(Mar 27, 2023)
Unfortunately, many people buy real estate without setting reasonable financial goals. As a result, they end up paying dearly for the consequences of a rushed decision. Eventually, they own a home but struggle with debts, foreclosure, and bankruptcy.
This chapter highlights how you can assess your budget and spending. You’ll also learn how to position your savings to meet your financial objectives and live happily in your home.
Tracking Your Spending Patterns
Before setting out for your home purchase, it is essential to master your current budget and routine expenses. It lets you see where you’re currently spending your money and if your income will suffice the purchase cost.
Your income and spending may fluctuate, but you certainly have a basic spending pattern. A good strategy is to review your spending pattern within a three-month cycle. Then, evaluate how much to dedicate to essential needs and secondary wants.
If you have a wide variation in your spending habits, work out an average of your spending for six months to determine the correct figure.
Trimming Unnecessary Expenses
Whenever you plan to buy a home, be sure to cut down on unnecessary expenses to build enough cash for the down payment, closing costs, and homeownership expenses. Unless you are incredibly wealthy, trimming unnecessary expenses is a necessity you cannot overlook.
Here’s how to cut unnecessary costs:
1. Eliminate All Consumer Debt
Although consumer credit provides quick and ready cash, it has high, non-tax-deductible interest rates.
Consumer loans can increase your chances of living beyond your financial capability, subjecting you to costly loan repayments. Getting rid of consumer debt is a crucial step to long-term financial health. A good strategy is to use personal savings to eliminate consumer debts.
2. Refinance Your Credit Card Debts
If you have barely any savings to clear consumer debts, consider refinancing. The strategy involves turning the high cost of credit card debt into a low-interest loan. Then you can focus on limiting other expenses to build extra cash to pay the low-interest credit card debt.
Additionally, you could obtain debit cards that allow merchants to deduct money from your checking account only.
3. Kick-off Unnecessary Items
You may not be a high-income earner or a spendthrift, but some items in your budget aren’t necessities. Essential items include food, clothing, shelter, and medication. Nonetheless, we expend more money on non-essentials.
4. Buy Items in Bulk
Purchasing products in mass is less expensive than purchasing a small unit. Therefore, consider wholesale and chain stores that offer discounts for bulk buying when purchasing items. It helps reduce your overall expenses.
Using Credit Wisely
Borrowing on your credit card may subject you to higher interests, but that alone doesn’t mean credit is terrible. You can borrow credit for a solid investment purpose if you don’t outstretch your repayment ability. For instance, borrowing to purchase real estate or open a business will pay back in the long run.
The upside is that mortgage interest tax is deductible; hence, you’ll earn tax reliefs. Similarly, if you borrow to open a business, you may qualify for a tax break on your interest expenses.
Analyzing Your Spending Information
Tracking your expenses is only a step towards financial health and fitness. In addition, tabulate and interpret all vital information about how you spend money.
Here are likely outcomes of your spending information:
1. You Spend Too Much
A closer look at your spending habits may shock you if you discover the money pit that consumes your earnings. If you spend too much, your task is to identify where to cut back and start saving more.
How much you should save depends on your financial goals and how aggressive you invest. For instance, if you wish to retire early, consider saving more than 10% of your pretax income to meet your financial objectives.
2. You Save Right
You are right on track if you have mapped out a healthy financial trajectory where you save rightly. However, property acquisition can disrupt even the most organized budget. So, it may help to review your budget, analyze your spending, and determine if it will suffice after the home purchase.
3. You Save Excessively
Perhaps you’re among the few buyers who save more than necessary. You may skip a budget when buying a property. But even if you have solid financial plans, you may still track your expenses to ensure you won’t encounter financial difficulties in the future.
Setting Retirement Goals
Most people find joy in saving to accomplish a specific goal, but most have no idea of saving for their retirement. The truth is, you’ll retire someday hence you require a retirement savings plan.
A retirement goal cushions you against nasty surprises such as paying consumer debts in your golden age.
However, thinking that you’ll work into your 70s, 80s, and throughout your entire life is risky. You never know what the job market holds or how your health will be in the future. As such, you must have pension plans and goals in place.
You can opt for a 401 (k) or 403 (b) saving plan if you have formal employment. Similarly, an SEP plan would work best if you are in business. Both options have a tax write-off that saves you from hefty state and federal taxes.
Additionally, all money kept in a retirement saving account compounds over the years and allows tax-free withdrawal at the end.
Budgeting For a Home Purchase: Is It Worth?
When it comes to buying a house, the most important rule is to buy a house that you can afford. That is why you need a budget.
However, setting a home buying budget entails more than simply determining whether you can afford a mortgage loan.
It entails keeping track of your spending habits, eliminating extra expenses, and reviewing your spending data. Finally, it would help if you had a retirement savings strategy in place for your golden years.
(Mar 27, 2023)
