Buyer’s Guide – The Budget | Part 1: Building It
When you sit down to figure out your home buying budget, the goal is to make sure you don’t end up “House Poor”. What’s house poor? Spending so much money on housing that you don’t have the funds to buy furniture or maintain the lifestyle that is important to you.
If, after paying the mortgage, property taxes, and utilities, you don’t have money kicking around for surprise maintenance issues or appliance replacement, you are living on the edge of a very stressful situation.
The key here is finding out what monthly cash outflow is comfortable or reasonable – not just taking the maximum amount of mortgage that the mortgage company or bank will lend. You know your lifestyle and spending habits better than they do, and if you don’t, this is the time to figure that out!
Learning exactly what your budget is helps you predict and plan for where and when you can spend your money. A budget is essentially an overview of how much money you have coming in versus how much money you have going out.
It can be hard to keep track of your spending at first, but it’s worth the peace of mind in the long run.
How to Build Your Budget
1) Determine Your Current Budget
Figure out what your costs are right now. What are you spending and in what categories (eg. rent, food, entertainment, car payment, coffee, gym memberships, savings, etc.) Mint is a great tool to help you get a sense of where your money is going.
2) See Where you can Make Adjustments
Look at what you can adjust or re-allocate. Are there expenses you can cut or reign in? Are there expenses that would no longer exist once you are a homeowner that you could put towards your home, like parking fees and rent?
You might be able to free up some cash.
3) Find Out What You Need to Save Up For
Look at the costs of moving that you need to save up for. You’ll need a down payment and it’s smart to have a bit of money put aside in case of new home surprise maintenance, like if your dishwasher quits and needs to be replaced.
Other costs of moving that you’ll need to cover are utility hook-ups; you’ll need room in your finances for those too.
4) Monthly Costs
Look at the monthly costs of home ownership like a mortgage, insurance, utilities, and potentially more.
The Government of Canada has as worksheet you can use for Steps 3 and 4 on their website. It will help you see what your one-time and ongoing expenses will be.
In Part 2 of this blog series, The Budget: Home Ownership Costs, I explain these ongoing costs and what they mean to you.