Any financial advisor will tell you the same thing: You need a savings plan. Homeowners and prospective homeowners alike need money tucked away for emergencies or a future down payment, though that’s easier said than done. It takes a great deal of effort to budget—and a great deal of time for savings to accumulate. Developing a savings plan sounds simple but in reality requires a good deal of strategy, so we’ve compiled four steps to help you start yours.
1. Outline Your Goals
Do you hope to be a homeowner in the next two years? Have you been itching to renovate your kitchen? Are your kids nearing the age when you have to prepare for college tuition? Everyone needs some savings tucked away for emergencies, but most people have additional financial needs to consider for the future. Before you do anything else, determine your financial goals, and be sure to be specific. You need to have firm numbers attached to your goals before you can plan to reach them.
2. Determine Your Monthly Income
This might seem like a silly step, but many people don’t know, definitively, how much money they make each month. Don’t look at your salary and divide by twelve—rather, base your monthly income on the size of your paychecks, once insurance, taxes, and your 401k have been taken out. This is the actual amount you have to spend, so it will ultimately be the source of your savings.
3. Calculate Expenses
Add up every expense you have each month—mortgage or rent payments, car maintenance and insurance bills, debt payments, utilities, your food budget, and anything else you regularly contribute to. Be specific and include bylines even for things like a Netflix subscription. Rank these expenses by essentials and compare the total to your total monthly income.
4. Budget to Save
Hopefully after step #3, your monthly income will surpass your monthly expenses. (If not, you need to reexamine everything you’re spending money on, and determine how to live below your means.) This doesn’t mean, though, that all of the remaining money will go into savings. There are quite a few unnecessary expenses you probably didn’t calculate, because even buying a latte twice a week will cut into your income. Consider your goals, though, and determine how much to set aside, each month, to put into your savings account. If you consider this amount as essential as your mortgage payment—and if you save it as soon as your paycheck comes through—you’ll be prepared to live a little more simply, and you’ll be on your way to developing a strong savings.
Tags: best time to buy a home, Everyday Living, first time home buyer, mortgage payment