First Time Homebuyer Series - Part 1: Personal Budget

Most conversations about buying your first home start with money.

Buyers ask "Can I afford to buy a house?" and if so, "How much house can I afford?" I always ask buyers to take one step back at this point. We can't answer the previous questions until you have a solid grasp on your current financial situation. You may have even spoken to a lender and found out that you are pre-qualified for a loan. However, just because you are pre-qualified, doesn't mean that buying a house is a wise decision. We may find that you can easily afford a certain price house, or we may find that it's better to keep saving for another year or two.

Here are some basic steps to assessing your current financial situation and then making a budget for moving forward.

1. Track Your Income and Spending

Until you know how much money you bring home and how much you are currently spending, it is impossible to make a budget. You will just be guessing! After a few months of tracking your spending you will see how much you really spend eating out, at the sporting goods store, or shopping online. You will also see how much you actually have to spend after Uncle Sam takes his cut.

You can track your spending the old fashioned way by saving your receipts and logging your expenses in a spreadsheet. However, there are lots of great FREE tools available now. One of my favorites is a website called Mint.com. Mint allows you to enter in all of your checking, savings, credit cards, and investment accounts into one very friendly interface. They have great tools for you to see where your money goes each month. Once we get to the budget step, you can even do this in Mint.

2. Establish Reserves

I'm no financial planner, but the first thing most financial gurus tell you to do is to establish reserve savings. I usually hear them say to have 2 to 6 months of reserves in savings. That is 2 to 6 times what you normally spend each month. This is your safety blanket in case you face unexpected expenses, a job loss, etc. In most cases, if you don't have this extra cash in the bank IN ADDITION TO your down payment, I would say to think long and hard about buying a house at the current time.

3. Make a Budget

I love the advice given in a financial study that my wife and I did called, Balanced. The study said to set your budget in this order:

- Give
- Save
- Live

Their advice was to first determine how much you want to give to charity, second determine how much you want to save, and lastly divide up your remaining income into living expenses. The great thing about this advice is that you are always helping others, and you are always saving for your future. No ifs, ands or buts about it.

As I mentioned earlier, Mint.com has a great budget tool that allows you to set and track your budget online. Most people like to break their budget into categories such as Gas, Grocery, Dining, Insurance, Travel, Shopping, etc. Take a look at your historical expenses in each category and see if you think those are realistic numbers moving forward. Once you have numbers in all of your categories, we are particularly interested in what you can comfortably spend each month on housing.

4. Determine your Desired Monthly Payment

Once you've tracked your spending and set your budget, you should be able to see what you can spend each month towards housing. If this number is lower than you hoped, you may be able to tweak it by paying off a car, paying off a student loan, or cutting back on some extra expenses.

This number is important because we will match it up with a housing purchase price to determine what housing price point is right for you. We will talk more about how this monthly payment correlates to how much house you can afford in the next part of the series - Loan Pre-qualification.

Additional Resources

There is no shortage of information to help you with your finances. Lots of financial superstars have written entire books on this topic. I just tried to hit the highlights. I have read a few books and completed a few studies on personal finances. I have a some favorites, and depending on your current situation, I'm happy to share my suggestions with you.

Justin Landis
Keller Williams Realty
404-803-0471
justin.landis@kw.com