January Budget Doldrums

Now that we are 3 weeks into the new year, I'm sure if you made a resolution to do better with your money, your enthusiasm is starting to wain.  Have no fear!  I'm here for a mid-month pep talk.  First of all, remember a couple of things.  Change doesn't happen overnight and it's the little things that add up to be big.  Start by taking baby steps.  You can get anywhere by taking baby steps, right?  So here's a few steps you can follow if you're new to the game. 

1~ Lay out your entire budget- Income vs. Expenses.  Let it all hang out, flab and all.  This won't be pretty but you need to know what you spend on everything from debt payments to gas and groceries.  Don't forget little things like activities for the kids, lunches, and pet supplies.  Chances are you're going to feel anxious and overwhelmed by this, especially if what goes out is more than what comes in.  

2~ Cut it in half.  If doing an entire month is too much, start with a pay period instead.  This is a great way to break things off into bite sized pieces.  This is what I do and it's become super easy.

3~ Remember your four walls ALWAYS come first.  Read here for more about that.  These big pieces always go into place first so you don't have to worry about what you're going to eat, or if the electricity is going to be shut off.

4~ Choose one area that you want to change right now.  Maybe you'll start using cash for everyday expenses instead of credit or debit cards.  Maybe it's cutting back on dining out.   Maybe you need to shop around for insurance because it's been a while since you've looked.  Maybe it's even as simple as menu planning to save on your impulse grocery spending.  Regardless, find something that you can start today.  Once you've mastered that one thing, choose another.

5~ Remember to take one day at a time.  There's nothing more discouraging than feeling like you're stuck.  Taking baby steps one day at a time helps.  Life is never perfect and neither is budgeting.  But if you keep at it, you will achieve your goals.

House Fever

Have you noticed the recent new wave of house fever that has hit?  Maybe it's just my area but people are jumping through hoops just to buy a house 1- because interest rates are at historic lows but 2- because house prices are also so low right now.  Could this be the beginning of a new problems?  Isn't people buying houses when they weren't ready one of the main reasons for the collapse?  Buying and owning a home is one of the biggest blessings.  However, if you do it when you're not ready it turns into a curse. Here's why.  Say you're the average American.  You have credit cards, a car payment (or two), and student loans from your college days.  Add getting married or a baby and you have a recipe for house fever.  Major life changes like marriage and children cause temporary brain damage in most.  I know it did for my husband and I when we had our first child.  Looking back it makes me sick to think of the mistakes we made.  In less than a year we bought a car, had a baby and then bought our first home with no money down, a whole lot of debt, and very little savings.  We thought we needed all that.  Man were we wrong!  We ended up broke and unable to reach our financial goals without some major sacrifice.  So I'm here to tell you, don't make the same mistakes.  We're still feeling the ripples from those choices many years later.

Here are my basic guidelines to home buying.  Do NOT buy a house unless you have achieved the following.
1~ Have a healthy down payment.  This is first for a reason.  If you don't have a down payment, you can't afford to buy a house. Period.  Doing so will come back to haunt you.  Trust me, I know from experience.  20% is ideal because you won't have to worry about PMI (private mortgage insurance).  After the housing bubble burst these rates have nearly doubled.  Depending what type of loan you have will determine the amount you pay monthly.  FHA and Conventional loans for instance have a graded rate you pay every month.  The more your down payment the lower the percentage.  With FHA loans however there is the added catch that you are required to pay the PMI for a minimum of 5 years and until you reach 78% LTV (loan to value).  Conventional loans will drop the PMI after you reach 80% LTV, even if it's been less than 5 years but you may be required to prove that with an appraisal.  VA loans are different. While they don't require a down payment and have no PMI strings, the interest rates are typically much higher (1-1.5% higher) than either FHA or Conventional loans and of course you have to be or be married to a Veteran or active Military/National Guard to qualify.  Think carefully before you sign up for this because you could very well get a better overall deal elsewhere.

2~ Be out of debt.  Having student loans, car payments and/or credit card debt hanging over your head when you buy a house is asking for trouble.  The added costs will stifle and further divide your focus and ability to pay down that debt, build an emergency fund, and save for retirement.  Furthermore, if you have a pile of debt, chances are you are less likely to have money to pay for basic repairs and breakdowns that are inevitable to come.

3~ Keep the payment no more than 25% of your take home pay.  Sure you'll qualify for much more than this because lenders look at your gross pay, not your net.  But think about it.  Going off your gross pay is deceptive since you don't actually see the money that goes to taxes, health insurance and other pre-tax expenses.  You may be able to go a bit above that number to include the property tax and home owner's insurance portion of your payment, but if you stay in that range you won't be at risk of being house poor.  Buying too much house stifles your financial goals just as much as debt can.

4~Get the lowest mortgage term you can.  Not only do you get a nice drop in interest rate by going to a 15 or 20 year mortgage but you get your house paid off sooner.

5~Don't buy a house unless you plan on living there for at least 5 years.  Don't buy within the first year of marriage, if you're in school or plan on going back to school.  Life is unpredictable, but if you know change is coming, don't make a long-term commitment.  Selling a house is expensive with Realtor fees, closing costs for you and possibly the buyer, whatever equity you do have can be eaten up quickly.  Plus, with today's market it might take a while to sell if you need to, depending on what area you're in.

I know this seems like a lot, but if you follow these 5 steps you won't regret any part of buying and owning a home.