3: Understanding Credit2: Savings and SpendingIntroductionCareful money management is an important part of the homebuying process. Reviewing yourincome and expenses will help provide an estimate of what you can afford to pay for amortgage. You may discover that you have to change spending habits or build more savings inorder to afford the costs of homeownership.With realistic financial goals and a Savings and Spending Plan, you will be one step closer toachieving your dream of homeownership. Section Objectives: Understand the importance of establishing a Savings and Spending Plan Develop a Savings and Spending Plan and learn how to stick to it Create SMART financial goals and use your Savings and Spending Plan to reach your goals Learn ways to cut down on spending and increase savingsPlanning How to Spend Your MoneyHow you plan to spend your money can bring you closer toward your homeownership goal.Use the information and tools in this section to: Track income and expenses: Use the Savings & Spending Plan to figure how much money you have coming in (income) and how much you have going out (expenses) using a Savings and REVIEW & TRACK INCOME Spending Plan MAKE & EXPENSES ADJUSTMENTS Review and make adjustments: Decide which expenses are necessary, those you could trim and those you could cut out completely. Boost savings: See patterns or habits you could change that will allow you to boost your savings potential. BOOST SAVINGS
3: Understanding Credit WHY IS IT IMPORTANT TO HAVE A SAVINGS & SPENDING PLAN? Class Discussion What types of words (negative or positive) come to mind when you think about budgeting? What are some of the benefits of tracking spending? A budget is a valuable tool for planning ahead, but it can also feel boring, restrictive and tedious to some. We call our budget a Savings & Spending Plan because it’s a plan to help you reach your goals. It is not meant to be restricting or difficult, but is instead a useful tool to guide you in spending your money wisely. When it comes to buying a home, a Savings & Spending Plan can help you to: Estimate what you can afford to pay for a mortgage Identify where you may be able to cut expenses and increase savings Develop a stronger loan application (By improving your Debt-to-Income ratio) Prepare for the additional costs of homeownership using savings Provide motivation: Once you see that you’ve saved money one month, keep it going the next! ________________________________ ________________________________
3: Understanding CreditTRACKING SPENDINGThere are many ways to track savings and expenses – develop a method that works for you!Explore the ideas below. Notebook: Keep a notebook at hand (in your car, purse or wallet) to write down when you spend money. Be sure to include the date, what you bought, how much you paid for it, and if you paid in cash, debit card, or credit card. Calendar: If you’re used to looking at a calendar every day, try this method. Prepare that month’s calendar ahead of time with bill due- dates, pay days, and special events that may require spending (such as Holidays or birthdays). Throughout the month, record expenses and savings. Online: Many online programs or phone apps can track your spending for you! These include Quicken and Money as well as free programs such as mint.com, quizzle.com, and thebeehive.org (See Online Resources to learn more) Receipts: Put your receipts in a folder or envelope and add them up at the end of the month. If you didn’t get a receipt, write the amount on the folder or envelope. Bank: Many banks offer online bill pay, expense tracking, and online piggy banks to save money. Be sure to check your monthly bank statements often!
3: Understanding CreditESTABLISHING A SAVINGS AND SPENDING PLANSteps to take in establishing a Savings and Spending Plan: 1. Determine your net monthly income 2. Calculate monthly expenses 3. Determine your extra monthly income 4. Review your Savings and Spending Plan & make adjustmentsStep 1. Determine your net monthly incomeYour net income is how much money you bring in each monthafter taxes and other payroll deductions have been taken out.Be sure to include all the money you receive each month, suchas pay from your job and your spouse’s job, child support,retirement benefits, and government assistance. Use thisMonthly Income Worksheet to figure your total net monthlyincome.YOUR MONTHLY INCOME (Choose 1)Your hourly pay $ ____________ $ ____________ X 40 X 52 ÷ 12(based on 40-hour week) (take-home pay) (monthly income) $ ___________ $ ____________Your weekly pay X 52 ÷ 12 (take-home pay) (monthly income) $ ___________ $ ____________Your bi-weekly pay X 26 ÷ 12 (take-home pay) (monthly income) $ ___________ $ ____________Your annual pay ÷ 12 (take-home pay) (monthly income)OTHER HOUSEHOLD MEMBER’S INCOME (Choose 1)Hourly pay $ ___________ $ ____________ X 40 X 52 ÷ 12(based on 40-hour week) (take-home pay) (monthly income) $ 360 $ ____________Weekly pay X 52 ÷ 12 (take-home pay) (monthly income) $ ___________ $ ____________Bi-weekly pay X 26 ÷ 12 (take-home pay) (monthly income) $ ___________ $ ____________Annual pay ÷ 12 (take-home pay) (monthly income)OTHER MONTHLY INCOMESecond job $ ____________Regular overtime $ ____________Public assistance $ ____________Child support $ ____________Pension $ ____________Social security $ ____________Other $ ____________TOTAL NET MONTHLY INCOME $ ____________
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3: Understanding CreditStep 2. Calculate your monthly expensesUse the Savings and Spending Plan on the following page to track monthly expenses. Expensescan include fixed, flexible and periodic expenses as shown in the chart below: FIXED EXPENSES FLEXIBLE EXPENSES PERIODIC EXPENSES Expenses that stay the same Expenses that vary from Expenses paid periodically each month month to month throughout the yearExamples: Examples: Examples: Rent/mortgage Electricity Renters or Homeowners Car Payment Phone Insurance Insurance Grocery Purchases Car insurance Eating Out Car repairs and Movies maintenance Children’s Allowances Car registrationWhen creating your Savings and Spending Plan, be sure to review your flexible expenses firstto see adjustments that can be made, as these expenses are the easiest to adjust. You may beable to cut back on certain expenses such as eating out, grocery purchases, etc. Next, reviewfixed and periodic expenses to see where you may be able to save money. You may tryresearching different insurance companies or finding other ways to reduce costs.
3: Understanding CreditMonthly Household Savings and Spending Plan Month: ___________ Year: _______HOME Projected Actual Difference SAVINGS Projected Actual DifferenceMortgage/Rent Emergency FundUtilities (electricity, gas, water/ Transfer to Savingssewer/trash)Phone (mobile and landline) Retirement (401k, IRA)Cable/Satellite InvestmentsInternet CollegeHousehold Repair/Maintenance/Furnishings Other:Property taxes Total SAVINGSHouse cleaning supplies OBLIGATIONS/DEBTS Projected Actual DifferenceOther: Credit card 1 Total HOME Credit card 2DAILY LIVING Projected Actual Difference Credit card 3Groceries Alimony/child supportDining/eating out TaxesPersonal care & supplies Student loanPets: food, supplies, medical Other loanLaundry/dry cleaner Legal feesClothing and shoes Other: TotalOther: OBLIGATIONS/DEBTS Total DAILY LIVING SUBSCRIPTIONS Projected Actual DifferenceHEALTH Newspaper/magazinesDoctor/dentist Membership duesMedicine/drugs Other:Glasses Total SUBSCRIPTIONSOther: CHILDREN Projected Actual Difference Total HEALTH School feesTRANSPORTATION Projected Actual Difference School lunchCar registration/license School suppliesCar maintenance/repairs Child care/babysittingFuel Other:Public transportation fares Other:Parking fees Total CHILDREN Total TRANSPORTATION
3: Understanding CreditINSURANCE Projected Actual Difference EDUCATION Projected Actual DifferenceAuto TuitionHealth BooksHome/rental ComputerLife Other:Other: Total EDUCATION Total INSURANCE ENTERTAINMENT Projected Actual DifferenceCHARITY/GIFTS Projected Actual Difference Sports/HobbiesGifts (birthday, holiday, etc.) Videos/DVDsDonations/tithing Camera suppliesOther: Movies/Theater Total CHARITY Travel/vacationMISCELLANEOUS Projected Actual Difference Toys/gamesBank fees Other:Postage Total ENTERTAINMENTOther:Other:Other: Total MISCELLANEOUS MONTHLY SUMMARY Projected Actual Difference HOME DAILY LIVING HEALTH TRANSPORTATION SAVINGS OBLIGATIONS/DEBT HEALTH SUBSCRIPTIONS CHILDREN INSURANCE CHARITY/GIFTS MISCELLANEOUS EDUCATION ENTERTAINMENT TOTAL EXPENSES NET (INCOME-EXPENSES) Step 3. Determine your Extra Monthly Income Use Total Net Monthly Income from Monthly Income Worksheet
3: Understanding CreditSubtract your expenses from your income. If your income is greater than your expenses, youhave money left over to contribute to additional savings or expenses. This is your Extra Income(labeled Net in Savings and Spending Plan). Use the formula below to calculate your availableExtra Income. You can also call this your Potential Savings.Extra Monthly Income (Potential Savings) $ ______________ ― $ ______________ = $ ______________ Total monthly Total regular monthly Extra income income expenses (Balance available to save or spend)If your expenses are greater than your income (resulting in a negative discretionary incomenumber), you have a deficit. It is important for you to decide with your household how you canbegin trimming expenses or earning more income. Be careful – households that manage with adeficit for more than one or two months generally start relying on credit cards to pay bills andend up in debt.Step 4. Review your Savings and Spending Plan & make adjustmentsThe Monthly Household Savings and Spending Plan has three columns –projected expenses, orbudgeted amount of money to spend, actual amount spent on expenses, and the differencebetween the two. This is so you can review the plan monthly to see how you are doing andwhere you may be able to trim or cut out expenses. It is helpful to track your spending for atleast three months in order to get an average and more accurate data. If you have a family, besure to include them in reviewing your plan, as they are part of the household spending as well.Here are some questions to consider when reviewing your plan: Which costs seem to be always over the planned amount? See if there is a way to lower these expenses or if you may need to adjust your plan accordingly. Can you cut back or cut out any flexible expenses? These may include limiting eating out, saving on electricity, or cutting out expenses like cable. Think about your wants versus your needs – if it is a want, can you put a limit on it? Are all household members following the Savings and Spending Plan? If someone may be overspending, express your concern and how that family member may be able to contribute toward the family’s goal of homeownership.
3: Understanding CreditSaving for HomeownershipIn preparing for homeownership it is important to begin saving money for a down payment andhome buying costs as well as save on additional expenses once you are in your new home. Atypical down payment requirement for a loan can be as much as 20% or as little as 3-5%.Closing costs run between 3-5% of your loan amount. In addition, homeowners pay manyexpenses that renters do not pay, such as property taxes, homeowner’s insurance, and certainutilities. Below are some ways to begin saving for the costs of buying a home.DOWN PAYMENT & HOME BUYING COSTSSet a Goal Decide how much money you need to save to purchase an affordable home. Try using the Affordability Estimate in the Obtaining a Loan section. Use the Homeownership Goal Action Plan on the next page to plan out the steps to achieve your goal of buying a homeBoost Savings Take your “extra income” from above and automatically transfer each month from your checking to your savings account. You can also deposit into a savings account. Pay yourself first before spending any of your paycheck. Put this money into your savings account.Seek Additional Funding Find out if you are eligible for Down Payment assistance or special programs (see Obtaining a Loan section for more information) Cash gifts from relatives can be a big help in funding a down payment. Check with your lender for requirements. Many lenders will require a “gift letter” documenting that the giver is your relative and is not expecting you to pay the money back.
3: Understanding Credit1. HOMEOWNERSHIP GOAL ACTION PLAN2. My goal is to purchase a ______________________ (house, condo, apartment, etc.) in the neighborhood or city of ______________________ in the following price range: $ ________________ to $ _________________.3. I will start to work on my goal on: .4. I will reach my goal the month of: , Year of 20 ___.5. I, _________________________, will do the following to reach my goal: Due Date Necessary Action Steps Completed Notes Signature: Date: ________________________
3: Understanding CreditSAVINGS ACCOUNTSThe process of buying a home comes with many unexpected expenses, such as loan fees,appraisals, moving costs, home inspections, and insurance. These are explained in more detailin the Shopping for a Home section. It is beneficial to start a savings account for these expensesas well as the additional expenses you will see as a homeowner.Types of Savings Accounts Regular Savings Account: This is a basic savings account offered by many banks and credit unions free of charge. The minimum deposit is usually low, from about $5 to $200. Your money may earn a relatively low interest rate, but you can put money in and take money out of your account freely without any penalties. Online Savings Account: There are many online savings accounts options available today. One of these sites, SmartyPig.com, provides online savings accounts to help you save toward your specific goals. You can even have friends or family contribute to your account online. Go to smartypig.com to learn more. Certificate of Deposit: This account earns a higher interest rate than a regular savings account, but you have to make a larger minimum deposit, generally between $1,000 and $5,000. You also have to keep your money in the CD for a certain period of time. The longer you promise to keep your money in a CD, the higher the interest rate. If you take your money out before the end of the term, you may have to pay a penalty. Money Market Account: This account earns a higher interest rate than a regular savings account, but you have to make a larger minimum deposit, averaging between $500 and $2,500. This account also limits the number of times you can take out money each month. Matched Savings Account: This is a special type of savings account. You keep your money in a bank, and the amount of money you put into your account is matched by a set amount. This amount is much higher than the interest rate on a regular savings account. You can only use the accounts for certain things, such as buying a home.
3: Understanding CreditSaving as a HomeownerNot only do home buyers have to save money to get into the home, but they also need to beprepared for the additional expenses homeowners encounter. As mentioned, homeowners paymany expenses renters do not pay, such as certain utilities, maintenance and repair costs, andhomeowner’s insurance. Below are some ideas to help you save money once you get into yourhome:SAVING ENERGY (AND MONEY)The bad news: A typical U.S. family spends about $1,900 a year on home utility bills; often alarge portion due to wasted energy. As a new homeowner, you may be surprised at thenumber of new monthly expenses you will have. You are likely to have higher utility bills, moreinsurance payments, property taxes and the costs of repair and maintenance.The good news: There is a lot you can do to start saving energy and money at home. Let’sexplore some ideas of ways to save on utilities:Energy AuditingThe first step to reducing home energy costs is tounderstand which parts of your house use the mostenergy. This chart shows how the average household 1uses energy in the home. As you can see, heatingaccounts for the largest amount of a typical utility bill.Whether a renter or a homeowner, energy auditing canbe very helpful in reducing costs. You can conduct asimple home energy audit to show those areas where you use the most energy and where youcan reduce your costs. Here are some tips for conducting an audit: Take the SDG&E Home Energy Efficiency Survey to see where you can save energy and money. After completing the survey, request a complimentary Energy and Water Savings Kit at https://energyaudit-sdge.sempra.com Check the insulation levels in your attic, exterior and basement walls, ceilings, floors and crawl spaces. Visit www.energysavers.gov for instructions. Check for holes or cracks around your walls, ceilings, windows, doors, light and plumbing fixtures, switches and electrical outlets that can leak air into or out of your home. Make sure your appliances and heating and cooling systems are properly maintained.1 Source: 2007 Buildings Energy Data Book, Table 4.2.1.,2005 energy cost data.
3: Understanding Credit Install caulking or weather stripping around windows and doors to reduce energy loss and protect your home from moisture damage. Install attic fans or vents to keep hot or cold air from being trapped in your attic. Replace filters on units often to maintain an adequate and clean air flow and reduce energy costs. Look for ways to use lighting controls – like occupancy sensors, dimmers, or timers – to reduce lighting energy use.2Quick Tips to Save on Electricity Discount Programs: San Diego Gas & Electric offers two discount programs for qualifying customers. Call 1-800-411-7343 or go to sdge.com/customerassistance to apply for either program. California Alternate Rates for Energy (CARE): If you meet income guidelines or receive public assistance, you may qualify to save an average of $275 a year. Energy Savings Assistance Program: Provides a discount on electricity costs once your energy usage reaches certain levels for households of three or more persons. Instead of using the air conditioner, set up fans to draw in cool air and circulate into the warmer areas Turn off all lights and appliances that are not being used Replace bulbs with new energy-saving bulbs Hang laundry up to dry rather than using the dryer as often Increase the efficiency of your refrigerator: Increase your temperature settings (A refrigerator temperature of 37°F and a freezer temperature of 0°F will keep your food from spoiling, without causing you to spend unnecessarily), don’t store things on top of the fridge, check your refrigerator seal to be sure it is closed tight, keep your fridge organized so that you don’t have to open it as long. Look for appliances with the ENERGY STAR® label. Plug home electronics, such as TVs and DVD players, into power strips; turn the power strips off when the equipment is not in use. Visit www.energysavers.gov for more energy-saving ideas.2 Source: http://www.energysavers.gov/pdfs/energy_savers.pdf
3: Understanding CreditQuick Tips to Save on Water Only run the dishwasher when full Reduce bill by 25-60% (US Department of Energy) by switching to a low-flow shower head, which uses 2.5 gallons per minute versus 5.5 Change the faucets and shower heads to lower flow models that reduce water use Install lower water use toilets Take shorter showers (stick to about 5 minutes) Choose drought-resistant plants Take your car to a car wash: It may be worth it when you consider that it takes up to 100 gallons of water to wash a car.3SAVING ON MAINTENANCE AND REPAIREven if you are purchasing a new home, you will probably want to make some changes orimprovements to the house after moving in. From landscaping to painting to new garagedoors, these expenses can add up fast. It’s important to save up so that you can make yourhouse your own. In addition, new homeowners must be prepared for unexpected repairsneeded in the house. Here are some ways to save on these costs: When painting, some experts recommend saving money by purchasing paint that requires fewer coats Consider renting tools that you are only going to use once or twice rather than buying them Save money by doing the more labor intensive but easier steps in the home improvement project yourself before bringing in the professional. For example, if you are remodeling your bathroom, remove mirrors, flooring and fixture yourself, but leave the plumbing and other details to professionals.4 Keep in mind that add-ons such as decks, sheds and additional rooms will cost you for parts and labor but also can cause your taxes to go up. Perform preventative maintenance on your home. This can extend the life of major home components and prevent expensive repairs in the future. Check out the Home Maintenance Checklist in the Protecting your Home section.3 Source: www.eartheasy.com4 Source: http://www.bankrate.com/finance/smart-spending/6-ways-to-save-money-on-home-maintenance-1.aspx#ixzz1wSmQeoo1
3: Understanding CreditMONEY MANAGEMENT TIPSPaying Bills on Time Decide who pays bills and when they will pay them. Know when bills are due: Time your fixed payments, your rent or mortgage and your car loan payment to match your paycheck schedule. Automatic bill pay: Set up online bill pay through your bank to automatically pay bills by the due date (be sure to check your statements so you know how much you were charged). You can also set up automatic bill pay directly through some utility companies’ websites. Use reminders: Try using Google Calendar to get reminders to pay your bills, or set up reminders on your phone to alert you when a bill is coming due.Controlling Day-to-Day Spending Carry a reminder of your homeownership goal with you. Use CHW’s Goal Guard, a credit or debit card sleeve, to remind you to save. When you are about to buy something, decide whether that purchase will help you get closer to your goal. Avoid frequent trips to the ATM for pocket change, as it can add up quickly. When you do use the ATM, make sure it is your bank’s ATM or you may have to pay high fees. Buy only what you need. Avoid buying items just because they are on sale or because you have a coupon.FINANCIAL FITNESSIf you would like to learn more extensive money management skills and increase your savingspotential, please sign up for CHW’s Financial Fitness Class. Register at chworks.org, call 888-884-4CHW ext. 5466, or email us at email@example.com.