How to organize and follow a Personal Budget when you Purchase a Home

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How to Manage Your Finances when you Purchase a House

Creating a Weekly or Monthly Budget


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1. Some Spending Ground Rules

Living within a budget requires continued and ongoing discipline. There is little use, if you create a budget and then, when you spend the money, you do not keep within the guidelines which you gave yourself in the budget. Moreover, you have to record your expenditure regularly and accurately.

One starts a budget by making a few ground rules. It is important that the budget covers your immediate family and not just yourself. This is often not an easy task, but it is of the utmost importance if the budgeting process is to work. The rules might be painful, but they are essential, if you want to succeed:

The goal of the budget is a financially painless and secure transition from your existing expenditure pattern to your new level of expenditure which will include the new home.
Review all your expenditure, item by item. Separate essential from non essential expenditure. If you have a family, see that all members of the family take part in that review.
No expenditure is too precious to be touched or cut. Social status or consideration of such and expenses associated with them (the "what will the neighbors or my peers think" syndrome), are all open to question.
Cooperation from all family or group members is the key.
Enforce continued discipline, once the budget is established.

This may sound to you as if the above is common sense. Though many people, have become accustomed, to live and spend with a vague relationship to what they earn. There used to be the Credit Card! But be careful to expand your debt. You will just take on a huge additional debt, through your mortgage!

When you start your budget, classify the expenditure items on the basis of essential and non-essential expenditure. The former are those which you will require for survival. They have limited flexibility to change. The latter will be those, which have some flexibility.

Essential Expenditure Non Essential Expenditure
Housing (mortgage, rent, property taxes, home insurance) Clothing and shoes
Utilities (Gas, Electricity, Water, Garbage fees) and Phone Line Club Fees (sports and Gold Clubs)
Food, cleaning and laundry detergent Eating in Restaurants (including fast food places)
Essential Health care, Medical Insurance and essential Medication School Fees for private schools
Car Payment for one car, Gas and Car Insurance Secondary Cars for family members

You have to individualize these lists, because each person's list will be different. You have to create your own list, depending on your particular circumstances. But there should be little discussion about the housing costs. The one-off closing costs and the ongoing mortgage costs will be a given. As a general rule you will pay hazard insurance for the property and property taxes, as part of the mortgage payment into an escrow account, administered by your lender or mortgage company.

Utility costs are somewhat flexible, because they can be reduced by switching on or off, non essential electricity uses, such as the TV or lights in rooms that are not occupied. Similarly, reducing the temperature when heating a house by two degrees less (say to 68 degrees instead of 70) and wearing some pullover inside the house will create significant savings. Remember, if you move from a smaller apartment into a larger house, your utility costs could increase dramatically. Like for heating, the same applies for air conditioning, though in the other direction. Living in a two degree warmer house in summer can save you several hundred dollars a year.

Phone usage via phone lines and cell phones can usually also be cut significantly. A mix of renegotiating your phone plan for the fixed line/DSL internet access, and maybe buying prepaid phones, such as those from TracFone Ultimate Bundle or any other prepaid service could reduce costs.

Food, cleaning and laundry costs are also highly variable and with some effort can be managed quite easily. We are not suggesting that you cut down on food costs. Instead, what we suggest that you manage these costs while eating healthily, just by making some effort in planning how you live. Our suggestions would be to:

  • Plan your meals one week ahead of time and then make a shopping list. Stick to it and don't buy things you do not need!
  • Buy fresh vegetables rather than tinned ones.
  • Buy fresh fruit!
  • Don't buy semi prepared foods!
  • Buy meats in bulk (for instance at Sam's), then take it home and cut it up to the size of portions you use for one, or maybe two, family meals! The rest pack in portions and put into sealed bags and freeze them! One of these little machines that seal freezer food now costs around $40.00 and they are well worth it!
  • If you cannot cook, learn to cook. Start with simple things and do not try elaborate cook books.
  • Buy washing detergents in bulk and wash and iron clothes in a planned manner. Try to air dry them rather then use to electric dryer. It is not only cheaper but your clothes will last longer and keep in better shape.
  • Stop using dry cleaners if at all possible. Obviously, you cannot wash a suit or some dresses, but shirts can be washed and ironed at home! If you do not know how, learn it!

Health Care costs are always part of your life. But try to keep them within reach. Eating good food with vegetables (don't overcook them!) and fresh fruits will help to keep little stomach ailments, heartburn, your cholesterol and your sugar levels in check. One way to reduce heath insurance costs without changing your coverage much is to increase the deductible amounts.

Car Payments, and with it the associated insurance premiums, are only to some extent variable. When you purchase a second car, buy one with a smaller engine. One does not have to have a 5 liter engine to have decent acceleration or a good top speed! It is quite simple, the larger your engine the more fuel the car consumes!

So once you have settled all that, you can start to make up a budget. But don't use solving the above issues as an excuse to delay the creation of a budget!

There are several ways to create the outlines of a budget. Some people prefer to do it on a weekly basis, others on a monthly. The principles stay the same, but a monthly budget needs more care and control in spending. So, if you are not a very disciplined person, create a weekly budget! Here is an example of a monthly budget.


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1.1.Software Programs that are a valuable Aid to creating a Budget

The easiest way to create a budget is to use a program like Microsoft's Excel or Quicken or another spreadsheet or domestic accounting program. Mvelopes Personal is another specially designed budgeting program for personal use. If you do not have that, you can do it manually, by buying accounting paper that has a number of columns.

Software for Home Expenditure Budgeting from Amazon

You want to buy a software package that is easy to use. Quicken and E-Z Books are both user friendly. As with all software, the more often you use it, the easier it will get!



2. The Monthly Income and Expenditure Budget
(an Example)

The Sample Family

We have created a "sample family" in order make up a budget that is close to reality.

The Income of the sample Family
- "Buddy" the head of the family is a lower level supervisor/manager and has
an annual gross salary of $75,000
This works out at a net salary, after tax and deductions of about $5,000 a month
- Mary, Buddy's wife, works as a secretary and has an annual gross salary of $24,000
The net salary, after tax and deductions will be $1,600 a month
- Two kids aged 9 and 10

Savings
The family has $50,000 savings (non retirement related). Some will be used for the down payment on the property and the closing costs

Buddy's Debt Exposure
- $150,000 new Mortgage, 6.75% fixed interest for 30 years
- two medium sized cars @ $ 25,000 on 8% - 60 month payment plan,
@ $510 per month equal to $1020/month
- $8,000 Credit Card debt, minimum monthly payment $400.00
- $5,000 revolving bank credit debt, minimum payment $150.00

"Buddy's" Maximum Debt Capacity
- His maximum mortgage should not exceed 3 x his own after tax salary plus 3 x 50%*) of his wife's salary equal to $207,300
- "Buddy" pays monthly $2,700 in debt repayments (mortgage, car loan plus credit card and bank revolving credit). That is 41% of buddy's and his wife's joint after tax income.
- His mortgage repayment represent 14.8% of the joint after tax income.

*) since "buddy's" wife could potentially become pregnant, and therefore, could for some time, no longer be a wage earner, only 50% of his wife's salary is taken into account for the maximum mortgage debt capacity calculation. The non-essential expenditures, or those that can be varied without major impact on the family's comfort, are shown in blue row/columns.

Buddy's monthly expenditure includes all items that he and his family require for living. We have not taken into account any income tax refunds which Buddy is likely to get for the interest deduction on his mortgage. If you want, this is an additional contingency for expenditure variations.

You can make these budget tables weekly or monthly. We have, because of the page size available on the internet, made the tables only monthly. Weekly budgets are better, since it will be much easier to control. If you don't know the exact amount of a future expenditure, make a conservative "best guess". Generally in budgeting, be conservative and don't project future pay rises, until you know they are coming at a known specific date.

Remember, the budget does not become invalid, if you earn more and spend less!

Items January February March April May June July August Sept Oct Nov Dec Total
Opening
Balance in Checking


Add fr. Saving
-



44,000
(80)



-
20



-
40



-
60



-
80



-
100



-
120



-
140



-
160



-
180



-
200



-
-



44,000
Income *)
Buddy Salary
Wife's Income

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

60,000
19,200
Mortgage (incl., Property Tax Hazard/Home Insurance)

Gas, Electricity, Water, Garbage

Phone, Internet, Cable

Down Payment

Closing Costs
980
150
130


500


250


40,000

4,000
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
980
150
130


500


250


-

-
11,760
1,800
1,560


6,000


3,000


40,000

4,000
Food, Laundry,
Dry Cleaning

Children's Allowance
Lunch Money***)

Entertainment***)

Health Insurance
Medical
Dentists
1,000


150



100


400

1,000


150



20


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

1,000


150



100


400

12,000


1,800



1,120


4,800

Car Payment **) 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 12,240
Gas and Car Repair and Insurance 350 350 350 350 350 350 350 350 350 350 350 350 4,200
Credit Card
120% of minimum
Payment

Revolving Bank Credit Line 130%
of min payment

500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
6,000



2,400
College Fund 400 300 300 300 300 300 300 300 300 300 300 300 3,700
Retirement Savings Fund 200 200 200 200 200 200 200 200 200 200 200 200 2,400
Emergency Fund 150 150 150 150 150 150 150 150 150 150 150 150 1,800
House Repair Provision 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Misc. 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Total Expenditure 50,680 6,500 6,580 6,580 6,580 6,580 6,580 6,580 6,580 6,580 6,580 6,580 122,980
Closing Balance (Carried Forward) (80) 20 40 60 80 100 120 140 160 180 200 220 220
*) Income is after tax and all deduction on a combined gross income of
**) Two cars mid size (Camry, Altima or in similar price class) 60 months 8% on a combined loan of $ 50,000. Obviously, one could reduce this expenditure by purchasing a slightly smaller car, such as a Sentry or a Corolla or something equivalent. Hence this is a variable expense.
***)Children's allowances, lunch money for the kids and entertainment are already at the minimum and are therefore assumed to not to be variable.

The above is a rather tight budget. But it is one within which a family can live. Expenditures for new clothing are limited, and come out of the credit card or the revolving Credit line. We assumed that Buddy will pay down more than the minimum every month (120% of the minimum payment for the credit card, respectively 133% of the minimum payment for the revolving bank credit line). Remember that credit cards charge now very high interest rates and you should avoid using them with the above budget.

2.1.The Savings and Emergency Funds

The two savings funds are for retirement and for the future college costs for the two children. They are pretty minimal, but will at least add some funds. Hopefully, in some future years, the funding for future use can be increased. However, in the roughly ten years left before the kids will go to college, Buddy's family will be able to accumulate $37,000 plus any interest for the college fund. While that is nowhere near enough, for college expenses, it will nevertheless add some money, to any scholarships or bursaries the kids can obtain.

Whenever you have a house there will be some repairs and breakdowns for which you need funding. Hopefully, you will only use part of the contingency which you accumulate.

Items January February March April May June July August Sept Oct Nov Dec Total End of Year
Opening
Balance in Savings


Emergency Funds
-



-
600



350
1,100



700
1,600



1,050
2,100



1,400
2,600



1,750
3,100



2,100
3,600



2,450
4,100



2,800
4,600



3,150
5,100



3,500
5,600



3,850
6,100



4,200
Savings for future use                          
College Fund

Retirement Savings Fund
400


200
300


200
300


200
300


200
300


200
300


200
300


200
300


200
300


200
300


200
300


200
300


200
3,700


2,400
Emergency Funds and Contingencies
                       
Emergency Fund 150 150 150 150 150 150 150 150 150 150 150 150 1,800
House Repair Provision 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Misc. 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Total Monthly Accumulation 950 850 850 850 850 850 850 850 850 850 850 850 10,300
One of the items you have to keep an eye on, are your credit card and revolving credit line debts. Especially credit cards are now incredibly expensive with interest rates (APR's), without any defaults or late payments at close to 20% per annum. If you have only paid once late, or exceeded your credit limit, your interest rate (APR), by major credit card banks (Chase, Citibank, Wells Fargo etc.,) can easily reach a staggering 29.99%. Therefore, reduce your credit card exposure as much as you can!

In general, revolving personal credit lines from the main street bank are a bit cheaper. But these days they can also have quite high APR's, especially, when you paid late or exceeded your credit line.


3. The Control of your Expenses using the Budget you have created

Now, you have a budget and you start spending the money. You have to control that you live within your budget. The best way to do this is, as we have mentioned above, to create the budget from the start, on a weekly basis and to control it on a weekly basis. Again, having a spreadsheet like Microsoft's Excel is a great help and makes things a lot easier. But if you don't, you can just use accountants sheets divided into columns. You need three columns for every week:
  • Budget Expenditure
  • Actual Expenditure
  • Variance (or difference between the two).

You have to enter the actual expenditure each week and calculate how far you have strayed from your expenditure. Easy, you think, but most people fall down on this part, since they do not have the diligence to follow up on their own expenses. They will do it for a week or two, and then stop. Now, that defeats the purpose.

3.1. Example Weekly Control Sheets for your Budgeted Expenses

Items Week 1 Week 2 Week 3
Items Budget Actual Variance [+/(-)] Budget Actual Variance [+/(-)] Budget Actual Variance [+/(-)]
Opening Balance in Checking

Add fr. Saving

Reserves
-

44,000

0
-

44,000


0
-

-


0
(495)

-

475
235

-


475

730

-


0

(940)

-

-

75

-

-

1,015

-

0
Buddy's Income *)
Wife's Income
2,500
-
2,500
-
- -
800
-
920
-
120
2,500
0
2,650
0
150
0
Mortgage (incl., Tax and Insurance)

Downpayment

Closing Costs
1,260



40,000

4,000

1,260



40,000

3,250

0



0

750

-



-

-
-



-

-
-



-

-
-



-

-
-



-

-
-



-

-
Gas, Electricity, Water, Garbage

Phone Internet Cable
0


0
0


0
0


0
250


200
200


150
50


50
50


150
30


180
20


(30)
Food, Laundry,
Dry
Cleaning

Children's
Allowance,
Lunch Money

Entertainment

Health (Medical &
Dentists)
Insurance

200


35


25


400

250


35


10


400


(50)


0


15


0


200


35


25


400
150


35


25


400
50


0


0


0


250


40


25


400



190


40


25


400



60


0


0


0

Car Payment

Gas, Car Repair/Maint
Car Insurance
0


100

0


85

0


15

510


100

510


85

0


15

510


100

510


90

0


10

Credit Card

Revolving Bank
Credit Line
500

0
500

0
0

0
0

0
0

0
0

0
0

200
0

200
0

0
To Reserves:

College Fund

Retirement Fund

Emergency Fund

House Repair

Misc. Exp.


200

100

75

50

50


200

100

75

50

50


0

0

0

0

0


0

0

0

0

0


0

0

0

0

0


0

0

0

0

0


200

100

75

50

50


200

100

75

50

50


0

0

0

0

0
Total Expenditure 46,995 46,265 730 1,720 1,555 170 2,200 2.140 60
Closing Balance (Carried Forward) (495) 235 730 (940) 75 1015 (640) 585 1,225
( ) stand for minus, in other words, if you spend more than you budgeted it will be in (brackets). The same, if you have less income than you budgeted, it will be in (brackets). If you have an "overdraft" it will also be in (brackets).

The convention is Opening Balance plus Income less Total Expenditure equals Closing Balance which in turn is the Opening Balance for the next week.

The above shows that "Buddy" does slightly better than budgeted, by spending less. Since the timing between income and outgoing funds is a bit "off", "Buddy" will have to supplement his checking account, temporarily with funds from his savings or his reserve funds. It is important that this remains temporary and, that its use is disciplined. The last thing "Buddy" should do, is go into an overdraft, since it is very expensive, even with overdraft protection.

Make up the above table by week for the whole of the year. It is really important and will give you a lot more confidence, since you know where you stand.


That concludes our budget session. Work through it, and review it several times to make sure, you have not forgotten anything. And then talk it over with your spouse and other members of your family. This might not be the way you do things in your family, but the purchase of the house maybe a good time to change old habits!

Below are some books that could help you. Buy the cheapest version (2nd hand)!

Books on Home Expenditure Budgeting from Amazon

We might create a low cost help and review line, if there is a demand for it. So if you have any suggestions,
e-mail us, mentioning "House Purchase Budget" in the subject line. If you do not have anything in the subject line, the e-mail will be rejected as spam.

Good Luck!


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