How To Test Budget A Mortgage

Estimated reading time: 17 minutes

Creating a test budget before buying a home is not only a wiser financial decision; it is why you look back and thank yourself for investing in your future.

Live Like You Own A House

Consider the above statement briefly and ask yourself how that may have changed your past or current budget before buying your home.

You may find that had you created a test budget before that purchase; you may have noticed that you shouldn’t have spent so much.

Typically, you wouldn’t hear me say anything about using a test budget because a budget is a budget.

However, there are times when pretending to budget comes in handy.

Forget the word pretends for a moment and consider why you would want to prepare a test budget and how it would benefit you as a potential homeowner.

Can I afford the house?

Start Young Finish Free

I believe anyone who learns about finance from a young age will have the basic knowledge to make financial decisions that may not impact their lives like someone who did not.

I urge parents to teach themselves about finance FIRST and pass that knowledge on to their kids.

Even then, some parents have somewhat of an idea about money, budgets, interest rates, debt, and so on and pass along skills that may or may not be accurate.

This is why you need to learn from a trusted source such as a financial advisor, finance courses, or reading lots of reputable online sources or books.

The education is available for those willing to learn.

When I was young and living with my parents, I wasn’t using a budget; however, as time went on and I earned money, I saved money.

I never touched the money I saved because I wanted to keep it handy for the time I moved out and to buy my first car.

You would think this is merely a savings vessel, but I was budgeting my money without knowing it for a child because I would pay myself a few pounds a month to do whatever I wanted.

University Kid to Homeowner

Moving forward, when I bought my car and moved out to attend university, I was frugal and still saving what I could while working and studying.

Money was tight, as you would expect for a University student, but I continued only to pay myself first x amount of dollars each month.

These moments made me realize how important saving money was but also to limit what I was allowed to spend.

As an old fart now, I still get an allowance, and it is a category in our monthly budget, just like it was when I was growing up but without the actual budget.

It was a test budget that I was creating and learning to understand using baby steps.

I didn’t have any significant budgeting categories apart from savings.

Still, it taught me that if you test the budget or test something out before jumping into it, you know better where you will stand financially.

As you may know, I bought my first flat when I was 21 years old and my first house at 24, which was a struggle financially but two of the best decisions I had ever made.

I still used the financial habits I created at a young age to get me through the house purchase.

There’s a difference between getting through and leaping over, which I came to learn on my financial learning journey.

Test Budget-What is this?

Now that I’m in my 40s, something I wish I had done back in the UK was to create a test budget before I had even purchased my first flat.

After we married in Canada, we rented a room while we went back to school.

Near the end of this rental journey, we created a paper budget, but it was not something we followed recurrently.

Our paper test budget scribbles, as we called them, were to see if we could afford to purchase a home with our current income.

We were already living very frugally, so we felt no real need for an actual budget.

That “we don’t need a budget” was a silly misconception of frugal living. YES, we did.

Our test budget was far from perfect; however, it tackled most of the necessary budget categories we use today as homeowners and offered free to our CBB readers. Free Money Saving Tools

Thinking back, we realized that it was a continuation of those financial baby steps that led us to the point where we now understand money.

In ten years, I will likely look back at this article and easily continue what we have done with our money, how we’ve jumped over other life hurdles, and continued pursuit of financial knowledge.

My point is that the more effort you put into your money, even if it is baby steps, the better you will become on the other side.

The other side is not after death either; it’s the freedom side of money so you can enjoy life without so much burden.

It also has nothing to do with being rich either.

Two Budget Living

Today, we support a budget in any situation, whether living independently, in a relationship, or at home with family or friends.

A budget is crucial in all facets of daily living and future dealings, so it’s essential to consider your goals before budgeting.

If we could go back in time (1.21 Gigawatts), I would tell us to ditch the paper scribbles and create a test and actual budget.

I know you may think it’s more work, but not if you consider what the outcome could bring you on the other side.

Remember that anything can happen financially during your lifetime, and it probably will, but you’ll be better served if you know how to handle financial falls.

Frugal Doesn’t Equal Financial Freedom

You can be frugal and save money to spend on something else, or you can be both cheap and financially free by using a budget.

Even if you keep a few dollars a month, it is more than you had earlier.

Many people suffer financially now, and it’s a rough spot.

The good part is that things can change by making sound financial decisions. This is, however, a case-by-case situation.

SOLD because The calculator says YES

If you jump into buying a house with a mortgage that you struggle to pay even if you thought you could afford you might have regrets.

Think of it in terms of… YOU CAN AFFORD TO PAY THE MORTGAGE ONLY. Then what?

What about all of the rest of your budget categories?

Who will pay for them?

This is an area that many homeowners fail in, and that is to believe what others say they can do with their money instead of doing the simple math themselves.

One of the most brilliant things we did was to buy our current home using only one of our incomes.

We ran numbers utilizing a mortgage calculator, but we didn’t listen to it or what the bank said we could afford.

It was less than one of our incomes, which helped tremendously when Mrs. CBB lost her job only a few months after purchasing the house.

Talk about scary, but we were confident that we could still make it, and we did. Just five years later, we had our house paid in full.

That’s another reason creating a test budget BEFORE buying a home is critical and not just using a mortgage calculator as a definitive YES or NO.

They may be handy, but they certainly won’t tell you whether you can live comfortably with your given financial status or other situations that might arise.

Job loss above, as an example, is one of those situations.

Sometimes, you need more than a mortgage calculator to tell you what you can and can’t afford when buying a house and taking on a mortgage.

One of the top reasons people struggle with their new mortgage is because they failed to do one thing before signing on the dotted line: test budgeting.

How To Create A Test Budget

If you don’t want to use a test budget and an actual budget, you can add the home you plan to purchase to your current rental costs, including property taxes and maintenance fees.

Renters often have utilities included with their rent, but for those that don’t, you already have budget categories for hydro, water, gas, and other rentals.

Consider these when creating your test budget because you will most likely have to pay for them as a homeowner as variable expenses.

This means the costs will increase depending on usage and how you set up your payment plan.

For example:

We rented a room that cost us $500 all-inclusive, meaning we pay nothing more than $500 monthly. Ah, the life of a renter was easy for us.

The internet, cable, water, property taxes, hydro, gas, and home phone were all included in that $500 price.

What you need to do is first analyze your debt-to-income ratio.

You need to know how much money you net or bring home each month minus your debts, not including the rent.

From there, you can use one of those handy mortgage calculators to see what you can afford.

Let’s say you are single and earn $50,000/year and take home $3000 a month.

The critical thing to remember is that this test budget will take some work, including making phone calls, but you’ll learn more than you imagined.

You will be thankful, trust me.

Your test Budget would include critical payments; this is not an inclusive idea.

Considerations For Your Test Budget

Mortgage (if your current rent is $500 a month and your mortgage would be approx $1000 a month with a down payment, add $500 to your test budget.
Consider current interest rates, but be aware they can increase based on when you purchase your home and the speed and term you agree to. This is meant to be a test budget so that accuracy will be unbalanced, but it gives you a good idea of whether to leap.
Hydro – Find out what the costs of hydro might be on a home you’d like to purchase
Gas- same as above
Water Heater Rental- same as above
Home Maintenance- Keep approximately 1-2% of your yearly maintenance around the house unless you buy a condo with maintenance fees you pay separately.
Property Taxes- Call the city and tell them you are creating a test budget and ask them what you might pay for a particular home or priced home in the area.
House insurance- Call an insurance company
Savings- You should always aim to have an emergency savings fund of 6 months to a year of test budget. (I’d suggest saving this before buying your house.)
Transportation

Budget Categories

Other budget categories must be added based on need FIRST.

Groceries
Life insurance
Vehicle insurance/Repair/Maintenance
Healthcare
Consumer Debt
Personal Care
Daycare
Investments
Other important charges

From there, you can add other stuff that is not a need but more a want based on your lifestyle.

Can you afford these?

Well, if you can’t pay for the above, then no.

If you are not saving money, then no.

The idea is to balance your test budget to include emergency money FIRST because a cell phone won’t put a roof over you.

Home phone
Cell phone
Internet
Subscriptions
Hobbies

Other things to consider might be projected expenses that occur in your actual and test budgets after purchasing a home.

An example of this might be vehicle maintenance or stuff you must get done once or twice a year that you must budget for every month to have the money ready.

Also, don’t forget to talk to a real estate agent who will explain all the money needed for closing costs and mortgage insurance that you need to have available BEFORE buying. There are also certain credits you can get as a first-time home buyer.

The best part about your test budget is that it can become a savings port for many of you before buying.

Take all the extra money you poured into your test budget and put it towards your down payment or other costs.

Home Buying Anxiety

If you go into buying a home without any anxiety, you’re doing it wrong. Everyone does, whether they are debt-free or not.

The only way to ease some of that home buyer’s anxiety is to become knowledgeable about the process, including the biggest stress.

Can I afford to buy a home?

Consider all facets of home buying and the costs involved BEFORE signing the paperwork, my friends.

You’ll be glad you did.

Discussion: Before buying your first home, did you run a test or scribble budget?

What tips could you offer today for those looking to buy but unsure if they can afford it?

CBB At Home

We’ve finally decided to go paperless with our bills and automate them.

More on that to come in an upcoming blog post.

This week was all about love as we conquered another Valentine’s Day in the CBB house, and I didn’t have to sleep on the deck.

I bought Mrs. CBB flowers this year even though she would rather me not spend the money on them.

We’ve always thought of spending money on things we need, but sometimes we need beauty, so spending $30 on a dozen roses not only lit up the room but also made her smile.

That was worth the money over and over, especially given the tough times we’ve entered into with family right now.

The other fun part of our week was setting up our PC Optimum Card, which we were told would be a simple process.

It is when you do it for one person, but combining households is a PITA if you ask me.

Even I had to make phone calls to understand the marriage of two accounts.

It’s complete now, but I spent hours on speaker phone, as did Mrs. CBB, and more completed the process.

Done.Happy.Moving On

Family Death

Note: I was finishing my post when the call came in that my FIL had passed.

The past two weeks have been filled with funeral planning, estates, and wills.

I’ll be blogging about it soon.

I’ve just finished this blog post, but my words in this section were two weeks ago.

RIP father.

To finish the week, we are heading home to see what we can help with around the house at the in-laws.

I know I’ll be fixing the oven and likely clearing stuff in the basement, mostly empty boxes.

We’re working on clearing out stuff in the house now while we can, so it’s not a tremendous job when and if the house goes to sell.

It’s amazing how much stuff we can acquire over the years.

That’s our week…. now I’m hungry. What else is new, right?

Have a great week, and enjoy your Family Day 2018!

Mr.CBB

CBB Published Posts

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Contact me for more info at canadianbudgetbinder@yahoo.ca

Top Post This Week: Free Money-Saving Tools

Favourite Weekly Read

I stumbled upon this post about how retirement causes brain function to rapidly decline, which had me thinking about my parents and my in-laws.

Both sets of parents are retired and only one is suffering memory loss worse than the other 3.

New research shows that brain function declines rapidly as soon as people stop work and put their feet up.

It appears that the lack of regular stimulation takes a heavy toll on cognitive function and speeds up memory loss and dementia, researchers warned.

Oddly enough, the one suffering memory loss since retiring 6 years ago doesn’t interact with people much outside of grocery shopping or the telephone and doesn’t read, write, or engage in activities to keep the brain going.

The others all do. I don’t know how much science is behind it all, but certainly something to ponder for those in retirement mode or on the way down that path.

What are some things you do to keep your mind going during retirement?

Making A Difference 2018

The Making A Difference Networking Series 2018 is booking NOW!!

Hi there, Mr. CBB and Readers,

I am John Claborn, running the finance blog Money On Purpose.

Our blog teaches you how to give purpose to your money by figuring out what you genuinely want to do with your finances.

The vision for Money on Purpose is to empower others to see money in a life-giving way, not life-sucking.

We want to see you take your money by the neck and control it rather than having your money control you! Money is not evil.

Money buys things, helps people, and drives our economies.

Conversely, money buys bad things. Money destroys people.

Money hinders our personal growth.

How we view our money is the driving force behind how we handle our money.

Our mission was birthed out of a disdain for the status quo of 9-5 to retire in 40 years with a nice pension, and RRSP didn’t resonate.

We wanted the purpose to be front and center.

Few things are more fulfilling than a productive day at the “office.”

In most cases, one of the by-products of work is financial gain.

Regardless of the purpose you find or do not find in your vocation, you can find immense purpose in what you do with the money you receive from that work.

We want you to see how money can be viewed properly.

Check us out at My Money On Purpose. (website currently under construction)

Thanks for having us come by, Mr.CBB.

CBB Words of Wisdom

stop overthinking about what everyone says you must do with your money quote-1

It’s easy for someone to tell you what you should do with your money.

You can become overwhelmed, especially when that someone doesn’t know your situation.

It’s one thing to read about financial tips, but it’s another thing to be dishing out advice to people who don’t want to listen.

Not everyone wants to be told what to do with their money.

It’s yours, so do what you want to do and whatever the consequences, you live with them, good or bad.

Hopefully, all is good, though.

Parenting and Home Life

Over at Sugar Spice and Glitter, I learned about making a Paper Chain of Kindness, a colourful craft for toddlers.

We will undoubtedly craft this beautiful idea with our son, but I also thought it would be fun for adults to do as a reminder of how far kind words will go.

Children are always watching and listening because it helps them grow emotionally.

Too often, it’s easier to snap back, or instead of sharing ideas or thoughts, it is communicated with anger.

Think about improving your communication and letting kindness lead the way.

Relationship 101

Words DO matter in a relationship, and as Tony Robbins points out in his article “Words matter: You Vs. I“, you must learn how to change your language for any relationship to survive.

Budget-Friendly Recipe Pick of the Week

Double-Crunch-Honey-Garlic-Chicken-Breasts

I think I’ve found the best recipe for Chicken over at Rock Recipes with Barry.

You won’t want to miss out because his Double Crunch Honey Chicken recipe has been shared over 500,000 times across social media.

Saturday Search Term Giggles

Every week, thousands of people visit Canadian Budget Binder because they searched online and found my blog.

(SIC) means I’ve copied the text exactly, and it has spelling errors.

Canada Food Shopping So Expensive– Welcome to Canada!
How to make flavored milk from toffee– Pour toffee flavor into the milk.
Best way to make money in Canada– Yawn, one of those questions you shake your head at. Snap your fingers, of course!
How to pay $100 for groceries annually– If you find out, please return and share with us.
Traditional Soft Bums Recipe– There is no recipe for soft bums here, but we have a nice Scottish Bap!

Note: Some posts on CBB may be paid for and written by me and this is my opinion of a product/service that I’ve tried and used before. Please read the disclaimer.