For many people, buying a home is an important financial goal. But because it requires ongoing responsibility, including financial responsibility, buying a home is quite different from most other purchases.
To make sure you’re ready for the responsibility of home ownership, start developing the right financial habits before you purchase the house. Focus on developing the following four habits before taking the exciting and fulfilling step of becoming a homeowner.
Save a portion of every paycheck
If you’re not accustomed to saving regularly, it’s important to start building this habit now. As a homeowner, you’ll need savings on hand for things like insurance and home repairs, sometimes unexpectedly.
A good rule of thumb is to be prepared to spend about one percent of your home’s value on maintenance and repairs each year. For example, if your home is worth $300,000, you’ll need to plan to spend about $3,000 on it each year. In some years, you may not spend that much but in other years, you may need to spend more.
You can make the savings habit automatic by setting up an automatic transfer to a savings account from every paycheck. If you never see the money in your checking account, you will grow accustomed to living without it and you won’t miss it.
Stick to a budget
If you don’t already have a budget, build one now and discipline yourself to stick to it. Some people think “budgeting” is a scary word, but a budget is really just a plan for spending your money.
If you’re not sure where to begin in developing a spending plan, use the 50-30-20 format. Here’s how it works: Half (50 percent) of a month’s income should go toward your needs, such as housing, transportation, groceries, utilities, and so on. A third (30 percent) of your monthly income should be devoted to your wants, such as shopping, entertainment, and subscriptions. And the remaining 20 percent should go to savings and debt repayment.
Keep an eye on your credit score
If you’re planning to get a mortgage to purchase your home, a strong credit score is crucial. Your credit score will not only determine whether you can be approved for a mortgage, but it will also determine whether you get a favorable interest rate. For example, your score may be high enough to get approved, but not high enough to get the lowest interest rate, so you’ll be stuck paying a higher rate of interest throughout the life of your mortgage.
Don’t wait until you’re ready to buy a home to start looking at your credit reports, as many people’s reports have errors and it can take time to get errors corrected with the credit bureaus. Start now to access your credit reports from the credit bureaus, check for errors, and work to boost your scores if they aren’t high enough to qualify for the best mortgage rates.
Commit to things you don’t enjoy
Spending time and money on things that really aren’t enjoyable is part of being an adult—and especially if you’re a homeowner. As a homeowner, you’ll sometimes need to spend a weekend pulling weeds or cleaning windows. You may sometimes need to spend money to replace a broken toilet or repair a hole in sheetrock.
Sometimes you may have to forego dining out, taking a weekend trip, or doing something else you want to do in order to take care of home maintenance or repairs. However, being committed to spending time and money on your home—even when you don’t want to—is important for protecting your investment and saving money down the road by preventing more costly repairs. For instance, homeowner’s insurance will not cover a new roof that is needed because the homeowner failed to conduct proper maintenance, such as cleaning out gutters and keeping wet leaves from piling up on top of the house.
Working to build these four important financial habits will help you develop discipline and prepare you for the financial and personal commitment of being a homeowner. It may sound like owning a home is all about making sacrifices, but that’s not the case. Most homeowners do have to make some sacrifices with their time and money, but they find that what they give up is worth the rewards of building equity and having their own space to settle in, enjoy and make memories.