We’ve all seen the statistics. As a general rule, we Americans aren’t saving enough. We’re not careful enough with our money. We don’t plan, therefore, we plan to fail. The national average debt per person rises each year. Basically, as a whole, we’re spending more than we’re making each year. I recently read that Americans spend $1.22 for every $1 earned. At that rate, no wonder we have the ridiculous bankruptcy & foreclosure trends we do.
That said, I’m a firm believer that a large part of the problem is lack of education. Our public schools don’t teach us as kids how to handle our money and, in many cases, our parents are dropping the ball also. For most of us, it’s a learn-as-you-go, school of hard-knocks process. Yes, managing your money takes a constant, consistent effort. But, if you’ve never been shown how to manage a checking account, how to budget, or how to save, where do you start?
First, it takes a dedication to learn, earn, give, save, and THEN spend (last). Take it from me, as I’m still stumbling my way through this learning process, it’s NOT FUN for most of us. However, the rewards can be amazing! I’m posting this in hopes that it blesses a few people, helping them to take some hard steps toward financial strength.
Here are the first steps that everyone should, and most of us have to, take before buying a home:
- Develop a family budget. This is, in my opinion, the most dreadful part of the process (and the primary reason that many people never get on track), so just suck it up & tackle it head-on, then you’re headed toward smooth sailing. Don’t budget what you’d like to spend; Instead, use receipts to create a budget for what you’ve actually spent over the past 6 or 12 months. Doing it this way, you’ll factor in unexpected expenses, such as car repairs, illnesses, etc, as well as predictable costs such as rent and car payments.
- Increase your income. I hate to throw this one at you so early on, but if making ends meet is a challenge, it may be necessary to take on a second, part-time job to effectively handle the following steps, and get the home you want.
- Pay down your debts. Generally speaking, lenders look for a total debt load of 36% of your income, or less. Since this figure includes your mortgage, which typically ranges between 25-28% of income, you need to get the rest of installment debt -car loans, student loans, revolving balances on credit cards- down to 8-10% of your total income.
- Get a handle on expenses. I’m sure you know how much you spend on rent and utilities, but I believe it’s the little expenses that bite us. Try writing down everything (yes, EVERY penny) you spend for one month. You’ll probably spot some things you’re spending on that aren’t true necessities. Now, ask yourself whether you’d rather have those things or be able to buy your own home.
- Save for a down payment. Although it’s possible to get a mortgage with only 5% down (or even less in some cases) you can usually get a better rate and a lower overall cost if you put down more. Shooting for a 20% down-payment could save you a lot in up-front costs and make paying your monthly mortgage much more comfortable.
- Create a house fund. Don’t just plan on saving whatever’s left at the end of the month for your down-payment. Instead, decide on a certain dollar figure or percentage of every paycheck that you want to save, then put it away in a separate account as you pay your monthly bills.
- Keep your job. While you don’t need to be in the same job forever to qualify for a mortgage, having a job for less than two years may mean you have to pay a higher interest rate.
- Establish a good credit history. While I’m a huge fan of zero debt, credit is a necessary evil unless you plan to pay cash for your house. Getting a low-limit credit card and making payments by the due date can help you get there. Be sure you pay all of your other bills on time too.
OK, now for the disclaimer. I am not an accountant, a CPA, a CFA or anything of the sort. Please consult your tax advisor, your mother, your neighbor or your banker for help in determining if these things will work for you, and consult me when you’re ready to start seeing homes and talking to a mortgage lender.