Tuesday, March 2, 2010

Dissect Your Budget - Part 1 - Housing

Tip #237 - Dissect Your Budget - Part 1 - Housing. The whole purpose of this blog is to show people how to save money and how my family has accomplished it. When I say "saving money" I mean not just how to buy things more cheaply or how to live on less, but how to actually put money away and build up wealth. One tool that I, and most people in financial circles, promote to save money is to have a budget - that is a line-item list of everything that you spend money on each month and the estimated amount that you spend on it.

Oftentimes people write a budget at the beginning of the year, try to follow it, and then at the end of the year they may review it in time to write up the next year's budget. But I want to take a more active approach to your budget. Let's go through it line by line and evaluate where we can cut out extra spending so less money is going to your expenses and more is available for your savings/investing line item.

Let's start with most people's biggest expense - their home. Whether you are renting or own, your apartment, house, condo, townhouse, etc. probably takes up the greatest percentage of your monthly expenses. Let's evaluate it. In general, housing is a pretty inflexible cost. However, whether you rent from a private individual or from a corporation, there are ways you can decrease it. Compare your rent to other rents in your area. Are there other less expensive places for you to rent that would give you the same amount of amenities, room, and enjoyment? Or perhaps there are similar places that may be slightly smaller, slightly older or have fewer amenenities - no pool, no exercise room, etc. If you rent from a different place that can save you money over the long run (taking into account moving costs, startup costs, etc.) then it is worth looking into to decrease this greatest line item on your budget.

If you are unwilling to move, then perhaps you might still have pull. Maybe you have been a long-term tenant who hasn't cost the management company or private owner much in move-in/move-out fees - no carpet replacement, no yearly cleanup charge, no painting charge. Talk to your landlord and see if he can give you a discount because of that. Or maybe your area is hurting for rentals and your management company has new lease specials, ask if you can get a one-year special, too. If you are renting from a private owner, perhaps you might volunteer to mow the lawn or shovel snow in exchange for cheaper rent. Look at your circumstances and see if there is any way to lower this cost.

If you are a homeowner, check your mortgage statement and see what type of rate you are getting. Is there any way you can improve upon it? If you have a 30-year loan, can you consolidate it to a 15-year loan at a lower rate without increasing your monthly payment? Are rates better than what you are locked in at for you to be able to refinance and drop your monthly payment without increasing your term? Do you belong to a credit union? Check out their mortgage rates. They are often very competitive and have lower fees than traditional banks and mortgage companies. Is it worth it to switch to them? If you don't belong to a credit union, find out if you are eligible to join one that has good mortgage rates.

Unless you are in a dire financial situation, I don't usually recommend moving. The costs of selling a house, moving, and buying a new home can be huge. However, if you overbought a home - one that is too big or too fancy or in too exclusive of a neighborhood - it might be worth considering. Many people bought homes with their eyes and not their pocketbook. If this is your case, moving to a smaller, less fancy or less exclusive home could save you thousands upon thousands of dollars. While there will be short-term costs associated with moving, it may be worth looking into depending on your situation.

If your housing costs are too much, consider making changes to them. You may or may not be successful at it. If not, we have many more line items in our budget where we can cut costs so more can go into savings. Stay tuned.

In Real Life (IRL) - My husband and I bought our home in the year 2000. The market in the Washington, DC area was high at the time. But little did we know how much higher it was going to get. We bought a home for $290,000 and put $70,000 down on the house, taking out a $220,000 mortgage for 15 years. The rate was about 5 1/2%. We were able to get a competitive rate at the time because our credit union had about the best rates out there. Also, they never resell their mortgage loans so we always pay directly to them, which we like. About a year or two later, the mortgage rates had dropped a bit from what we were paying. While there were fees associated with refinancing, we figured out that it would take about one year or so to recoup the costs of refinanciing, yet we would save quite a bit each month and overall.

We were able to secure a 4 3/4% rate that we still have today. Every so often I check the mortgage rates at our credit union to see if they are lower than what we are paying. While they are a bit lower now - about 4 1/2% for a 15-year loan, it is not worth it to make the change on such a small spread. Because we did not buy a big house or a fancy house in an exclusive neighborhood, it would be hard for us to reduce our housing costs much unless we wanted to move much farther out of the city or to a different city altogether, which we don't. We currently pay about $2,300 per month on housing which isn't high for this area. What do you pay? Do you think you can get this line-item on your budget any lower?


Christy Wheeler said...

I just found your blog (from a comment you left on Money saving mom) and am loving it! Thanks for all the tips! It is always great to find new little ideas of how to save money.

Kristia@FamilyBalancesheet said...

We refinanced in February 2009 when our credit union offered 4.99% 15 year with no fees and no points and no pre-payment penalties. I jumped at the chance b/c I was at 5.75%. We only had 10.5 years left on our previous loan when we refi'd. I kept our payments the same as what they were and we will pay off our mortgage in about 8 years and save ourselves about $9000 when it is all said and done.

Melissa said...

The Dissect your budget series is great!