There are many methods used for setting a budget for an apartment. One such method outlined by Dave Ramsey describes a 5-step process that makes sure you do not exhaust your finances when purchasing an apartment.
Step 1: Aggregation of Monthly Income
Adding together your income and all others expecting to purchase a new apartment, find the total aggregate monthly income. We advise that you use your post-tax income in calculating aggregate monthly income.
Earner 1: $2,500 per month
Earner 2: $3,500 per month
Aggregate Monthly Income (Earner 1 + Earner 2): $6,000
Step 2: Calculate Monthly Household Expenses
Identify and sum the total amount of monthly costs you and those intending to finance the apartment. We recommend you divide annual expenses by 12 months and other expenses respectively. Take in my certain expenses unique to owning an apartment such as parking. Also, keep in mind certain expenses such as gym memberships may be complimentary in an apartment complex.
Step 3: Calculate the Cost of Owning an apartment
According to the Dave Ramsey model, your apartment housing payment, including property taxes and insurance, should be no more than 25% of your take-home income (Monthly Income – Monthly Expenses).
There are many different types of mortgages. To maximize savings, many buyers obtain 15-year, fixed rate mortgages in order to maximize savings. However, other mortgage plans, like a 30-year, fixed rate mortgage, allows for lower monthly payments, but a larger total amount paid to the lender. Since financing is incredibly circumstantial, researching methods of payment is useful in determining the best financing plan for you.
Step 4: Prepare for the Unexpected
Although buying an apartment demands attention to your current finances and financial plan, it is always a good idea to think about unpredictable circumstances, or even predictable ones. For example, having kids, buying a new car, and spending money on vacations are all expenses you may not consider now, but could eventually affect your mortgage-paying behavior.
Setting aside a considerable amount of money in case of emergencies or unexpected events can help to keep a roof over your head when you may need it most.
Step 5: Fine-Tune Your Plan
Given the amount you are willing to put away as reserves for the unexpected, calculate your new plan and find a monthly payment that makes sense given your expenses. Remember the golden rule – keep your mortgage under 25% of your monthly income and keep in mind your future self and unexpected curve-balls life may throw at you.
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