You’ve likely budgeted before for a big-ticket item like a new television or car. However, it’s another thing altogether when saving up for a new home.
Here are some tips on how to develop a budget and where to cut expenses for when you plan to make a home purchase.
Be Realistic About the Budget
You can cut out every extra expense in your life and still not be able to afford some homes. Do yourself a favor and avoid setting your sights too high. Everyone has their dream home, but if the price is astronomical, all the budgeting in the world won’t make a difference. Budgeting is a powerful tool, and gives you have an idea of your realistic price range. Knowing what you can afford will save a lot of time and heartache later.
Track Your Money
Where do you start? Start by simply analyzing where all the money goes now. For one month, track everything you spend, no matter how trivial it seems. Don’t exclude that morning cup of coffee or pack of gum bought at the drugstore. These things are not free, so they count. Come up with a total by category (for example, rent, car payment, food, clothing, entertainment, etc).
Next, add up your income for the month. Are you spending more than you’re making? Is it about even or less?
Make Spending Cuts
To make your home-buying dreams come true, it’s time to make some lifestyle changes. Consider making coffee at home. Bring a bagged lunch. Prepare meals at the beginning of the week to avoid the temptation of ordering takeout after a long day at work. Cut coupons or use digital coupons, especially when shopping at the grocery store.
Think twice about buying non-essentials; do you really need another new shirt? Decide whether you can do without those expensive cable TV services. Check out cell phone providers to see if you can reduce monthly bills. You'll think of more and more ways to cut costs as you go along. Track these changes for a month or two and see how much extra money you have leftover at month’s end.
Pay off Debt
As you reduce expenses over time, use that leftover cash to pay off debt. This could be anything from student loans to credit card charges and anything in between. The less debt you have, the better your credit will be and the more appealing you’ll be as a home-buyer.
Consider Costs of Homeownership
Do be aware that when you purchase a home, you’ll pay for more than just a mortgage. If you’re making the jump from an apartment to a home for the first time, you may be surprised to discover that a lot of expenses once covered for you through the apartment association aren’t covered for you as a homeowner.
For example, you’ll have to pay for all utilities each month. You’ll also have to cover the inevitable home maintenance items. Don't forget that there will be significant initial closing and upfront costs, neighborhood or homeowner’s association fees, personal property taxes, and annual real estate property taxes. You should also factor in home insurance to cover events such as fire, earthquake, or flooding.
Build a Future Nest Egg
Even once you've bought a home, you shouldn’t stop using a budget. Keep saving where you can, socking away bits of money each month as a nest egg. This can be a life saver in case of emergencies like an unexpected car repair, pricey doctor’s bills, or any other unanticipated expense.
If at any time during this process you’re feeling in over your head, it’s smart to scale down your home buying goals for a more affordable property. It’s better to know what you can reasonably afford early on instead of contacting a realtor and checking out a home that’s out of reach. Overall, by mastering the budgeting process and saving money long before going house-hunting, you’re learning a valuable skill that will serve you well for a lifetime.