In October, many of us took a closer look at our physical health and disease prevention during Breast Cancer Month, and in November we focused on things to be grateful for during Thanksgiving. As we say goodbye to the fall and move through the holiday season, it is a great time for a fall-into-winter financial checkup. In other words, focus on our financial health. One way to do this is to evaluate our income versus housing expenses, otherwise known as debt to income ratio.
Traditionally, we tend to view housing expenses as our mortgage, taxes, insurance and homeowners’ dues. These are important, but there are other expenses and issues to consider when deciding how much house we can afford. Factors such as: other types of debt, various types of insurance, utilities, reserves for home repairs and emergencies, reserves for medical expenses and potential illness, education expenses, and basic necessities like food, clothing, etc. Plus, it would be nice to have something leftover at the end of the month for retirement planning and leisure!
Debt can be broken down into several categories. Secured debt is usually secured by a lien on a property, vehicle or some other tangible asset. There is revolving debt, including credit cards. Other loans may include school or business loans. Monthly payments are usually associated with these debts and need to be taken into account when we are analyzing monthly expenses.
In addition to homeowners’ insurance, remember to factor in insurance for automobile, life, disability and health. Whether paid monthly, quarterly, semiannually or yearly, they can take a big chunk out of income.
Utilities, such as electric, water, cable, Internet and telephone, will also take a big bite out of a budget. But don’t forget other housing expenses, such as pest control, lawn care, cleaning service, pool maintenance, window washing, service contracts on appliances, security systems, etc. Bundling several services with one provider may offer a discount. When budgets get tight, homeowners may decide to take care of some maintenance themselves. Also remember about less regularly scheduled maintenance items, such as roof cleaning, house painting, driveway sealing or landscaping.
There are many types of emergencies that can occur and these can often be the most costly. I remember my parents telling me as a child to always leave something for a rainy day. I quickly learned this lesson as a newly divorced homeowner…a new roof in 2005, a new air conditioner in 2006, and new appliances and hot water heater in 2007. Remember that roofs, windows/doors, appliances, carpeting/flooring and air conditioners may need to be replaced and at some point the kitchen, bathrooms or other areas of the home may also need a facelift.
Despite the high insurance rates we pay in Florida, most of us have very large hurricane deductibles, up to 2 percent, which can offer a challenge if the worst case scenario occurs. On a $400,000 house, for example, that translates to an $8,000 deductible. Deductibles also apply for other losses, such as when my son’s toilet cracked and we had to replace most of the flooring in the house.
Beyond those that are home-related, other emergencies include sudden illness or death of a loved one, job loss or increases to our homeowners’ insurance or special assessments. These are some of the reasons why it is important to also set aside sufficient money in your monthly budget for reserves for repairs and emergencies.
As we consider how much house we can afford, and chose to afford, we all need to contemplate our priorities. What percentage of our income should go toward basic necessities, housing, education, leisure and retirement planning? None of us have a crystal ball to tell us what the future will bring, but we all have the ability to evaluate our financial health on a regular basis, and make adjustments based on our comfort level and choices we make about our lifestyle.
As we start a new year, this might be a great time for a fall-into-winter financial checkup. The end result will be greater physical and financial health in 2015.
Did you know…During the Third Quarter of 2014… The average home in Palm Beach County sold for 93% of the listing price!
Other Fun Facts:
- Closed home sales were up by approximately 18% from 2013.
- Pending home sales were up by approximately 20% from 2013.
- The number of active home listings has increased by approximately 23% from 2013.
- The number of new home listings went up by approximately 13% from 2013.
- The median sales price has changed by less than 1% since 2013. Laurie Dubow