Looking for a new place? Will it cost a little more than what you’re paying now? Chances are that you need to take your new payment for a test drive, especially if you’re a first time home buyer. Even if you look at your financial situation, and you think that — on paper — you’ll be able to handle a bigger monthly payment, the truth is that the reality of a higher payment is usually more complicated.
Instead of just assuming that you will be able to afford your new housing payment, you need to try it out for a little bit. Here’s how to take your new housing payment for a test drive:
What Will Your New Costs Be?
The first step is to figure out what your new costs will be. This isn’t just about looking at your higher monthly payment for a mortgage or for a more expensive rental. While you do need to look at those items, you also need to consider other costs. Are you moving into a bigger place with utilities that will likely be more expensive? Will you have added maintenance and repair costs? What about property taxes and insurance costs?
Carefully consider your new costs, and determine what you will pay extra. When you sit down and really estimate your increased costs, you might be surprised.
Now, add up what you are paying now, and subtract it from your new costs. If your current housing costs are $950 a month, and your new housing costs will be $1,300 per month, that’s a difference of $350. That means that you need an extra $350 each month to make your new housing situation work.
Take Your New Payment for a Test Drive
Now that you know that you need $350 extra each month, it’s time to see if that’s practical for you on a day-to-day basis. Open a high-yield savings account, or some other account, and arrange to deposit $350 into that account each month. You can set up an automatic transfer, or you can make it a point to instigate the transfer yourself each month. The important thing is that you take that $350 and take it from your primary checking account, and put it somewhere that it’s not easy to get at.
This will be your test of whether or not you can really afford your higher housing costs. You should be able to put that money aside for between four and six months, without any trouble. If you find yourself raiding your emergency fund, or getting $100 from the “practice” fund each month, that’s an indication that you can’t quite afford your new housing payment.
You should be able to financially function without that money if you can truly afford your new payment. It’s important to test it out, because if you go through with your move, you will have to function without that money. That will be money that you will no longer have at your disposal. If you find yourself stretching at the end of the month while making your test drive payment, it’s fairly clear that you are setting yourself up for a situation in which you spend more than you earn, and that can lead to debt problems.
It can be an exciting prospect to move. However, you need to see the consequences in action before you go forward. Take your new housing costs for a test drive, and be honest about the situation. This can let you see whether you need to make changes to your budget, or try to earn more money, before you can make your move in a financially responsible way.
