Budgets for Pursuing Dreams
Updated September 2, 2016 . AmFam Team
Few things feed possibility like financial freedom. Creating a budget with your dreams in mind will reveal truths about your spending, help you decide where to cut back and outline steps that will put you in a position to dream more fearlessly. Sharpening your metaphorical pencils will help you make decisions about your money that will make you happier in the long run.
First a Snapshot. Then a Roadmap.
A budget blends a thorough look at your current financial reality with steps that are reversed engineered from your long-term dreams. Saving for a house, car, retirement, vacation or kids’ college each come with unique considerations. Many plans are a combination of these goals happening simultaneously.
Between where you are and where you want to be are time, income and choices. Often the income part is fairly set. But maybe there are hidden financial opportunities you’re overlooking, like streamlining your personal belongings and turning your crowded storage areas into cash. Let’s start with your goals. That will uncover what steps need to be taken.
Go for the Goals
What are your financial objectives? Lowering your debt, saving for early retirement, purchasing something? Put them all down, then rank their priority. Paying off any debt that costs you money is first on the list.
Income-ing. Where does your money come from? Paychecks, interest, a tenant, driving Uber, eBay? For budgeting purposes, considering fixed income like paychecks is wise. For dreaming purposes, having some variables like commissions, bonuses or side hustles can help keep you motivated to make things happen. Turning your dormant possessions into cash often takes a little push.
The costs of living. Including all expenses — such as rent or mortgage payments, loan payments, minimum credit card payments, groceries and utilities — will let you see what percentage of your income each aspect is claiming. If possible, build in a monthly saving amount for planned events like holiday gift giving or travel.
Adding up the day-to-day. Write down everything you spend money on for a month, including coffee, gas, lunch, entertainment, etc. By identifying where your money goes, you’ll see where you can make budget adjustments. You may be able to consult your online banking summaries to tell you which categories are getting the biggest chunks. Those $5 coffees, while nice little rewards, could be traded for much larger rewards over time.
You do the math. Subtracting expenses from income can be eye-opening. If you're spending more than you bring in, the first step is deciding where to cut back. If you have extra money at the end of the month, the first financial move to is to pay off debt. Getting out from under debt that charges you interest comes before everything else. From there, building a surplus is smart, helping you handle the nagging realities of unexpected auto repairs, illnesses and more. Careful planning and saving will allow you to manage those surprises more easily.
Budget Advice From the Pros
Financial advisors recommend saving 10 percent of your income or more. The earlier you start, the better position you’ll be in for retirement. Planners say you should have enough cash on hand to cover six months of expenses. Recent financial turmoil has prompted many planners to increase that amount to 12 months.
Lowering credit card balances means keeping more of your money. Convincing yourself that paying interest isn’t in your best interest will change your outlook on debt. If you're promoted at work, automatically shifting raises into savings can make a big difference. Using income boosts to elevate financial plans or pay down debt faster is always smart.
Making Money Healthy
Money has a strange power to make people uncomfortable. Taking control of your situation takes the power back. Getting everyone in your household on board with a budget will make everyone happier in the long run and bring your family’s dreams even closer.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
Related Articles
- Ways to Save Money for a Family Trip
Among the many joys of being a parent is the opportunity to share your passions with your children. From exploring your favorite hobbies to diving into cherished family recipes, as your kids grow so do the memories you create together.
Going on vacation with your children is a great way to bond with them, but it can get costly. The good news is that getting out of town doesn’t have to break the bank. Plan for your next family adventure by exploring the tips in these family vacation FAQs.
- Credit and Identity Theft Monitoring
Protecting your home with a security system and locking your doors when you leave for the day are measures you might take to protect your home from intruders. Credit and identity theft monitoring are a type of “security system” that protects you from intruders gaining access to your personal information. From credit fraud to identity theft, everyone is susceptible to these types of breaches — that’s why it’s so important to defend yourself against them.
Credit monitoring and identity theft protection are two different ways to proactively protect yourself if your personal information gets into the wrong hands. Let’s take a look at the differences and why it’s important to implement them both together.
- Saving for a House
There are a few defining moments in our lives. For some, it’s the realization that buying that first home is within reach, both financially and emotionally. It’s a big step, and it’s one that’s built into the American dream. And if you’re left wondering how much money you should save before buying a house, you’re not alone. These costs can add up quickly.
After you’ve made the big decision to start shopping for a home, you might be surprised to find that coming up with the cash down payment is only one of several financial hurdles you’ll need to clear. Exactly how much you should save for a house depends on a number of factors, like the value of the home you’re targeting and the amount of money you intend on pushing into your down payment.
- Pay Off Student Loans or Buy a House?
After college, life moves fast. You get your first big job, move out of your parents’ house and start a whole new life on your own. For most people, this also means paying off student loan debt from your college tuition. Having this debt may make big milestones like buying a house seem far off, but there are ways to make the leap from renter to homeowner even if you have student loans. So can you get a mortgage while also paying off student debt? Or should you wait to pay it off before you buy a house?
Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
