Budgeting Tips for New Homeowners 2023
If you recently became a homeowner for the first time: congratulations! That’s no small feat these days. However, house hunting, down payments and closing costs are just the beginning. You’ll have to make certain adjustments to your budget and plans that you may not have had to think about while you were renting.
The sooner you can get your budget together, the better. Budgeting may not be a fun task, but it will help protect your personal finances and investment in your new home, leaving you better prepared for the future. Recent events have shown that unpredictable circumstances are always possible, and a balanced budget with a healthy savings account will better equip you to weather these eventualities.
Source: How Money Walks
Of course, this is just a general guideline. You should allot a higher percentage of your income toward paying those off if you have high debt levels. After all, savings accounts typically yield less than 1% interest, while high-interest credit cards could charge as much as 30%. Also, remember to include insurance in your calculation of housing expenses. If you’re new to household budgets, you can check out some of our budgeting tips for beginners.
Even if you’ve been on top of things so far, it’s a good idea to revisit your budget after a significant life change. Many free budget calculators and financial planning apps are available to help you.
5 Budgeting Tips for New Homeowners
Here’s some budgeting advice from our Guides Home Team to get you started.
Anticipate New Expenses
When you purchase a home, one of the most considerable immediate changes is that you’ll have a monthly mortgage payment instead of rent. Typically, your mortgage payment will include items like property taxes and homeowners insurance, but not always. Additionally, since both taxes and insurance premiums can fluctuate over time, it’s essential to keep an eye on them.
Particularly when it comes to homeowners insurance, remember that you have options. If your premiums with your current insurance company increase enough to upset your budget, it may be time to look into other insurance providers. Alternatively, if you find that your current policy lacks the coverage you need, you can always upgrade. We at the Guides Home Team have laid out our recommendations for the best homeowners insurance providers for various situations.
Homeowners Association Fees
Some new homeowners, particularly in townhouses and condos, may be part of a homeowners association (HOA). The fees for these associations, which should go toward the upkeep of community spaces, can be steep, sometimes costing hundreds of dollars each month. Hopefully, you were aware of the HOA fees before purchasing your home. Regardless, make sure to include this item in your budget.
Unlike renters, homeowners are responsible for maintaining their residence and property. Typically, this will involve things like lawn mowing and HVAC tune-ups, but there’s always the possibility that something essential and expensive could break. Thus, you should have savings earmarked specifically for home repair.
The Housing Counseling Network at the National Community Reinvestment Coalition (NCRC) is a HUD-approved collective of agencies made up of mortgage advisers offering guidance on budgeting, credit, financial management and savings techniques. Its director, Ibijoke Akinbowale, recommends planning to spend 1%–2% of your home’s purchase price in ongoing costs for maintenance each year. However, if your home is older or in poor repair, the percentage could be higher.
One way to keep your home maintenance costs lower and more consistent is to invest in a home warranty. This residential service contract helps cover the cost of repairs and replacements for covered home systems and major appliances that break down due to normal wear and tear, but these are not always worth the cost.
You pay a monthly premium, and if a covered item breaks down, you call your provider, who will send someone to diagnose the problem. If it falls under the terms of your warranty, the technician will repair or replace the item for the cost of a predetermined service call fee.
Plan for Big Projects
The big home improvement projects are ones you probably don’t plan on tackling right away but might be necessary a few years down the road. These could also include major, unexpected maintenance projects or upgrades you decide you want to do.
Even if you didn’t purchase your home with the intention of remodeling your kitchen, for example, you might find that the existing structures don’t fit your needs as well as you thought. For example, if you’re a first-time homebuyer, perhaps you will need to add more usable space as your family grows. Or maybe you just get sick of the carpeting and would rather install hardwood floors. Regardless of the home improvement need, you may want to start saving for it now.
Additionally, no matter how new your home is, you’ll eventually run into maintenance projects that exceed the typical 1%–2% allowance in your budget. For instance, large-scale roof repair is expensive, and partial or total roof replacement is even more pricey. Although you may only need to redo the roof every 20 to 30 years — or before you decide to sell — the project will be much easier if you’ve been setting aside money for some time.
Unfortunately, you may also face events that you couldn’t have anticipated. Homeowners insurance will protect the structure of your home and your most expensive possessions, but it’s not unlimited. Some homeowners are unaware of what home insurance will or won’t cover. Here’s a non-comprehensive list of what typically is or isn’t included in a typical policy.
Standard homeowners insurance typically will cover these:
- Your main dwelling and any outbuildings on your property
- Personal and medical liability
- Fire and smoke damage
- Extreme weather like storms, lightning and hail
- Crimes such as theft and vandalism
- Accidents such as falling trees
Standard homeowners insurance typically will not cover these:
- Earthquakes and flooding (though add-on coverage is often available)
- Termite or other pest damage
- Valuable jewelry or artwork (though add-on coverage is often available)
- Damage caused by neglect, poor home maintenance or normal wear and tear
Additionally, most insurance policies have nuanced coverage options: personal liability, cash value versus replacement, depreciation costs and more. It’s a lot of information to sort out, but it’s worth it to make sure your home is fully protected.
Revisit Savings and Life Insurance
Any time you have a significant life event, it’s a good idea to take another look at the state of your long-term finances, and buying a house definitely qualifies as one of those events.
Unfortunately, the world recently got a stark reminder of the importance of emergency savings in the form of a global pandemic. Of course, it doesn’t take a worldwide catastrophe to knock you or your family off your feet — injury or illness can change your financial situation just as quickly.
Experts recommend keeping an emergency fund with enough cash to cover three to six months of necessary monthly expenses. That’s easier said than done, but make sure your emergency fund accounts for all your new expenses as a homeowner.
Similarly, since your expenses may have increased, it’s also a good idea to determine whether you need to purchase a more robust life insurance policy. Particularly if you have a family who depends on your income, it’s a good idea to price some different policies. You might consider looking at policies that cover only the house (i.e., your new assets) and compare them with policies that cover all your assets together.
Finally, take a careful look at your retirement plan to see if it will cover your new set of expenses. For example, if you plan to retire before you’ve paid off your mortgage, make sure you take your monthly payments into account. Several formulas can help you figure out how much of your yearly income you should save based on your age, but regardless of which one you use, the earlier you start, the better off you’ll be.
Source: Retirement Living
Make Priorities for Reducing Debt
Since your mortgage is likely your largest and longest debt, you may be tempted to put any leftover monthly income toward extra mortgage payments. However, financial experts typically recommend prioritizing high-interest debt, including the following:
- Payday loans
- Auto title loans
- Credit card bills
- High-interest personal loans
In general, you should begin paying off the debt with the highest interest rate fastest, while paying the minimums on all other debts. Alternatively, you could adopt a strategy of paying the loans with the lowest balances off first, which can help keep you motivated and keep collection agencies off your back. However, you’ll likely end up spending more in the long run. You could also prioritize the debts that will impact your credit score the most, such as payday loans and back income taxes.
Unlike these debts, home loans typically have a lower interest rate, and your home’s value should appreciate over time. Your mortgage is generally considered the “good” kind of debt, like student loans.
If you’re having trouble making a dent in your debt, you can always consider starting a side hustle to increase your income. The internet and the rise of the gig economy have made it easier to monetize your hobbies or connect you with people who need the skills you can provide.
Ultimately, planning now can prevent problems later. Getting your housing expenses in order and having a robust emergency fund are some of the best ways to plan for what you can’t foresee.
Homeownership can sometimes feel like a crash course in Murphy’s Law, but you can remind yourself that with this purchase, you’ve gained more control over your future than you had before.
A saying commonly attributed to President Franklin D. Roosevelt states, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” This statement is still true, even in the uncertainty of the current economy, so protect your investment with good financial decisions and planning right from the start.