Do you use the “B” word?
Making budgeting a little less scary
I know I said “budget”, but hold on. Don’t run. Don’t hide. We can get through this together. One of the questions I am asked the most from homebuyers is “How much can I afford?” It is a tricky question. Mortgage lenders and insurers use ratios to set your maximum purchase price. Generally speaking, you can use up to 35% of your gross monthly income on your monthly housing costs (mortgage payment, heating, and property taxes). Your monthly housing costs plus your debt and other financial commitments (ex. credit cards, car payment, child support) must be less than 42% of your gross income.
I can provide what lenders and insurers say you can afford, but at the end of the day only you can work out what you can actually afford. Lenders don’t take into consideration the cost of keeping your 5 pets, retirement savings goals, summers in the Schuwaps, weekend ski trips, or your plans to have 2 children in the next 5 years. The only way you’ll know what you can actually afford is if you build a budget.
The only problem is that the “B” word seriously scares people. I’m not a financial advisor, but I do balance the costs for our family of 5. My husband and I sit down every 6 months and make sure our budget still makes sense and compare it to what we are actually spending as a reality check. For the last 7 years we’ve used a budget spreadsheet from Gail Vaz Oxlade’s website. She is a Canadian Personal Finance Expert and her process made sense to us (no, unfortunately, she isn’t paying me for this promotion). If you follow this link you will see an online budget with two links at the bottom – one to download the budget in excel and one with instructions:
The Financial Consumer Agency of Canada also offers some excellent online tools. The website calculators include a detailed budgeting worksheet and a credit card calculator that analyzes your cards and the interest costs on various payment scenarios:
Personal Finance Calculators: http://www.fcac-acfc.gc.ca/Eng/resources/toolsCalculators/Pages/home-accueil.aspx
While budgeting is critical when purchasing a house, it is also a fit for all phases of our lives. If you have young adults or students in your life it is a great time to share these tools. If you are looking at purchasing a new home, calculate what amount you can spend on your housing and share that number with me. We can then work backwards to find out what the maximum house price is that still fits within your budget.