Only a third of Americans can answer at least four out of five financial fundamental questions. These questions cover topics like mortgages, interest rates, and inflation. Can you relate?
If so, this article on budgeting tips for beginners is perfect for you, especially if you want to buy a house at any point in time. We’ll cover everything you need to know from setting up a budget to finding a mortgage lender so it makes sense.
Are you ready? Take a deep breath. Let’s dive right in.
What Is a Budget?
A budget is a plan for your money. There are a lot of different types of budgets, and we’ll cover only a few.
The main purpose of a budget is to keep you from overspending so you don’t go into debt and help you save for your major financial goals, like buying a house.
Three Common Budget Types
The cool thing about budgets is they come in a wide variety. This makes it easy to pick a method that works for your lifestyle. Because if you can’t track your budget, it’s not much of a tool at all.
We’ll talk about three different types of budgets here: the zero-based budget, the envelope method, and the 50/30/20 rule.
The zero-based budget is best for meticulous people who want to track all of their expenses. In a zero-based budget, you estimate your income and plan where every single dollar goes, and track every dollar that goes out.
The envelope method is for people who don’t want to worry about tracking expenses but want to plan where the money goes in advance. Whenever money comes in, divide it into envelopes. When there’s no more money in the envelope, there’s no more money to spend.
These can be literal envelopes that manage cash. But a series of checking and saving accounts will work just as effectively.
The 50/30/20 rule suggests you save or pay off debt with 20%, use 50% on needs, and the last 30% for whatever you want. It’s a great way to allocate your money smartly, without worrying about the little details.
How Can I Create a Budget That Works for Me?
There’s not a one size fits all budget, so it may take some tweaking to find what works for you. Take a glance at the above budgeting methods and pick one that feels right for you. Try it for a month or two, and tweak it as needed.
Remember, you can’t pass or fail a budget. If you go over, you don’t have to just try again next month. Instead, tweak your budget throughout the month if you go over in any one category. Just remember you have to take the money out somewhere else.
To create a budget, list all your incomes and expenses. Make sure you remember the ones that always come up and are pretty fixed, like rent, electric, and Netflix. Some expenses are flexible like food, shopping, and entertainment.
To get a thorough view of your money, print off the past few bank statements and see how much you spend.
If there’s money left over after you list all your expenses, you’re doing great! If not, you need to cut back to avoid going further into debt. The good news is, now you know where the money is going and you can decide where you want to cut back more easily.
Build an Emergency Fund
In your budget, make sure you’re saving for an emergency fund. A good emergency fund needs to be at least $1000. This is usually enough to cover major expenses in case of an emergency.
As you become more financially stable, you can build up this emergency fund to include three to six months’ worth of expenses. That way if you ever lose your job or go through a global pandemic, you have a bit of a cushion to help you through.
Pay Off Debt
Once you have a basic emergency fund in place, pay off high-interest-rate consumer debt like credit cards and car payments. Why? The high interest is eating your money alive.
Paying off debt is the best investment you can make. The fewer expenses you have, the more financial freedom you have.
Especially if you want to buy a house, you need to pay off debt. Your debt to income ratio has a big impact on how big of a mortgage you qualify for.
On top of that, paying off debt will help you boost your credit score.
Boost Your Credit Score
A credit score ranges from 300 to 850. A high credit score doesn’t mean you’re in a good financial place, it just means you’re good at managing debt which is what lenders want to see.
It also means you can get a mortgage at a much lower interest rate. With a purchase as big as a house, fractions of percentages can add up to thousands of dollars throughout a thirty-year mortgage.
Raising your score from 629 to 760 can save you an extra $66,000 in interest on your loan.
Start Saving and Investing
In the habit of budgeting? Check. Emergency fund in place? Check. Debt mostly paid off? Check.
You’re ready to start saving and investing.
What’s the difference? When you save, the money goes to a designated saving spot and stays there. When you invest, the money goes into an investment account or buys stocks, bonds, or real estate (among other things) and grows more money.
Investing is a big topic, beyond the scope of this article, so we’ll focus more on saving. But understand that investing is the best way to grow your money and fight rising inflation rates.
So why save? You need to save money to be able to afford the things that you want in your life. This can be a cool trip, emergency vet care, college, wedding, honeymoon, or a house.
Since we’re talking about budgeting to buy a house, let’s focus on that.
How Much Do I Need to Buy a House?
Across the U.S., the average price for a house is $340,000. Considering the average U.S. salary is only $31,000, you would have to save every penny for over ten years to pay for a house outright.
Fortunately, you can get home financing. You’ve probably heard you should save enough money to put 20% down on your new home. Even still, that’s $68,000. With numbers like that, homeownership seems nearly impossible.
A 20% down payment means you don’t have to get mortgage insurance. Mortgage insurance protects the bank’s investment, and you pay for it.
The good news is programs exist to help people buy homes, especially their first homes, for as little as only 3.5% down. For a $340,000 home, that’s about $11,900. You still have to pay for mortgage insurance, but you can also start building wealth in a house.
If you buy a cheaper home, you need even less to get in the door.
Start House Hunting
Here’s the fun part! It’s time to start house hunting! As you browse through Zillow and Redfin, try not to get your heart set on any of the houses you see right away.
The goal of the early house hunting days is to figure out what the real estate market looks like in your area. Keep an eye on the average cost and availability for houses that seem like a good fit for you.
This way, you can better plan how much you need to save for a down payment for a house.
Understand Different Housing Lenders
While you’re house hunting, it’s time to start hunting for lenders too. Lenders are almost always banks, like Chase or Wells Fargo, but there are other options too, like Loanpal.
Also consider government-sponsored options, like an FHA loan or a VA loan. Here’s where you can get your foot in the door for only 3.5% of the cost of the home. If you’re a veteran, you may need even less than that.
It’s not always a good idea to accept the first mortgage offer you get. Other banks or lenders may offer you a better rate, and like we talked about earlier, fractions of a percentage count.
When you pick a lender, get pre-approved. That way when your dream house comes on the market, you can snap it up right away without waiting for the money to come through.
When to Buy vs. Rent
There are a lot of hidden costs associated with owning a house that you should consider. But as a very loose rule of thumb, if you plan on living in an area for more than five years, it’s more financially prudent to buy a house.
Five years is usually enough time for the home’s value to grow, so you can turn around and sell it at a profit. That is, assuming there’s no major damage and the housing bubble doesn’t collapse again like it did in 2008.
A Good Grasp On Budgeting Tips for Beginners Is Essential for Financial Security
It’s okay to start from square one, and these budgeting tips for beginners are perfect for just that. Even if you know nothing about managing your finances, you can put together a good budget that helps you save for all your big goals, even financing a house.
We’re here to help you get the most out of every moment. Keep exploring to see what you can learn next.