One of the most common ways new homeowners determine their home buying budget is with the 28% rule. That means your mortgage shouldn’t be more than 28% of your gross income each month.
Once you’ve bought your home, your monthly budget should always start with your mortgage. It is typically your largest expense. Your monthly mortgage payment consists of more than what you owe your lender. It consists of your principal, interest, taxes, and insurance, which is commonly referred to as your PITI.
Principle: This is the money that goes towards the actual balance of your home loan.
Interest: The money going towards paying the interest on your home loan.
Taxes: These are property or real estate taxes. This amount is determined locally and varies from area to area.
Insurance: This always includes homeowners insurance and title insurance, but you could also have mortgage and flood insurance.
If you have a homeowners association, you will also need to budget for fees, which could be a few hundred dollars a month.
Creating Your Budget
To budget effectively, make a list of your income and your new homeownership expenses. To get started, list all forms of income and monthly cash flows. You’ll want to include income from your job, spousal or child support, investments, and any other sources.
Now, list your expenses, like your monthly mortgage payment and any other home-related costs, like homeowners association fees, insurance, and taxes. Make sure to add in funds for ongoing repairs. According to realtor.com, homeowners should budget about one percent of their homes’ annual cost for repairs and emergencies. Take the time to determine that amount and split it up into 12 monthly amounts to keep your budget as accurate as possible.
After you list your expenses, make a list of other required bills. Other bills might include your car payments and auto insurance, student loan payments, utilities, groceries, childcare, Netflix, etc. Total all your expenses, and you’ll know how much take-home pay you need every month to make ends meet.
When you are done totaling up your expenses, subtract that from your total household income. Hopefully, you have some money left over. You can use these leftover funds to add to your emergency or savings fund. If you don’t have leftover money and instead are short of money, you’ll need to bring in more income or cut some expenses. Think of non-essentials like Netflix, Spotify, gym memberships, and household services such as lawn care or housekeeping.
Ways To Cut Costs
One way to cut costs is to evaluate your impulsive spending. Look at your recent bank statements. Did you shop a little too hard on Amazon, or treat yourself a few too many times last month, or order takeout instead of cooking at home? Being aware of how you are spending money is a good first step to cutting back and living within your budget.
Track Your Spending
By tracking your income and expenses, you can create an ongoing monthly budget. Staying on budget will make homeownership a little sweeter. You can manually add your spending to make sure you’re on track or use free digital tools, like Mint. They’ll allow you to designate spending categories and their limits and then automatically track your progress once you link your accounts.
>Many homeowners use the popular 50/30/20 budgeting method. This method is when your mortgage, essential bills, and necessities are no more than 50% of your monthly income. You want to aim for about 30% of your income to be leftover for your wants. Finally, you want to be able to commit around 20% of your income to savings and debt repayment.
Budgeting can take a while to get used to, but budgeting will help you plan for emergencies and manage your money a little more effectively for a homeowner with a new set of expenses.