Household Budgeting

As a new homeowner, there are probably some things you really want to buy. Maybe you would like a new lawn mower, an air conditioner, or some new furniture. Now you must think like a homeowner. Before you buy an expensive item, review your options. Talk with your planning team about other alternatives, such as renting or borrowing a piece of equipment. Garage sales are often a good place to find second-hand items. We have stressed that your mortgage payments should be your top financial priority. But you also can't afford to get behind on your utility bills, or you risk having your water, electricity, or gas turned off. If you have a car payment, this is another critical obligation. Let’s spend some time looking at how to prioritize your expenses and manage your household budget.

Creating a household budget is the first step to managing your money. A budget provides an easy way to compare your income to your expenses on a monthly basis. The process of developing a budget will help you to set your goals and priorities and keep track of how you spend your money. More importantly, a budget will help identify poor spending habits before they cause problems. When you looked at your income and expenses in Chapter One (see Budget Worksheet), you completed much of the work needed to develop your budget.

You might find it helpful to use a calendar that shows each month of the year. Write down all of your monthly expenses (mortgage, utilities, car payments, etc.) on the dates they are due. Write down expenses that are due quarterly or annually as well, such as property taxes, property insurance, and car insurance and registration. Make sure that you have set aside enough money to cover all of these expenses and are not caught unprepared.

Ask for help from your planning team to assist you in creating a budget. There are four basic steps to follow as you develop and manage your budget: (1) determine your total net income; (2) determine your total monthly expenses; (3) compare your total monthly expenses to your monthly net income; and (4) establish goals.

For budget purposes, you need to determine the total amount of money you receive each month. This includes your benefits, any take-home or net pay (net pay is the amount of money you actually have after you pay for taxes and any other deductions, such as medical insurance), as well as any other regular income that you receive.

Review the expense figures you wrote down in your Budget Worksheet.

Consider each of the following budget areas as you make your way through this process.

Housing expenses. Update the housing expenses you wrote down in your Budget Worksheet to include your actual mortgage payments (and property taxes and property insurance if you pay these directly). Also, include your average monthly utility costs (gas, electricity, water and sewage, trash collection, cable television, and telephone) and homeowner's association or condo fees, if you have these expenses.

Sign up for your gas and electric companies' "budget" or "average payment" plan. The company determines an estimated cost per year based on the past history of gas or electric use in your home. This figure is divided by 12, and that amount will be your monthly payment. No matter how much energy you actually use in a given month, your monthly bill remains the same all year long. Once a year, the company will adjust your monthly payment up or down to reflect your actual usage. Paying a set amount each month helps with budgeting this expense since it spreads the high cost of winter heating throughout the year. It is still important to conserve your use of electricity and fuel. If you use more electricity or fuel than the original estimate, you will have to pay a large adjustment fee at the end of the year.

Home maintenance allowance. As we have discussed, you need to budget for regular home maintenance and emergency repairs. Some financial advisors suggest setting aside one percent of the purchase price of the house for annual maintenance and repairs.

The amount you budget should be appropriate for your personal situation. Your maintenance costs may be a lot higher if you have an older house with the original plumbing, wiring, furnace, and roof. You may have received a commitment that an agency will provide a certain amount to help cover these costs. If you have an escrow account for long-term maintenance, include this figure in your allowance.

Non-housing expenses. Now look at the non-housing expenses you listed in your Budget Worksheet. For budget purposes, don't include any expenses (such as income taxes and health insurance) that are already deducted from your paycheck. Do include any debt payments you wrote down in the worksheet.

Credit card debt. If you have credit card debt, these monthly payments must be included as a budgeted expense. While most consumer debt (such as a car loan) must be paid off in regular monthly payments, credit card companies usually require you to make only a minimum payment each month. Even though it might be tempting to budget only this minimum amount, that would be a serious mistake. If you pay only the minimum required payment, you are actually only paying the interest charges and not the principal, or the amount you originally charged on the credit card. It can take years to pay off even a small credit card balance if you pay only the minimum monthly payment. Credit card companies often increase their interest rates which may cause your balance to increase, thus increasing your debt.

Because the interest rate is so high, you should pay off your credit card bills as quickly as possible. Make a plan for paying off your existing credit card debt and include this as a separate monthly expense. Establish the habit of using only one credit card, and pay for all new purchases when you are billed for them each month.

If you are going to have credit cards, choose them wisely. Store-issued credit cards usually have higher interest rates than bank-issued cards (such as VISA or Mastercard). If you have a major credit card, you can use it everywhere. Compare the annual percentage rate (APR), the finance charge, the annual fee (if any), your credit limit, the grace period (the number of days you may be late with a payment and not be charged a penalty), and the minimum monthly payment. As a new homeowner, you will receive offers from credit card companies. These companies assume that since you were approved for a mortgage, you must have an excellent credit history. They may send you a credit card in the mail and tell you that you have been approved to make purchases with it. These "pre-approved" credit cards do not have the usual application requirements.

Cash purchases. Record your major fixed expenses, as well as any unusual expenses that you pay for by check or credit card. Your cash purchases also need to be accounted for and put into the proper budget category. It may be a lot harder to keep track of your cash expenses, such as eating out, buying a newspaper or magazine, or other personal expenses. If you aren’t sure how much you spend in cash each month, start out with your best guess and estimate this expense. For six months, keep all of your receipts for cash payments. You can then adjust your budget to show your actual monthly cash expenses.

Automated teller machines (ATMs) are very convenient because they allow you to withdraw cash from your bank account 24 hours a day. ATMs may be dangerous, though, because having easy access to cash may make it harder to resist buying something on impulse. If you don’t have cash in your pocket, you may take more time to think about whether you need, or can afford, an item. Impulse purchases (a candy bar, a new shirt, or a specialty coffee) will really add up! In addition, many banks now charge withdrawal fees when you use ATMs. In some cases, you may be charged twice--once by your own bank and once by the bank operating the ATM machine.

If your expenses are more than your net income, you are spending more than you can afford. You can't continue this practice for too long before you will face a financial crisis. If your net income exceeds your budgeted expenses, and you find yourself running out of money before the end of each pay period, you need to look more closely at your budget to see the expenses you left out. If your net income covers all of your total monthly expenses, you may skip ahead to step four.

What can you do if you need to cut back on your spending? In Chapter One, we talked about the difference between fixed expenses (those that cannot be changed, such as your mortgage, utilities, and insurance premiums) and discretionary expenses (those that you have control over, such as entertainment, eating out, and clothing). If you need to cut back on your spending, look closely at your discretionary expenses. These areas are the easiest places to save money. First, determine the difference between what you WANT and what you NEED. You may want a swimming pool or a hot tub in your backyard, but if your roof is leaking, replacing it is something you need to do. Make one list of your needs, placing them in order of importance, then do the same for your wants. This will help you create a spending plan that will allow you to live within your budget.

Food and clothing are necessary expenses, but the amount you spend on these items is partly discretionary. For example, you might be able to decrease your food budget by taking a lunch to school or work rather than eating out. Or you might decide you don't really need another new pair of shoes. You may wish to take a look at entertainment expenses as well. Do you really need a new CD? Could you rent a movie a couple of times a month rather than going out to the movie theater? Think about whether you really need to subscribe to extra cable TV movie channels. Look for free activities and entertainment in your community.

If you have enough income to cover all of your expenses, congratulations! It is time for you to establish some goals (perhaps a home improvement project, a new stereo, a car, or a vacation). Think about how much you would need to save each month to achieve one or more goals, and put this money aside in a separate bank account. Make sure you stick to the limits of how much money you can save without having your benefits affected.

Creating a budget is a helpful way to understand how you spend your money. But a budget is not useful unless you use it. A budget is not something you can create once and then put aside and forget. You should look at your budget at least once a month to see how you are doing financially. If you continue to spend more than you're bringing in (income), you need to keep looking for ways to cut back expenses. If you're having trouble following your spending plan, don't give up. See what other money management plans might work for you.

One easy method of managing money that works for some people is the "envelope method" of budgeting. Here's how it works. Make an envelope for each major category of expense and write on it the amount you need to set aside every week. If your mortgage is $600, then you would need to set aside $150 each week. For an electricity bill of $60 per month, put $15 per week in the envelope. For ongoing expenses (such as food and entertainment), write down the amount budgeted for each week. Each week, put money in the individual envelopes according to the amounts shown on each envelope. For quarterly or annual expenses, put the amount needed in a separate account.

When the envelope for discretionary expenses is empty, then you stop spending for that week. For example, if you spent the entire amount set aside for entertainment at the beginning of the week, you will have to find free leisure activities for the rest of that week. If you do run out of cash, don’t begin charging for these activities.

The following budget tips may also be helpful:

• Be a wise grocery shopper. Try not to go food shopping when you're hungry. Always use a grocery list so that you only buy items you need. Compare prices of similar products and of the same product in different size packages. Sometimes buying a larger package is less expensive in the long run. Do your food shopping quickly, because the longer you spend in the store, the more money you are likely to spend. Shopping at the same store each week will help you to shop more quickly, because you will know where to find everything you need. Also, using coupons may be a way to reduce your grocery bill, but not always. Remember to compare prices.

• Plan ahead for major purchases rather than making impulsive decisions. Whenever you charge anything, look carefully at the financing terms. Often the retailers that offer the easiest terms (no payments due for three months!) actually charge the highest rates. Shop around and compare. Try to save up for things you need, rather than charging them. You'll pay less, and, while you are saving, you may decide that you'd rather use the money for something else.

Most people find that credit cards create a temptation to spend money they don't have. Establish the habit of using checks to make purchases and pay bills, rather than using a credit card. Close out all credit accounts you have not used for the last six months.

As always, remember to ask the people who provide assistance to you and your planning team members for help if you run into problems or have questions. Hopefully, there is a group of people in your area who can help find resources for financial or technical assistance with any situation you may encounter. For more information, or for assistance with any homeownership issue, call the National Home of Your Own Alliance at 1-800-220-8770 or Fannie Mae HomePath Services Hotline at 1-800-7FANNIE (or 1-800-732-6643).

Ö Move in.

Ö Meet your neighbors.

Ö Become familiar with your house.

Ö Take all safety precautions.

Ö Define roles of people who provide assistance.

Ö Establish schedules.

Ö Set boundaries.

Ö Make a list of house rules.

Ö Review your household budget and revise.

Ö Understand your loan terms.

Ö Plan for repairs and maintenance.

Ö Organize a housewarming party!