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1. Some 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.

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.

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)

*) 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.

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!

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.

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.

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.

• 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.

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)!

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!