Finding The Uncommon Deal

Once the three parts of the list have been completed you can realistically analyze and determine your buying power. Many financial planners assert that no more than 25 to 33 percent of your salary after tax and other income should be used to pay for the monthly cost of a home. Others preach that you should not spend more than 40 percent of your after-tax income on housing. In New York City, many large apartment building owners rent only to persons whose total income equals 40 times the monthly rent. Instead of embracing a certain formula, I advocate first conducting an analysis of your total income and expenses. By following this path, you will identify your previous spending habits and may be able to eliminate unnecessary items from your future spending. Remember, how much you earn is only relevant after you subtract your necessary expenses. The amount you are able to save is the key.

Together, total income, assets, and liabilities provide an excellent X-ray of your finances. So, we can use these numbers to take a closer look at your monthly spending. You can start with housing, transportation, food, medical/dental insurance, phone, cable, and clothing. Add any other fixed costs such as loans, credit card debt, and car payments. You may want to put as many items as you can on a credit card for a month or two in order to keep better track of your spending habits. Keep a separate tally for your housing expenses.

Track your spending for a few months. Housing, transportation, and food will take up a large chunk of your income. Also note the changes that may be expected in your spending once you own a home. For example, if you are paying rent for your present housing, determine the difference between your estimated mortgage payments, real estate taxes, and other home expenses (fuel, electricity, gas, maintenance) compared to the rent and utilities you are currently paying. Remember that interest paid on your home loan and real estate taxes are tax-deductible but no deduction is allowed for rental payments. Compare the monthly housing expenses and whether, at that level of expense, you were able to save a comfortable amount of money each month. If you are living with your parents or anywhere else where you are not paying rent, consider if there are any other payments that might be eliminated upon the purchase of a new home. Can you give up a car if you move from the suburbs to the city? If you are already an owner, you should be able to afford the difference between the old and new housing expenses.

Once you find the amount you are comfortable spending for your total monthly housing expenses, you will be ready to intelligently shop for a home and choose the proper mortgage.

Your total housing expenses include monies spent through closing and after closing for maintaining a property. The biggest ongoing expenses will likely be the mortgage payments and real estate taxes. After a conversation with your lending professional, you will have an estimate of the amount of money you will be able to borrow and the monthly mortgage payments necessary to repay the loan. Then include your yearly housing costs such as homeowner’s insurance, heating and cooling, electricity, water, repairs, and common charges for a condominium or maintenance for a cooperative apartment. For cooperative apartment ownership, remember that the taxes and part of the mortgage on the building are paid out of monthly maintenance payments. Usually the largest single expense is the down payment amount, which is discussed below.

If your analysis concludes that you need more time to save before buying a home, you should set some saving and spending goals. Your ultimate goal should be not only to create a budget but also to put away as much savings as possible out of your income. Many of my clients have started with a piggy bank. Others have created bank accounts exclusively for deposits to be used only for purchasing property.

MY STORY: BUDGETING AND TRACKING SPENDING

My Grandpa Bob Vance was my most important cheerleader and teacher about budgeting and saving. Grandpa Bob sold picture frames for a living, and he was the richest person I had ever met. I had no idea how to define rich, but he had the most beautifully decorated apartment in Encino, California, his car always looked new and, unlike so many others in my world, he never complained about money. During my college years at Rutgers, Grandpa Bob began his long campaign to get me to keep track of every dollar I spent so that I could analyze where my money was going each week. It wasn’t until after law school that I actually listened to his advice. He spent countless hours discussing money and business with me, and I can sound off his favorite success sayings as he would repeat them countless times with his deep confident voice. Two of his favorites were: “It is not how much you make but how much you save” and “Fear is false evidence assumed real.” Years later I named my real estate company BP Vance, after my grandparents, Bob and Paula Vance. Although 80 years old at the time, my Grandpa loved flying to New York and seeing their names in large white letters on the big green façade.

Grandpa Bob urged me to keep more money in my savings account, and he helped me plan for big ticket items like spring break trips. In fact, it wasn’t until I realized how badly I wanted to save a down payment for a home that I finally started tracking my spending. Every time I spent money, an entry went on my yellow pad with the date. Everything I doled out money for was noted: food, laundry, clothes, toothpaste, groceries, books, and even the hot dog from the corner vendor. A few pages into the pad, I separately listed my fixed costs and liabilities, which at the time included my rent and education loan payments. As these would change, so would the entries in my legal pad. Eventually, I created a large stack of pads, and my ability to track forced me to be accountable to myself and motivated me to save money in every way possible.

This simple tracking tool allowed me to focus and track my spending and begin to develop my budgeting. Since I had to acknowledge my spending every time I made a purchase, many times I would think twice before indulging myself with a luxury. Over a few weeks and months I noticed patterns. Still, I decided that some extravagances such as weekend dinners at restaurants, although still not strictly necessary, were nevertheless worthwhile. So this simple method both caused me to save money and allowed me to take my first steps toward realistic budgeting.

Unfortunately, at that time, my budgeting demonstrated that I could not afford a home until I learned how to make more and save more. So I set my goals. A little less than three years later, I became a homeowner.

My method of tracking spending developed before the Internet. As the years progressed and as I taught this method, I watched friends and clients build upon its simple philosophies by using computer spreadsheets and Web tools to track spending and budgeting. It was clear that the yellow pads to which I owed my success were a thing of the past, but Grandpa Bob’s wisdom remained timelessly valuable with the newfangled tools available to implement it.

When one friend who had taken my advice showed me her computerized spreadsheets illustrating years of budgeting and spending tracking, I was completely dazzled. Her cross-referencing and graphs were marvels; they were like nothing I had ever seen on paper. For those who wish to use them, there are programs such as Quicken, which are more specifically aimed at money management than generic spreadsheet programs.

But the real point of this story is not that you should use this or that program or should use a yellow pad of paper or a pale green one. By keeping spending records you can, like me, develop the self-control and awareness necessary to get the big items you want without frittering away your resources on the small ones.

You can also combine this method with balancing your checkbook and putting as many items as possible on your credit card as long as the credit card charges are paid in full at the end of every month. While this may seem to be the exact opposite of advice you usually receive, in fact, credit card payments allow you to track your spending without having to pull out paper or a computer. The credit card companies not only provide you with a monthly itemized bill, but most will also give you a quarterly or yearly printout upon request and some of them will even break it down into categories.

When you use a credit card, your money stays in the bank and earns interest for an extra 30 days until you pay off your credit card bill.

Of course, this method only works if you pay your full balance on the credit card every single month as soon as the bill arrives. Be careful not to leave the payment to the last day. Some credit card companies purposely structure their late fees to be far above the legally permissible interest and therefore they actually want you to be late in your payments. But if you pay your full balance as soon as the bill arrives you save a lot of money and also improve your credit score.

Many credit card companies allow a grace period in which no late fee will be imposed after the due date. Be sure to check with your company about this. Also check any programs where you can earn money, airline miles, or other so-called gifts. Of course, they are not really gifts; you are paying for them either with your money or the money of the merchants where you are shopping.

So whether using paper or a computer, Grandpa Bob’s saving plan really does work as long as you have the passion to make it a success. As he would tell you with a smile, “You must believe, in order to achieve.”