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The importance of a budget is something you’ve heard me talk about over and over and OVER again, but I realized that for a lot of people, the biggest hurdle is just getting started! Don’t feel bad- this can really be overwhelming if you’re not sure where to begin. So this week, I wanted to talk about how to actually start your budget… what to gather, future savings, and future investing  all with the goal of sustainable home ownership

So budgeting… I struggle too. But I’ve learned that if you get into the habit of budgeting, it becomes the foundation for a solid financial future. But I think it’s really important to clarify what a budget actually is. Budgets are often mistaken for just a list of bills… nope. That’s not it! That has something to do with it, but a real budget is actually a limitation on the amount of money that you will spend in a period of time. For our purposes, we’re going to talk about a monthly budget. 

Where do we begin? Get a baseline of your actual spending. And I mean EVERYTHING. Let’s figure out what you have been spending money on so we can determine where we can maximize cashflow. 

First things first- We want to get three months of spending on paper. When looking at your spending it’s important to look at ALL accounts. So for example, if you are married and you and your spouse have both joining and separate accounts, you should be looking at spending in each of those accounts.  (And by the way, if you want to hear more about how my husband and I talk about money in our family, check out this video)

Once you have three months of spending down on paper, categorize each expenditure into the following categories:

SURVIVAL- housing, food, transportation, utilities, medical bills, child support.  Any mandatory minimum payments that you have to make. This does NOT include personal hygiene spends, or recreational activities.

MAINTENANCE- These are expenditures for maintenance (including healthcare) for your big assets like your car and your house, and then also your children, pets, family and self.

LIFESTYLE- This where you categorize things like pedicures, golf, going out to eat, entertainment, etc. Anything that is not absolutely vital to your literal survival, but is something you spent money on.  

GIVING- I’m a big believer in giving back, so for me, any sustainable budget needs to include a category for charity and giving back.

So keep in mind when you’re categorizing things between lifestyle and survival, things like eating out are lifestyle expenses. Going to the grocery store is survival. So if unsure if which category something fits into, ask yourself the basic question- do I literally need to spend this money for food, shelter, transportation to work, etc? If yes, survival. If no, lifestyle. 

WHAT NEXT?

A Successful budget is about 70% of net take home income. The remaining 30% then goes to paying off debt, saving, and investing. But I realize that if you are just starting out with the concept of budgeting, living off that 70% might be daunting. So let’s look at some of the ways to get you there.  

1- Decrease liabilities – The very first step is to take all that work you did above (categorizing three months of expenses) and determining which of those expenses you can reduce or eliminate. 

This might mean sacrifices… things like moving in with family, getting a less expensive car, etc. But those tough choices now will help you in the long run if it means that you can pay off debt, save, and hopefully even invest! 

 

2- Evaluate assets – If you’ve already taken step 1, and still have too much debt to overcome, it’s time to start looking around to see what kind of assets you might be able to sell to get rid of some of this debt. Things like jewelry, instruments, art, old laptops, phones, clothes… maybe you have a storage space with old furniture, or recreational toys… items that you don’t need or use on a regular basis. 

I know this can be a pain point- trust me, I’ve been there. I personally have gotten myself into a ton of debt before, and had to make sacrifices like this. But because of this, I know it can be done, and I’ve personally seen the benefit.

 

3- Increasing income – When it comes to your 9 to 5, it’s worth seeing if you earn more money. How do you do this? The first thing you want to do is determine if you are a valuable asset or a liability as an employee. Hint: liabilities don’t usually get raises.  Figure out where you can add value, and then negotiate a work for commission compensation for that added value. 

If that’s not possible, do additional earned income work- babysitting, grocery shopping, graphics, etc. Anything you can do with your own talents that you can offer as a service or product, you should! Or, if you have the time to take an additional job doing part time work at a grocery or delivery service, it’s well worth it if it will get you closer to that 70%. 

I know these steps aren’t easy. It takes serious commitment and sacrifice to reach these goals, but I KNOW you can do it. I did it too, and the results in my own life are beyond anything I ever expected. 

And I want to leave you with this tidbit: The most impactful thing I have learned about investing and money is that: If invested properly, (somewhere between every 4-6%) money doubles every 10 years. DOUBLES. Every TEN years. 

So I hope this inspires you, I hope it helps you, and if you have any questions and/or want to join me on this journey, be sure to join our SMART Steps community on Facebook! 

 

Stay healthy & stay well!

Lizy

This week it seemed like it was a good idea to take a look back and answer some of the questions I’ve had over the past few months! I love hearing what people need help with, and the whole point of this channel is to give practical everyday advice to those who are looking for it! So keep those questions coming! I’m here to help, and always do my best to answer them 🙂

Am I really a “first time home buyer”?

 

Question 1: Manny inherited a home in 2010, but now he and his fiance would like to purchase a home together. So, Manny is wondering if he qualifies as a “first time home buyer”.

 

You’d probably be surprised how often this kind of question comes up! It’s not uncommon for someone to inherit property through an estate, and that usually brings questions about what kind of programs someone will qualify for after. 

 

For the purposes of mortgages, “first time home buyers” are considered people who have not purchased a home in the last three years. So since he inherited the home over three years ago, he would be considered a first time home buyer. Obviously we’d have to take a close look and make sure there are no other conditions that need to be met, but with just this information, he qualifies for all the first time home buyer benefits. 

 

Also, something to keep in mind, for most mortgage programs, you only need one of the people purchasing to be considered a first time buyer for the couple be able to take advantage of these. 

Are home prices going to keep going up?

 

Question 2:  MH wrote in and let us know that she and her family wanted to purchase a home last year, but due to personal financial circumstances, could not. Now prices have increased, and keep increasing, and she wonders if the market will “stabilize” and prices will stop going up.  

 

So this is a tough one to predict- it’s really hard to say if prices will keep going up. At the current moment, there is a lack of supply and a large demand for homes, so there’s no immediate indication that prices would drop. However, because interest rates are SO low (like seriously historically low), you actually have more purchasing power than you would have a year or two years ago. As a result, even with a higher sale price, your monthly payments may end up being even lower than they would have for the same home a couple of years ago. 

What’s a donor letter?

 

Question 3 – Thea Davis asks “What’s a donor gift fund statement?”

 

Very often, people have help from loved ones when it comes to purchasing a home. That brings up something called a “Donor Gift Fund Statement”, which is simply a document that your lender will provide. This statement is filled out by whomever is giving you the money, and has them state their relationship with borrower (you), what the amount is, what the source of the funds is, and that it’s a gift (it doesn’t need to be repaid). 

 

This document really serves to verify that the funds are in fact a gift, and there’s no requirement for repayment.  

 

Can I buy a bigger house if I buy with someone else?

 

Question 4: This question comes from Trigger Happy 134. They were looking for a 4 bedroom home, but now realize that they need to look for a larger home to have space for their parents to move in with them.

 

Moving in with aging parents is a big deal, and it’s absolutely something you can plan for when applying for a mortgage! The most important thing to do here is discuss with your family member what your strategy is going to be, and definitely put an exit strategy in place in case circumstances change in the future. And honestly, that’s the same discussion you should have with any person you’d consider buying a home with! 

 

That being said, if you are purchasing the home together, you will both have to submit applications, you will both have to provide financial documents. But this also means that you will most likely have expanded purchasing power, and more options. 

What do I need to know before I buy a car?

 

Question 5: Kajung writes in to ask what they should know before they buy a vehicle. 

 

This is such a great thing to be thinking about!!  First of all, it is SO important to do as much research as you can up front. You want to be armed with as much knowledge as possible. Then, when it comes to negotiating with the car salesperson, let them know what you have found when it comes to other prices, ask them what they can do for you, and then BE QUIET. I cannot stress this enough- when it comes to negotiating, it’s important to know when to shut up! If you let them know you’re an educated consumer, and also let them know what your budget is, you can shut up and let them give you their best price. 

 

Is taking cash out of your home the same as having a line of credit?

 

Question 6: Jessica asks, what’s the difference between cash-out refinance and home equity line of credit? 

 

So a cash out refinance is something that is rolled into a single mortgage on your property. A home Equity Line of Credit (HELOC) is actually a second mortgage that follows the first, and has an adjustable interest rate. But with a HELOC, you can pay it down and charge it up on an as-needed basis. 

 

I actually recorded an entire video on what you need to know before refinancing, which has lots of information to consider before doing any type of refinance! 

 

How to budget when you’re self employed?

 

Question 7: Mitchell asks us the SUPER common (and great) question of how to budget when you’re self employed.

 

I feel you on this one- I’m not technically self employed, but I also don’t have a regular consistent salary. So many people have this same challenge, and I promise it’s something you can manage with a little bit of time and planning. 

 

My best advice here is to look back over the last two years of both income and expenses and take an average.  Once you’ve done that, set aside the amount of money that the average revealed. 

 

Some people like to do this by setting aside the exact number, and others do it by percentage. 

I personally do it by percentage, and I make sure that money is automatically sent to an account that all of my regular expenses come out of. The reason I like this method is because so often, people spend whatever they make as soon as they get it, and then don’t have anything left over for anything else. 

 

If you’re having trouble figuring out how to budget for your personal expenses, download our free budget guide! Budgeting will help you plan for the future, and make those inevitable ebbs and flows much easier to manage!!

It all starts with a budget. I know you’re probably sick of me saying this, but I’m going to repeat it till it sinks in! I’m also going to talk about refinancing, side hustles, and other ways to save, but IT ALL STARTS WITH A BUDGET.  

If you’re new here, go download my free SMART Steps Budget Guide right now. That guide is going to help you learn to live on 70% of your net income, and use the remaining 10-30% available to invest and/or have for a rainy day. And guess what? It doesn’t get much rainier than this… 

Rainy Day Funds

So what is a rainy day fund? It’s a savings account that holds enough cash to cover your living expenses for a certain amount of time. Some people like to have 3 months saved up, some 6, and then for the SUPER worriers (like me), 12 months. My recommendation in our current situation is actually to try and get that fund up to 6 moths. We really don’t know how long we will be in this quarantine situation, and I personally believe it’s best to be over-prepared and plan for worst case scenario. 

Obviously this takes time to accrue, but the sooner you get started, the sooner you reach that goal! Especially if you are still gainfully employed right now. Start putting away those savings into a rainy day fund until you have a comfortable cushion to see you through any financial emergency.

How do you do this? You start by minimizing your budget to the BARE ESSENTIALS. Cut all the extra curriculars, cancel all the subscriptions. Right now, many people are paying for things like gym memberships, nail clubs, massage memberships, etc., but because of “Shelter in Place” orders, you can’t make use of them. Now, if you are in the financial position to keep up those memberships and support those businesses, then great. I think that’s wonderful and I hope that the people who can afford that, maintain their memberships for use when this clears up. BUT, if you don’t have any savings and/or are concerned that you will be losing your income in the future, you need to make adjustments now to prepare. Canceling those subscriptions and services is a start.

Student Loan Payments

Let’s take a moment to talk about student loan debt. I’ve said it before and I’ll say it again- compound interest is a weapon of mass destruction. Guess what student loan interest is? You got it- compound interest. 

In our current financial situation, there has been a lot of talk about student loan companies suspending payments, and if you DO make payments, the full amount of the payment will go towards principal. You can read more on that here. 

If you are able to make your payments right now, you have an incredible opportunity to pay down your loan amount by applying those funds just to principle. If you lost your job and need to forgo making payments in order to continue paying for essential bills like food and housing, please do that. BUT, if you are still employed and still able to make payments, this can help you reduce your overall debt in the long term.  

Refinancing

I’ve talked about this a lot in recent months, even before the COVID Crisis hit us. My advice on refinancing is actually the same now as it was then- I think you should only refinance if it makes financial sense in the long term. 

 

That means that you should be seeing a significant savings on your monthly mortgage payment (200$ or more), saving at least a percentage point, and planning on being in the home for a long period of time. Be sure to check out my other video on refinancing for more detailed analysis on this topic. 

Side Hustles

If you find yourself with nothing but time on your hands, now is the time to explore alternative ways of making money so you can build up that rainy day fund! Have you ever considered learning another language? Stick with me here- I know that sounds odd, but using this time to learn a second or even third language will make you more marketable to companies looking for customer service help when it comes to foreign languages. Maybe you have skills with graphic design, video conferencing, digital marketing, etc… there are companies that need help navigating this new socially distanced work from home life, and you can help them do it. If you don’t have a special skill, that’s ok. Use this time to develop one! Or use the time to do deliveries, or some other very necessary essential labor.

Learn about the Market

If you have the time, and you are unsure about what to do to plan for your financial future, I HIGHLY recommend learning about the market, do your own research on what is best for you, and pay attention to the news as it relates to finance. This way you can figure out where you can capitalize and make investments. Whatever you do, don’t be reactionary when it comes to investing. Following the masses is rarely a good idea when it comes to investing. This is why doing your own research and educating yourself is important. 

SMART STEPS

I’ve been mentioning this for a couple weeks now, and we’re close to launching! SMART Steps is a facebook group where you can go to get practical money advice, ask questions and be part of a community that is focused on reaching financial goals with realistic principals. If you’re interested in joining, click here! We’d love to see you there 🙂

We’re living through unprecedented times. With the pandemic starting to rear its ugly head in our country, we’ve already seen economic disruption, and are bracing for much more. In an effort to mitigate the damages, our federal government passed a financial relief bill that addresses both individuals and small businesses impacted by COVID-19. CARE ACT

So today I want to talk to you about how that relief package is affecting the homeowners and the housing market, and what some of your options are as we as a nation face a difficult economic situation. 

 

IF YOU READ NOTHING ELSE, READ THIS: 

Before anything else, the MOST IMPORTANT thing I can tell you right now is that if you are under financial distress as a direct result of COVID 19 and cannot pay your mortgage, you have to contact your mortgage servicing company. This federal relief act does not mean that your mortgage payments automatically stop. It simply enables you as a homeowner to apply for relief and be protected from financial hardship as it relates to your mortgage.

As an overview, this bill puts a halt on all evictions and foreclosures for a period of 60 days. There is already talk of extending this period, but as of this writing, this halt extends through May 2020. So, if you find yourself in a COVID 19 related financial hardship, this bill gives you 60 days to figure out your next steps as it relates to your mortgage. 

The Difference between Forbearance and Deferment

The forbearance part of this act means that there is a hold on evictions and foreclosures. If you are financially impacted by COVID 19, you have a period of time that you are not required to make payments. Then when that grace period is up (in this case, two months), you will have to make both your regularly scheduled payments, and make up for the payments that would have occurred during the grace period. Depending on your circumstances, you will either have to pay that amount up front, or you will make modified payments along with your regular payments. 

Deferment programs are slightly different in that whatever payments would have been made during the deferment period are simply tacked on at the end of your loan term, and they still accrue interest as they normally would. This is really similar to the way student loans work. The thing to note here is that you have to be able to prove that this is a COVID 19 related hardship, and the deferment period (for now) is only 180 days. So if you had job loss prior to the pandemic, it does not qualify. At the current moment, only Fannie Mae and Freddie Mac have issued guidelines on deferments, but I do anticipate more to come in the weeks ahead.

So in summary, the CARES Act impacts the housing market by injecting liquidity (in the form of direct payments to tax payers- read more on that HERE, halting evictions and foreclosures, and offering deferments to those in need.

 

How mortgage banking works

This is a hefy topic, but I’m going to do an extremely simplified overview as it relates to what’s going on right now. 

Once a home loan is closed, it is transferred and managed by a mortgage servicer (the bank you make your payments to). The asset (closed loan) itself is sold to investors or a government agency like Fannie Mae, Freddie Mac, or Ginnie Mae (FHA/VA). The servicer’s role is extremely important because they collect payments from the borrowers and pay property tax insurance and handle customer service related questions/issues. They are also responsible for timely payment to investors (in this case, the government) who buy pools of these loans through investments called Mortgage Backed Securities (MBS). 

The reason it’s important to understand this right now is because the CARES Act does not provide relief or guidance for Servicing companies. Which means that if a homeowner stops paying their mortgage, the service provider is STILL on the hook to pay the investor (the government). This is why it is SO IMPORTANT for people to continue paying their mortgage if they are still employed. It was this exact problem that contributed to the housing crisis in 2008. People who still had an ability to pay stopped, and then servicing companies were not able to fulfill their obligations to investors. 

 

My advice

I know this is not going to be the popular opinion, but I truly believe that if you have equity in your home, and you are in a position (for whatever reason) where you can no longer afford your mortgage, you should sell. That way you can figure out housing that is within your budget (which may be dramatically different now), pay off your debt, and still have assets left. This will leave you in a stronger financial position on the other side of this, rather than deeper in debt. 

Also, for those of you who find yourself suddenly unemployed, and don’t know what to do next, I really believe that there is serious value in work, and there is work to be found right now. So many groceries are hiring, and delivery services too. Obviously, I don’t want anyone to put themselves or their families at risk. But if it is a possibility for you, don’t feel bad for stepping away from whatever your chosen work was to do something in the interim. It may not be what you want to do with your time, but, if the choice is giving up or doing an honest day’s work, DO THE WORK. We all need to do what we can to help pull ourselves and our communities out of this.

In closing, please stay safe out there. Stay healthy, and be well. We WILL get through this, and as always, if there are any questions I can help answer for you, please don’t hesitate to reach out.