This document discusses the importance of creating and maintaining a budget. It notes that banks may loan more than individuals can afford, so budgeting is necessary to determine spending limits. Maintaining a budget provides financial stability and helps achieve goals. The document then provides tips for creating an effective budget, including tracking spending, prioritizing expenses based on values, and ensuring all household members participate in the budgeting process. Finally, it discusses how lenders evaluate debt-to-income ratios to determine loan eligibility.
2. Introduction
Banks will often loan you
more than you can really
afford
Creating a budget will
help you determine how
much you can afford to
borrow
Maintaining a budget will
help you achieve any
financial goal
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3. Budgeting is Important
With a Budget No Budget
Reduced Stress
Better Quality of Life
Peace of Mind
Comfort in knowing your
finances are properly
managed
75% of Americans live
paycheck to paycheck
Money is the #1 cause of
divorce in America
Less than 10% of high
school graduates receive
a financial education in
school
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4. What is a budget?
More ideas
A financial plan
A list of expenses and income
A financial road map for the future
An action plan
A way to avoid going broke
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5. Why should you have a budget?
Budgets …
Stop you from overspending
Help you get out of debt & save money
Give you peace of mind
Help you determine what is important to you
Help you meet your financial goals
Help your family focus on common goals
Decrease family conflict
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6. Tips for Creating a Good Budget
The most important things to remember:
Spend less money than you make.
Maintain savings.
Other tips:
Detail, detail, detail
Make sure your budget tracks all your expenditures
Remember, a budget is an action plan
Include a contingency category to cover unexpected
expenses
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7. Track your Spending
One way to do this is to create an envelope
for each category in your budget
Put the receipts in the correct envelope at the
end of each day
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8. Spending is About Choices
If you don’t have a
budget, your latest
whim or emergency
will make the choice
for you
With a budget, you
prioritize spending so
that your money is
used on what you
value
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9. Lifestyle & Family Decisions
You will need to make some financial choices
Most of us don’t have enough money for
everything we want
Remember that what is right for your family
may be very different from what is right for
other families
A budget allows your spending to be in line
with your financial goals
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10. Other Considerations
Do you have elderly parents you need to
consider?
Do you have college-bound children?
Do you or family members have disabilities?
Do you have to pay for …
Tutoring?
Athletics?
Childcare?
After-school programs?
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11. Expenses that Lenders
Don’t Count
When lenders decide how much you can
afford to borrow, they don’t include:
Childcare or after-school care
Elderly parents
Tuition expenses
Disabilities
Tutoring
Athletics
Vacations
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12. Everyone Must Participate in
Household Budgeting
Who spends money in
your household?
Partner/Spouse
Teenager
Parent
Other household
members
Everyone who spends money
needs to be part of this process
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13. Have a Plan
Your budget is your plan for
the future
Now you know how to create
a budget and determine an
affordable monthly payment
Don’t shop for houses or
loans until you have a budget in place and
know what you can afford to pay
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14. How do you qualify for a loan?
The underwriters will look at:
Debt-to-Income Ratios
FICO score & credit history
Adequate collateral for the loan
(down payment)
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15. Debt to Income Ratios
There are two key ratios:
“Front-end” ratio
What portion of your income is
used for your mortgage payment?
“Back-end” ratio
What portion of your income is
used for all debt payments?
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16. Calculating “Front-End” Ratio
Front-end example:
Total monthly mortgage payment = $1,000
Total monthly gross income = $4,000
$1,000/$4,000= 0.25
Front-end ratio = 25%
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17. Calculating “Back-End” Ratio
17
Back-end Example:
Total monthly loan payments of all kinds
(including mortgage) = $1,500
Total monthly gross income = $4,000
$1,500/$4,000 = .375
Back-end ratio = 37.5%
Borrowing
18. Overall Debt Ratios
According to Example:
Front-end/Back-end
25%/37.5%
These ratios are good ones that
should qualify for a loan
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19. Three reasons for YOU to budget
List three ways a budget would help you.
Be as specific as possible.
1. How a budget can help me #1
2. How a budget can help me #2
3. How a budget can help me #3
4. What challenges prevent you from
maintaining a budget?
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Classroom activity
20. Best Way to Create a Budget
You won’t have a good budget until you really
know what you spend your money on.
Keep track of all spending for 30 days
Keep all your receipts for 30 days
Organize your receipts
Separate into different categories
Total your expenditures in each category at the end
of the month
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Classroom activity
21. Homebuyer Education
Teach future
homebuyers about the
home buying process
Classes offered every
other month (odd
months)
8 hour HUD-approved
course
Collaboration with Las
Positas College
22. Financial Literacy
Education
Group classes offered every
other month (even months)
Two sessions
Understanding credit
Budgeting
Expanding outreach to
emancipated foster youth and
other at-risk youth and young
adults
One-on-one counseling to
prepare for homeownership
23. 141 N. Livermore Ave.
Livermore, CA 94550
(925) 373-3130
www.tvhoc.org
“Working to Promote Housing in the Tri-Valley”