After years of saving, sacrificing and paying down debt, you’ve finally purchased your first home. But now what?
Budgeting is essential for new homeowners. You’ll now face bills like property taxes and homeowners insurance, as well as monthly utility payments and possible repairs. Luckily, there are some simple tips for budgeting as a first time homeowner.
1. Track Your Expenses
The first step in budgeting is to take a look at what money is coming in and going out. This can be done in a spreadsheet or by using a budgeting app that will automatically track and categorize your spending habits.
Start by listing your recurring monthly expenses, such as your rent/mortgage, utilities, transportation and debt payments. Then add in the estimated costs of homeownership such as property taxes and homeowners insurance.
You can also include a savings category for unanticipated costs such as new roof, replacement appliances or major home repairs. Once you’ve tallied up your estimated monthly expenses, subtract your total household income from that number to determine the percentage of your net income that should go toward necessities, wants and debt repayment/savings.
2. Set Goals
Having a set budget doesn’t have to be restrictive and can help you find ways to save money. Using a budgeting app or creating an expense tracking spreadsheet can help you categorize your expenses so that you’re aware of what’s coming in and going out each month.
The biggest expense as a homeowner is your mortgage, but other costs like property taxes and homeowners insurance may add up. In addition, new homeowners may also incur other fixed fees, such as homeowners association dues or home security.
Once you know your new expenses, create savings goals that are specific, measurable, attainable, relevant and time-bound (SMART). Check in on these goals at the end of each month or even each week to keep track of your progress.
3. Create a Budget
After paying your mortgage payment, property taxes and insurance, it’s time to start creating a budget. This is the first step in ensuring you have enough money to pay your nonnegotiable expenses and build savings and debt repayment.
Start by adding up your income, including your salary and any side hustles you do. Then subtract your household expenses to see how much you have left over each month. We recommend using the 50/30/20 budgeting rule, which allocates 50% of
your income toward needs, 30% to wants and 20% to debt repayment and savings.
Don’t forget to include homeowners association fees (if applicable) and an emergency fund. Remember, Murphy’s Law is always in play, so having a slush fund will help protect your investment in the event something unexpected breaks down.
4. Set Aside Money for Extras
Homeownership comes with a lot of hidden expenses. In addition to the mortgage payment, homeowners need to budget for insurance, property taxes, homeowner’s association fees and utility bills.
The key to successful homeownership is ensuring that your total household income is sufficient to cover all of the monthly costs and leave room for savings and fun stuff. The first step is reviewing all of your expenses and finding places where you can cut back. For example, do you need a cable subscription or could you reduce your grocery spending?
Once you’ve trimmed your excess spending, you can use that money to build up a savings account or even put it toward future repairs. It’s a good idea to set aside 1 – 4 percent of your home’s purchase price each year for maintenance-related expenses. You may be needing some replacement in your house and you want to be able to cover everything you can. Educate yourself on home services and what other homeowners are talking about when they first buy their homes. Cinch Home Services: does home warranty cover electrical panel replacement: a post like this is a good reference to learn more about what is and isn’t covered under a home warranty. Over time, appliances and things that you frequently use will go through a lot of wear and tear and will need repair or replacing.
5. Keep a Checklist
Creating a checklist helps keep you on track. The best checklists include all relative tasks and are constructed in small measurable goals that are attainable and easy to remember.
The list may seem endless, but you can begin by setting priorities based on need or affordability. For example, you might plan to plant rose bushes or buy a new couch but realize that these non-essential purchases can wait while you’re still working on getting your finances in order.
It’s also important to budget for additional expenses unique to homeownership, such as property taxes and homeowners insurance. Adding these expenses to your monthly budget will help you avoid “payment shock,” the transition from renting to paying a mortgage. Having this extra cushion can make the difference between financial comfort and stress.