A Home Inspector’s Weblog by Frank Schulte-Ladbeck

exploring homes and the lives in them around Houston

Setting Up Your Budget

Wether you have given this thought or not, you do have a budget. You may plan to overspend, so borrowing or credit has become part of your budget. You may adjust your expenditures to give out more money on clothing one month and entertainment the next. However, now you are in a house, and you might find things are getting out of control fast.

I would like to understand why many of us let this happen. We have an attitude that much of the events in our lives are beyond our control. Finances seem to hold a special place in our helplessness. Do the wealthy spend a great deal of time concerned over their finances? Studies have shown that they do not. On average, an hour each week is all you need to control your financial situation. A recent survey found that many people who are facing foreclosure are unaware that they are heading down this path. People routinely call me for advice on their 401Ks, since I used to educate my employees about this when I was a corporate denizen. The conversations typically start with the phrase “The deadline has passed, so now what do I do?”. When I ask about why they did not act beforehand, the response comes that they did not want/feel like opening the envelope. Most of our problems can be resolved, if we address them. I write all of this to preface the fact that having some type of budget plan in place is the first step in controlling your finances.

Pay yourself first. Setting up a savings account is important for the new homeowner. You never know when you will have to pay some large invoice for a repair. With each paycheck, have an automatic withdrawal to this savings. Then forget about the savings account. It is a rainy day fund for your home and other matters. Do not think of it as a vacation fund; set other money aside for that. This is your emergency fund. Financial planners say that you should have three to six months of your salary in reserves. This is supposed to last you through a job loss. You can consider it the fund for your emergency home repairs as well. Different gurus will give you various monthly amounts. I think you should have at least $5000 back up in an area where the cost of living is moderate, so you can plan accordingly to reach that amount. Otherwise, I tell people to start off with $25 per paycheck for their savings account transfer. This is not much, but it does add up over the course of the year. If you can handle it do more.

What type of savings account should it be? If you do not have one, I would strongly suggest having a regular passbook savings or money market savings account at you bank. The interest earned is not great, but it is better than nothing. Once you have the funds, go to your bank to obtain a CD (certificate of deposit). This earns better interest than an account. The longer the term (the amount of time the bank holds the money), the higher interest rate you earn. From there you can move into a brokerage account (I will save this account for the next financial post).

Alright, you have paid yourself, what is next? Your dreaded monthly bills. Make sure the payment is received in such a way that you will not be considered late. Pay the minimum for each bill. Yes, I know that paying down the principal on credit card bills is the best thing to do, but I have a plan for you. In future posts on finances, I will write more on reducing your costs. Hopefully, you will have money at the end of the month. Use the extra money to pay down the card with the highest interest rate. In this way, you will start to reduce your debt. Why am I assuming that you have debt? Most of us do, so it is a fair assumption.

Before using the extra money to pay down a credit bill or your mortgage principal, how are you paying for your groceries? Your morning Starbucks? If you are using credit cards, you are simply increasing your debt, and you have hidden the true cost from yourself. What happens to that $5 coffee at the end of the month when you have not paid? Is it now $5.90 because of the interest rate on your credit card? If you do not pay this by the next month, you will be charged interest on that interest. Fun game is it not? As much as you can plan to pay for you groceries in cash or debit from your checking. Use your credit cards as back up for major purchases.

Your main goal with your budget is to make the money going out of your wallet less than the money coming into your wallet. Aristotle pointed out many years ago that this was the way to build wealth. To help you with this, take the bills out of the mail and place them in one spot. At the end of the week, open them, and pay them. You do not need to have a written budget, but this could help you. At the beginning of the month, you can write down the amounts of all the payments that you made last month. Then look at the amount of money you have coming in from paychecks. Income (pay)- Liabilities (bills)= profit (extra money) or loss (further debt). Try to develop means to make this equation equal profit. It really is a simple task. If you are going further into debt, your main goal will be to look for ways for increasing your pay while reducing your liabilities, but do not panic at the first sign of developing debt. Be proactive and deal with it. Not dealing with it causes more headaches.

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