Someone said to me “I wish I could buy a house right now but I don’t know how to get the down payment saved up and I don’t think I have the credit, plus renting just seems easier”. I used to think the same thing until one day circumstances forced me into re-evaluating new living situations and I learned I could buy… and then I did! However, I know the key factor that helped me to get the buying power I needed was good credit. That was no easy feat but well worth the efforts and discipline it requires.
As far as the renting versus buying debate, CNN Money surveyed cities around the country to see which option made the most financial sense, and in the Seattle area, they found that renting truly is like throwing money out the window and buying is, of course, a better investment. If you need to know where to start, it’s with discipline in your budgeting and spending. Seriously, bad credit is typically a reflection of irresponsible spending, or just poor financial decisions, and can almost always be avoided if you follow the credit rules, regardless of income. If my husband and I could do it on our limited income and with two layoffs in less than a year while we were repairing our credit, then I believe you can too.
- Carefully calculate and negotiate: This means that you must sit down with a pile of bills and receipts/bank statements from the last couple months and add up how much you spend. Put everything into categories like bills, food, fuel, etc. Then add into your expenses how much needs to be going out to your debts every month and that totals your expenses. Then subtract your income (your expenses + debt payments are in many times more than your income) and this is the number of dollars that you need to cut out of your spending.
- Save for an Emergency: After you cut out as much as possible from your unnecessary spending, even cutting down on unnecessary bills (like cable TV?) then you set a plan to set aside a small amount for savings every month. You only do this long enough to get $1,000 in the bank. This is for emergencies only, and seems to be the common amount financial advisors suggest. Also, once it is accomplished you will feel motivated and encouraged to keep going and then…
- Pay off your debts: Now that you have had practice paying all your bills on-time and setting aside a little every month, you can add that extra amount ($10-100 whatever it was you put into savings) on top of the minimum payments for your debts. This will help get your balances paid down and if your car breaks down, you can use your emergency savings, not a credit card, to fix it.
- Continue to save: Once your balances are significantly reduced and you’re in the habit of working a monthly budget, not using credit but paying off your credit, the money that was going to all your debts can be applied to your savings account. This time you won’t just be setting aside $20 like perhaps you were at first, it’s now going to be 10 times that amount because you’ll have that plus all the money that was being distributed to your minimum monthly payments that are now paid off.
- Watch your credit score and bank balance soar: Be sure to take advantage of your free credit check every year. It does take a few years to pull it all off, but you’ll be busy learning to manage your money and creating budget plans every month that before long you’ll have “rock star” credit. If the market stays close to where it is, then there will still be programs around that let you buy with smaller down payments and no closing costs so your savings may not have to be as much as 20% like it used to be.
For some more helpful tips check out these sites I dug up and good luck turning things around!
Top 7 Tips for Creating a Budget from SweatingTheBigStuff.com
How and Why to Start an Emergency Fund from GetRichSlowly.org
Debt Tsunami: The Ultimate Method to Pay Off Debt from ManVsDebt.com
How to Buy a House by Michael Bluejay