top of page
Search

Budgeting & Real Estate: Impact, Tips, Detail

Updated: May 19

Here I share about budgets in general in addition to the positive impact that homeownership can make to help many save more and invest more. Sometimes renting is a better fit, but it's important to look at the facts to be sure before renting, even if homeownership seems impossible. No matter how much or how little your income is, your financial growth, even your giving potential, will be forever limited if you don't first limit yourself with a budget. The ability to invest is catapulted by good budgeting. Without good budgeting, it's easy for years, especially younger years, to pass by without nearly the assets built up that one would be more intentional about if they were to do it again looking back. 


Budgeting Overview:

Can those of low-income budget?

Absolutely. In fact, children should begin budgeting at a very young age, and parents would do well to teach them wise financial habits like budgeting, with poverty as well as high income being a highly generational problem or benefit based in part on the actions of parents and grandparents as well as what they teach the future generations.


Most of the world has a lower average and median income than the US. Typical low income in the US would be considered a high income in some countries like South Sudan, where the 2024 GDP per capita is a mere $455 (compared to $85,373 in the US per Global Finance). And yet, people making much less than people here, with much more limited opportunity, are able to do things like save up to buy a car in cash & more.


Also, those with low income in the US have some of the best opportunities for savings by % available. For instance, the Saver's Credit is only available to those of mid to low income, & Roth IRAs aren't available to the rich. The Saver's Credit "helps taxpayers offset a portion of the first $2,000 ($4,000 if married filing jointly) they voluntarily contribute to Individual Retirement Arrangements (IRAs), 401(k) plans and similar workplace retirement programs." It provides up to a 50% credit, which means that for every dollar put into one of these IRAs or 401(k)s up to the cap, taxes can be reduced by up to 50%! That's savings on top of any 401(k) employer contribution and isn't limited to employer-based retirement plans since it's an option with IRAs as well. That means that if adding to a 401k with a 50% match of your employer, it's almost like getting an up to 100% total match since you could put that 50% extra credit right back into an IRA or Roth IRA if you wanted to and haven't met your cap for the year.

Is low income the biggest problem?

Typically not. While there are some exceptions (i.e. those in slavery, those who are quadriplegics, those who are severely mentally handicapped, & those born in countries of very low income who never get the opportunity to move somewhere better), the biggest problem fuels low-income as well as other bad financial habits. The biggest problem is the lack of effectual wisdom on finances including the self-discipline necessary to rapidly grow financially.

While a low income has a dramatic impact on budgeting, and increasing your income legally and ethically should be a high priority if you're low income, it's important to keep in mind the following:


"Low income is not always to blame for financial hardship. Only 1 in 5 people (20%) facing financial hardship fall below the poverty line and make less than $40,000 per year." https://www.debt.com/statistics/

What's the biggest budgeting problem? Most don't budget.

The biggest issue with budgeting is that most people don't budget, and if they plan out a budget, they don't stick to it. Besides that, some of the biggest budgeting issues that people typically don't save or invest enough, while they overspend on the major average expenses, like housing (especially renters) & transportation (especially those that buy vehicles new &/or with financing & those that lease). Many people I talk to are car poor or house poor. The average American also carries a balance on his credit cards. Bad credit can also have a very negative impact on budgeting, increasing insurance costs & interest rates on housing, transportation (if not buying in cash), & otherwise. Besides those 2 things, many people commonly overspend on their food, clothes, & certain items that are not necessary. For those that smoke, drink alcohol, or do drugs, many also spend quite a bit on those items as well, not to mention the higher health costs for those that smoke, do drugs, & drink a lot. A low amount of red wine can have a positive impact on health but overdrinking & smoking are part of what made me never know my grandfather. 

Overspending on transportation

In our experience buying older, low mileage, low depreciating, reliably rated vehicles (such as Subaru, Toyota, & Honda w individual reliable ratings as well for the specific vehicle) with high MPG that are relatively cheap without too many fancy amenities in cash, then taking them to honest repair shops including but not limited to for all the inspections, is the way to go.

How much do I need to save/invest?

If you don't have any savings, it's best to start with Dave Ramsey's baby step 1 recommendation of $1k, but a big part of Dave's advice is to get out of debt via the debt snowball next in baby step 2 before getting more savings in baby step 3. The small nature of the $1k should help incentivize you getting out of debt fast because of times when only $1k would cause a hardship.


Forbes shares a graph from Fidelity of how much you should have saved in a bank & for retirement per your age, with the biggest time to save being starting early to get compounding interest going and in your prime years, from 40-50:

Age

Multiple of Annual Salary Saved

30

1X

40

2X

45

4X

50

6X

55

7X

60

8X

67

10X

What's the best app to use for budgeting?

I used to use Mint, but with that out of the picture, here are some alternatives. Of those, my favorite is likely Empower.

Free classes, web tools, &/or personalized budgeting assistance:

  1. If looking for a non-profit financial counselor, select "Managing or Budgeting Your Finances" on HUD's Housing Counselor Finder page.

  2. Undebt.it


Options in Hampton Roads:

  1. The Up Center Housing Crisis Financial Counseling

  2. CCEVA Housing Financial Counseling

The closest offices for many are in Chesapeake & Newport News

Call (757) 484-0703 to schedule a budget counseling session

Disclosure

The content on this site is not provided by a bank or issuer. Opinions expressed here are author's alone, not those of a bank or issuer, and have not been reviewed, approved or otherwise endorsed by a bank or issuer. Adam Garrett, the author, is not a CPA nor a financial advisor.


Budgeting & Real Estate:

Budgeting for a house purchase when the monthly cost will exceed your current housing costs

While there are some exceptions where it's best to go above your initial pre-approval (i.e. my 1st house purchase), it's typically best to have a budget threshold for a purchase that is lower than your max preapproval.


If you're planning on paying more monthly for housing than your current costs (across utilities, monthly housing payment, maintenance, etc.), it's vital to do the math with a budget geared pre purchase and another for after purchase prior to your first showing.


When your housing costs are about to increase if you purchase, the main thing to look at is if the savings/investing of your current income monthly (especially if you have a fixed income that doesn't vary) & annually (especially if your income varies substantially throughout the year and year by year) can be reduced to accommodate the higher expenses.

  • If so, are you comfortable with that lower monthly threshold of savings/investing? If not, you may want to have a lower purchase budget.

  • If not, are there other expenses that you can reduce to have the funds for a purchase and to accommodate some savings/investing apart from your house?

  • Would a larger down payment or a program to reduce home cost help your budget?

Impact of home ownership on budgeting

Mortgages tend to go up over time even on a fixed rate mortgage due to increased property values that translate to higher taxes and insurance. This rate of increase tends to be lower than the rate of increase for renting a house.


Even if one has an initially higher mortgage payment vs the comparable rental, the savings of long term home-ownership, especially after 10 years in a house, are an excellent way to assist with having more funds available for funding savings and investments.

  • While rents tend to increase over time, owning a home at a fixed-rate mortgage or fully outright tends to not increase nearly as much over time.

  • Part of your payment goes directly toward your debt principal. While your debt principal goes down over time with a traditional mortgage, your home's worth tends to go up over time, increasing your net worth.

  • Step 6 of Dave Ramsey's 7 baby steps is to pay off your house. Once that's done, especially if completed long before retirement, many can save and grow in their net worth like never before.

Examples of When to Lower Your House Budget Even if Preapproved for More

  • If you are getting a 50% or 100% match on a Roth 401k from your work, and buying a house would mean that you wouldn't be able to contribute to that anymore, it's typically best to lower your budget so that you could keep making 100% of the contributions that get matched.

  • Likewise, if buying a house meant that you could no longer maintain a substantial emergency fund and sufficient funds for insurance deductibles (i.e. house insurance, auto insurance, and medical insurance), you may want to reduce your house budget.

  • If buying a house meant that you could no longer afford to maintain a term life insurance policy (or whole life if you've been investing into it for many years), you may want to lower your house budget.

How high of an income do you need to purchase a home?

How can someone during my career with an income of less than $750/month, who wanted a house instead of the never-ending rent cycle, be in a position to buy a house? They budget decently & don't take on too much debt. Also, government grants and programs like the USDA direct loan with 1% interest and a 38 year loan are very helpful. Even with an interest rate closer to normal, they could still get a house. They purchased a house & are paying significantly less in their monthly mortgage today than what they used to pay in rent. They also no longer have to deal with a landlord who didn't like to fix anything. 

Tax & Benefit Implications of Home Ownership

How Locations & Situations Vary Considerably In Terms of Renting vs Purchasing

Not every location is optimized for long term homeownership due to a number of factors.

There is a break even point when owning a property for a certain period of time is better than renting a comparable property. The break even point of renting vs buying the same comparable house can be substantially different depending on the price, the location, loan options vs renting options (especially programs to reduce the mortgage cost or rent assistance), real estate tax rate, and how good of a deal a property is.

Best Budgeting Practices for Ensuring That You Never Miss a House Payment or Other Fixed Expense

For fixed expenses like the following if you are on a fixed income, it's best to be automatically moving the funds to a separate account from your main checking account. This can be accomplished either by your employer sending funds to separate accounts or you having automatic transfers going every time you get a paycheck if your paychecks come in around the same time. That way, you don't have to do the math every time you look at your checking account and what you can afford:

  • House payments (whether mortgage or rent)

  • Car payments

  • Insurance payments

  • Owner's association payments (if not wrapped into your mortgage)

  • Savings

  • Investing

  • Taxes (including annual taxes like car taxes)



Related:


Comments

Rated 0 out of 5 stars.
No ratings yet
Add a rating
bottom of page