Budgeting for first time Homeowner
I'm in the process of closing on my first home. I'm looking for budget setup feedback, and pro's and con's for each method.
There are 3 things that we are budgeting for now
- Closing Costs
- Renovations
- Home Furnishings
The first two categories feel like true Savings categories where I'll save for these items, but they can be hidden once those costs get incurred. On the other hand, I feel like Home Furnishings beyond initial furniture purchases could be an ongoing budget category. I created a Master Category for Closing Costs, with subcategories for the individual items that make up Closing Costs.
My questions:
- I've seen two approaches to non-recurring categories. I can either categorize all closing costs to a generic closing costs category as the closing costs come in and delete all the individual subcategories, or I can categorize everything to the subcategories and just hide the whole Closing Costs category. Is there pro's/con's to each method?
- Am I better off being more general about the whole thing, or specific? Part of me feels like we'd benefit having more specific subcategories within each budget. So we can for example budget for "Living Room Couch", etc.
- How specific is too specific? We will have a variety of items for each person. Electrician, Plumber, etc. I'm leaning towards having general subcategories for each of them under Renovations, and not having line items for each individual item they will do. I.E. Install lights in bedroom etc.
- How do we handle the home furnishings category go forward? Do I ignore the averages when thinking about recurring home furnishings items that we will want to budget for monthly?
Thanks in advance!
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Here are my categories related to housing:
Mortgage - if I were buying a new house, I personally would just lump all closing costs and fees into this category to keep it simple. Once you purchase your mortgage I'm not sure what the point would be of keeping track of those items separately, but maybe people doing a lot of real estate transactions would want to track something like that.
Insurance
Property Tax (paid twice a year, but I bundle both payments in one category)
House Maintenance -- this is for ordinary things like plumber, getting a repair person out for the dishwasher, dealing with raccoons in the attic, a new furnace, etc. I keep $500 in there.
Keep the House Standing -- an emergency fund that is a bit higher than my homeowner insurance deductible.
Household & Furniture
Trees & Garden & Outdoors
then I have smaller categories for specific renovations & repairs I want to do. I haven't been able to actually do any renovations, but when I do, my plan is to create a bigger category "Renovations" and then move the funds from the more specific category into either my Maintenance category or Renovations category before I spend it. So for instance, I'm saving up for a furnace, but when I buy the furnace & have it installed I will move those funds into "House Maintenance" so that that's what shows up on the report. I find the specific category helpful to motivate me to save, but in my reports, I don't need a line item for something I'll purchase once every 20 years. In the memo associated with House Maintenance, I did start listing all the major maintenance things that the house will need and when it will need them, just for keeping track.
You will probably just adjust as you go. I don't break out plumber/electric/etc because I don't need help, at the level of my budget, making sure that I'm not paying too much for those things. I am intrinsically motivated not to pay too much. So I just lump it all together. But if you had a lot of ongoing expenses in each of these, I could see breaking it out.
Congratulations, it's pretty exciting to get a house! I hope you have lots of fun with your house and with your budget!-
I put my closing costs, such as appraisal and recording fees, in the mortgage category. I put the
prepaid items, such as insurance, in insurance, Eventually I made one category called “Roof over my head” that has mortgage, property taxes and HOA fees. I have maintenance check categories for interior and exterior.
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I separated closing costs into actual costs for closing versus prepaid items like interest, property taxes and insurance. But no granular than that.
We have a general Home Improvement Category for the wants, and a Home Maintenance & Repairs category for the needs.
If I was doing a major overhaul of a room, I would have a renovations category for that. But something like installing lights would go under my home improvement, and we'd pay for it when we had the money.
Ongoing maintenance and repairs costs are about 1-2% of the value of the home depending on the gae of the home, lower in VHCOL areas, possibly higher in VLCOL areas. That should be separate from major renovations or home improvements.
Don't forget about things like yard costs and pest control.
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nolesrule Two questions:
1. What was the thought process of breaking up the prepaid items that you have to "pay" at closing, and other costs?
2. We live in a VHCOL (Westchester) and already have a Home Maintenance/Repairs category funded at about 7 months of our mortgage. Should we begin funding in addition to our balance on day 1? How does the roughly 1% figure work? Let's say it's a $700k house, which means you should fund $7k annually. Let's say you already had $14k reserved in that category. What is the go forward funding strategy?
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jestarr
1. Just because I don't escrow property taxes or insurance, and I split out my mortgage payments into P & I separately, so they just fall into those categories already in my budget naturally. Otherwise I wouldn't have broken them out at all.
2. Yeah, I'd prefund it with the $14k and then just add a regular amount every month. You never know how close you really are to something needing replacing unless you are buying new construction and everything is brand new. I actually fund the category 1/10 of 1% every month (for your home that would be $700). The house we owned in NJ needed a water heater replacement after 1 year, and almost all major appliances reached their end of life by the 4th year we owned the home.
In the last 6 years we've moved twice, from a home that was 30+ years old and we owned for 11 years to a 15 year old home we owned for 5 years to a new construction home we've been in for a year. So we've had some experience across the board.
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nolesrule For this 1%, do you use the purchase price or the market price? my house doubled in value, should I ideally be doubling how much I reserve for maintenance? (I couldn't actually afford to do that right now but wondering if that should be my aim - still in year 1 of ynab so have no idea what these true expenses are)
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Ivory Storm I use the greater of purchase price, most recent appraisal or assessed value for property taxes. But it's also a judgement call. I don't use the real estate valuation websites because in my experience they have always been poor estimates of value.
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nolesrule How would you handle something like Home Electronics, or Kitchen Supplies? There will be situations where you have a need, I.E. a TV broke, and other times you have a working TV, but are saving up to replace it.
Also, did you just Hide the Closing Costs category once completed? Is there a benefit to have the granularity of a line item per closing cost type, but also having a Closing Costs bucket. The workflow would be to have the money saved in each subcategory, then when expenses come in you categorize them in the "Closing Costs Bucket" and move money from the subcategory there. Then delete the subcategory.
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jestarr We have a Household Goods category which is for small cost kitchen supplies. The appliances and such are Home Improvement. So is a TV (or it can be home electronics). I don't see the need to budget for individual items but rather just save a pot and then choose which thing to buy based on prioritiy when there's enough money.
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jestarr said:
you have a need, I.E. a TV broke,I would use the contingency savings (Technology Replacement) category to deal with the unexpected. Right now, we'd have to move money from another contingency savings category because we thought home/car maintenance might come up first, but that's Rule #3 for you.
jestarr said:
you have a working TV, but are saving up to replace it.I would have a specific category to save for this in the Wish Farm group (look up that YNAB blog post). When it's time to spend, I'd categorize the purchase to the Technology Replacement category and move the money from the Wish Farm category to support the purchase.
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Move Light Sound Life so in your example, do you not budget into the Technology replacement category?
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jestarr Right now, we budget very little there because we have different priorities. My point was that you can't predict the future exactly, so it's ok to adjust the plan accordingly.
If you were asking about the Wish Farm process, then that's a way to separate out something you know you'd like to make happen from the general unknown of a contingency category.
Whether that means you budget less to the general category in order to fund the specific category is entirely up to you and your priorities. Maybe you also want to have something ready if a phone or computer breaks. The point of having a specific savings category is to protect that money for the TV.
If push comes to shove and you have to replace a computer before you buy a new TV, it's very clear what your money can do for you. You may decide to pull back the TV money, but if that's still a higher priority than another category, the fact that it's separated from the general technology find means you don't have to constantly recalculate and second guess your savings status.
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I can't answer all of these for you specifically because we didn't really do things the normal way (NEEDING to find a home and not having the funds prepared for it put us in a really different situation. We purchased our house with almost nothing out of pocket, and nothing saved up... I don't recommend this method!).
BUT what I can say is that whatever you plan and prepare for is not likely how it's going to end up going. AND you can always change your categories and organization later. In my experience you'll spend way more when you move in on all sorts of things you had no idea you needed (we need a piece of furniture HERE NOW to make this room work, there's no shower curtain and we threw ours out, can't handle the lack of organization in the closet, we have more doors than we had before and don't have enough door mats and we're tracking mud in the house!) but you will need them anyway. So keeping a category for the 'things we had no idea we'd need' that can be applied to anywhere that you want in the moment is helpful. And creating a wish farm for the house is also a really great way to prioritize saving up for things that you know you're going to need or will want to do. I've included some essentials in the wish farm list before, because it just made sense to leave the money piled up there.
Best of luck - and enjoy your new home when you get there! It's exciting, and feels so amazing to have something that's really YOURS.
