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Chapter 2

      Getting Your Financial House in Order

      IN THIS CHAPTER

       Assessing your budget and spending

       Determining your savings requirements to achieve your goals

       Protecting yourself and your assets with insurance

       Remembering what’s most important in life

      When you’re shopping for a home, you’re the person best suited to look out for your overall interests. The people involved in typical real estate deals (such as real estate agents, bankers, loan brokers, and the like) are there to get their jobs done. It’s not within their realm of responsibility to worry about how the real estate purchase fits with the rest of your personal finances and how best to arrange your finances before and after purchasing a home. This chapter explains how you can address these important issues.

      

In the great history of home buying, many people have bought real estate without first getting their finances in order, setting some goals, and dealing with problems — and they’ve often paid dearly for this oversight. What are the consequences of plunging headlong into a home purchase before you’re financially ready? For starters, you can end up paying tens of thousands of dollars more in taxes and interest over the years ahead. In the worst cases, we’ve witnessed the financial ruin of intelligent, hardworking people who end up over their heads in debt (and in some situations, even in foreclosure and bankruptcy). We want you to be happy and financially successful in your home — so please read this chapter!

Surveying Your Spending

      Even if your income and spending fluctuate, you may have developed a basic spending routine. Every month, you earn a particular income and then spend most of, all of, or perhaps even more than what you earn on the necessities (and the not-so-necessary things) of life.

      

When you want to buy a home, saving is one area where it pays to be above average. Consistently saving more than 5 to 10 percent of your income can help turn you from a renter into a financially able and successful homeowner. Why? For two important reasons:

       To purchase a home, you need to accumulate a decent chunk of money for the down payment and closing costs. True, wealthy relatives may help you out, but counting on their generosity is foolhardy. The attached strings may make such a gift or loan undesirable. If you’re like most people, you probably don’t have any wealthy relatives anyhow.

       After you buy a home, your total monthly expenses will probably increase. So if you had trouble saving before the purchase, your finances are really going to be squeezed postpurchase. This will further handicap your ability to accomplish other important financial goals, such as accumulating money for retirement. If you don’t take advantage of tax-sheltered retirement accounts, you’ll miss out on thousands (if not tens of thousands) of dollars in valuable tax benefits. We discuss the importance and value of funding retirement accounts later in this chapter.

      Gathering the data

      One of the single most important things that you can and should do before you head out to purchase a home is to examine where (and on what) you’re currently spending your money. Completing these financial calisthenics enables you to see what portion of your current income you’re saving. Having a handle on your current budget also enables you to see how a given home purchase will fit within the budget or destroy it!

Review your spending data from at least a three-month span to determine how much you spend in a typical month on various things — such as rent, clothing, income taxes, haircuts, cellphone and streaming plans, and everything else (see Table 2-1; you can access Table 2-1 online at www.dummies.com/go/homebuyingkit7e). If your spending fluctuates greatly throughout the year, you may need to analyze and average for 6 (or even 12) months to get an accurate sense of your spending behavior.

TABLE 2-1 Your Spending, Now and After Purchasing a Home

Item	Current Monthly Average ($)	Expected Monthly Average with Home Purchase ($)
Income	__________	__________
Taxes
Social Security	__________	__________
Federal	__________	__________
State and local	__________	__________
Housing Expenses
Rent	__________	n/a
Mortgage	n/a	__________
Property taxes	n/a	__________
Homeowners/renters insurance	__________	__________
Gas/electric/oil	__________	__________
Water/garbage	__________	__________
Phone/cellphone	__________	__________
Cable/satellite TV/streaming plans	__________	__________
Furniture/appliances	__________	__________
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