The Working Backward Series: How Much Home Can I Afford?

Unknown-1The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home. While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

To see more from the Working Backwards Series, read last month’s post:  Working Backwards Series: Autos 

Topic For This Post: HOME & HOME EXPENSES

Our homes or apartments are normally the largest expenses in our budget, so “right sizing” our housing costs is essential to living in financial freedom with a balanced budget.  How much home can we afford in our balanced budget? It is a tricky and emotional question. Americans are passionate about their homes. The question has many variables too: If we own our homes outright, then our home expenses are just operating costs like utilities, taxes,maintenance, etc. But if we have a home loan(s) or rent, we have monthly mortgage/rent payments that must be factored in as well. For the purposes of this exercise, we will look at the budget with and without home loans/rent.

What percentage of our budget is allocated to housing? In our balanced budget, the total operating costs of the home total  30% of your net spendable budget (NSB, after taxes and charitable donations). That includes any mortgage or rent, all utilities, taxes, insurance and upkeep.

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 30% of our budget going to housing, that’s roughly $1,369/month for housing costs. Total. I know, that is not very much when you figure the operating costs of utilities, taxes and insurance eat up a large part of that budget. Let’s take a look by “backing into the loan amount that let’s us meet our 30% NSB objective:

Monthly home insurance:                            $125

Property taxes:                                            $350 (Big assumptions here but very conservative)

Monthly utilities:                                          $250 (Gas and electric – averaged out over 12 months)

Monthly water & sewer:                              $125 (It’s hot in Austin!)

Repairs/Misc                                                $ 50 (Optimistic)

Sub-total – Operating costs:                       $900 (Wow! that’s 65% of our total housing budget!!!)

What’s left in the budget for a mortgage:   $469

What does this say? It says that utilities are expensive in Austin and we only have $469 to service home loans or leases. Obviously this analysis is geared toward owning a single family home. A rental situation is different but for now let’s keep going with the analysis. Have you heard of a home loan as low as $469/month in Austin? Not me. That would be a home valued at roughly $124,000 with many conservative assumptions. Not many of those in Austin. In fact, I think, none. It was 20 years ago that you could buy a home for a family of four, in a reasonable neighborhood, for that amount of money. And this doesn’t even include things such as home owner’s association fees. Ouch!

Can we afford this single family home if we own the house outright? Absolutely, look: Total housing operating costs are $900, that’s only 20% of our NSB of $4,563. So, yes, we could afford that easily in our balanced budget.

What about renting? Well, doing some fast math, our monthly operating costs for a rental is roughly only about $300 because there are no taxes and utilities are usually much lower since apartments are usually smaller than single family homes. That leaves us up to $1,069 each month to service the monthly rent, ($1,369 allocated to housing minus the $300 of operating costs). Can we find apartments in Austin for $1,069? Yes, we can, but they won’t be fancy.  It will be a small two bedroom apartment in an OK part of town. No pool, no covered parking and no special common areas and probably a very long commute to work.

So What Is All The Fuss?

The point is that a balanced budget for an Austin, Texas family of four on an average household income and with many essential budget categories like housing, auto, food, children’s needs, etc, does not have much room for housing loans or leases. Plain and simple. While the vast amount of housing in Austin have some form of loan or lease associated with them, most of us can’t afford them. Ouch. But true. We certainly can’t afford most of the high priced single family homes on a loan or lease. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

What’s The Solution

There are really only three or four viable options to keep within our budget for housing: 1) Rent. But that limits us in size and location because Austin rent is expensive. And we have no ownership, therefore limited opportunity to personalize or change to fit our needs.. 2) We could rent/lease/buy a home and rent out rooms or have roommates to help with housing costs but how practical is that with a growing family of four? 3) Buy a small condo or multi-family home. But that requires a substantial downpayment to keep our monthly mortgage low, and we eventually may have space issues with a growing family. 4) Buying a single family home in Austin with a small or traditional downpayment, unfortunately, is not an option if we want to keep within our budget.

The reality here is that housing in Austin is expensive and to own anything here will require equity; money for a large downpayment to keep our monthly housing expenses within our $1,369/month goal. Let’s face it, borrowing money is expensive. What is the best plan if you want to own a home? Do everything possible to save your money in order to have a huge downpayment to purchase a home or maybe even enough money to buy the home outright.

Final Word

Home expenses are the largest expense in your budget and in many cases, the biggest budget buster (with autos and entertainment, too) that can force us into an un-sustainable budget or worse, consumer debt.  And that’s even before we get into housing operating expenses. The best way to control your housing expenses is to own your home and not have outstanding home loans. Or rent. If you must finance your homes, and most of us do, be careful not to “break the bank” on financing that prevents you from maintaining a balanced budget and living in financial freedom!

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