So you’ve decided to purchase your first home. Congratulations! Purchasing a home is a huge decision, and it can be one of the most exciting and rewarding experiences of your life.
But purchasing a home requires capital, and if your savings account is looking a little trim, it means that you will have to do some budgeting in the upcoming year to make your dream of being a homeowner a reality.
Here are 7 budgeting tips to help you buy your first home:
1. Track Everything You Spend
You will not be able to make any major changes to your budget if you don’t have a firm understanding of how your money is being spent. Tracking everything you spend for a month will show you exactly how much you’re spending, where you’re spending it, how much of your budget is going towards necessities and how much of your budget is going towards luxuries.
You can keep track of all of your expenses in a spreadsheet, but a better strategy is to use a spending tracker like Mint or Prosper Daily (formerly BillGuard). These apps link to all of your accounts and will track and categorize your spending, making it easy to visualize where your money is going.
2. Identify Areas To Cut Back
Once you know where your money is going, it’s time to identify the areas where you can cut back and save additional funds to put towards your down payment. Every household will be different, but when you’re saving for a house, anything that’s not a necessity (like rent or medical insurance) should be considered an area where you can cut back.
Things like eating out, daily Starbucks and an expensive gym membership are great, but they can quickly eat into your budget. Cutting back on extra spending is a great way to build your savings and get you into your new home faster.
3. Create A Budget
Creating a budget – and sticking to it – is one of the best things you can do for your finances as you’re gearing up to buy your first home. There’s nothing more frustrating than having a savings goal and consistently falling short each month because of thoughtless spending. Having a firm budget (and holding everyone in your household accountable to it) helps you stay on track towards your savings goal.
Create a budget that includes all of your set expenses (like rent), the amount of money you will put into your savings account each month and allowances for categories like food, entertainment and gas. Then, stick to the budget no matter what.
Having a set amount for how much you can spend on things will make you think twice before pulling out your wallet.
4. Get Your Score Up
One of the most important factors in the home buying process is your credit score. Your credit score (and the credit score of your spouse, partner or co-buyer) will directly affect the interest rates on your mortgage, and a good credit score can save you thousands of dollars a month.
If you can, work to bring up your credit score as much as possible before you apply for your mortgage. Pay down any outstanding credit card debt, check your credit report for inconsistencies and always pay your bills on time.
5. Practice Paying Your Mortgage
When you create your budget, you should have an idea of how much you can afford to spend on your mortgage payment when you buy a home. But you shouldn’t wait to buy a home to start making that payment, particularly if it’s higher than what you’re currently paying in rent.
Practicing your mortgage payment will give you real life experience of what it will be like to make that payment each month. Take the difference between your current rent payment and your projected mortgage payment and immediately put it into savings at the beginning of the month.
You might find that you overshot how much you can afford and your projected mortgage payment puts you under too much financial strain. Or you might find that you actually have more wiggle room in your budget than you anticipated and can afford a higher mortgage. Either way, that’s information you want to know before you lock in a 15 or 30 year payment.
6. Pay For Everything In Cash
It’s easy to lose track of how much money you’re spending when you put everything on a debit or credit card. With just a quick swipe, you have everything you need. But paying for things in cash can make the purchase feel more real and can help you get a better handle on your spending.
At the beginning of the week, take out all of your spending money in cash. Then, make a commitment to only use the cash in your wallet to cover your expenses. If you run out of cash, that’s it.
Seeing your cash dwindle as the week goes on will help you visualize how much money you have left for the week and can help curb needless spending.
7. Reward Yourself
There’s no way around it – saving money is tough. It’s important that you reward yourself for your successes and for moving towards your savings goals.
Set milestones for your savings goals (like saving $1000 or paying off an outstanding credit card balance), and treat yourself when you hit that goal. The reward will give incentive to keep going when things get challenging.
One trap you’ll want to avoid is rewarding yourself with something large, extravagant and expensive. Rewarding yourself for saving money by spending money isn’t a recipe for success! Your reward should be something low cost (or free) that still feels like an indulgence, like a picnic day at the park with your family.
With these tips, you’ll be well on your way to signing those closing papers, getting your keys and making a new life in your first home.