“I am going to teach you to hate spending money.”
— Rupert Horn, rich Uncle to Montgomery Brewster (Richard Pryor)
Well, I would imagine that, for most people, even if you did have an insanely-rich (or rather, insane and rich) uncle, and even if that uncle wanted to give you $30 million dollars that you were required to waste in 30 days as some form of sick test, in order for you to earn and to inherit the full-estate of $300 million dollars . . . I just can’t imagine hating to spend money. Losing it? sure. Wasting it? absolutely. Paying taxes on it? probably. But spending it? I think most of us would probably be ok with that.
How about budgeting it? And no, I don’t mean the $300,000 million dollars — just budgeting in general. Most people don’t like writing a budget, keeping a budget, or thinking about a budget, as a matter of fact, a lot of people don’t even like to talk about a budget. I am surprised every time it happens, but every few months or so, I will ask someone this question: “How much were you hoping to spend per month on your mortgage payment (principle, interest, taxes, insurance, everything)?” The (surprising) answer: “Well, I was kind of hoping that you would tell me that.”
Granted, every now and then someone misunderstands the question, but what you can afford in a house payment has little to do with what I can qualify you for in a mortgage payment. And here is why — generally speaking, mortgage programs allow you to use 28% of your monthly (gross) income on your house payment (housing ratio) and they allow you to use 36% of your monthly income on all of your debt payments (debt-to-income ratio). The lesser of these two numbers determines your qualifying maximum monthly payment (as you would fit perfectly into the guidelines). So, for example, if you made $60,000 per year, or $5,000 per month, at 28%, your maximum house payment would equal $1,400. If your only debt was a $450 car payment, $5,000 x 36% = $1,800 . . . minus the $450 per month . . . so $1,350 would be the maximum payment you could qualify for to keep your debt-to-income ratio at the 36%.
However, with the ability to push the ratios above the guidelines for borrowers with great credit, strong employment, $$ reserves in the bank, etc. and with many loan programs having expanded qualifying guidelines (allowing debt ratios of 41%, 45%, 50% or even 55%), you can see how what you want to spend and what you can spend might be drastically different. Hence, back to the talk of a budget.
Here are some helpful ideas to remember when working on a budget:
1. start working backwards — go through your check-book or bank statement and first find out where you are spending your money
2. look for easy places to reduce expenses — excessive dining out, swiping the debit card for small impulse buys, trips to Wal-Mart where you go in to buy toothpaste and somehow end up spending $128. How does that happen anyways?? A similar phenomenon occurs at Home Depot . . . you go in to buy a hammer . . . $164 later . . . you are now the proud owner of a hammer and a brand-new cordless drill. Don’t even get me started on Target.
3. don’t confuse budgeting with being cheap — if you have tried budgeting before, you probably heard advice like, “if you give up your designer-latte’ two times a week, that would add up to over $300 a year in savings!”, sounds good, right? NO, it doesn’t sound good. It sounds like a way to tick-off a lot of hard-working, early-rising people by making them forgo a favorite part of the day and replace it with having to pre-program their Mr. Coffee, loaded with some not-so-similar-tasting Maxwell House. If you try this approach, you’ll hate your budget and your likely to trash the whole thing in a few weeks (or days). What if you bought a Starbucks Barista personal brewer and then made your own great tasting coffee? Hmmm . . . at $120, plus coffee grounds . . . at 2 cups a day (one for me and one for my wife), you’d break even in how many months??? (spoken like a true mortgage broker).
4. give yourself some cash — I would guess that the downfall of a lot of budgets is the debit card. It’s convenient to use a debit card for ‘small-things’ but 15 ‘small things’ can quickly add up to $150 and multiply that by two (15 for me and 15 for my wife = $300) and you almost have a car payment in off-budget expenses. My advice, pull out a set amount of cash each month for discretionary spending. This money is for anything not on the budget — a McD’s breakfast, a sushi lunch or a smoothie at the gym. Once the cash is gone for the month, if it’s not on the budget, you’re done until next month.
5. review your mortgage — taking 20 minutes to review your current mortgage may free-up extra cash per month and pull that budget closer to balanced. Make sure you review all of your options: full-closing costs, 0% origination, or even no-closing costs.
When shopping for a mortgage, I hope that you will do your homework before starting the loan process so that you have a good idea of your comfort range in terms of a monthly payment. Having that piece of the puzzle together before you start shopping for a mortgage will save you time, energy and anxiety — because looking for houses in the wrong price-range is hard to un-do. I can promise you . . . you will like the more expensive houses better . . . that’s why they’re more expensive.