Your values play a big role in determining the way you spend money. If you don’t understand how your values and emotions influence your money decisions, you’ll never be able to gain control and make better money decisions. Take the money personality assessment to understand your money values.
Steps for Decision Making
Making financial decisions is a huge process. Decisions to buy big tickets items such as homes or cars should not be taken lightly. Here are a few questions to ask yourself or discuss with your family:
What is the money issue or decision you need to make?
What are the possible options or choices for making the decision?
What are the possible results (pros and cons) for each option or choice?
What is your decision? When will you look at the decision again?
When buying a house, it’s important to stick to a price range that meets your needs and will be affordable with your current income. Keeping this price range in mind, you can have confidence during the application process. Consider the following:
Overall Cost: If you have good credit, a steady income and a reasonable amount of preexisting debt, it may be safe to estimate that you can afford—and will qualify for a mortgage on—a home that costs 2.5 -3 times your gross annual income (the amount of your paycheck before deductions). You’ll also want to factor in steady income from other sources, such as retirement, disability, child support, social security or alimony. For all income, you must be able to show a history of at least two years, and a likelihood that the income source will continue.
Mortgage Payments: Before approving your mortgage loan, a lender will examine two different ratios:
Housing ratio = the maximum percentage of a borrower’s gross monthly income that can be used to make the monthly mortgage payment, including principal, interest, taxes and insurance (or PITI). This percentage will be pre-set based on the type of loan that you are applying for, and is typically between 28 and 33 percent.
Debt-to-income ratio = the maximum percentage of a borrower’s gross monthly income that can be used for the house payment, plus all other debts. These debts can be from credit cards, vehicles, student loans, etc. The debt-to-income ratio is predetermined based on loan type and ranges from 36 to 41 percent. It’s important to know how much outstanding debt you have before applying for a mortgage. If you find you have a lot of debt, you might need to pay some of it off before applying for a mortgage.
TIP! You don’t have to borrow all of the funds you’re qualified for. Borrow only what you can reasonably afford to repay each month. Your mortgage payment will include PITI.
Communicating About Money
Are you a good listener? The I-Message is a helpful tool for couples and families because it helps you express your feelings in a calm way. For example, if you were discussing paying bills with your spouse, you may say, “I feel nervous when I notice that the phone bill is not paid because I worry about bad information on our credit report.” Additionally, these steps may help you communicate better about money:
Find the real problem
Talk only about the problem itself
Face the problem
Brainstorm and talk about options
Agree on a plan
Support the plan
And keep talking!
Setting S.M.A.R.T. Goals
Do you have financial goals that you wish to reach, but it seem like you never do? Maybe you’re not being detailed enough or writing your financial goals down. It’s time to get SMART about your financial goals! SMART is an acronym that stands for Specific, Measurable, Attainable, Realistic and Timely.
MSU Extension Educator Wanda Roberts explains SMART goals in the video above. Use our SMART goals worksheet and work toward your SMART goals today!