Personal Budgeting

[brett701]

I'm new to the forum. Thanks for your help in advance.

I am out of college and i am engaged. My fiance and i both have college loans. She has a job that pays 44k a year and i will have a job that pays 44k(not necessarily a salary, but 22 an hour which is about 44k a year. Also i don't have benefits).

I am trying to get everything straightened out and organize for the future so that i have a clear plan of where i want to go and how long it will take me. If i want to be successful i can't have my finances disorganized.

I don't know how much i have out in loans. somewhere from 12k-30k. Please excuse my ignorance, but my dad signed me up for loans when i was early in college and i was very immature. I am now just immature. thats an improvement.

Anyways. We are getting engaged in the summer and i was trying to plan a few things. I was trying to create a budget. My intentions are to figure out where i stand financially so that i can eventually purchase a franchise.

First i must purchase a house or find a place to live. I am currently living in my parents house with my fiance, but would like to purchase a home.


I was wanting to get this all going in excel, but i can't figure out how to start. I am pretty good at excel in doing formulas and stuff like that. I was hoping i could be directed or given some advice on how to get going and do this properly for the 2 of us. Thanks immensely for your help.

[ma45frost]

Hi brett701,

You might want to consider working for a few months until you have enough savings for your engagement plan and buying a new home. If your parents are ok with your plan, then that would be great. I may not be the best person to give an advice but believe me, you need to have some savings before you can buy a home.

-M Frost

[jpg7n16]

Welcome to the forums

Well you've got a lot going on there! Congrats on the engagement, congrats on graduating, and congrats on the new job!! Lots of changes coming up in your life...

Personal note - I wouldn't combine your finances until you're legally married, but you can prepare in advance to assist with debt elimination.

Here's what I'd suggest:

Priority 1 - learn to budget. Get some software (Mint, YNAB, Quicken, MS Money, etc. - mint is free, the rest aren't) and let it track your expenses for you. If you're good enough with excel you can use the free budget templates available online. Post your budget on the SA forums for critique. etc.

But your budget will be the foundation. Truly back to basics. All your goals can either be met or missed, based on how well or how poorly you budget.

Priority 2 - take any employer match (if offered). You say you have no benefits, so don't know if there is a retirement option available to you at work (same goes for your new wife). But if they're giving away free money to save for retirement, take it!

Priority 3 - build up a small cushion of cash. Likely 1 month's expenses (based on your budget above). You need at least some cushion against life. Stuff happens.

Priority 4 - eliminate any high interest rate debt (think 5-7% or higher) There's no point in saving up for a home, when you're getting charged 18% on a CC, or 9% on a student loan. The interest just costs too much.

Priority 5 - build up your EF to 3-6 months in cash. No more than 6 months, no less than 3.

Priority 6 - once you're free of any high interest rate debt and have an EF in place, begin trying to save 15-20% for retirement. Use Roths, employer plans, and brokerage accounts to get to your 15-20%.

And if that's too high for you, start small and work up. Maybe do 10% this year, and increase by 1% each year until you're at 20%.

Priority 7 - this is a personal choice. Either eliminate the rest of your debt, or start building your downpayment for a home. I'd personally pay off any remaining debt over 3%, then start saving up for the home.


To be in an ideal place to buy a home, you'd want to be debt free, with a 3-6 mo EF in place, and an additional 20% available for downpayment on a home.


For your first home, I'd recommend buying a home that costs no more than 2.5x your combined annual income. You'll likely make around $90k combined, so no more than a $225k home ($45k down - $180k mortgage) I don't care what the market is like in your area, that's the max. If no decent house is available for that much, don't buy a home. (technically personal finance rules of thumb say 3x income, so that would be 270k, but it's nice to have some wiggle room - 225k will make it much easier to save for retirement, kids college, eliminate debt, etc.)

Other things:
- you should be covered by some of your wife's benefits (health plan) but will need to get your own coverage for other needs (long term disability, life insurance, etc.)
- go to a lawyer and have wills made. Also start changing beneficiary's on your accounts/policies. It'd be terrible to have your life insurance pay out to your mom because she used to be the beneficiary and you forgot to change it. Beneficiary's are contracts that a will can't override.

And I've been typing for a while now, so this has to be a good start

[Frugal]

I would first find out what your student loans are, and monitor them closely. They can sneak up on you, if you don't keep an eye on just how much you own, the interest on them, and whether there is a deferment period after you graduate.

[brett701]

Welcome to the forums

Well you've got a lot going on there! Congrats on the engagement, congrats on graduating, and congrats on the new job!! Lots of changes coming up in your life...

Personal note - I wouldn't combine your finances until you're legally married, but you can prepare in advance to assist with debt elimination.

Here's what I'd suggest:

Priority 1 - learn to budget. Get some software (Mint, YNAB, Quicken, MS Money, etc. - mint is free, the rest aren't) and let it track your expenses for you. If you're good enough with excel you can use the free budget templates available online. Post your budget on the SA forums for critique. etc.

But your budget will be the foundation. Truly back to basics. All your goals can either be met or missed, based on how well or how poorly you budget.

Priority 2 - take any employer match (if offered). You say you have no benefits, so don't know if there is a retirement option available to you at work (same goes for your new wife). But if they're giving away free money to save for retirement, take it!

Priority 3 - build up a small cushion of cash. Likely 1 month's expenses (based on your budget above). You need at least some cushion against life. Stuff happens.

Priority 4 - eliminate any high interest rate debt (think 5-7% or higher) There's no point in saving up for a home, when you're getting charged 18% on a CC, or 9% on a student loan. The interest just costs too much.

Priority 5 - build up your EF to 3-6 months in cash. No more than 6 months, no less than 3.

Priority 6 - once you're free of any high interest rate debt and have an EF in place, begin trying to save 15-20% for retirement. Use Roths, employer plans, and brokerage accounts to get to your 15-20%.

And if that's too high for you, start small and work up. Maybe do 10% this year, and increase by 1% each year until you're at 20%.

Priority 7 - this is a personal choice. Either eliminate the rest of your debt, or start building your downpayment for a home. I'd personally pay off any remaining debt over 3%, then start saving up for the home.


To be in an ideal place to buy a home, you'd want to be debt free, with a 3-6 mo EF in place, and an additional 20% available for downpayment on a home.


For your first home, I'd recommend buying a home that costs no more than 2.5x your combined annual income. You'll likely make around $90k combined, so no more than a $225k home ($45k down - $180k mortgage) I don't care what the market is like in your area, that's the max. If no decent house is available for that much, don't buy a home. (technically personal finance rules of thumb say 3x income, so that would be 270k, but it's nice to have some wiggle room - 225k will make it much easier to save for retirement, kids college, eliminate debt, etc.)

Other things:
- you should be covered by some of your wife's benefits (health plan) but will need to get your own coverage for other needs (long term disability, life insurance, etc.)
- go to a lawyer and have wills made. Also start changing beneficiary's on your accounts/policies. It'd be terrible to have your life insurance pay out to your mom because she used to be the beneficiary and you forgot to change it. Beneficiary's are contracts that a will can't override.

And I've been typing for a while now, so this has to be a good start

Ok. so ive done some work. i have quicken and ive imported our banks info into it. We both are debt free aside from our student loans.

What I would suggest makings 2 columns in Excel, 1 is income, 2 is bills and savings, investments. Then manipulate these until the result is zero that way every dollar has a name. I do mine bi-weekly. This shows where each dollar goes and allows you to pay yourself something. The main thing is to actually stick to it and agree with your fiance about them.
As for a house, I wouldn't recommend it until after your married. You should rent right now until you get your finances in order. A house can be a blessing and a curse. Rent a cheap apartment while your getting out of debt. As for the college loans, you need to speak with your parents and find out what you owe exactly. Then the way I would pay off your debt is with the snowball method. Pay smallest to largest.

Good luck buddy!

Hey thanks so much for the response. i am planning on purchasing a home or a duplex and rent out the other half. I would like to get an FHA loan so that i dont have to put a large down payment. it doesnt make much sense to me to rent bc/ i feel like money is going down the drain.

We both are debt free in terms of credit cards. we bot hhave student loans.

She has 28,000 in loans at 6% and 3000 @5%.

i have 3500 at 6.8% , 2750 @4.5% , 5500@5.6% , 1562 @6.8% and 11741 at 2.875%

She has a car payment of 200 a month and i have my car paid off.

She makes 43k a year and i will be making 44-66k a year.

It seems as if its the common thing for people to worry about purchasing the home together before they are married, but weve been dating for over 8 years and living together for most of them. Because of that id like to purchase the home before we are married so that we can have everything situated. I've made her wait long enough for nice stuff . I have health insurance for 200 a month and when we get married i will join hers.

id like to get an FHA loan for a home. We both have about 8k in cash in our banks, but do not want to spend it on a down payment for a home and prefer to keep it in bank just in case. By the time we are ready to purchase a home we will both have more money. Marriage date is aug 20 just to let u know the timeframe.

Thanks again.

[jpg7n16]

Ok. so ive done some work. i have quicken and ive imported our banks info into it. We both are debt free aside from our student loans.

...

She has a car payment of 200 a month and i have my car paid off.

How does she have a car payment if you're both debt free?

She has 28,000 in loans at 6% and 3000 @5%.

i have 3500 at 6.8% , 2750 @4.5% , 5500@5.6% , 1562 @6.8% and 11741 at 2.875%

Given these figures, I would get 1 month's expenses saved up, then pay off: (in order, snowballing payments)

-the car (likely goes here)
-1562 @ 6.8%
-3500 @ 6.8%
-28,000 @ 6%
-5500 @ 5.6%
-3000 @ 5%

Then I'd build up my EF to 3-6 months, and up my retirement to 10%

Then pay of the $2750 @ 4.5%

Up retirement to 15%

Pay off 11,741 @ 2.875% slowly over time, while using my extra cash to save for house, build up my investments as much as possible, etc.

[StepRightUp]

Hi Brett - congrats on all the good stuff you have going on.

I'd have to make a suggestion that you take care of that debt of hers (including the car) before you think about buying a home. And probably half of yours (the one at 2.875% doesn't seem like a big concern to me at the moment).

Also, I'd suggest you stop thinking of rent as money going "down the drain". Renting gives you a roof over your head, allows you to get out of the parents' house, pay down your debt, and then save for a home. And as you will find out, you will be throwing a lot of money away when you buy a home (mortgage interest, closing costs, insurance, repairs and upkeep, etc.). And then you'll have an enormous debt.

If you are renting, the extra costs I just listed above could be going to things like paying cash for a car, a dream vacation, retirement, etc. I'd suggest that your decision to buy a home be based first and foremost on enhancing your quality of life (after all, that's what money is for), AND that you should only do so if it will not affect retirement, emergency savings, and paying cash for major purchases.

Just my $0.02.

Best of luck to you!

[Hector]

For your first home, I'd recommend buying a home that costs no more than 2.5x your combined annual income. You'll likely make around $90k combined, so no more than a $225k home ($45k down - $180k mortgage) I don't care what the market is like in your area, that's the max. If no decent house is available for that much, don't buy a home. (technically personal finance rules of thumb say 3x income, so that would be 270k, but it's nice to have some wiggle room - 225k will make it much easier to save for retirement, kids college, eliminate debt, etc.)

Sometimes I wonder who came up with these rules of thumb. What if OP is living in TX? Would rules be same for someone living in CA?

I wont worry much about rules of thumb. If I was an OP, I will find out interest rate and amount of student loan first.

[Hector]

Ok. so ive done some work. i have quicken and ive imported our banks info into it. We both are debt free aside from our student loans.



Hey thanks so much for the response. i am planning on purchasing a home or a duplex and rent out the other half. I would like to get an FHA loan so that i dont have to put a large down payment. it doesnt make much sense to me to rent bc/ i feel like money is going down the drain.

We both are debt free in terms of credit cards. we bot hhave student loans.

She has 28,000 in loans at 6% and 3000 @5%.

i have 3500 at 6.8% , 2750 @4.5% , 5500@5.6% , 1562 @6.8% and 11741 at 2.875%

She has a car payment of 200 a month and i have my car paid off.

She makes 43k a year and i will be making 44-66k a year.

It seems as if its the common thing for people to worry about purchasing the home together before they are married, but weve been dating for over 8 years and living together for most of them. Because of that id like to purchase the home before we are married so that we can have everything situated. I've made her wait long enough for nice stuff . I have health insurance for 200 a month and when we get married i will join hers.

id like to get an FHA loan for a home. We both have about 8k in cash in our banks, but do not want to spend it on a down payment for a home and prefer to keep it in bank just in case. By the time we are ready to purchase a home we will both have more money. Marriage date is aug 20 just to let u know the timeframe.

Thanks again.

I am glad that you posted here. You need a reality check. Try to understand what JPG is saying.

[jpg7n16]

Sometimes I wonder who came up with these rules of thumb.

I wont worry much about rules of thumb.

rule of thumb
–noun
1. a general or approximate principle, procedure, or rule based on experience or practice, as opposed to a specific, scientific calculation or estimate.

In order to not have too much of your monthly cash tied up in debt payments, financial planners recommend not spending more than 28% of your monthly income on housing (mortgage, insurance, taxes, HOA dues, etc.). This keeps the majority of your cash available for things like food, retirement, various living expenses, etc.

So why then the 3x salary rule of thumb?

Please see my prior post here: http://www.savingadvice.com/forums/p...tml#post281575

which describes how a 3x limit on the home gives a rough estimate of 30% income after all expenses are considered. It's a general or approximate procedure, as opposed to a specific calculation.

What if OP is living in TX? Would rules be same for someone living in CA?

So if OP is living in CA he can afford to have 60% of his income go towards housing expense? Or if he could find a suitable house for $150k in Texas that he'd have to keep looking until he got up to $225k? I don't believe either of those is true.

OP should attempt to keep housing expense under 28% of his monthly income. A 2.5x salary home would give him roughly 25% housing expenses. If he can find a home for $150k that satisfies his needs, that's even better! Would free up even more cash for investments, or whatever else the OP wants.

Why would the rule of thumb change based on location? If the present real estate market does not offer a suitable home that suits your needs for a reasonable price - don't buy a home. Rent instead.

It's not required to buy a home. It's an investment that comes with a lot of risk. Just ask people in Arizona and CA who didn't consider the price of the home when they purchased it.

If I was an OP, I will find out interest rate and amount of student loan first.

Agreed. As I agree that OP should get out of high interest rate debt before he even considers looking into buying a home.

[frugalgirl]

I think what makes a lot of people on these boards nervous are three things:

1) You "will" have a job that pays 44k or more per year. How secure is this job?
2) You don't want to put down more than 3% for your down payment.
3) You have a not insignificant amount of student loan debt.

I know you WANT to have a home and you feel your fiance DESERVES to live in a home after all of this time. However, wanting and deserving are different from needing and being wise.

If you rent and work to pay off your debt and build an emergency fund BEFORE you buy a house:
1) You and your fiance/wife will probably do everything you can to get that done so you can buy the house you want so badly. This will force you to live very frugally to get these debts gone and you will learn to live with less and make the most of your money. This will develop into having a large cash "surplus" (or snowball) over time that you had been using for debt repayment. Over time, you will feel like you have a ton of extra cash.

2) You will be protected if one of you loses your job. You will have 3-6 months living expenses saved up in your emergency fund AND you won't be tied down to a house so you could move to find employment elsewhere. If you had a house and only put 3% down, then lost your job and had to move, you'd have to sell your house. You may not be able to move because that house won't sell, OR with real estate agent fees and changes in the real estate market you could owe more on the house than you will get from the sale. With a job loss and no emergency savings, how would you bring money to the table in a sale to be able to sell and move on? There are several threads on this board about people who are considering foreclosure as a last resort in these circumstances. This is a common problem.

3) You will be in a much better financial position to provide for a family. If you plan on having children, you will be much better off financially if you have no debt, have an emergency fund and a down payment on a house. Kids are very expensive. You can move on to the next phase of your life- family life- if you can leave the student loan/debt phase behind.

[maat55]

If you were wise, you would take every opportunity to payoff your debts, build a three months EF and 20% down payment before you buy a house. This may sound like a long road, but if you are dedicated, it will go fast and you will have a very fruitfull life.

Most people who jump into a house end up fighting their finances for many many years. With the two of you earning around 80k, you should be able to accomplish paying of your debts and building your savings within two years.

This way, you can go into your home debtfree, have emergency savings and be prepared to meet future needs like having kids and retirement.

[Hector]

Why would the rule of thumb change based on location?

I was referring to taxes. Its not uncommon that a person living in CA will fall in state income tax bracket of ~10% more than person living in TX. One would argue about mortgage deduction, but still same rule of thumb does not apply everywhere (I am talking about difference in state income tax)

I agree that if you are living in a city where houses are very expensive, it does not mean you should spend 50% of your income in houses (when we talk about 30% rule of thumb)

[Little House]

Is there a specific reason you want to purchase a house right away? It would seem to make more sense to save money while you rent. Remember that there are more costs associated with owning a home, like maintenance, taxes and insurance, than with renting. Once you have your 20% saved up for a down payment, then use the 3x your salary ballpark to purchase a house.

[khosta]

I would just rent for now and continue save. There is no reason that just because you are married you "have" to own a house!! My parents rented for w hile when they first got married... I remember being a kid and they didn't own their first house until I was in 5th grade - good thing though, was they were able to save a build their own house!!! Fromt eh ground up and that makes it really special!!!