The very first step when buying a house is to create a budget. This is really the foundation for homeownership in any housing market. How do you create a budget? How do you create a budget to save money when buying a house in 2023? In this episode, we discuss how to budget to buy a house to help you become The Educated HomeBuyer
✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: email@example.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
📩 – firstname.lastname@example.org
For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: In past episodes when we’ve talked about buying a home, we’ve often talked about starting with a budget, not finding a lender, not going out and looking at houses, but starting from really the foundation, which is having a budget. And this isn’t something they teach in school, unfortunately. It’s something that has to be almost self-taught to some extent.
[00:00:24] So in today’s episode, we wanna spend a little bit of time and walk you through the idea of creating a budget. What needs to go into that budget, why it’s important. More or less where to start, Josh. So when I say the word budget, Josh, does it make you scared? Little timid.
[00:00:40] Josh Lewis, Certified Mortgage Consultant: Not timid, it’s not fun. It’s uh, it’s definitely not fun.
[00:00:43] It’s like taking your medicine, going to the doctor, necessary to be healthy, but never all that pleasant.
[00:00:49] Jeb Smith, Huntington Beach Realtor: And with that said, this conversation, if you’re married, if you have a spouse, can create arguments. So go in it with an open mind. And I say that from experience, right?
[00:01:01] Having conversations about money, where money’s going, where you think it should go. There’s often differences in relationships. In the way people view it. So just make sure if you’re having this conversation with a spouse, a significant other, you have an open mind because a budget is something that is really going to help you create that financial stability, whether you’re planning on buying a house or not, it is really important. But Josh, let’s start today by maybe just simple definition.
[00:01:29] What is a budget and why is it important?
[00:01:32] Josh Lewis, Certified Mortgage Consultant: It’s a plan for how you spend your money. So that’s the first thing. I have a plan, and it’s a system of tracking income and expenses so you can see how you’re matching up to that plan. We can look at it either way. Some people say, Hey, I’m gonna remodel my bathroom. I need to get a budget for that.
[00:01:49] And that means I’m gonna plan, what are the things that I want? How much money do I have? And then, as we go we have to track that. How did I do according to that plan? So in the context of what we’re talking about it’s both. And probably the tracking piece is more important and for most people needs to come before the plan.
[00:02:09] And the reason why I say that is most people have no idea, Jeb. How many times have we said here on the show that people will come to me and they ask the question, what can I afford? I’ve got no idea what you can afford. Two very similar people, same income, same family size, can handle money incredibly differently.
[00:02:26] As we were preparing for this episode, I read an article from 2019. It was in the New York Times. They did a profile on four families. There was a family in Iowa City that I looked at their numbers and I’m like, these people, this is rough. They gotta be barely getting by. And you read the quote from the wife who handled the finances, and she says no, we’re good. We have enough. We save, we get to take nice vacations more often than most people do…
[00:02:49] And that is purely a function of those people don’t live a crazy lifestyle. They don’t have two Mercedes in the driveway. They don’t have a million dollar home. They have two good jobs. They spend very little relative to the income and it allows them to do all the important things.
[00:03:06] So with that, you know what is important? A quote that I came across from Morgan Housel author, wrote an awesome book called The Psychology of Money. I would recommend that anyone here listening, read it. Jeb, you were talking about before you get into a relationship, before you get into a permanent relationship in terms of a marriage, going through that book will give you some great information.
[00:03:25] But one of the big points he said is “Building wealth has little to do with your income or investment returns and lots to do with your savings rate.” So if you don’t have a budget, Almost impossible to know what your savings rate is. Like if you have very simple finances, you could go and look at your bank statement every month and go I got $500 more than last month and $500 more than the month before that. You say I have a surplus.
[00:03:45] But for most people, it’s not that simple. They’re using credit cards, mixing that stuff into the mix. So we have to have a budget and a plan for our income and expenses. We have to track ’em. We have to know what they are. And then a plan to meet our objectives. Obviously here, Jeb, in the context of The Educated Homebuyer, we’re talking about a budget to save for a down payment and closing costs for a home, but it could be for retirement.
[00:04:06] We talk about that being equally important to owning a home. Talk about putting a kid through school. Maybe you don’t have parents who are going to pay for a wedding and you and your significant other are scheduling and planning for that. You need to budget for all of that, and unless you know where your money’s going and account for it all, you cannot make any type of plan.
[00:04:26] Jeb Smith, Huntington Beach Realtor: And while we’re quoting books, one of the books that’s been around forever, the Richest Man in Babylon, and one of the quotes outta that book, George Clason, if you’re not familiar with it. Definitely one of the foundational books, I think to just financial literacy, to understanding finance is, the quote goes something like a portion of all you earn is yours to keep.
[00:04:45] And basically in the book they teach the principle of essentially taking 10% of your income and saving that money. Not letting it go somewhere else. And using the remainder, the 90% to take care of your finances or to put part of that in savings and part of that towards your budget and to buy a house or what have you.
[00:05:03] So today we’re gonna be talking about some of those principles, but also how to prepare yourself, how to put yourself in the best position to become a homeowner, if that’s what you want to save your money for. If that’s what you’re budgeting for.
[00:05:16] We’ve talked in other episodes, if you’re not going to buy a house, that’s okay. But if you wanna end up at the same place as 65% of Americans do at retirement with the majority of their net worth being invested in something like real estate that creates generational wealth, you’ve got to invest money in other places to, to create a similar return. And you’re not gonna be able to do that unless you have the budget.
[00:05:39] So whether you choose to rent and save your money, or you choose to become a homeowner at some point in your life, we’re gonna be talking about the foundation, the fundamentals that you need to know. So Josh, when we talk about budgeting and home buying you mentioned the idea of what you qualify for and what you afford are really two different things.
[00:06:00] So let’s, I think build off that a little bit and then get in the purpose of budgeting to start.
[00:06:07] Josh Lewis, Certified Mortgage Consultant: I think the number one purpose of budgeting and really the income and expense tracking portion of it is to see where your money is going. Every time I do this, we talked last week in the Dave Ramsey episode, Jeb, that you and I are not active trackers of a budget.
[00:06:24] But I do this probably every 18 months or so. Because I start going, you know what, we’ve got a lot of little services, little things going along. So I will throw it into an app and have it start tracking and look, and every time there’s expense creep, you know that you don’t realize. We’ve got too much going out here, too much going out here.
[00:06:42] And if you have more than enough coming in that you’re able to meet your savings goals well, hey, no big deal. I have a little bit more going out on streaming services than I thought. I have a little bit more going out on eating out than I thought. Okay, it’s not keeping me from saving for a home, saving for retirement, going on vacations, putting money away for my kid’s college fund.
[00:07:03] My kid’s got four legs, so she’s not probably gonna go to college. But you have lots of two-legged kids. Yes. So that’s the number one purpose to me, Jeb. What are your thoughts?
[00:07:11] Jeb Smith, Huntington Beach Realtor: What I’ll say is I’ve done episodes in talking about the idea of buying a home, right? How can you set yourself up for success when buying a home? What are the things that you should focus on?
[00:07:21] And one of the things is obviously down payment and creating a budget. And I often get the response in these videos, people in the comments and what have you going, Why does people tell me, Essentially the answer they don’t want to hear is that they need to cut back on what they’re spending. Right? That’s never the answer that people want to hear.
[00:07:38] They want to continue to spend like they’re spending and still somehow be putting money in a place that is going to either grow or it’s gonna compound to the point where they can do whatever they want to do without ever making the adjustment on the other side. The easy conversation that often comes up when people talk about money is cutting out Starbucks, cutting out different things and people are like, everybody says that.
[00:08:02] There’s a reason everybody says it. Because what’s easy to do is also easy not to do. The five bucks that you spend every day. Yeah. 150 bucks a month, is that gonna make or break most people? No. But that along with the Netflix and the Disney Plus and the Hulu and the five other streaming services that you have.
[00:08:25] Those things, when you start to realize you don’t need ’em all and you start to cut back and you say, I’m still going to spend that money but I’m gonna spend it by putting it in a different account that’s going to create that savings and we’re able to invest it and it’s gonna compound and what have you, will put you in a better position.
[00:08:42] Now, is it gonna get you the full down payment? Maybe not. But the problem is people don’t want to hear the easy solution. They wanna hear the magic solution in many cases. And so with that said, you’ve talked about apps and stuff, and we’re gonna get into some apps, but the easy answer is to avoid debt, right?
[00:09:00] So avoiding it by knowing where your money is going. Not your money telling you where it’s going, you know where your money is going. And then figuring out a way to cut in areas so that you have money to go to the other places.
[00:09:16] Josh Lewis, Certified Mortgage Consultant: A hundred percent. Jeb, as a loan officer. If you talk to me and we’ve progressed far enough in that conversation, we’re going to pull your credit. And I’m gonna say I have people who know down to the penny exactly what they owe on everything. Most people do not.
[00:09:31] And most people, when they see their credit report, they’re surprised to find out how much they owe. Going back to what you were just saying, of determining what’s really important, what really matters, what brings you joy in life.
[00:09:42] If your cup of coffee is like your number one thing in life that makes you happy every day and that gives you 20 minutes to meditate, pray, plan your day, and that’s like your ritual that it’s one of those keystone habits for a, a successful life. Don’t cut it out. But Morgan Housel in that same book says, savings equals income minus ego.
[00:10:02] So is it ego?
[00:10:05] Jeb Smith, Huntington Beach Realtor: Say that again. That’s big. That’s really big.
[00:10:07] Josh Lewis, Certified Mortgage Consultant: Yeah, savings equals income minus ego. And that is not a judgment call. That’s not saying what you are doing is wrong. It’s saying if again, you have this ritual every morning of going to Starbucks, getting a $7 cup of coffee, planning out your day, reflecting on what is important to you, sitting with your spouse and having a conversation. That might be the best $7 you spend.
[00:10:29] If you want everyone to see you with the $7 Starbucks when you show up at the office, and it doesn’t really bring you any joy, that’s ego getting in the way. So it’s not a judgment call. It’s not telling you when ego is wrong or outta the way. Everyone has to have a healthy ego to be successful. So it’s just when does it become above and beyond?
[00:10:48] Like I sit here, Jeb, and right now I drive a 2017 Toyota Tundra. I love my truck. But they redid them in 2022. And I sit here and I look, and every day my ego says, You need a 2023 Tundra. But then you go through the numbers and you go, okay, essentially if I sold my truck and bought a new one, I would either have to write a check for $35,000 or finance $35,000.
[00:11:11] And then I go, does my ego want or need that badly enough? And we don’t. So those are the judgment calls that we talk about. And when you say avoid debt, this is what I would say. If you carry a balance without a purpose of benefiting from a period of zero interest, You are not using credit correctly.
[00:11:33] If you are relying on it to meet your expenses and it went to from a thousand dollars to $3,000 to a five or seven or $10,000 credit card balance. That is problematic. We’re going the wrong direction. The two things that we said are most important if you’re not a homeowner is saving to become a homeowner. Saving for retirement.
[00:11:51] If you’re not doing that, or if you’re saving 3% in your 401k while growing a credit card balance $5,000 a year, our priorities are outta whack and there’s no way of knowing that. We don’t know that we’re getting further and further away from our objective if we’re not watching and tracking it.
[00:12:09] Jeb Smith, Huntington Beach Realtor: No, and one thing I say all the time comes from a mentor of mine, people buy emotionally and then they justify logically. When you’re buying a house that happens. When you want the PlayStation five, you want the new pair of shoes, you want whatever it is, it’s an emotional decision.
[00:12:27] And then you tell yourself you needed it. You need the new truck, this one’s it’s got maintenance issues. The tires. I’m gonna have to replace the tires. Like all of the things start to play in, into the equation. I’m in a similar position. I have a 2016 G M C Denali. It’s paid for, it’s been paid for a long time.
[00:12:45] It’s now seven, eight going on eight years old. It’s got some wear and tear on it. I got three kids. Wife drives it. We take it on vacations, we drive it everywhere. There’s maintenance issues constantly. New tires, just things in it that are basically falling apart to some extent. And I go, we could use a new car.
[00:13:04] And then I look and go, okay, interest rates on cars at the moment, insane, if you finance it. I’m not gonna lease a car. And so I start just going through It in my head and go, it just, it doesn’t make sense. We don’t need it. If we needed it, one thing. Right now it would be nice to have. It’s a want.
[00:13:21] And for my budget, right? Many of you guys know real estate is down year over year. Less transactions happening. So I have to be more mindful. Right now in where money goes, then in a market that’s going absolutely gangbuster, right? If I’m able to still meet all the financial obligations that I have, put money away and do everything, and then there’s money that’s left over, quote unquote leftover, I.
[00:13:45] Then so be it. But when you’re in a more of a when the finances change, you have to pay attention to that, right? You can’t look at it and go, I’m getting a raise in, in December, or I’m getting the bonus at the end of the year and I’m gonna use that to pay off this. A lot of people do that and that can be okay if you’re doing it the right way, but what I often see is people.
[00:14:09] Living the lifestyle that they couldn’t afford to live otherwise by using money that they’re going to get in the future to pay it off. And Dave Ramsey actually has the quote that, people spend money, they don’t have to buy things, they don’t need to impress people. I. They don’t like, or something along those lines.
[00:14:25] They don’t know that They don’t even know. And so it’s so true. But Josh, with that said, let’s talk about the idea of creating a budget. Where do you start? How do you start? Because I think that’s the important piece, right? It’s easy to say, have a budget. It’s easy to say, do all these things.
[00:14:40] It creates all these things. But if you don’t know where to start or how to start, You’re really setting yourself up for failure. So let’s start back at step one. What is the very first step in creating that budget?
[00:14:51] Josh Lewis, Certified Mortgage Consultant: So to me, chicken or the egg there’s one of two places you can start and it almost doesn’t matter.
[00:14:56] You can start right in with the tracking. You can say, I have no idea how much money comes in every month. I know what my salary is, but after taxes and 401k withdrawals, I have no idea what it is. So track my income, track my expenses, see where everything is going. So that gives you a roadmap.
[00:15:16] I would probably start there. ’cause most people it will be eye-opening. The other place that you can start is what are my priorities and objectives? Do I wanna buy a house? Do I wanna max my 401k? Do I want to pay for a wedding for myself or a child? Do I want to buy a new vehicle? Is my car 20 years old and is now problematic? Like whatever your objective is, you need to know what it is and what it will cost to finance that.
[00:15:44] From that perspective, let’s go back to my example. If I want that new truck, I need $35,000. Just like you said, interest rates are high and I’m not gonna finance it. So I need to have a spare $35,000 that is not allocated to something else.
[00:15:56] So if I can budget and I can see that I can have a spare $1,500 a month after I’ve met all of my other objectives, then in a couple of years I can go write a check for that truck. Otherwise, I need to make a different plan, a cheaper truck, cheaper vehicle. Make this one last longer.
[00:16:13] So identify what is a priority to you in your financial life. Then track and measure income and expenses and see where you have a deficit. Or where you have a surplus and how long it’s going to take you to meet that objective. Jeb, the most important thing is once you define it and then you measure where you’re at, now you can come up with a plan. And this is going to clarify what’s important to you.
[00:16:37] Right now of those two things, bitchin’ new truck or no car payment. I value no car payment much more. I’m happy to go get in my truck and go, Hey, my truck is seven years old, but it’s still awesome and it still doesn’t require a payment. At some point, I may go, it’s a 10 year old truck, and I would value having that new truck more.
[00:16:57] But until you identify what things you wanna accomplish and then identify deficit or surplus, and where all that money is going and where you can cut or where you can earn more, whether that means asking for a raise, changing jobs, adding a second job, you can’t know what you need to do until you have defined your objective and then measured where you are currently at.
[00:17:21] Jeb Smith, Huntington Beach Realtor: Yeah, and what I like to do there’s some apps and we’re gonna talk about some apps in a moment. What I like to do is just go back and see what I spent, right? So I take the last couple of months, I say, what did I spend? Everything should be documented to some extent, right?
[00:17:34] If you’re paying cash, it’s really even more important to document where that cash goes ’cause it’s easy to spend cash and not have any idea where it went because there’s no real way to track it. But what I would say is go back, pull up your bank statements, pull up your credit card statements. All of them. Yes, I know this is gonna be painful for many people out there. And start writing that stuff down.
[00:17:53] I put mine into an Excel spreadsheet. I’m not a big app guy on some of this stuff because I like to see it all at one time in a spreadsheet versus having to scroll different places to see it. Just me. And I’m sure there’s, computer programs and websites out there that will show it to you. I like being able to move things around if I need to because personally I have a personal budget and then I have a business budget and to some extent they overlap.
[00:18:17] And that can be difficult in some of the tracking. So if you’re somebody out there that is self-employed and you have a personal budget outside of your business, Start with your personal, start with that first, and then you can figure out the business budget. And maybe there’s two separate budgets, maybe there’s kind of one that overlaps the other.
[00:18:37] And the reason mine somewhat overlaps is because I’m self-employed. My wife’s, she works at home. She’s the CEO of the house, if you will. Takes care of the kids and everything there. And so I’m managing both sides of everything. And so there is money that gets taken from the business, put into the personal account that pays for those expenses, right?
[00:18:58] And then there are other expenses that come out of the business and so on and so forth. But what I like to do is take those statements and itemize everything. What’s everything I spend on housing? And I categorize it. This is housing expenses. This is personal expenses, whatever it is, these are streaming expenses, these are whatever.
[00:19:15] And then sometimes I highlight, depending on what it is, things that we might be getting rid of, things that we don’t really need. Hey, have we used this? Have we not used this? And I’ll be the first to tell you that I don’t do this every month. It’s about once a quarter that I do it. Maybe a little bit less, maybe a little bit more, depending on where we are in the year.
[00:19:34] But I’ll tell you, every single time I go through a credit card statement, there are things on there that I’m paying recurring that I had no idea where it came from. Either my kid asked for something and we signed up and didn’t realize it was recurring, or my wife signed up, or I signed. Something there that you’re like, 40 bucks a month, 50 bucks a month.
[00:19:56] How long have I been paying that? And then you go back and you go, crap. I’ve been paying that for three months, four months, no idea. And I feel like I look at that stuff often and it still gets outta sight, outta mind and it’s really easy to put money in places that you forget about.
[00:20:12] So I think that is really the best place to start. If you’re starting at square one, start there. Just write the stuff down, see where it’s going. What should you include? Gas, groceries. Childcare, anything. Look at your Venmo, right? You pay people outta your Venmo. Look at your Venmo. Do you have people pay you out of PayPal ? Look at all of those places. Wherever money comes in and goes out needs to be put into the budget because it’s all part of the same thing.
[00:20:40] Josh Lewis, Certified Mortgage Consultant: Let’s Jeb say one thing there. If you do it, I think you should do at least a 90 day period, minimum of 30 days, so you get a full picture. But 90 days is gonna give you a better picture.
[00:20:50] You might have had an aberration of an expense last month. Jeb had to put tires on his car. 1500 bucks. Is that common ? Are you gonna see that every month? That sucked, but you don’t see that every month. So 90 days, a 12 month would be ideal. That gives you the whole seasonality, the whole cycle of a year.
[00:21:05] But 90 days should give you a pretty firm idea. Jeb made a very important point that what feels right to you. To him, Excel feels right. There are some amazing apps. Some of the benefits of the apps are the recurring stuff. I threw all my stuff in Simplifi by Quicken last night. It’s one of the tools we’re gonna talk about.
[00:21:23] It gave me a list of every recurring charge that I have. And I went through and I canceled one last night. Most of ’em, I look and I go, no, that’s valuable. No, that’s valuable. No, I used that. But there was one I was able to cut out immediately. So the far end, the super high techie solution is one of those apps.
[00:21:38] There’s not a right or wrong answer. In several articles that I researched, Simplifi came out highly rated and I had not used it. That’s why I tried it last night.
[00:21:46] Jeb Smith, Huntington Beach Realtor: And one thing I want to talk about, the reason I like Excel is because whenever I cut an expense off, I I just put a line through it. I don’t remove it from the budget. I might move it to an area in the Excel spreadsheet sometimes of things I canceled.
[00:21:59] For me, that’s like a momentum builder. It makes me feel good, right? I canceled something that was 50 bucks that I didn’t need outta my monthly budget, or in some cases maybe have a car. A mortgage that you paid off, and you can keep track of it there.
[00:22:13] Hey, you paid this off. That stuff builds momentum, the snowball effect. Dave Ramsey, we crapped on Dave Ramsey last week, Josh, he’s got some really good financial advice for the majority of people out there, just to get ’em in that mindset of being able to save money and he uses the snowball effect, which essentially is taking all your credit cards, taking the balances, starting with the smallest one first and paying it off.
[00:22:35] Everybody says, eat the frog, right? Eat. Start with the biggest thing of, when you’re trying to do your to-do list, start with the biggest thing. Knock that out. It’ll create momentum. This is opposite. Start with the smallest thing and then pay it off and see how that feels. Feels good when you pay a credit card off. And then use that excess money now that you were spending on that one and use it towards the next debt.
[00:22:57] Once you get that one paid off, use the two that you’ve paid off, still paying the same amounts that you were paying when you had three credit cards, but now you only have one and now you’re using it all to pay off that larger card, which in theory, you’re putting more money towards it. But it’s really that momentum that kind of gets you going to the next level and gets you and carries you to the next stage.
[00:23:17] Again Josh, we talk about what’s the best app, what’s the best way
[00:23:22] Josh Lewis, Certified Mortgage Consultant: The one that you’re gonna use.
[00:23:23] Jeb Smith, Huntington Beach Realtor: The one you’ll use, right?
[00:23:23] Josh Lewis, Certified Mortgage Consultant: The one that you’ll use. So a couple things that what you said brought to mind. We just saw in the news, either yesterday or today record level of credit card debt in the United States, $1 trillion.
[00:23:34] Jeb Smith, Huntington Beach Realtor: Holy God,
[00:23:35] Josh Lewis, Certified Mortgage Consultant: I can safely say that’s a lot of money. I can safely say that when we review that, at least 10% of that is frivolous, unnecessary spending. So a hundred billion dollars of American debt from US households. So a hundred billion dollars. But here’s the important part, Jeb.
[00:23:54] This time last year, interest rates were much lower. That credit card debt was an average of 21%. Average credit card there was 25%. So we have $250 billion of interest that will be paid on credit cards, at least 10% of which was frivolous spending. You owe it to yourself to do this. Jeb, you are almost passing yourself off as a Luddite here saying, I use Excel. I don’t like this techie stuff.
[00:24:17] I’m gonna go back. If you don’t even like excel or a spreadsheet confuses or boggles you, my dad budgeted every month with a calculator and a pen and a piece of copier paper. A plain white sheet paper.
[00:24:33] I went I didn’t have time to go over into his storage. My dad passed away in 2020. We still have a bunch of his stuff. I know I have his budgets in there. And it was super simple. He was a school teacher, so he knew every month, here’s my salary, here’s what my net is. So it started with, here’s my net pay that goes in. He started off with giving. He was a Christian, gave 10% every month, and he had four or five different sources that he gave to.
[00:24:54] And here’s what I would say. I don’t think that the only benefit of giving is religious, where your religion says you need to give away 10%. What I will say there’s a psychological component to giving where you are teaching yourself that you have enough, that you have a surplus, and that will over time help you with your spending and budgeting.
[00:25:16] But going back to the paper, it basically, my dad was pretty simple. He had one credit card. He had one checking account, one savings account, and it was like 12 items long. He paid cash for everything till the day he died, cash in his wallet, and he would say, I’m gonna take out this much cash. It’s going to go here.
[00:25:31] So you do not need to use a tool. A couple of comments on tools. So first of all from what I’ve seen so far in 24 hours of using Simplifi, I really like it. Mint is very popular. You Need A Budget, very popular. All of those automate a lot of this. Make it easy to pull in many sources of spending and investing.
[00:25:52] One I’d never heard of Jeb is one called Honeydue, D U E.
[00:25:55] Jeb Smith, Huntington Beach Realtor: That’s new. Yeah.
[00:25:55] Josh Lewis, Certified Mortgage Consultant: And it’s new. And if you’re combining finances, so if you’re in a relationship and you’re thinking about either cohabitating, buying a house together, getting married, there’s so many stresses that come with a relationship, don’t let money be one of them.
[00:26:10] And I will go so far as to say I know people, I have friends, I have clients who never should have got married because they would never be compatible with their spending and money habits. So let that be a piece of this. There is no greater path to headaches and heartaches than a bad relationship, and money is probably the greatest possibility of running afoul of one another.
[00:26:32] Now, what I wanted to mention, Jeb, we’ve got two free options. NerdWallet has a really good one. Rocket Money has a really good one. Rocket Money has tried to get us to do a sponsored show here.
[00:26:42] Jeb Smith, Huntington Beach Realtor: would be a really good intro to an ad right now, wouldn’t it?
[00:26:44] Josh Lewis, Certified Mortgage Consultant: They would love to sponsor one here on budgeting. Here’s what I would like to point out. Those are both very good. They are free. If a product is free, you are the product. Both NerdWallet and Rocket wanna sell you a lot of stuff, mortgages, auto loans, student loan consolidation credit card offers. You are the product. You will end up paying more and if you think they’re advising you on what’s best versus what they have to offer you would be sadly mistaken.
[00:27:08] So whether it’s $3 a month, $5 a month, a hundred dollars a year, I would probably use a paid app. And another comment, Jeb. I was actually in my annual continuing education yesterday and there was a slide from Freddie Mac in there and Freddie Mac said, studies find that FinTech tool usage is often tied to poor money management. The increased tool usage in part explains the lower levels of millennial financial literacy. As millennials leverage FinTech tools more than older adults.
[00:27:35] Part of that is that in school, you know whether you’re a boomer all the way through to millennials and Gen Y coming behind them. Schools do a terrible job of teaching what is fundamental in your life, which is personal finance.
[00:27:48] The apps can make it better, but if you don’t really understand the basics of dual entry, bookkeeping debits, credits, keeping a ledger, you’re going to have a problem with it. So in that instance, Jeb it’s probably leaning towards saying, Do it on paper, do it in the spreadsheet, get a basic understanding of what this is.
[00:28:06] But the tools do a great job, and as you said, perfectly, the best tool is the one that you will actually commit to and use.
[00:28:13] Jeb Smith, Huntington Beach Realtor: Good stuff. So let’s kinda circle back here for a moment, ’cause this is, the educated home buyer. So we’ve talked about the idea of budgeting, why it’s important, how to start budgeting.
[00:28:22] Let’s talk about two things, Josh. What you really need to budget for. So the idea of creating a budget, why you need to budget, I think people understand that concept. But there’s a almost a misbelief out there that you can still buy a home with really no money down.
[00:28:36] And maybe you can, right? That’s not completely a myth. But it’s difficult to do. Most loans are gonna require. Some sort of closing costs, some sort of down payment, some sort of assets in the bank to show that you have some money if nothing else, even if you’re able to get down payment assistance and do different things.
[00:28:54] It’s important to budget, right? You shouldn’t be buying a house if you don’t have enough money to buy a house, right? You still need the money there to budget whether or not it goes towards the down payment of the closing cost. So Josh, let’s just briefly talk about those two things, right?
[00:29:10] How much. Is safe? Is there a number that we should be thinking about when we’re talking about down payment? A percentage wise, a closing cost percentage, just to give people a goal to shoot from. Where should people start?
[00:29:23] Josh Lewis, Certified Mortgage Consultant: So we have 3% down options. We have 3.5% down with f H A. If you are either in a rural area or a veteran, you have zero down options, but those are less than 10% of the market.
[00:29:35] So for 90% of the people that we’re talking to, you need to have three to three and a half percent for a down payment and be prepared to pay for closing costs and prepaid items. So I would say 5% of whatever your target purchase price is what you should be thinking in terms of saving to be ready to buy a home.
[00:29:52] Does that sound about right to you?
[00:29:53] Jeb Smith, Huntington Beach Realtor: Yeah, I think that’s fair. And here’s what I’ll say. A lot of people get really shy about having that conversation. If you’re planning on buying a house. Maybe you’re not in the position at the moment. It might be a year from now, it might be six months from now, who knows what the timeframe is and you’re unsure of how much you need.
[00:30:10] Have the conversation with the lender. These are free conversations guys. Lenders are there to guide you through the process to build relationships and really earn your business and your trust. And most lenders are going to have that conversation with you.
[00:30:25] They’re gonna tell you, Hey, based off. What you’re trying to do, you know what you’re willing or able to spend per month in a budget. This is essentially your price point where you would be, and in turn, this is about how much money you would need to have in order to accomplish your goal.
[00:30:42] Is that not fair, Josh? Is that a conversation that you have with people you know that are considering the process that are completely new to this whole thing?
[00:30:49] Josh Lewis, Certified Mortgage Consultant: A great example, Jeb a gentleman, listener to the podcast here, reached out last Thursday. We connected on Friday and he called back on Monday and he said, Hey, based off of our conversation, I think I need 60 days.
[00:30:59] And we go through it and I go, I don’t disagree. I think 60 days, most people, when they think in terms of 60 days, there’s not much that”s gonna change. He had a couple of things and I’m like, that will put you into a better position. So he goes into, I have a task on October 8th to give him a call and pick up that conversation.
[00:31:16] And every month, the beginning of the month or whatever day of the month, I have calendar reminders of people I talked to six months ago, 12 months ago, three months ago.
[00:31:23] What happens if the plan is, Hey, I’m gonna do it in 12 months. You have what Tony Robbins calls the law of diminishing intent. The longer you put a off doing something you plan to do, the less likely you are to do it.
[00:31:35] There’s an element of that. If you’re thinking you want to buy, unless you are very diligent in terms of saving, planning and working a plan over a 12 month period, I would say three to six months should be enough to get your ducks in a row and be ready to go. But it’s not my call.
[00:31:50] You are a hundred percent correct. That initial conversation is to help you determine where you’re at, where you want to be, and are we ready or is there a gap to cross and what is our plan to do it? There’s a giant misconception that when we send a calendar link and say, Hey, get on my calendar. Let’s have a call. That’s a sales call. I’m there to sell you a loan.
[00:32:06] I don’t ever want to sell anyone a loan. I don’t ever want to talk anyone into buying a home. I want to facilitate you making the best decision possible with your finances and for 60, 70% of the people that I talk to, that is buying a home and figuring out an optimized plan for doing that. And that may mean three months, six months, 12 months down the line, and not today.
[00:32:26] Jeb Smith, Huntington Beach Realtor: And it’s ironic you brought up the law of diminishing intent, because I would say for most people, that’s the budget that we’re talking about in today’s episode, right? Is the idea of yeah, I’m gonna get to it, I’m gonna do it. And then what happens is most people don’t do it.
[00:32:39] They end up talking to the lender first, having the conversation. The lender tells ’em that, Hey, you’re approved up to this amount. And then that’s what people go and spend versus working backwards and knowing what they’re comfortable spending and saying, you know what, Josh? Yeah, I might be approved for 500,000, but I think I really need to be around, this amount monthly, and then you equate that to 400,000 or whatever the number is.
[00:33:03] So the budget really is the foundation for home buying. For really life in general, just knowing where your money’s going versus wondering where it went. So Josh, let’s do a little recap here. A conclusion if you will, top couple of things that, that listeners should be getting out of this episode.
[00:33:22] Josh Lewis, Certified Mortgage Consultant: Come up with a plan of what’s important to you, what you want to accomplish. Again, that could be buying a house. It could be buying a car. It could be paying for a wedding, it could be just maxing out your 401k.
[00:33:31] Come up with a plan, then track for one to three months, all of your income and expenses. You can do that today going back. Almost everything today, we have it digitally, and if you’re gonna put it into a spreadsheet, most banks, credit cards will export to Excel format where you can pull them in there.
[00:33:46] This is not that difficult, but it’s gonna take three, four hours over the course of a weekend. Go back 90 days, pull that all together, figure out where you’re spending. The stuff that maybe doesn’t necessarily show up there, we wanna account for what is my housing and utility expense, everything that goes into shelter?
[00:34:02] What am I spending on transportation? Am I in an area where I take the bus every day or do I Uber everywhere? Do I have a car payment or do I just have maintenance on my auto? What am I spending on food? How much do I spend at home? How much do I spend out? What do I have in terms of debt payments, credit cards, auto loans, student loans? Student loans are a big one. Millennials we talk about a lot because they are the prime buying age and they’re about a third of the buying market, and student loans are a big issue for them.
[00:34:27] One thing that doesn’t get accounted for, and I don’t think people have a really good understanding of is their taxes, the withholdings from their payroll. I think this is a great opportunity to dig into that and say, am I over withholding where I’m getting a big refund at the end of the year? Am I under withholding where I’m afraid to file my taxes ’cause I have a payment?
[00:34:44] Things like childcare. If you have kids what does that look like for you? Do you have family that covers it or do you have a really high end daycare that you send them to? The last two are: Giving. Do I want to give? How much do I have to give? And then savings. Dave talks about an emergency fund, one to three months, three to six months of living expenses. That’s awesome to get that built just in terms of reducing anxiety and stress.
[00:35:08] Big picture goals that we talked about. Buying a house, planning for retirement, major life expenses like weddings, school, education for kids. Those are the big things. Pick a tool, commit to it, track it. And this doesn’t need to be a thing where you’re looking at it every day.
[00:35:24] Jeb, you’ve talked a million times on the show. Please don’t look at the value of your home on Zillow every day. You don’t have to look at this. I would say minimum would be quarterly, preferably would be once a month to just check in and say how am I doing? Am I budgeting properly? Is my income getting allocated properly to expenses to allow me to meet the things that I stated are my goals?
[00:35:44] Those would be the big things to meet Jeb.
[00:35:46] Jeb Smith, Huntington Beach Realtor: I think those are the big things. So with that, as we always say, buy right, borrow smart, build wealth. And there’s one other quote that comes to mind. Wealth, like a tree starts from a tiny seed. Is that something that comes to mind? That’s a quote. I don’t know. I think it’s something along those lines. But essentially wealth comes from starting small and letting it build over time. And you can do that by creating a budget.
[00:36:08] Josh Lewis, Certified Mortgage Consultant: Double down on that. Jeb, when was the best time to plant a tree? A thousand years ago.
[00:36:12] Jeb Smith, Huntington Beach Realtor: Mm-hmm.
[00:36:12] Josh Lewis, Certified Mortgage Consultant: When’s the second best time to plant a tree?
[00:36:14] Jeb Smith, Huntington Beach Realtor: Today.
[00:36:14] Josh Lewis, Certified Mortgage Consultant: Today. So that tiny seed, you may not have anything, but you have a tiny seed. If you have things that you want, today is the day to make the plan and plant that seed.
[00:36:23] Jeb Smith, Huntington Beach Realtor: Good stuff. Until next time, guys. Adios.
[00:36:25] Josh Lewis, Certified Mortgage Consultant: Amigos!
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