Setting a budget for purchasing a property is a crucial step in ensuring your financial stability and long-term success in real estate.
While it might be tempting to base your purchase price on a bank borrowing capacity calculator, it’s more prudent to focus on your cash flow and financial comfort.
In today’s blog, we delve into practical steps to accurately determine your financial limits, clarify your living expenses, and develop a strategic plan for your property purchase, ensuring you buy within your means and avoid future financial stress.
Determining a Comfortable Price Point for Your Property Purchase
The first step in setting a budget is understanding the price point you are comfortable with. This should be based on your cash flow rather than the maximum amount a bank is willing to lend you.
Consider the following…
Available Funds Post-Purchase: Determine how much you want in available funds after the purchase.
Monthly Surplus Savings: Calculate how much surplus funds you aim to save each month after settlement, factoring in your new mortgage repayments.
By working backwards from these figures, you can establish a comfortable purchase price that won’t stretch your finances too thin.
Considering the Long-Term Financial Implications of Your Property Purchase
Additionally, think long term. Consider how this purchase will impact future property investments.
For instance, buying an investment property now might limit your ability to upgrade your family home in the next five years.
Mastering Your Cash Flow and Spending Habits
A deep understanding of your current cash flow and spending habits is essential. Many people have only a vague idea of their monthly savings and living expenses.
Here’s how to get a clearer picture:
Step 1: Track All Expenses
– Move all your expenses from bank accounts into a spreadsheet.
– Download all payments from the past twelve months from your online banking to capture annual payments.
Step 2: Categorise Your Payments
– Categorise expenses into groups like loan repayments, utilities, childcare, clothing, personal maintenance, groceries, insurances, recreation and dining out.
– The more detailed your categories, the better you can manage your money.
Step 3: Define Your Bucket Accounts
– Create three accounts: Grow (fixed expenses like utilities and loans), Life (variable necessities like groceries and petrol) and Fun (discretionary spending).
– Allocate expenses accordingly. For example, groceries should be paid from the Life account, while restaurant dining should come from the Fun account.
Step 4: Identify Areas to Cut Back
– Outline specific areas to reduce spending, such as dining out, buying new clothes, or cutting unnecessary subscriptions like multiple streaming services. You will be surprised how much extra this can boost your purchase budget by if you are able to stick to the new outgoings.
Step 5: Set Monthly Money Goals
– Define expenditure limits for each bucket account per week and month.
– Your net income minus your bucket expenditure money goals will determine your surplus cash flow each month. This should determine your next property purchase price.
Step 6: Decide How to Transact
– Choose whether to use a credit or debit card for your Life and Fun accounts.
– Consider placing stickers on cards to ensure you use the correct account for payments.
Step 7: Establish Your Mortgage Strategy
– Finalise your mortgage strategy with your mortgage broker or property planner.
– Determine your offset strategy and repayment plan.
– Set up direct debits and salary credits to your Grow offset account
– Transfer your budgeted spending amounts to your Life and Fun accounts each week. Ideally make this automatic
Regular Review and Adjustment
How often should you review your system? There is no fixed answer. Ideally you should cross-check what you have spent and saved each month to assist with re-evaluating your monthly cash flow.
If your money management system is working well and you are meeting your spending and saving goals, an annual deep-dive should also be undertaken.
You should also review your system before any major life events such as taking extended leave, travel, job changes or having children.
By following the above steps, you can set a realistic and manageable budget for your property purchase and ideally create a Money Management System that is sustainable and create the habits so that you can invest regularly and continue to build your wealth.
Listen to the Property Trio podcast
Take a listen to these episodes for more in-depth insights on effective money management and when it comes to setting a price point for your next purchase.
#6 – What determines your Property Strategy
#30 – Money Management – 7 steps to success
#191 – Risk management and the things that can go wrong when mortgage strategy is ineffective
Reach Out to Us for Expert Advice
Careful property planning and disciplined financial management are the keys to long term success in using property as a vehicle to create your ideal lifestyle.
Schedule a meeting with us to discuss your mortgage strategy, plan your next purchase, refinance your existing loan, or develop a comprehensive Property Plan aligned with your objectives.
