bills.
“A budget is a crucial tool to help you take control of your money,” says Natalie Graham, money and budget coach at Go From Broke, LLC in Arizona. “Budgeting brings you clarity and confidence with your finances, so you can spend according to your values and stay on track to reach your goals.”
Creating a Budget
Consider a budget as a necessary part of your financial plan instead of a chore that should be avoided. It will help you progress in your current and long-term financial goals and help you manage income, expenses, and current and future savings.
“One of the most common complaints people have toward budgeting is that it’s too restrictive. But a good budget should be a reflection of your values and priorities,” says Graham. “If it feels restrictive it’s because something is out of alignment. Your budget is just a tool to help you spend more intentionally so you can feel confident about your purchasing decisions.”
A budget can help you manage the costs of owning a home. Contact Attorney Mortgage to guide you through the mortgage process and explain the long-term financial benefits of a purchasing a home.
First Steps to Budget Savvy
How do you start to create a budget? When counseling clients, Graham begins with a simple budget that focuses on the paycheck. “They can practice only spending the money they have, instead of forecasting and budgeting dollars they expect in the future,” Graham explains.
“To start, you’ll need to figure out how much money you have available (typically your checking and savings), and what expenses you have coming up before you get paid again. This helps you avoid overspending while also allowing you to save more than you typically would.”
If you receive a salary, or your employment earnings are fairly regular every week or month, total your monthly income. If you are paid on an hourly basis that fluctuates from week to week, or if you freelance and your monthly income changes, you will need to take a look at your income for the last six months to a year. There are a few ways to find a beginning monthly income for your budget:
- Attorney Mortgage will help you determine your debt-to-income ratio and your monthly income at the beginning of your mortgage process. You will be able to create a monthly income sheet that will help you understand expenses and smoothly transition into home ownership.
- Use the total of the lowest month’s income in the last six to twelve months. This is a safe and simple way to create a beginning budget, as you will learn to keep expenses within those income boundaries. If you make more than that amount, you can save the extra money or invest it for the future.
- If you already have money in a savings account that you are able to utilize, you can use the income from the previous month as your starting point. If you have a month that dips below that previous month’s income, you can balance with savings until you have established a comfortable budget based on an average income level.
- You can create a budget by looking at your expenses first and determining how much income you need to manage your expenses. You can then divide the amount of required income and come up with a weekly or daily amount you need to earn. This reverse budget method could work well for those who work on a per diem or per project basis.
Sinking Funds as Lifesavers
Do you work at more than one job? You may have additional income, such as secondary jobs, alimony, child support, freelance projects, etc. Depending on your circumstances, you may choose to average any steady additional income into the budget, or delegate that extra money to a separate, or sinking fund.
Graham recommends creating sinking funds for infrequent and unexpected expenses as well as your savings goals. A sinking fund is a line in your budget where you set aside an amount of money to save for future expenses, or for large purchases. You may have more than one sinking fund; you could set aside money for a specific expense, such as a car, future home repairs, or a vacation. You can also consider funding savings goals or debt payoff goals with any extra money you have.
“You’re saving up small amounts over a longer time frame instead of having to come up with a big chunk of money all at once,” she says. “Determine the amount you’ll need and when you need it, then divide that amount by the months until you need it. Next, start saving that amount each month until you reach your target. For example, if your homeowner’s insurance is $3,000 and is due in 10 months, you’ll want to set aside $300 a month to make sure you have enough to pay it.”
Planning for Rising Costs
Graham says that it is a smart idea to create an emergency fund that can cover at least a month’s worth of expenses. “Ideally, you’ll grow that fund to three to six months or more in case you have a job loss or unexpected medical expense. For utilities, I like to tally up what I paid the previous year and make sure to budget at least the average each month. Depending when you start, you may need to budget more to cover your immediate bills,” says Graham. “For example, your air conditioning expense might be higher in the summers. If you don’t have anything saved yet, you’ll need to budget more at the beginning. But eventually it will even out and you’ll have enough set aside in the fund to cover the expense while keeping your budgeted amount consistent. You could also take this figure and round it up to the nearest $10 or $50 to create a buffer for future increases.”
Many utility companies offer “budget billing” for customers that have used their services for one year or more. These budget plans are not a discount on utilities. The company usually averages usage over a year and projects price increases and weather conditions. Then the customer is billed an estimated monthly amount. At the end of the budget-billing period, the company compares actual usage to payments, and adjusts the amount at a predetermined settlement date. Some companies offer refunds if the customer uses less than the budgeted amount, and others may add the unused amount to the next year’s budget plan as a credit. If usage is greater, the customer is charged the difference, although some companies allow the customer to add the debt to the next year’s budget billing amount.
If you have student debt, apply it to your monthly budget as a fixed expense. You can qualify for a home loan with Attorney Mortgage even if you have student debt. Use a debt payoff calculator like Undebt.it or Savi to help you make a plan to determine how much you need to set aside each month. Then incorporate that amount into your budget.
Be familiar with the type and terms of your student debt. Each one has a different repayment requirement and interest rate. Attorney Mortgage can help you acquire a home mortgage despite student debt.
“When your income increases, it’s important to avoid lifestyle inflation,” Graham warns. “Instead of increasing your expenses, allocate those extra dollars to your savings goals or toward paying off debt. This approach will help you reach your long-term goals faster and build your net worth in the process.”
If you are a newly degreed attorney, an established attorney looking for a first home, or if you are ready to refinance your home, Attorney Mortgage can help you navigate the loan process. We can help you maneuver through those obstacles. Begin to build long-term wealth and create financial flexibility through home ownership today. Contact us or call (816) 456-7478.
“Be flexible with your budget. It should reflect your priorities to help you reach your goals so it’s ok to change things up if your priorities shift,” says Graham. “Remember, the purpose of a budget is for you to tell your money where to go – instead of wondering where it went.”
Ready to find out more?
If you are a newly degreed attorney, an established attorney looking for a first home, or if you are ready to re-finance your home, Attorney Mortgage can help you navigate the loan process. Contact us or call (816) 860-1686.