Tag Archives: saving

5 Steps to Buying a Home That Won’t Bust Your Budget

A new homeowner holding out the keys to her house while looking at her budget.

It’s easy to feel overwhelmed by all the decisions that go into buying a new home. Brand new or existing? Cottage or McMansion? Fixer-upper or move-in ready? City or country? After all, a home is a big purchase, and you want it to be a blessing for many years to come.

But one question holds the key to home-buying success: how much home can you afford?

Lucky for you, you don’t need a degree in rocket science to find the answer. You just need to know how to budget. Here are five steps to buying a home Dave Ramsey recommends to make the process smoother.

Step 1: Add Up Your Income

You can’t make a budget if you don’t know how much you can spend. So sit down and add up every source of income you receive each month.

Let’s crunch numbers based on a two-earner household. In our example, John brings home two paychecks a month, while his wife Jane receives one.

John’s Paycheck 1 = $1,600
John’s Paycheck 2 = $1,600
Jane’s Paycheck = $2,800

Total Monthly Income = $6,000

Step 2: List Your Household Expenses

Next, write down every place your dollars go each month. Find expert agents to help you buy your home.

John and Jane rent a one-bedroom apartment in the heart of town so they can be close to work. A big chunk of their budget goes toward saving for retirement and a down payment on their new home. Here’s how their current budget looks:

John and Jane’s Pre-Home Budget
Charitable Gifts = $600
Savings = $2,200
Rent = $900
Utilities = $300
Food = $400
Clothing = $100
Transportation = $450
Medical = $400
Personal = $450
Recreation = $200

Total Expenses = $6,000

Of course, everybody’s budget is going to be different. We’ve assumed some things in this sample. If some of these categories don’t fit, feel free to make them your own.

Step 3: Calculate Home-Ownership Costs

Dave Ramsey recommends your housing payment, including property taxes and insurance, to be no more than 25% of your take-home income. 

To maximize your savings, you should get a 15-year, fixed rate mortgage.

That means the maximum amount John and Jane should spend on their home payment each month is $1,500. Of course, home ownership isn’t limited to a house note. John and Jane make room for expenses like HOA fees, maintenance and repair, furniture and décor, and lawn care in their budget. They also add extra heft to utilities and transportation since they’ll have more square footage and a longer commute in their new home.

John and Jane’s down-payment goal will be complete when they purchase a home, so they reduce the amount they allot to savings.

If you need help figuring out how much house you can afford, we suggest using our mortgage calculator

John and Jane’s Budget: Changes Made With Home Ownership in Mind
Savings = $2,200 $900
Rent Mortgage = $900 $1,500
Other Housing Expenses = $250
Utilities = $300 $400
Transportation = $450 $550

Total Expenses = $6,000 $5,750

With these adjustments, John and Jane still have money left over—but the budgeting doesn’t stop here.

Step 4: Give Your Budget Room to Grow

Life is going to happen in the years you occupy your home. Before you get married to a mortgage, look ahead and consider events that might increase your living expenses down the road.

John and Jane don’t have children yet but hope to start a family next year. Guess what? Kids cost money! According to the USDA, a middle-income married couple spends an average of $727 a month on non-housing expenses in a child’s first years of life. Depending on what you make or where you live, it could be more, it could be less.

John and Jane build cushion for Junior into their budget by parking an additional $750 into their savings account each month. That puts their savings total at $1,650 and bumps their monthly expenses up to $6,500.

John and Jane’s Budget: Changes Made With Junior in Mind
Savings = $900 $1,650

Total Expenses = $5,750 $6,500

Step 5: Make Adjustments

Right now, John and Jane’s expenses outweigh their income by $500, so they’ve got some balancing to do. John and Jane realize that spending 25% of their income on a mortgage will squeeze out their ability to afford diapers and daycare. So they aim for a more conservative home payment and tighten the purse strings in a few other areas.

John and Jane’s Final Home-Buying Budget
Charitable Gifts = $600
Savings = $1,650
Mortgage = $1,500 $1,250
Other Housing Expenses = $250
Utilities = $400
Food = $400
Clothing = $100 $50
Transportation = $550
Medical = $400
Personal = $450 $400
Recreation = $200 $50

Total Expenses = $6,600 $6,000

When income minus outgo equals zero, your job is done because every dollar has a name.

$6,000 – $6,000 = $0

Success!

That means you can feel confident buying a home that won’t bust your budget. Just keep your mortgage to 25%—or less!—of your monthly income and don’t borrow so much that you can’t breathe if life changes down the road.

Boost Your Buying Power

Now that you know the secret to being a happy homeowner, it’s time to go out and get the most home for your money! All you need is an expert negotiator by your side. A buyer’s agent brings your best interests to the table so you can get the best deal on a home that’s right for you and your budget.

Source: DaveRamsey.com

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How couples can save for a downpayment and stop arguing about money

According to a poll by the Bank of Montreal, 68 percent of Canadian couples surveyed cited fighting over money as a top reason for divorce, ahead of infidelity. Buying a home together only raises the stakes — bank accounts are merged, couples are collectively preparing for the biggest purchase of their lives and are budgeting together to chip away at a downpayment.

Octavia Ramirez is the founder of Paper & Coin — a financial coaching company that helps Millennials reach their personal finance goals. “Money can be a huge stressor in relationships. So why not get ahead of the problem?” she says.

Photo: Paper and Coin 

The finance pro is uniquely qualified to help couples. Since getting married, Ramirez has never once fought about money with her husband. “Obviously, I enjoy finances but it’s taken years of practice to get here,” she tells Livabl.

It all comes down to communication and understanding your partner’s unique worldview — especially when it comes to money. Dr. Katelyn Gomes (Ph.D., C.Psych), a clinical psychologist with CBT Associates, echoes this: “We each have unique personal histories that define our values, rules, dislikes and assumptions for living in and viewing the world — including how we spend money, save money, even what’s important in the home you purchase.”

Octavia Ramirez and Dr. Katelyn Gomes spill their tips for communicating about finances and, in turn, making your partnership even stronger.

Photo: James Bombales

1. Work together as a team by joining your accounts

“I often see couples not working together as a team by splitting their expenses. This divides your efforts and can interfere with what you’re trying to accomplish,” Ramirez explains.

When it comes to buying a home, Ramirez makes a case for joining your bank accounts, “When my husband and I get paid, it all goes into the same checking account and we move the money accordingly. We don’t treat it as my money, your money. Consider that both of your incomes together are the grand total.”

When couples put their savings into separate accounts, they also diminish their returns. “Splitting your accounts is a democratic way of doing things, but you won’t get as much bang for your buck that way,” she says.

Ultimately, if you’re in a serious committed relationship, be in a serious committed relationship. “If you divide things based on your separate incomes, it gives the person who makes more a leg-up versus feeling like you’re equally respected in the relationship,” says Ramirez.

Ultimately, you will both be living in the house together. If one person makes considerably less, going 50/50 can potentially lead to selling yourself short — and building resentment long-term.

Photo: Paper and Coin

2. Agree on your collective goals, then make a transparent budget

Ramirez often hears her clients explain that they have budgets — in their head. “It’s important to have a shared document that communicates your budget and spending at a glance.”

Before putting numbers into a Google spreadsheet, agree on your short-term and long-term financial goals with your partner. Working towards homeownership? Start by determining the cost of the house you want to buy, then work backwards to see how much you will need to save each year to make it happen.

“Once you know how much you’ll have to save in the year ahead, go back month-by-month and see what areas of your budget can be cut or if you can increase your income to reach that goal,” explains Ramirez.

Even if it means passing on your yearly vacation and doing a staycation, instead.

Octavia and Will Ramirez. Photo: Paper and Coin

3. Have regular budget meetings with your partner

Once you’ve set your budget and are tracking your expenses and spending, set monthly or bi-monthly meetings to stay on track.

“Getting a downpayment together is a huge accomplishment. It’s a long-term process and there are occasionally going to be slip-ups in your savings efforts. It’s important to come back together regularly to remind yourself of your ‘why’. Maybe you didn’t reach your goal one month. Don’t dwell on it for too long, and instead decide together to get back on the saddle,” says Ramirez.

Dr. Katelyn Gomes explains, “We have this tendency to incorporate comments from our partners using faulty or unhelpful interpretations. These are known as cognitive distortion and it includes things like mindreading, jumping to conclusions, catastrophizing or thinking of the worst-case scenario. When we think our partners opinion, wants or needs don’t align with our lens it can lead to difficulties in communication, clashes or arguments.”

When you keep the lines of communication open over your spending habits, it creates an opportunity to have the necessary dialogue to avoid miscommunications or jumping to conclusions.

“Whether it’s contentious or not, just showing up to have that conversation is really important to keep couples on the same page,” explains Ramirez.

Photo: Paper and Coin

4. Save for an emergency fund

To avoid major money stress down the line, Ramirez recommends having an emergency fund in place: “Before you buy a house, prioritize saving three to six months of expenses in advance. If you break up or someone loses a job, you won’t risk going into extreme debt while you figure out your next move.”

5. Stay in the loop, even if you aren’t handling the finances

If you’re the one to handle the finances, Ramirez recommends letting your partner in on exactly what’s going on — whether it’s your insurance policy, the status of the car payments, how much interest you’re paying on the mortgage, or how much credit card debt each person has brought into the relationship.

“Because I enjoy finances, there’s a temptation to not keep my husband in the loop,” says Ramirez. “But even when I handle everything, I always debrief him after. He knows the passwords for the bank accounts and where things go, so he can take over at any point. Having everything on the table encourages you to trust each other.”

Source: Livabl.com –  

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Canadians don’t save like we used to, and for good reason

Megan Coady is paying a student loan and Toronto rents and finds it hard to save.

Megan Coady’s salary doubled overnight, but the 29-year-old says she’s still not saving any money.

Coady moved from Prince Edward Island to Toronto a year ago, to take a host position at Flow 93.5, a popular local radio station.

“I jumped at a chance to work in the biggest market in Canada,” says Coady.  “And I’m making twice what I was in P.E.I.”

Canadian household savings

Canadian household savings rates have been declining for 30 years. (CBC)

But as a single mother with a young son, she rents an apartment, and has instalments to pay on a car loan and a student loan.

“I don’t have a stash of cash just for a rainy day,” she admits. “My cost of living has also doubled.”

Coady is hardly alone with her lack of savings. Close to half of Canadians would have a tough time paying bills if their paycheque came even just one week late, according to the Canadian Payroll Association’s 2015 survey.

The survey also showed that although more of us say we are trying to save, fewer are able to actually do so.

Hard to believe that early in the 1980s, Canadians saved twice as much as Americans — an astonishing 20 per cent of our disposable income in 1982.  Nowadays we save less than our southern neighbours.

Falling savings rates

In the third quarter of 2015, Statistics Canada estimated the household savings rate at 4.2 per cent. That compares to 5.5 per cent for U.S. households, according to the Bureau of Economic Analysis.

But that’s not because we’ve become self-indulgent, undisciplined wastrels. Bank of Montreal chief economist Doug Porter says the change in behaviour is logical — and it’s all about interest rates.

Ron Thomson

Ron Thomson says he’s careful with money, looking for items on sale and buying things with points to make his dollars stretch. (Ron Thomson)

“Consumers ultimately respond to the incentives that are put in front of them,” he explains.  “Persistently low, low real interest rates have crushed savings. It’s not surprising.”

The 20-per-cent savings rate only lasted a year at a time when interest rates were sky-high and Canadians got a good return on their savings. Yet, since 1982, the household savings rate in Canada has been in decline.

Those high interest rates also damaged the economy, as businesses and consumers with debts struggled and even collapsed under the cost of their borrowing.

“So I’m not sure we really should see that episode as some kind of golden era,” says Porter.

Saving in the good old days

Ron Thomson remembers those days fondly. He was a heavy-equipment operator in Linden, Ont., until his retirement last year.

“I remember having a one-year savings bond and getting 18 per cent,” he marvels.  “Hard to bloody believe, isn’t it?”

Thomson. 62, is a champion saver. His parents split when he was 10 years old. “Because of the separation neither one ever had much money,” he says.

‘I remember having a one-year savings bond and getting 18 per cent’– Ron Thomson, 62

Growing up on a farm, he says he learned the difference between needs and wants, spending his hard-earned dollars only when absolutely necessary. And he married a woman who shared the same values.

Together they were able to save a down payment for their second home, a detached house, without selling their first home, a townhouse. They kept the property and rented it out.

Thomson still counts his pennies. He says he’d never buy a greeting card anywhere but the dollar store, for example.

“I watch for sale items,” he explains. “For instance, I have a Canadian Tire Mastercard and it builds up points. The last snowblower I got, I used my points. And of course it was on sale, too. I’m not paying $1,000 for a snowblower when I know I can wait a couple months and get it for $700.”

Thomson says young people don’t seem as concerned about finances the way he was at their age.  “My son and his wife live just up the road — they seem to go out for dinner a lot.  And my daughter, she says she doesn’t need to worry. Her mother and I do all the worrying for her!”

Eat out or save money?

Newly better-paid Megan Coady says she spends a fair bit on restaurants as well — perhaps too much.

“I don’t buy groceries,” she says. “I’m on the go most of the time, so I eat out a lot.”

She admits though that she’s not too busy to head to the pub for a pint or two after work on occasion.

“I battle with myself over this sometimes, but I obviously enjoy spending my money socially,” she says with a laugh.

She takes comfort knowing that she has at least started a Registered Education Savings Plan for her son. And she intends to start an RRSP for herself this year, before she turns 30.

Ideally more Canadians will reconsider their dedication to saving, despite the fact that low interest rates don’t offer much incentive, according to BMO’s Porter.

He believes, as most economists do, that the Bank of Canada will be forced to lower rates yet again sometime this year, in another attempt to spur economic growth.

“We are punishing savers tremendously in this country,” he says, while also pointing out that everyone should have some sort of financial cushion, in case their fortunes turn unexpectedly.

“That lack of a shock absorber is the big risk. We’re dealing with the oil shock right now, but there’s a risk that the shock becomes deeper than it needs to be,  because households have no protection to deal with it.”

Source: Dianne Buckner, CBC News Posted: Jan 16, 2016 5:00 AM ET

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