Budgeting For a New Home
After years of student income and tight expenses, it can be tempting to throw caution to the wind and operate without a budget, upon completing medical school or your residency. This would be a big mistake, because history shows that as income rises, so do expenses. No one has limitless funds to buy everything you want. When transferring from a low income to a substantially higher income, prudence will be rewarded 100 fold.
For physicians who move from living off student loans to a much higher income, nearly any increase can make you feel wealthy. You want to buy a new home and fill it with new furniture. More than ever before, there is a bigger need for a budget, now that you have discretionary income. Gaining budgeting skills will lead to financial success no matter where your career leads.
Assess your expenses. A budget consists of two basic parts, income and expenses. Expenses are further broken down into fixed and discretionary (or variable). Fixed expenses, remain the same each month, and include rent or mortgage, car payments, student loans, and other fixed debt payments. Fixed expenses can include some utilities like the cable or cell phone bill. Electric bills, food, gas, and entertainment are variable and change from month to month. Ideally you want your fixed expenses to be around half of your budget. The fixed bills you have less control over than discretionary bills.
Assess your income. This addresses how much pay you bring home. Be sure to subtract out expenses that are deducted from your pay which might include insurance premiums, retirement, and other benefits provided by the company. Take home pay is what you will have to spend so that is the number to focus on. Be sure to carefully look at tax deductions, insurance options and retirement spending. The sooner you pay into retirement the faster the money will grow and paying yourself first is an essential part of budgeting.
Make thoughtful decisions about a final budget. Once everything is on paper it is easier to see where your income is spent. If you are unsure keep an expense journal for a month. Another method is to put every expense on a credit or debit card for 30 days and then closely examine the bill. The one catch to this is purchases as general stores like a Walmart or Target, does not identify the actual purchase. Matching your actual spending as closely as possible will create a budget you can both keep and adjust.
Maintain the budget. It is one thing to write down where you want to spend money. It is another to actually track the spending and keep the budget. Fortunately, online tools are available to keep track of your budget. Some can also connect with your checking account to help you maintain the budget on an ongoing basis.
If you set up and maintain a budget before you finish medical school or your residency then you will be more prepared to purchase a home. As your pay substantially increases, you will have the skills to better determine how much house you can afford when it comes to taking on a mortgage payment.
Build a budget with a new mortgage payment. If you are just finishing school or your residency it might not be possible to live several months setting aside what you want to spend on the mortgage. However, if you have kept a budget for three to six months before looking for a home, you will have a clear understanding of your expenses, and those that will be coming up, to get a feel for what you can afford. It will also give you a chance to save money for both a down payment and moving expenses.
Include more than just the mortgage. Often first time homebuyers think the only cost to home ownership is the mortgage. Buying a larger home you come with higher utility costs. Also include a budget for home repairs. No longer will you be able to call a landlord if a pipe breaks or the plumbing backs up. As a homeowner, it now becomes your responsibility. Setting aside funds each month to cover unexpected home repairs will keep your budget in tact when these expenses arise.
Buying your first home is an exciting accomplishment. If you take time to financially prepare and budget for the changes, you will be able to make the adjustments smoothly.