Affording Our Lives
Affording Our Lives sets out to help those who want to improve their financial situation by learning from our journey. Here we will share where we were from the start and how we got there. While we are still on our journey, we have already made significant strides to move from a tough situation to a more comfortable one. However, because we have future ambitions, we will continue to explore new ways to better afford the life we want. So, as we learn new lessons about how to afford the lives we want, we will continue to share.
Strategies for an Improved Financial Situation
The strategies we used to get us to a better place financially will show ways to save money, invest wisely and grow income. Some of those strategies came at the right time in our lives and others we wish we had known sooner. Not all the ones we used worked. Others worked, but, as we evolved our financial competency, we either modified or quit using them. Some of those strategies rely on conventional wisdom and others are less common. So, as we share what we learned some may seem intuitive because you heard them before while others might take more to understand.
Regardless, using these strategies and learning lessons from their use, we were able to strengthen our financial standing. We will get into all of that as this website grows. As we learn about new financial strategies, we will be sure to share those as well. While your situation and desires, may not align perfectly with ours, there will inevitably be things you can learn from us to improve your financial situation. Some of those learning will be from our failures and others from our successes. Unlike other sites that only share the positives, we want to be transparent to show that the process, much like life has its ups and downs.
The Future of this Site
We look forward to building our website and community overtime. We will post future blogs weekly telling our story and the nuggets of knowledge we gain along the way. Please stop by frequently to hear what we have to say and leave your questions and comments so we can collectively learn and grow.
New Posts on Our Journey
- How to Save Money for a House
Photo by Emre Can Acer on Pexels.com How to save money for a house depends on our personal goals and expectations. The information discussed here illustrates a framework or checklist we used for exploring how much we could afford. There may be items we do not discuss that may be important to your financial circumstances. You will also need to factor those in. We hope that this article will provide a good starting point for your personal assessment. After all, buying a house is a big and fairly complex purchase.
Below is a three step process for how we budgeted and saved money for a house. The process includes establishing a budget for your purchase, developing a timeline for when you plan to purchase a house and determining where to save your money.
#1 – Start by determining your budget
When starting to determine a budget so we can save money for a house, we need to consider the total cost of the house from purchase through ownership. The “through ownership” part is what many tend to overlook. By default we start with the price of the house. This is after all the largest dollar value of the overall purchase. However, there are many other components to consider that will affect how much you end up spending. Generally the most obvious costs are those that roll up into your monthly payment. The less obvious are closing costs and the costs to live in and operate your house. Finally and possibly most importantly, we have to think about how this fits into our household budget.
If you want more information on creating a home budget please see our post here: Home Budget: For Your Improved Financial Situation).
Monthly House Payment
When discussing a monthly house payment, you will likely hear the acronym PITI thrown around. This is the sum of multiple items to form your monthly housing payment. These include your Principal, Interest, Taxes and Insurance (PITI).
Principal
The principal payment is the amount going to pay off the face value of your loan. The principal is not all you will be paying to satisfy the debt however. Yet, of the PITI components, this is the largest. When choosing a home price and accompanying mortgage to fit our budget, the principal is typically the largest impact to the budget. Lower the principal amount on our loan and we can significantly reduce our monthly payment.
Interest
Interest is how the bank makes their money on the mortgage. Hey, we all have to make a living. Interest is also one of the ways we end up paying much more than the face or principal value of the loan over time. We have to be sure to understand how much interest we will be paying through the duration of the loan. It may surprise you. It certainly surprised us the first time we saw that calculation. Take a look and make sure you are comfortable with the interest you will be paying. Or, in our case, don’t get comfortable with it, but find ways to accept it and plan to pay it off sooner.
The better our credit score, the better the interest rate our bank/credit union will offer us. If we want to afford more house or spend less on our mortgage interest, improving our credit score can help. This may take time if we have a lot of work to do, but we shouldn’t be discouraged. We just have to do our best to build it as high as we can.
Taxes
Taxes include our real estate/property tax and any other tax that may be unique to our situation. In some geographies this isn’t a huge financial commitment, in other areas you will feel it significantly. Each jurisdiction or governmental entity has different requirements. There may even be a big difference between taxes just by crossing the street or into a different jurisdiction/district. Therefore, there is no one overarching calculation we can give that everyone can use. We have to look at the location we are buying in to determine the formula and rates to use. We should be able to find the calculation on our local assessors website. The information on the previous taxes should be publicly available too.
Insurance
Insurance includes your homeowners insurance. This is used to protect your home and the valuables in it. You can shop around between companies to find the coverage and costs that fit your needs. In our experience the price stays fairly consistent over time and isn’t a huge part of PITI. We opted for a little higher priced insurance because it afforded us better coverage. Having that extra safety net seemed worth it to us. Not everyone may feel the same way. Regardless, the difference in cost wasn’t all that much in the grand scheme of things.
Insurance also includes, if necessary, Private Mortgage Insurance (PMI). This insurance is often required if you supply less than a 20% downpayment as part of the home purchase. This insurance is used to protect the bank/lender in the instance that you default on your loan. This wasn’t particularly high for us. So, it didn’t impact our budget too much. It isn’t insignificant however. We have to admit that it stings a little seeing that we are paying PMI when we get or mortgage bill. Our PMI will cease after we reach 20% equity in our house.
You can learn more about PMI here: https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
Upfront Costs
Our monthly payment tells us what we will be paying in the future (but only for the purchase itself). There are some other upfront costs to factor into the equation when planning to save money for a house. Your down payment is one such factor. This is your upfront skin in the game. There are also closing costs to consider.
Down Payment
Your required down payment depends on the type of loan you take out, but it typically ranges from 3-20% of the property cost. As noted before, we usually pay an additional monthly fee for Private Mortgage Insurance (PMI) if we put down less than 20%. That’s because the bank is taking on some risk by allowing you to not put down more.
What we just discussed above for down payments are minimums. You could choose to put down more. The more you put down, the lower your monthly payment will be, because you are taking out a smaller mortgage. That may be enticing if you are able to wait and save up more money. If you delve into the way mortgage payments work, you will notice that the earlier on in your term, the less principal you pay. This means you are paying down less of the actual mortgage and instead paying more on the interest. As a result, it takes time to build equity for this reason. By putting a bigger down payment on the house, you gain more equity (or more ownership) upfront. That may also be enticing for some.
Closing Costs
Closing costs are tricky for many of us to understand. There are many fees, taxes and insurance that get bundled in here. Many of these are tied to legal components of the sale. Closing costs 2-6% of the principal of the mortgage. Different sources have this range as slightly smaller or larger, but from our research 2-6% seems the most likely range. Included in closing costs are real estate commissions, many fees, title searches, taxes, inspections, and the list goes on. Some of these costs are covered by the buyer and some by the seller. To reduce these costs we can try to negotiate with the seller (sometimes this works and other times it does not). Additionally, we can also look for lenders with lower fees.
Nerdwallet has a nice breakdown of some anticipated closing items and their associated costs. You can find that here: https://www.nerdwallet.com/article/mortgages/closing-costs-mortgage-fees-explained
Online Calculators
There are plenty of online calculators that allow you to play with these numbers and see what works for you. A simple internet search will supply us with numerous options. We have noticed that not all calculators are created equal. Some are very simple and others are very detailed. The simple ones were nice for some quick, high level numbers. We used those when we were trying to establish a home buying budget. The detailed ones provided more accurate costs. We checked our projected costs by using multiple calculators. As we identified how much money to save for a house we could afford, we switched to the more thorough calculators. When making a massive purchase like buying a home, spending the extra time was well worth it for us.
Cost of Ownership
The cost of ownership is next up on the list. Up until now, we have been taking about the costs of purchasing the house. But, there are plenty of costs for owning the house. This contributes to how much money we need to save for a house. Below we talk about our emergency fund, operating costs, capital expenditures and furnishing costs.
Emergency Fund
As homeowners, we are entirely convinced that an emergency fund is a must. It certainly is for us. Between our downpayment and our closing costs, our savings took a big hit. We were planning for these expenses, but we needed to make sure we had enough money left over for for those rainy days sure to come. In our situation we were moving from a small apartment to a much larger and expensive dwelling. This meant we were about to incur significantly more expenses. Having that emergency fund meant that we would be able to weather the storm should something unforeseen happen to the house or our incomes.
Within the first few months of home ownership, we were already dealing with issues that required use of our emergency fund. We wouldn’t want to imagine not having one. It’s stressful enough dealing with unforeseen headaches. Not having the money to fix those problems would only make the situation worse.Because we built up funds for a downpayment, closing costs and an emergency fund, it took a while before we could afford a house. Do we wish it could have happened sooner? Absolutely. However, we would have regretted not adequately building those funds. It took a lot of focus to get there, but it was worth it!
Operating Costs and Capital Expenditures
If having an emergency fund was a hit or miss topic in the articles we read before buying a house, operating costs and capital expenditures were even more rare. That makes sense as both of these terms are used in business rather than home ownership. But, as homeowners we do incur costs to operate our homes and we do have to make repairs.
Operating Costs (Utilities)
For us utilities were a big cost jump. Going from a 560 square foot apartment to a 1,200 square foot home added significant cost to our utility bills. These operating costs needed to be factored into our budget. We went from electric bills that peaked at around $100 in our worst months to over $200. A $100 per month jump isn’t insignificant for most of us. One way to estimate your future utility bill is to ask for the utility costs of the home you are considering buying. There are other items besides utilities that we could add here, but utilities were the biggest for us.
Capital Expenditures (Repairs & Improvements)
While operating expenses like utilities have an impact, home repairs and improvements can be even higher. In business owned real estate these are considered capital expenditures. If we apply the concept of capital expenditure to home ownership, we can start to anticipate future costs. (It is also our experience that it is easier to find information on the web pertaining to capital expenditures for buildings than home maintenance and repair.)
Projecting Costs
When we bought our house, the inspector did a great job of laying out how long he expected things to last and when he expected they would need to be replaced. (Getting a good inspector was worth the cost for us.) The laundry list of items on our house was long. But, we bought a fixer upper, so that was, in part, assumed going in.
Regardless of our decision to go that route, everyone has costs that will arise if they are in a house long enough. There is a life span to every construction material, system and appliance in our homes. Those who own and operate rental housing build (or should be building in) these capital expenditures into their budgets and rents. We as homeowners can do the same. So, when that roof that will cost $12,000 to replace in 10 year and that $20,000 in home tuckpointing comes in five years, we can plan for it. Yeah, it’s no fun to think about, but repairs are in the cards for us all if we plan to live in a home long-term.
As we looked for homes to buy, we considered the costs of future repairs and upgrades. We asked when different items were installed so we had an idea how much life was left on them. We then estimated those costs and placed them in our budget. So that $12,000 roof replacement over 10 year meant we needed to be saving $1,200 per year or $100 per month. These are important considerations for our home buying budget. There are some pretty good sources out there for the average lifespan of these items. We will put together a future blog post on sources we use to price these items out and determine an expected useful life.
Furnishing Costs
Furnishing costs are the last item we looked at. Going from a small apartment to a good sized home, we did not have the furnishings to fill the house. One idea we employed was to not over buy square footage, as it would cost us more to furnish. We also favor quality over quantity. So, we would prefer fewer items that are of higher quality. Regardless of your preference, we feel its important to be able to furnish a house. Aside from storage areas, we didn’t want a bunch of empty rooms. Furnishings cost money. We may be able to re-use some of the furnishings we already have, but sometimes we need or want more or newer furnishings. We just need to make sure to add this to our home buying budget.
Another post will talk about furnishing your home and the ways you can do so that fit within your budget.
#2 – Determine your timeline
Determining a buying timeline is a pretty critical step in the process. This tells you how much time you have to save for things like your emergency fund, closing costs and downpayment. The longer we have to save, the easier it should be (in theory) to save the money we need for a house. If we want to make a purchase sooner, we may have to work a bit harder to get there, depending upon our circumstances. Once we have our timeline and your budget, we can calculate how much we need to be saving a month to reach our target.
#3 – Determine Where to Save
Determining where to save our emergency fund, downpayment, closing costs and furnishing budget is an important step. If we have more time in our savings timeline, there are more ways to store our funds. Your emergency fund should always be highly accessible, so there is a bit of a limitation there. We looked into checking, savings, and money market accounts. We settled on a high interest savings account for fast access with a fairly decent interest rate. For the other savings we looked at additional opportunities like bonds. Given the market, the savings route worked best for us. Its worth noting that we stayed away from more volatile investment offerings like putting our money into the stock market. While the return have potential to be better there is also the risk of losing money. Getting a guaranteed return was the best option for us.
Conclusion
Buying a house is expensive and complex. In determining how much money to save for a house, there are many items to consider. Being comprehensive and conservative with our budget served us well. We recommend that anyone looking to buy a home use a budget to help them make the best possible decisions possible. Since this is a large and long-term expense, we valued the work we put into figuring out how buying a house. It did take some effort to get through all the calculations, but we chipped away at it overtime and it paid off significantly.
- Home Budget: For Your Improved Financial Situation
Home Budgeting Here we describe many reasons why you need a home budget to improve your financial condition. We all need to be able to assess where we are and where we want to be financially. A budget helps us lay out a framework for how we should use our money. A good budget will include our goals and ambitions.
10 Reasons Why (Your Goals)
There are numerous reasons we may have for home budgeting, including:
- Getting out of debt so we can quit bleeding money. Are your credit cards
- Quit living paycheck to paycheck and having the stress that comes with it
- Saving money for a big purchase (like a home, a car, a vacation, an expensive hobby or any number of other big ticket items)
- Saving for education whether it be your education or for a member of your family
- It may be about building an emergency fund so we are ready for the challenges life will inevitably throw at us. This can also reduce our anxiety about money or a lack thereof.
- We may be saving up money so we can afford to have a family whether that be a child, children or pets.
- Maybe you want to start a business but need startup capital to get going
- You may want to invest more than you currently do or get into new investments, like real estate
- Changing your life so you can be financially independent may be the ambition that excites you.
- Increasing the amount you donate, because giving is one of the best ways we can increase ours and others happiness
Many of us will likely choose to engage a number of these goals or maybe even all of them. There are many strategies for reaching our goals. Some may choose the checklist approach where they focus on one goal at a time and check it off when complete. Others will want to see progress across multiple goals at a time. Regardless of what you aim to accomplish, a home budget can help you lay out a roadmap to reaching our goals.
Do you need a home budget?
Do you need a home budget to be able to accomplish your goals? I am sure there are many people that have reached the above goals without one. However, having a budget will allow you to be strategic about what you want to do and how to get there. It can help you chart how well you are doing on your desired path. If you find things are not going as planned, you can use your budget to help correct course. If things are going well, you may be able to add a new goal you were not anticipating or maybe one that seemed far out on the horizon. Regardless, having a budget is a tool we use to help us navigate our financial journey.
Can you get by without a home budget?
We probably could have done a lot of what we accomplished financially without our budget. (Oops, I wasn’t supposed to say that.) We have no doubt the road would have been more difficult and less successful without one. Our budget allowed us to understand how much money we were wasting on things that didn’t serve our goals. Likely, we would have further delayed buying our first home and having our first child without a home budget (largely because it would have taken us longer to save). Alternatively, we could have done either or both too early and been in real bad shape financially. We do wonder how much more debt we would have if we had foregone the budgeting route.
Most people find a way to make it work without a budget, because they have no other choice. We made it without one for a while, but it wasn’t pretty. The money we brought in went right back out the door and we had little savings to show for it. It was a very frustrating time in our lives.
If you are reading our posts, there is a strong chance that you want to do better than just getting by. You probably want to live the life you want, instead of the one that everyone else seems to live. If that’s a good assumption, you are in the same boat as us! In that case, we highly recommend a budget. Do you want to live the life in debt model, have way more money coming in than you spend or you just like to roll the dice a little more? Well, maybe a budget is for you.
Why we home budget…Our Financial Disaster Story
Racking Up Debt
Tell me if you have heard this one before…
Before starting our home budget, we had a strong motivating force pushing us to manage our money better. After graduating from college, we had a lot of student loan debt. When I say a lot, I mean roughly $100,000 worth of combined household student loan debt. Maybe we are underselling what “a lot” means when the average graduate has $37,574 with of it, according to the Education Data Initiative (https://educationdata.org/average-student-loan-debt). The interesting thing is we both worked while in school, we had a mediocre apartment unit and we weren’t lavish spenders. But, when one of you gets multiple degrees and the other pays out-of-state tuition, well the bills add up.
Low Starting Salary
Upon graduation, the economy was not great. It was taking graduates a long time to find jobs. It was beyond the three to six months that the University of Washington estimated in 2021 (https://www.washington.edu/doit/what-can-students-do-improve-their-chances-finding-employment-after-college). I was fortunate to have a paying internship that was allowed to carry on for a few months after graduation. My wife was just starting her career and we were fortunate that she was able to find a job as I finished school. Collectively, the pay was not great. So we were stuck in low paying jobs, looking for ways to scrimp on what we were spending everywhere else, just to pay student loans.
Debt Payments
Our beautiful financial disaster left us with $1,220 per month in debt payments. That is only around $200 less per month than the average monthly mortgage payment in the United State in 2021 per Bankrate (https://www.bankrate.com/mortgages/average-monthly-mortgage-payment)! When you first leave school and your combined wages are less than your student loan debt, you are going to feel hefty financial discomfort. I am sure many of you reading this post know exactly what this feels like.
Some people suggested we go the income repayment plan route. We opted to not to do that, as our wages would eventually grow beyond the benefit of those plans. By dragging out the payments, we would end up paying a lot more money in interest. Personally, we felt our degrees were expensive enough without all the interest. We also were not planning on needing student loan forgiveness, so it made more sense to grit it out and pay the full bill every month.
Owning Up
Needless to say, some of this was out of our control. For example, the time of our graduation relative to the strength of the economy was not ideal. The rest was of our own doing. We opted for careers that require degrees. The student loans were now our burden. As a result, the path we were on was going to be a challenge. We had to own up to that. How we navigated that path would play a critical role in whether we lived the sort of life we wanted. This is where the home budget came into our lives.
What Home Budgeting Taught Us
We have two high-level home budgeting lessons to share with you. Our story might not align with yours perfectly. However, we believe that these primary lessons will help many of you. As we expand the articles on this website we will delve deeper into these two areas.
Most of us have financial goals. We also have barriers and opportunities to reaching them. Once we come to terms with what is in our control versus what is out of our control, we can start making financial headway. It often is not the best use of time worrying about what we cannot control. What we can control financially often comes in the form of opportunities and barriers. These live within our income and expenses. It really is that simple at a high level. There are of course nuances, but if you are just getting started it’s an easy way to jump into home budgeting.
Salary
You are not likely to make significant salary jumps right out of school (in a corporate job) large enough to have a huge impact on your finances. There are of course people who are able to do this in part due to their field of work, their capabilities and their drive. Unless you have all three working for you, it will be hard to make huge leaps in pay.
Let’s say you make the mean starting salary out of college in 2022. Per the National Association of Colleges and Employers (NACE) that would be $58,862 per year (https://www.naceweb.org/job-market/compensation/salary-projections-for-class-of-2022-bachelors-grads-a-mixed-bag/). If are hoping a raise will make a life changing difference, it would be good to know how much to expect. The annual average for raises is around 3% (*), per Investopedia (https://www.investopedia.com/articles/personal-finance/090415/salary-secrets-what-considered-big-raise.asp). With a 3% raise on a $58,862 salary you are looking at $1,765.86 in increased wages the next year.
That $1,765.86 amount is before all the taxes you will pay, including things like the “employment tax” (6.2% for Social Security & 1.45% Medicare up until wage limit), federal tax and state tax (if your state taxes your income). After all of that, you are looking at significantly less going into your pocket. We haven’t even taken into account that as inflation increases, the dollars you earn have less buying power.
The Takeaway
The too long, didn’t read (TLDR) takeaway? You have to see a promotion level quality raise for it to significantly alter your budget. Increasing you income generally takes time, so if you want to see big home budget gains, expenses should likely be your initial target.
We didn’t talk about other forms of income, as a majority of people are working W-2 and 1099 jobs. In other words, you are earning income on a standard job in the form of wages or salary. These are forms of earnings.
* With inflation running high, raises are quite a bit higher than normal, but cost of living increases often negate the benefits unless you are getting a raise higher than inflation. This is a bit of an oversimplification. But for the purpose of this example, let’s keep it simple and we will cover the wage to cost of living discussion for a future article.
Expenses
We tried to take out the lowest amount of loans possible by working through college. Our rent was affordable. We did not buy a lot of nice or new things. Our furnishings were mostly hand-me-downs. We tried to cook our own meals as often as possible. Admittedly working 70 hours per week between school and our jobs put a strain on affordable meals. Our entertainment is mostly a low cost subscription to Netflix. Despite all of these conservative measures, we were still spending a lot on schooling. But, if we had not skimped where we could, we would be in a more dire place right out of school.
In hindsight, we probably would have developed a better approach to education. You really don’t realize how much student loan debt and the accompanying (relatively high) interest rate will hit your wallet until you are living it. Some will say that you know what you were getting into when you took out the loans. Sure you know the terms, but most of us are not financially savvy coming out of school. We don’t truly comprehend the weight of those loans.
The Takeaway
Our advice is to skimp early and often. If you choose to rack up the student loans (or other forms of debt) like we did, do yourself a favor and not rack up a lot of other debt. You can use your home budget to target debt reduction so you can remove it as a barrier to your other goals.
Home Budget Conclusion: Gain Control of Your Money!
One of the main reasons why people need to have a home budget is to gain control of their money. Each of us has to make our own decisions and live with them. We personally chose the budgeting life so we could exhibit control over our money. A budget gives you a clear understanding of how much money you have coming in and going out each month. This information is crucial in helping you make informed decisions about spending and saving. Without a budget, it’s easy to overspend and fall into debt. A budget can also help you identify areas where you can cut back on unnecessary expenses and redirect that money to more important financial goals. We would much rather tell our money what to do for us than have money controlling what we do.
- Introducing the Journey to Affording Our Lives
Affording Our Lives Journey Welcome to our Affording Our Lives blog. We are excited to share our financial journey to affording the things we want in life. It is our hope others will be able to learn from our story to craft a better life for themselves.
We live in a time of opportunity and knowledge sharing, yet for many of us we feel financial pain. We have too much debt. Or we don’t feel we earn enough. We buy things we don’t need and cannot afford the things we really want. For many years, our family felt wronged. We blamed our circumstances and couldn’t understand how we were not getting ahead. Despite trying to follow what we thought was the right way to live our lives financially, we struggled. We were doing what we thought everyone did and that was largely part of the problem. We eventually realized that maybe “doing what we are supposed to do” was not the answer. This realization caused us to do some self reflection and investigate a better way forward.
Affording Our Lives Story
Over the past nine years we have come a long way toward achieving financial literacy. We continue building a strong financial foundation for our family. We spent many hours doing research, engaging in consultation with others (including financial planners), reading books, building a robust budget (more on this here: https://affordingourlives.com/home-budget-for-your-improved-financial-benefit/) and doing some experimentation with the strategies we found along the way. The process was long because we didn’t exactly know where we were heading. It didn’t help that we were constantly changing the vision for affording our lives.
When we started out we thought we had a decent understanding of how to operate financially. The more we read, the more lightbulbs went off and we realized that there is no one right way. At first that frustrated us. Yet, as we learned how many opportunities existed to live the lives we want, optimism and desire grew.
We knew we had to figure out what we really wanted in life. Then we had to find or develop tools to get there. Some of the strategies came naturally, as we had grown up doing them. Others were traditional things we learned and had not yet implemented. Some were quite different from anything we had learned prior.
As we develop this site, while evolving our goals and strategies, we will share what we learned. That includes not only the good stuff, but the bad as well. Our journey has not been easy. We continue to hit road bumps that we overcome. We developed some resiliency and safety in learning these lessons. These “failures” have driven us to make changes for the better and in many ways have become blessings. They made us say, enough with the status quo.
Our Hope
We hope by sharing our story we can help grow of community of people who are looking for a better way and show that there are ways to achieve your goals even when it feels like they are out of reach.