Once you become a homeowner, your budget changes. Before, living as a renter had the exclusive privilege of not worrying about some household expenses. Whenever something broke, your landlord took care of it and if left your wallet untouched. But as a homeowner, all house-related costs are your responsibility.
Budgeting can seem a complicated and challenging task. It requires determination and discipline to stick to one number through the month.
Here we offer you some guidance on how to set up a monthly household budget:
Get ready to budget
The first step to creating a monthly homeowner budget is to get into the right mindset. Schedule one day where you will dedicate yourself to figure out your finances (especially if you have never done it before).
Get a room and start by brainstorming what you spend on. If you want you can have your online bank statements right beside you to know how much money you are starting out with.
Set financial goals
The purpose of a personal budget is to achieve a financial goal. Without any goals, a budget will not work. You will keep going above your monthly budget since there is zero motivation to keep your spending in control.
Your financial goals must be in percentages based on what you earn. For example, you may want to save 5% of your monthly income towards some well-deserved vacation.
But before setting your vacation budget as a financial goal, you need to cover the basics. Financial advisors recommend that homeowners spend 30% to 35% of their take-home income in housing expenses and 20% on savings. That leaves 45% of your income to other expenses.
Record what the percentages will look like depending on how much you earn. After covering the basics, create your personal goals. The best way to set goals is the SMART strategy.
For example, your goal might be to do some kitchen renovations, and for it to happen, you will need to save money to cover the cost. Your SMART goal can be to save $500 of your income by next January 1st by withdrawing money monthly from your bank account. Does that sound more realistic than just writing down “save money” as a goal?
For your goals to be specific, you need to know how much you need to save. A vacation, home renovation, new sofa or home addition will have different related costs. Research the cost of every goal you set yourself and be wary of related expenses you might not be aware of at first!
Plan out your monthly expenses
As mentioned before, your housing expenses should be 30% to 35% of your income. Housing expenses are everything related to the maintenance of your property, and as a homeowner this should be your priority.
Housing expenses include:
Mortgage payments: Every month you have to make mortgage payments to your lender. This includes payments towards the principal and interest rates.
Pro tip: Check out the running costs on each listing to see what the monthly mortgage payment is on your dream home.
Utilities: These include hydro, water and gas. If you don’t have an estimate of how much they cost, contact your utility providers and ask for the rates in your area or a historical billings - or simply ask your realtor about the running costs of the property. After spending a few months in your new home, you can get a more realistic estimate and put it in your budget.
Property taxes: Every property owner needs to pay taxes to their municipality to fund water and sewer improvements, law enforcement and other local necessities. Some mortgage providers can offer to bundle your property taxes with your mortgage. However, if you need to pay taxes on your own, you will need a separate category on your budget. To find out how much your property tax is, go to your local city’s website.
Home insurance: Your largest investment needs protection against any unexpected damages. Home insurance might be another monthly expense, but it is essential for every homeowner.
Pro tip: Get an insurance quote here.
Life insurance: A mortgage goes on even after you are gone. Life insurance ensures that your loved ones are taking off in case you pass away.
House maintenance: it is essential to leave some funds to take care of your home. Whenever an appliance needs repair, a room needs a new coat of paint, or you just need to spend some money on winter maintenance costs, it will come out of your housing budget.
Now that you covered your housing expenses you have to consider the rest of your monthly spending: These can include:
The categories in your budget worksheet and what you spend on each will depend on your lifestyle, so customize it the way you want it! Go through your history and habits to estimate how much you want to spend each month.
Plan your savings
Money-saving is a top priority - and your goals and budget should reflect it. Your savings goals can be your retirement, an emergency fund, a down payment, a dream renovation, a new car and more. Any future needs or wants can be good saving goals.
But saving is hard. There is no shame in admitting it. We all spend our money and then realize we didn’t save enough. Luckily, there are several ways to make it easy.
A smart savings plan begins with a goal and tactics to achieve it. The best tactic is to create a separate tax-free savings account with your current bank. Set up monthly automatic contributions from your checking account to keep the cash flowing into your savings without you lifting a finger. You can set it once a month or bi-weekly as your payment comes in. After some months, you will be amazed at how much you have saved.
And don’t forget about retirement. Saving for retirement is non-negotiable. Experts recommend that you save 10% of your pre-tax income for it. And the best way to grow your retirement savings is by investing rather than letting it sit in a savings account. Talk to your bank about investment options and how they will impact your savings for years to come.
Track your spending
There is no point in creating a budget and setting a goal is don’t measure how successful you are. When it comes to spending, tracking your money will change your life - and that is no exaggeration. Once you start tracking your spending, you will see where your money is going and learn a bit about your spending habits.
Tracking your spending on a regular basis only requires a spreadsheet. Your spreadsheet will include all your budget categories (housing, groceries, transportation, etc.) and the monthly budget assigned to each one. Every time you make a purchase or pay a bill, add it the spreadsheet on its respective category. Total each category at the end of the month to see a more realistic number of the money left.
Pro tip: Add notes to remind yourself why you purchased certain items, and move things around if unexpected expenses come up.
It might look tedious in the beginning to go through all your bills and receipts. But once you start, the impact of your irregular spending will make you change your habits.
A spending sheet makes you gain control of your money and give you a more detailed insight into your monthly expenses.
Start your budget strategy before home searching
Your budget will affect which home you buy, and with a proper budget will avoid you the stress of going month to month once you move into your new home.