Count all the money you wasted this year

This is post #2 in the First Hundred Days series designed to answer the question “Should I Buy a House Now?”.  We often go to professionals to help us make decisions, but whether or not you should buy a house now, isn’t one of them.

By the time you walk into a real estate office or speak with a lender, you should already know whether or not you should buy a house now.  A lender tells you whether or not you CAN buy a house, not whether or not you SHOULD buy a house.  An agent helps you select which house, and guides you through the process of buying a house.  Only YOU can answer the question of whether or not you SHOULD buy a house, and this series is designed to assist you and give you confidence in your decision.

Step 1 – Calculating Your Gross Income for Home Buying Purposes was addressed yesterday

Step 2 – Account for how you have spent that Gross Income, using hindsight.

It’s pencil and paper time…yes, you have to move away from the computer for this step 🙂  Take out all of your bills from the last 12 months.  You are not making a budget in this step.  You are accounting for every dime of your gross income for the last 12 months.  Get three different notebooks and mark one of them WANTS, one of them NEEDS and the other one WASTED.  Everyone has that dream where they go to sleep, and every dime they’ve ever wasted shows up in their bank balance the next day.  So let’s not pretend we haven’t wasted any money over the last 12 months.

You are not finished until the total dollars in the three notebooks equal your total gross income from Step 1.

You, and no one else, can determine your needs.  I NEED a cell phone…it’s not optional for me, for others it may be optional.  I don’t NEED a landline (though I have two) so I guess that goes in my WASTED notebook.  Don’t Google sample budgets for this.  Make your own choices.  Picture yourself without that item when determining which notebook it should go in.  I WANT to see my children and grandchild X times a year (anyone who thinks seeing their children isn’t a big expense is a lot younger than I am, LOL)

Everyone’s wants and needs are different, and what you view as a need could appear to be wasted money from someone else’s perspective.  That is why this is a very personal part of the decision process that no one else can answer for you.  You may have children with expensive sports activities.  You may feel getting that Starbucks Coffee everyday is not optional.  It is your right and obligation to determine your own personal wants and needs.  No real estate agent or lender can tell you what you have “left over” from your gross income to spend on a housing payment.

I know this step is a lot of work, but it’s almost year end and a very good time to pull those receipts anyway.  If you don’t have receipts, you’ll have to fudge a bit, BUT starting today keep more receipts than you have in the past.  Put a big envelope in your car for this purpose.  If you use three envelopes marked NEED, WANT and WASTED, all the better.  You may find you waste less money if you force yourself to put the receipt in the money WASTED envelope on a daily basis.

Even if you decide not to buy a house at the end of these First Hundred Days, the process should be of value to you, by forcing you to account for every dime of your Gross Monthly Income.   Better to START the process with accountability, then to be forced into facing a hard reality AFTER you buy a house.

"Should I buy a house now?"

Q: Should I buy a house now?

A: NO!

Q: Why?

A: Because you should never buy a house when you are not sure that is what you want to do, and you should never let someone else make that decision for you.  Don’t EVER give anyone that much power over your life.

As part of our exuberant expectation of CHANGE, I will be starting a series called “First Hundred Days”.  It’s not enough to vote for change and then sit around waiting for change to come from someone else.  If each of us does something different every day for the next hundred days, that produces a change for the better…then change will happen.

I will tag all posts “First Hundred Days” and I will do my best to include all of the tools and skills you should employ to make your own decision about buying a home. We hear so much about “the stupidity” of people in trouble.  Instead of criticizing, let’s do our best to help the future buyers of homes make better decisions and choices by providing meatier, education oriented, instructional blog posts.

The first step in the home buying process does not start at the lender or the real estate agent.  It starts with you sitting in your own home working through some numbers.

1) Calculate your gross income.  If you are salaried, you have the number.  If you are commission based or hourly, add the last 12 months income to the previous 12 month income and divide by two.  Now double check it by taking the last 3 months income and multiplying it by 4.

Let’s say you are hourly or salary plus commission/bonus.  Note these are not lender guidelines.  These are old-fashioned and proven standards for responsible decision making and so will likely be more conservative  than lender guidelines.

Non-salaried income Last 12 months: $75,000

Non-salaried income previous 12 months $60,000

Current annual income for home buying purposes = $75,000 plus $60,000 divided by two or $67,500.

Now the double check.

Total income for the last 3 months = $14,000 (boss gave you fewer hours)

$14,000 times 4 (12 months) = $56,000.

The double check system suggests that you should not think about buying a home in the near future based on an income of more than $56,000 a year, and you should not buy a home until you are certain that the cut back in hours is not leading to no job at all or even fewer hours.  Stabilize your income situation before buying a home.

If the last 3 months income is $20,000 times 4 or $80,000, you still use $67,500 as your annual income and not $80,000, for homebuying purposes. 

You use the average two year income or 4 x your latest 3 month income, whichever is LOWER.

I’ll stop here and see if people have questions before going to the next post in the “First Hundred Days” series.  When you buy a house…if it is the wrong decision…you can blame lots of people, but you will be left holding the bag.  So let’s work together over the next hundred days to make sure you can answer the question for yourself without heavily relying on the opinion of others.

Treat the series like a workbook, get a notepad, and calculate your numbers.  Questions?  Ask them in the comments section.