Budgeting Basics for Homeowners

A new home often means making significant adjustments to how people spend their money. Expenses such as mortgage payments, property taxes, insurance, utilities, and maintenance add up quickly and can easily throw the best of financial intentions out of whack. Creating and following a budget is a great way to stay on track while cutting down on financial stress at the same time.

Having a budget gives homeowners a roadmap for their financial needs and goals. Yes, their monthly home-related expenses need to be met, but they’ll also need to consider much more: food, clothing, education, healthcare, transportation, and savings for both retirement and emergency expenses.

Homeowners will definitely have unexpected costs that arise at inconvenient times – the water heater needs replacing, or the roof needs repair right away. Having a way to cover these expenses is critical not only to the home but for peace of mind.

Homeowners should start budget planning by examining their household income against expenses. First, list the monthly income – take-home pay if they get a paycheck, self-employment income, and any other outside sources of income. This amount will form the basis of the budget.

Next, make a list of the monthly fixed expenses. These include the mortgage payment, car payments, phone and internet service, trash collection, etc. For expenses that are typically billed less frequently, such as property taxes, home insurance, and school tuition, divide the total yearly amount by 12. Fluctuating costs such as gas and electric bills can be averaged to a monthly total and added to this list as well. If there are carried balances on credit cards, those payments will need to be factored in, too. Importantly, savings should be considered fixed expenses – making this commitment to the future will pay off, literally, in the years to come.

Next, list the variable expenses. These are expenses over which homeowners have some control: food, clothing, cable or satellite TV, online subscriptions, gasoline, entertainment, gym memberships, and even haircuts are some typical examples. Track these expenses for a few months to arrive at accurate numbers to work with. It’s very important to be realistic about what is currently being spent, because once the overall expense budget is developed, they may need to look for reductions in these variable items.

Add the fixed and variable expenses together and compare them to the total monthly net income. If the income is enough to cover everything, homeowners can still look for ways to budget in their favor. Reducing some variable expenses and shifting the difference into savings, for example, is a great way to boost one’s financial situation without making major changes.

And if expenses exceed income?  If an increase in income isn’t on the horizon, they’ll need to reduce expenses so that they’re in line with what they can actually afford. First, go to the list of variable expenses and closely consider each line item. Is that upper-tier cable TV package really necessary? Can more meals be prepared at home? Go to the movies less often? Reducing expenses in these categories can really add up on a monthly basis.

If reducing the variable costs still isn’t enough, they’ll need to look at the fixed expenses. Consider trading down to a car with affordable payments and raising the deductibles on home and auto insurance. Check into cheaper plans for mobile devices. The differences can be significant over the course of a year.

No matter how careful the budget planning, it won’t work if the budget isn’t followed. Personal finance software can be helpful in tracking cashflow, and adjustments can continue to be made over time. By keeping to a budget, homeowners will come out ahead and sleep better at night, too.