Math for Grownups
Tag

BUDGETING

Browsing
In Math for Grownups

Math of Homebuying: Three easy rules for budgeting

If you’ve ever been in the market for a house, you know what the real estate agent asks first. It’s not the number of bedrooms or neighborhood or whether or not the home has a detached garage.

“What is your price range?”

Because whatever you have to spend will dictate the size of your house, where it is located and its amenities. Like it or not.

But how do you know how much you can spend?

Luckily, there are a few guidelines that can help you set this price before you even call on the agent. The following three rules use math to set your home-buying budget.

The Total Price Tag: Five times your annual gross salary

Remember how the diamond industry once told young men that an engagement ring should cost the equivalent of two months income? Of course that is simply a marketing plan. But there are similar and reliable guidelines for home buying.

These days, experts recommend spending no more than five times your gross salary on a home.* Let’s say that you gross $32,450 each year. Five times that is the most you should be spending on a house.

5 • $32,450 = $162,250

With that salary, you should spend no more than $162,250 on a home.

Of course the economy should be taken into consideration. If you’re concerned about losing your job, either purchase a much less expensive home or skip home buying until things get more stable. And if you have extra expenses, like college tuition or medical care for an ailing relative, put those in the mix as well. You might consider subtracting these large expenses from your gross salary, before multiplying by 5.

*It’s worth it to mention that the experts disagree on this multiplier: some suggest 1.5 times your gross salary, while others shoot for 2.5, 3 or 5 times. It’s always best to err on the side of caution, but any of these multipliers are much better than simply taking a wild guess.

Month to Month: A percent of your monthly income

Another way to consider this purchase is by looking at the monthly mortgage payment. (You may want to do both!) Financial planners advise homeowners to spend 28% to 33% of their monthly income on housing costs — that means rent or mortgage, and maintance.

It’s okay to look at a ball park figure here. Let’s say you bring home $1,995 each month. Using the percents above, you can reasonably spend 28% to 33% of this on housing.

0.28 • $1,995 = $558.60

0.33 • $1,995 = $658.35

So all things considered, you can budget between $558.60 and $658.35 each month on housing. (Your real estate agent can help you estimate your monthly mortgage payment, which will include taxes, interest and sometimes insurance.)

Maintain and Repair: A percent of the home’s value

But what about those maintenance and repair bills? Owning a house means fixing the furnace if it goes out, getting the gutters cleaned and repairing a leaky roof.

Lucky you: real estate experts have come up with another little guideline that will help you estimate these expenses. The cost of home maintenance can be estimated at 1% to 2% of the home’s valueeach year.  Let’s say you are considering a home priced at $155,000.

0.01 • $155,000 = $1,550

0.02 • $155,000 = $3,100

Does this mean you will absolutely spend no more than $3,100 each year in home repairs? Nope. Some years you may not come close, and in other years, you may exceed this amount by thousands of dollars.  And as the value of your home increases — as you hope it will! — the cost of repairs and maintenance will increase as well. Still this little benchmark can help you figure out if you can afford the home you have your eye on.

So there you have it. Three rules that can guide your home purchasing process. Do a little math, and you could make a very smart home purchase.

Do you have questions about these figures? Have you used these or similar guidelines in budgeting a home purchase? Post a comment!

Read More
By
In Personal Finance

The Real Cost of Car Ownership

Earlier this week, we took a look at one of the big personal finance decisions out there–buying a car. But the price of the vehicle alone isn’t the only consideration. Unlike a blender or sofa, your shiny new mode of transportation will tap your budget year round. But by how much?

Generally speaking, car ownership involves four additional costs: fuel, maintenance, insurance and taxes. (Some states and municipalities don’t have a property tax on vehicles, so you might be off the hook for that last one.) Problem is, these costs aren’t like your mortgage or cable bill. They can be hard to predict and aren’t due at the same time each month.

So how can you plan for these? Well, just like any other irregular or unexpected costs, it’s a good idea to  put something away each month for car expenses. The trick is figuring out how much you’ll need. Let’s start by estimating the annual costs for each of these items.

Fill ‘er up

With gas prices rising and falling like the barometric pressure on a spring day, budgeting for fuel sure ain’t easy. But you can get a rough idea of what to expect, and then tweak that amount as the year goes on.

You’ll need to consider several variables for this one: the miles you travel in a given year, your vehicle’s miles per gallon, and the cost of gas where you live. This is going to be an estimate, of course. Unless you’ve got a wicked crystal ball, you won’t be able to predict any of this for sure–but you can get close.

If you’ve been keeping records of your miles traveled, you can take a look at the previous year to predict this number. Of course if you’re like me, those records don’t exist. So figure out a rough estimate based on your commute (if you have one), annual trips and even carpool. You should add on for errands and other around-town trips. For reference, the U.S. Department of Transportation estimates that on average, Americans drive 13,476 miles per year.

Now calculate the amount of gas you will likely consume. Let’s say your car gets 32 miles per gallon, and you expect to drive 14,500 miles this year. To find out how many gallons of gas you’ll use, divide:

14,500 ÷ 32 = 453.125 gallons

And the last part is simple: multiply this number by the cost of gas per gallon. In my area, we’re averaging about $3.85 per gallon, so for the sake of this example, let’s use that number.

453.125 • 3.85 = 1,744.53

The annual cost of gas for this fictional vehicle is estimated at $1,744.53.

Maintenance and Repairs

While maintenance can be pretty predictable, repairs are something that you can’t foresee–just like you didn’t see that light pole behind you in the Giant parking lot. But you can budget for these.

Again, if you keep good maintenance records, you can review these to see what you have paid in past years. Your mechanic may have these on file, as well. Remember, most maintenance is based on the number of miles driven, so if you add a long commute, you can expect these costs to rise. The kind of car you drive also matters. And of course, older cars will likely require more maintenance and repair.

If you haven’t tracked these expenses, you will probably have to make a good guess. Ask your dealer or mechanic about this. Or start with $2,000 per year and see what you have left over in December.

Whatever you do, don’t forget your Emergency Fund. This is where you’re big, unexpected repair costs will come from, like an accident that isn’t covered by insurance.

Speaking of Insurance

If you’re driving in the good old U. S. of A. and you don’t have “Farm Vehicle” stamped on the bumper of your truck, you will need to pay insurance. Again, this is a cost that depends on several variables, including your age, your driving record, and much more. But once you choose your insurance policy, that number will be set in stone, as long as you keep your driving record squeaky clean.

The Tax Man

Some states (and some municipalities) require personal property taxes on vehicles. Problem is, these payments are not usually monthly. Sometimes they are only charged annually, and in some places, residents pay these taxes quarterly.

To budget for taxes, take a look at what you paid last year. Or look up a property tax calculator for your state.

Month by Month

Let’s say you’ve found all of these annual costs. Now it’s time break them down, so that you can put away some cash each month.

Fuel = $1,744.53 per year

Maintenance = $2,000 per year

Insurance = $1,566 per year

Taxes = $2,867 per year

First add these to find your total annual costs:

1,744.53 + 2,000 + 1,566 + 2,867 = $8,177.53

Now divide this total by 12 to get your estimated monthly costs.

8,177.53 ÷ 12 = $681.46

So, based on this fictional numbers, socking away $682.46 for car expenses should cover the annual cost of owning and maintaining this fictional car. (Your milage may vary.)

Do you have any tricks for covering these unpredictable costs? Share your ideas or questions in the comment section.

Read More
By
In Personal Finance

Saving for a Rainy Day (or for Singin’ in the Rain)

If you run your own business — like I do — your personal and professional expenses will overlap. So I understood exactly what commenter, Emma, was getting at when she posted this on Wednesday:

My question is like this: what are some things I can do to keep saving when I know I have large expenses that come up a lot? I’m am actor, and I’ve had several big trips for auditions and jobs the past few months that have taken a lot of money all at once to get me to where I needed to go, staying over in a hotel, food on the road, that kind of thing. And I get home and it’s like…. oh. Guess my savings for that pay period is kind of shot.

Here’s the short answer: You have to budget for these expenses, even though they’re not regular. The costs of traveling to auditions and jobs is what I would call overhead. But whether these are business or personal expenses, the issue is the same: You’ve got to budget for them.

The same is true for anyone facing irregular or unexpected costs. Many financial advisors suggest something called an Emergency Fund (EF). Whether this fund is used for home repairs, unexpected medical costs, to replace a totalled car or to travel to The Poughkeepskie Playhouse to star in a revival of 42nd Street, the mission is the same — have enough cash on hand to cover unforeseen expenses.

You also must budget for savings. Even if it’s only $50 each month, make sure that this money is going into a savings account before other expenses are paid for. I like to say that I’m paying myself first. After a while, you won’t even know that it’s gone. You might even be able to set up an automatic transfer, which is a great way to keep you honest.

Why do you need savings? Well, the answer is obvious. If you literally follow the old stage adage and do break your leg, you could be out of commission for a while — no auditions + no gigs = empty bank account. In fact, it’s now recommended that you have six months to a year of living expenses in your bank account for this very reason. So, if you’re spending $3,500 each month, you’ll need $21,000 to $42,000 in the bank to take care of these emergencies. That’s a lot of cash!

If that amount feels out of reach, set some goals — 10% by the end of the year, for example. Doing a few calculations can help you break things up into manageable pieces.

And here’s the other thing: you can squirrel away cash for lots of different reasons, including travel. You could decide to split your savings deposit, putting 70% in an emergency fund and 30% in an auditions/jobs account. So, if you have $100 for savings each month, that would mean $70 in savings and $30 in a travel account. This will give you some cushion, if a really cool opportunity comes up that you haven’t budgeted for.

So how do you budget for travel to auditions and jobs (or create an emergency fund)? My suggestion is to take a look at what you’ve spent in the past. Add up all of your audition expenses for the last three months and divide by three. (Or over the last year and divide by 12 or whatever numbers you have on hand.) Then take a good critical look at that number. Does it realistically represent what you normally spend on auditions and jobs? Did you go on more or fewer than usual? Did you have to fly farther or stay in an expensive city? Adjust this number based on the answers to those questions.

Now you have a good idea of what you can expect to spend each month on traveling to auditions or gigs. More than likely, this won’t be an exact number. If you spend less, put the extra in an auditions/jobs account. If you spend more, take it from that account. (And if you don’t have enough saved up yet, you might need to make other adjustments to your budget — like eating Ramen noodles for a while.)

Here’s one more step you can take. Your business is like mine. It’s feast or famine — you never know exactly how much you’ll be bringing in each month. So estimating a percent that you can use for travel expenses can help you stay on track. There are several ways to do this, and here’s one idea:

1. Find your average monthly expenses for traveling to auditions and jobs. (This is what you did above.)

2. Find your average monthly other expenses. (This will include rent, groceries, utilities, education costs, and yes, savings.)

3. Add the two together to get your total average monthly expenses. (Another way to think of this is your total income.)

4. Divide the travel expenses by the total. That will be your audition expenses rate.

So let’s say that your average monthly audition expenses are $2,000 and your other monthly expenses are averaged at $4,500. That means the average of your total monthly expenses (or total income) is $6,500. To find the audition expenses rate, divide:

2,000 ÷ 6,500 = 0.31 or 31%

So, on average, 31% of your monthly expenses should go to traveling for auditions and jobs. Even if your monthly expenses go up or down, you can keep this percent in mind for setting your audition expenses budget. If you’re making less money, you can trim your travel expenses. If you’re making more money, you can up that part of your budget.

Hope that helps, Emma!

Do you have different advice for Emma? If so feel free to share (nicely) in the comments section. How do you think this process would work for your unexpected expenses? If you have a personal finance question, don’t hesitate to ask!

Read More
By