Moving is part of most people’s lives. Maybe you’re heading to grad school a couple of towns away. Or perhaps you have a job offer hundreds of miles away that you’re excited to accept.
Whatever the reason, the logistics of getting your stuff from the old place to the new one will need wrangling. Here, you’ll learn more about your options for moving, how much it may cost (from a couple of hundred dollars to thousands), and how to afford the expense.
DIY Moving Costs
Yes, you could move yourself. This could be a smart move for a small, local move, and it can help keep costs within your budget.
Exactly how much this might cost will be based on several factors:
• Cost of transportation (can you borrow a friend’s van or do you need to rent one)?
• Cost of the packing materials you use (recycled boxes and old newspapers vs. the pros’ higher-end and job-specific supplies
• How much stuff you’re moving (and if you need to figure out insurance for any pricey items)
• How far you’re going
• Whether you need to store some things temporarily.
As you might guess, packing up the contents of a dorm room and moving it half a mile away to the apartment you’re renting with friends will cost one amount. Supplies might cost, say, $65.
Loading up the contents of the sweet bungalow you’ve been living in for a couple of years and depositing your worldly possessions at a new place 1,000 miles away will be a much more involved and expensive undertaking. Packing materials alone could be a few or several hundred dollars, and renting a moving truck could be anywhere from $20 to $100 per day, depending on your local cost of living. Also, you will likely have to pay to stay somewhere overnight and also spend at least a couple of hundred dollars on gas, dollies, and insurance. 💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.
Full Service Moving Costs
If you decide a full-service move best meets your needs, you’re probably going to want to gather some estimates, so you can nail down the details and be ready when it’s time to go. Some pointers as you do so:
• Also, do check ratings and references carefully. There are plenty of instances of fraud and scams in this realm, and it’s wise to protect yourself.
• Booking your truck four to eight weeks in advance is typically a good rule of thumb — maybe even further out if you’re moving in the busy summer months.
• Professional moving companies can give you an estimate based largely on how many rooms of furniture you have. Most have websites, so you can often get a quick estimate online. A typical local (or fairly local, not long-haul) move for a three-bedroom home is about $2,100.
The average moving costs if you relocate cross-country can easily be twice that, or $4,300 for a distance of about 1,225 miles. Keep in mind, specifics will vary. Oversized or extremely heavy items might cost you extra — as could lots of stairs, or things that need to be taken apart and put back together.
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Extra Moving Costs to Think About
Then there are the extras that go along with getting out of one place and into another.
• Transportation: If you’re taking your car across the country, you’ll probably want to get a tune-up before you go. And then there’s gas, hotel stays, and eating on the road. Having a car transported instead of driving it yourself could cost anywhere from $700 to $2,000.
If you’re in a hurry and decide to fly, that’s another expense. And if you’re taking a pet, you may have to add a little bit more to your overall bill, depending on the mode of transportation you choose for your furry friend.
• Getting into your new home: Don’t forget about deposits you might have to make at your new location. That could be anything from first and last month’s rent and a pet deposit at a new apartment, to utility deposits at a new house.
• Home repairs and cleaning: Be ready to pay for some home repairs on both ends of your move. You may have to make some quick fixes to get out of your rental without losing the deposit or maybe even major repairs if you’re selling a home. When you get to your new location, you could find some unexpected problems. Or you may just want to hire someone to come in and clean so you can cross that off your ever-growing moving to-do list.
• Starting out fresh: You’ll probably need to buy some things at your new home (like curtains, curtain rods, hangers, bedding, etc.) that are easily overlooked. Then there’s that fridge to fill. All those little costs can add up.
• Cash for tips: You will likely need to withdraw money from an ATM to thank people for their help when you move. Tips for the movers. Tips for the handyman or housekeeper who helps you get things in shape. Tips at your hotel. Tips for waitstaff at the restaurants you’ll be eating at until you get your new place up and running—or at the very least, tips for the pizza delivery guy.
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Financing Your Move
If you have enough room on multiple credit cards, you could go that route, but should you? Interest rates can be considerable.
Or would a personal loan make more sense for you to cover all those costs, big and small?
Remember, even if you’ll be reimbursed by your employer or plan to take some moving deductions when you file your tax return, it’s very likely you’ll be paying at least some moving costs up front. And the longer those expenses sit on a credit card, the more interest racks up.
The Takeaway
Even if you have a small amount of stuff and aren’t moving very far, moving takes time, energy, organization, and money. With the average professional move costing a couple of thousand dollars, you may want to plan carefully for this expense. It’s likely not a good reason to dip into your emergency fund, so you may want to save in advance or consider a personal loan. If you qualify for a personal loan, your interest rate may be lower than a credit card, which can free up some cash and reduce your money stress.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Inside: Learn how many months it usually takes for your budget to start working effectively. Plus explore successful budgeting strategies.
Learning to budget can often be a challenging process, but its benefits are irreplaceable. Initially, it might feel overwhelming, as it involves accounting for every small expenditure, adhering to a fixed financial plan, and exercising self-control.
The frustration often emerges from unexpected expenses or changes in income, like getting a raise or having to make a new car loan payment.
However, this ongoing process ultimately fosters financial discipline, enables goal-setting, offers a clear financial picture, and encourages proactive handling of money matters, making the frustration worthwhile.
According to experts, it could take up to three months to adapt to a new budget.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
The Essential Role of Budgeting
Financial budgeting plays a critical role in managing resources efficiently, informing financial goals, prioritizing initiatives, optimizing financing opportunities, and offering flexibility in various situations.
These reasons make it a highly regarded tool in business and personal finance.
Defining Financial Budgeting
Financial budgeting is a systematic approach to managing your finances by mapping out your income and expenditures over a designated period.
This process provides a framework to guide your financial decisions, which aids in achieving your monetary objectives.
It’s essentially an overview of your financial position, goals, and cash flows.
How many months does it usually take for your budget to start working as a budget should?
As per our expert opinion, it typically takes around three months for a budget to start functioning effectively.
When starting a new budget, it’s normal not to see results immediately.
This time frame allows for adjusting to new spending habits, dealing with unexpected costs, and instilling a sense of discipline and control over your finances. Remember, budgeting requires patience and commitment.
Practicing Efficient Budgeting Techniques
Now, the key to being successful is having a few budgeting tricks up your sleeve.
I can guarantee you that budgeting is actually freeing. This is how you do it!
The Process of Getting One Month Ahead
Getting one month ahead in your financial budgeting means living off last month’s income.
In this practice, you pay November’s bills with October’s income, for example, essentially preventing you from spending money you haven’t earned yet.
To set up this process, create a monthly budget, determine your income and expenditures, establish your spending goals, and ensure your income exceeds your spending. More than likely, you will have to save money to get one month ahead of bills completely. YNAB can help you with this.
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Familiarizing with Zero-Based Budgeting
Zero-based budgeting is a method where every penny of your income is allocated to different categories, from necessary and discretionary spending to savings and debt payments.
You start each month with a fresh budget, balancing out your expenses and income to zero. This approach demands meticulous attention to detail and is best suited for individuals with a fixed income and predictable expenses.
Executing the Envelope Method
The envelope method involves assigning an envelope (physical or digital) to each spending category, such as grocery or utilities, and putting cash into each envelope for planned expenditure. Once the cash in an envelope finishes, it means you’ve exhausted your budget for that category.
This method, as per expert suggestion, instills discipline and curbs overspending, making it an ideal choice for cash-driven individuals. Connecting this method with digital tracking systems is possible with the cashless envelope system to cater to those using debit or credit cards.
12 Effective Strategies to Make Budgets Work
These strategies not only allow the allocation of resources efficiently, but also help set realistic financial goals, prioritize projects based on their potential cash flow, and explore optimal chances to reach financial independence.
Moreover, having a budgeting plan in place also ensures flexibility to adjust to unanticipated financial challenges, contributing to long-term wealth creation.
1. Determine Goals and Objectives
Start your budgeting process by clearly defining your financial goals and objectives. Are you aiming to buy a new home, fund your education, or build an emergency fund?
Whatever aspiration you have, short- or long-term, incorporating them into your budget amplifies your drive and focus on achieving them.
This goal-driven strategy aligns your budgeting with your needs and wishes, creating a financial roadmap toward your envisioned milestones. Consider these smart financial goals to get you started.
2. Better Planning, Fewer Surprises
Planning your budget effectively requires a thorough consideration of all personal budget categories.
Also, incorporate both short and long-term financial goals into your budget by prioritizing them, such as purchasing a home, taking a vacation, or furthering your education. Regularly reviewing and adjusting your budget accordingly, based on changes in income or unexpected expenses, can also ensure you stay on track.
Utilizing a variety of budgeting tools, like spreadsheets, apps, or budgeting software, can simplify this process and help keep you accountable.
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3. Reduced Financial Stress through Budgeting
A successfully implemented budget significantly reduces financial stress by providing an accurate picture of your financial health.
With a well-defined budget, worries about overspending, living from paycheck to paycheck, or falling into debt diminish. Monitoring and updating your budget will allow you to feel more confident and secure about your financial standing, paving the way to monetary stability.
4. Deciding When to Review Your Budget More Frequently
An effective budget is not a set-and-forget one; it requires regular check-ins and updates. A bill calendar is very helpful.
A recommended starting point is a monthly review. However, when first starting out, you will need to review your budget monthly until you find it working for you.
Other situations may need more frequent check-ins according to changes in income, financial goals, or unexpected expenses.
5. Spot Potential Room for Improvement
Budgeting provides a realistic view of your spending patterns, allowing you to identify areas of improvement.
Upon reviewing your budget, you might notice unnecessary expenditures or categories where expenses consistently exceed budgeted amounts. Such insights help you re-evaluate your spending habits and update your budget accordingly.
This phase coupled with a no spend challenge involves being brutally honest with yourself, taking into account your needs, wants, and financial realities.
6. Analyze Your Expenses and Income
Critical examination of your income and expenses is crucial for successful budgeting. Begin by calculating your total income, then list and categorize your monthly expenses into fixed and variable.
Pinpointing the difference between the totals can highlight whether you’re living within your means.
If your income surpasses your spending, consider investing the surplus.
Conversely, if your expenses outnumber your earnings, think about ways to increase income or decrease spending.
7. Set Limits for Your Budget Items
Setting reasonable spending limits for your budget categories ensures financial discipline. Check each category of spending—groceries, entertainment, or personal care, for instance—and contemplate areas you can cut back.
Ask around to see how much others are spending in certain categories in your neighborhood.
Remember, your budget should be flexible and realistic to your lifestyle, ensuring you don’t feel deprived. Embed small “wants” into your budget to keep the whole process enjoyable and sustainable.
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8. Create a System for Tracking Your Expenses
Creating an efficient system for tracking expenses is vital to maintaining control over your finances. This could be a simple spreadsheet, a manual ledger, or budgeting apps on your smartphone.
Tally every cent spent, dividing your expenses into their respective categories—rent, food, clothing, utilities, etc.
This way, you get a detailed insight into your financial habits and can identify potential areas for savings. The method isn’t as important as its thoroughness in ensuring no expense gets overlooked.
9. Track Your Spending with a Spreadsheet
Spreadsheets are an optimal resource for tracking spending. You can utilize an online template, like Tally, or make one yourself from scratch.
As you spend, record each transaction under the fitting category. This real-time monitoring can help spot overspending, analyze spending habits, and adjust budgets as needed.
So, if you’re a whiz with Excel or Google Sheets, tracking expenses this way might be your best bet.
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10. Budget for Emergencies
Budgeting for the unexpected is an essential aspect of sound financial planning. Financial emergencies don’t knock before they occur; therefore, creating a buffer in your budget helps you face them without plunging into debt.
As an expert, we suggest an emergency fund of one month of income or at least $1000. Then, start a rainy day fund with three to six months of expenses.
Having these funds built into your budget ensures you’re financially covered for challenging situations such as job loss, medical emergencies, or sudden home repairs.
11. Talk to Your Family About Your Budget
Talking to your family about your budget ensures everyone understands and works towards your financial goals. This discussion becomes especially crucial if you’re budgeting for a household.
I always provide my family with an overview of the budget, explaining how it works and how we can achieve our goals. Being open about your financial plan can foster greater accountability, and cooperation to achieve shared financial objectives more seamlessly.
12. Look for Ways to Make Money
Increasing your income can be an effective strategy to make your budget work better, rather than solely focusing on cutting expenses.
By finding ways to earn more money, for example by taking a part-time job, freelancing, selling unused items, or investing, you add flexibility to your budget and reduce the pressure on spending.
Moreover, the additional income could be directed towards savings, debt repayment, or funding your personal goals as identified in your budget plan.
Financial Budgeting FAQs
Starting a budget begins by assessing your total income, followed by identifying and categorizing your expenses.
Once done, subtract your expenses from your income to understand your financial standing.
Next, set your financial goals—short term and long term.
Then, allocate your earnings across different categories, maintaining a balance between savings, expenditures, and other aspirations.
Review and adjust this plan periodically to ensure it aligns with your financial landscape.
Budgeting should ideally start as soon as a person starts earning money. It’s never too early to begin planning where your money should go, and late starters can still benefit significantly.
Budgeting is a lifelong practice that guides you to live within your means, handle emergencies smoothly, and achieve your financial goals efficiently. It’s an indispensable tool for ensuring monetary success and stability.
Successful Budgeting as an Essential Life Skill
Successful budgeting is undeniably an essential life skill. It not only helps you live within your means but also provides a clear direction towards your financial goals.
Mastering this skill early on can lead to effective financial decision-making, lesser financial stress, and a more secure way of life.
There will be fluctuations in your budgeting, so you can start to forecast your budget. It also reinforces the value of discipline and planning, offering improved self-management and positive monetary habits.
Ultimately, progressing from just surviving to thriving financially is the goal, and disciplined budgeting is a tool to get you there.
This is just one step towards becoming financially independent.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
As interest rates increased rapidly throughout 2022, the number of refinance mortgage originations declined. The composition of these refinances also changed. Cash-out refinances – where a homeowner borrows an amount substantially greater than what they owe on their existing mortgage – became more common than non-cash-out (also known as “rate-and-term”) refinances. An equity “cashed out” from the home – which, in turn, increases the mortgage balance – is often used by the borrower to pay down other debts, fund home repairs, and pay for educational expenses, among other big-ticket purchases. A cash-out refinance takes the place of the original mortgage, but alternative products that tap home equity, such as home equity loans and home equity lines of credit, leave the original first-lien mortgage intact. Such needs for cash may be necessary and unavoidable, hence the persistence of some (albeit reduced) amount of cash-out refinances even in the face of rising interest rates.
Despite the recent decrease in volume, cash-out refinance originations are a segment of the mortgage market worth monitoring, especially since they were considered one of the mechanisms that exacerbated the 2008 financial crisis.1 In the case of both cash-out and non-cash-out refinances, the borrower’s home is used as collateral for the loan. Failing to make payments or meet other loan conditions can result in the borrower losing their home through foreclosure. The added risk for borrowers originating a cash-out refinance, especially in today’s interest-rate environment, is that their mortgage payments and mortgage loan terms are both likely to increase.
Who are the homeowners taking out cash-out refinances, and are their loans comparable to non-cash-out refinance loans? Are cash-out refinance borrowers more likely to become delinquent? In this post, we look at the loan and borrower characteristics of homeowners who originated a cash-out refinance compared to a non-cash-out refinance. We study refinances originated between 2013 and 2023. This allows us to study delinquencies—one manifestation of risk—throughout the post-crisis period, and how they vary among the population. This period includes periods of falling and rising interest rates, as we have observed recently. With this information, we can better gauge the risk to consumers and the housing market of the recent trends in refinances. We find that:
Cash-out refinances were a larger share of all refinances during periods of rising interest rates.
Borrowers of cash-out refinances had lower credit scores, lower incomes, and smaller loan amounts compared to non-cash-out refinance borrowers.
Loan-to-value and debt-to-income ratios were similar for cash-out and non-cash-out refinances.
Cash-out refinances had larger shares of older, female, Black, and Hispanic borrowers, compared to non-cash-out refinances.
Serious delinquencies were rare for borrowers with higher credit scores, regardless of whether the refinance was cash-out or not.
For borrowers with lower credit scores, both cash-out and non-cash-out refinance borrowers have similar two-year delinquency rates, except for a relative increase in delinquencies among cash-out refinance borrowers in 2017—a year marked by rising interest rates.
We conclude with a comparison of the market for cash-out refinances before the financial crisis to the post-crisis time period, as well as potential concerns with cash-out refinances to monitor going forward.
Loan and borrower characteristics of refinances
We used refinance data in the National Mortgage Database to compare the loan characteristics and two-year delinquency status of cash-out refinances and non-cash-out refinances. The National Mortgage Database is a representative 1-in-20 sample of all closed-end first-lien mortgages in the United States. We identify refinances as cash-out refinance mortgages when the total value of sampled refinance loans and their associated junior liens were more than five percent larger than the total value of the preceding loans and associated junior liens.
Figure 1 shows the quarterly volume of refinances, cash-out and non-cash-out, from the first quarter of 2013 through the first quarter of 2023 (the latest quarter for which we have data). We added the average interest rate on 30-year fixed-rate mortgages from Freddie Mac’s Primary Mortgage Market Survey on the right axis.
As Figure 1 indicates, non-cash-out refinances are typically more common when interest rates are decreasing and borrowers seek better rates compared to their original mortgages. Cash-out refinances make up a larger proportion of all refinances during periods when interest rates are increasing, such as 2017 to 2019 and 2022 to 2023. For example, from 2013 to 2019, cash-out refinances averaged about 240,000 originations per quarter, followed by an increase to almost 730,000 in the fourth quarter of 2021. Cash-out refinance volumes then fell throughout 2022, down to 44,000 originations in the first quarter of 2023.
Figure 1: Quarterly volume of cash-out versus non-cash-out refinances, 2013-2023
Figure 2 plots median credit scores by refinance type. The median credit scores of cash-out refinance borrowers were lower than non-cash-out refinance borrowers throughout the 2013-2023 period.
Figure 2: Median credit score at origination of cash-out versus non-cash-out refinances, 2013-2023
Figure 3 plots median combined loan-to-value ratios (100 percent less borrower equity in the house) by refinance type. The median combined loan-to-value ratios for cash-out refinances are generally similar to or lower than non-cash-out refinances originated in the same period, except during high interest-rate periods from 2017 to 2019 and 2022 to 2023, when median combined loan-to-value ratios for cash-out refinances are relatively higher than non-cash-out refinances.
Figure 3: Median combined loan-to-value ratio at origination of cash-out versus non-cash-out refinances, 2013-2023
Table 1 describes other loan and borrower characteristics of cash-out and non-cash-out refinances originated between 2013 and 2023. We see that the median loan amount and borrower incomes for cash-out refinances were smaller than for non-cash-out refinances; the primary borrowers for cash-out refinances were older; and cash-out refinances were more likely to only have female borrowers and borrowers aged 62 and older. Cash-out refinance borrowers were also more likely to be Hispanic or Black and less likely to be Asian, compared to non-cash-out refinance borrowers.
Table 1: Loan and borrower characteristics by cash-out versus non-cash-out refinances
Loan/borrower characteristics
Cash-out refinances
Non-cash-out refinances
Loan amount (median)
$198,000
$241,700
Cash-out amount (median)
$37,131
N/A
Interest rate (median)
3.62%
3.38%
Combined loan-to-value ratio (median)
70
72
Debt-to-income ratio (median)
36
34
Borrower income (median)
$84,000
$102,000
Credit score (median)
741
765
Age of primary borrower (median)
51
47
Share of refinances with only female borrowers (%)
22.8
18.8
Share of refinances with only age 62 and older borrowers (%)
21.1
15.0
Share of refinances with any Hispanic borrower (%)
10.5
9.6
Share of refinances with any Black borrower (%)
9.1
7.5
Share of refinances with any Asian borrower (%)
4.7
9.8
Share of refinances with any American Indian borrower (%)
0.7
0.5
Share of refinances with any Native Hawaiian/Pacific Islander borrower (%)
0.7
0.8
Share of refinances with any borrower listing two or more races (%)
1.9
1.7
Observations (N)
641,657
957,748
Note: Sample includes refinance mortgages that were opened between the first quarter of 2013 and the first quarter of 2023. A cash-out refinance is identified when the total value of the sampled refinance loan and their associated junior liens was more than five percent larger than its preceding loan and associated junior liens. “Only female (or only age 62 and older) borrowers” means that for loans with only one borrower, that borrower is female (or age 62 and older), and for loans with multiple co-borrowers, that all co-borrowers are female (or age 62 and older). Source: National Mortgage Database.
Delinquencies of refinanced mortgages: the importance of borrowers’ credit scores
In terms of delinquencies at the two-year mark after their refinance loan origination, Figure 4 shows two-year delinquency rates of refinances, by year originated, from 2013 to 2020. We use a broad measure of delinquency: 60 or more days past due, including other adverse conditions such as bankruptcy and foreclosure. We also split the sample by credit score: refinances with a borrower credit score at or below the median credit score of 756 at origination (left panel) compared to refinances with a borrower credit score above the median (right panel).
Figure 4: Rates of serious delinquency (60+ days or worse) two years after origination for cash-out versus non-cash-out refinance borrowers
We first see that serious delinquencies two years after origination are rare among both types of refinances involving borrowers with higher credit scores: no higher than 0.1 percent for originations between 2013 and 2020. By contrast, serious delinquencies are more likely among refinances involving borrowers with lower credit scores but are still uncommon in absolute terms: ranging between 0.7 and 0.8 percent for all refinances originated between 2013 and 2016, followed by an increase in 2017 to 1 percent for cash-out refinances and 0.9 percent for non-cash out refinances.2 Two-year delinquency rates then fall among all refinances with lower credit scores originated after 2018, likely due to mortgage forbearance programs in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Worth noting is the increase in two-year delinquency rates for cash-out refinances originated in 2017. We know that these borrowers refinanced at a time when interest rates were rising (see Figure 1), and that credit scores were lower overall for cash-out borrowers in 2017 compared to previous years (see Figure 2). These findings from 2017 suggest that we may see increased delinquencies among cash-out refinance mortgages originated in 2022, another period with an increase in interest rates and a decrease in cash-out borrowers’ credit scores.
Discussion and potential concerns with cash-out refinances
In summary, during periods of rising interest rates, refinance volume declines and their composition shifts toward cash-out refinances, since homeowners may need cash from their home even when interest rates increase. From the first quarter of 2013 to the first quarter of 2023, cash-out refinances tended to have smaller loan amounts, lower borrower incomes, and lower borrower credit scores compared to non-cash-out refinances, but other loan characteristics, such as loan-to-value and debt-to-income ratios, were similar. We then showed that two-year delinquency rates were similar between both types of refinances, with only a noticeable increase for lower credit-score borrowers taking out cash-out refinances in 2017.
Prior research has focused on cash-out refinances as one of the mechanisms that exacerbated the 2008 financial crisis. However, mortgage originations from 2013 to 2023 are fundamentally different from mortgage underwriting before the financial crisis. Many risky features are now absent from the market – for example, interest-only mortgages, negative amortization mortgages, and mortgages with loan-to-value ratios over 100 percent – and lenders are now required to document borrowers’ ability to repay their loans. As we have shown above, most cash-out refinances now have loan-to-value ratios below 80 percent, requiring a 20 percent or more drop in house prices to be underwater. Most cash-out amounts are also below $50,000 during this period, and the volume of cash-out refinances has been declining each quarter since the start of 2022. Although cash-out refinances gained popularity from 2019 to 2021 due to record-low interest rates , the amount of equity extracted was lower than during the pre-2008 boom, despite home prices having increased substantially. These characteristics of cash-out refinances over the past decade suggest that cash-out refinances are now a smaller source of systemic risk than before the 2008 financial crisis.
Beyond the potential systemic risk of equity extraction contributing to a new financial crisis, cash-out refinances present at least two other concerns for borrowers. First, research from the JPMorgan Chase Institute showed that a typical cash-out refinance in their data had a longer loan term and larger monthly payment compared to the paid-off mortgage. This suggests that cash-out borrowers are more likely to still be paying off their mortgage and less likely to own their home free and clear in retirement, potentially exposing these borrowers to more future financial shocks while the mortgage is outstanding. Second, a cash-out refinance with a higher interest rate than the prior paid-off mortgage could effectively lead to much higher borrowing costs, relative to the original mortgage or to other sources of credit, like home equity loans or home equity lines of credit, that do not raise the interest rate on the existing first-lien loan balance.3 Prior research has shown that higher interest rates can cause delinquency and default.4 This relationship highlights the importance for borrowers of finding and obtaining lower interest-rate loans, and aligns with efforts to help borrowers refinance when interest rates fall as a way to avoid delinquencies.
As the interest-rate environment continues to evolve, the CFPB’s Office of Research will continue analyzing mortgage refinances and other home equity loan products to understand consumers’ borrowing decisions and loan performance.
Many people want to buy a home but think it isn’t possible because they don’t have money to put toward a down payment. Traditionally, lenders require a 20% down payment toward your mortgage.
But a 20% down payment adds up to a lot of money. For example, if you plan to purchase a $150,000 home, you’d need to come up with a $30,000 down payment. Many people cannot afford this, but fortunately, the 20% rule is a lot less common than you might think.
Is a buying a house with no money down possible?
The National Association of Realtors (NAR) reports that 39% of non-owners believe they need a 20% down payment or more and 22% believe they need a 10% to 14% down payment.
But neither of these are true. Many mortgage lenders will let you buy a home by putting down as little as 3%. And some lenders will let you skip the down payment altogether.
NAR also found that 61% of first-time homebuyers made a down payment between zero and 6%. So, it’s safe to say that a 20% down payment isn’t the standard anymore. But unfortunately, many consumers choose not to pursue homeownership because they believe this down payment myth.
Weighing the Pros and Cons of No Down Payment Mortgages
Is there any reason to aim for 20% down when most home buyers buy with a down payment less than 20%? If you can afford it, yes, the 20% rule is still a wise choice.
The more money you put toward your mortgage, the less debt you’ll have to repay and the less your monthly payment will be. Plus, there are several drawbacks to putting down less than 20%:
Less favorable rates: If you pay less than 20%, lenders will probably see you as a risky investment. And they will take this into consideration when calculating your mortgage rates. In general, you can expect to pay a higher interest rate if you put down a smaller down payment.
Higher closing costs: Closing costs are based on the size of your mortgage. So, the smaller your down payment is, the higher your closing costs will be. However, you may be able to get around this if you live in a state where it’s typical for the seller to pay the closing costs.
Private mortgage insurance (PMI): Private mortgage insurance is a type of mortgage insurance designed for borrowers who make a down payment lower than 20%. It protects your mortgage lender in case you end up defaulting on your loan.
PMI can cost as much as 1% of your total monthly mortgage payment. So for a $150,000 mortgage, you’ll end up paying $150 per month.
However, this may not be that bad, especially if you have a less expensive mortgage. And once you reach 20% home equity, you can cancel your PMI and get rid of these extra payments.
Check Out Our Top Picks for 2023:
Best Mortgage Lenders
How to Buy a House With No Money Down
Fortunately, there are several lending programs that do not require a down payment. Here are five payment assistance programs that will help you buy a home with little to no down payment.
1. VA Loans
VA loans are a valuable option for eligible military veterans, active-duty service members, and certain surviving spouses. These government-backed loans offer several benefits, making homeownership more accessible and affordable through the use of a VA loan.
100% Financing and No Down Payment
One of the most significant advantages of VA loans is the 100% financing, meaning you won’t need to make a down payment when utilizing a VA loan. This can save borrowers a substantial amount of money upfront, making it easier to enter the housing market.
No Private Mortgage Insurance (PMI) Requirement
Unlike conventional loans that require PMI for down payments less than 20%, VA loans do not require PMI. This can save borrowers hundreds or even thousands of dollars per year in mortgage insurance premiums when using a VA loan.
VA Funding Fee
While VA loans offer numerous benefits, there is a one-time funding fee charged to help offset the costs of the program. The funding fee is 2.15% of the total loan amount for first-time users of VA loans and 3.3% for subsequent uses.
This fee can be financed into the VA loan, reducing the out-of-pocket expenses for the borrower. In some cases, borrowers may be exempt from the funding fee, such as those with service-connected disabilities.
Certificate of Eligibility
To apply for a VA loan, borrowers need to obtain a Certificate of Eligibility (COE) from the Department of Veterans Affairs. The COE verifies the borrower’s eligibility for the VA loan program based on their military service or, in some cases, the service of their spouse. The COE can be requested online through the Department of Veterans Affairs website, by mail, or through an approved lender.
Additional Benefits
VA loans also offer competitive interest rates, more lenient credit requirements, and flexible underwriting guidelines compared to conventional loans. Additionally, there are no prepayment penalties, allowing borrowers to pay off their VA loans early without incurring additional fees.
2. Navy Federal Credit Union
Navy Federal Credit Union’s loan program is similar to what the VA offers. It offers a zero down mortgage and no mortgage insurance. And Navy Federal’s funding fee is only 1.75%.
Navy Federal offers a 30-year loan and a 30-year jumbo loan. 30-year loans have a loan limit of $424,100 while jumbo loans are available up to $1 million. However, you will have to be a Navy Federal member to qualify.
3. USDA Loans
If you’re looking to move to a rural area, you might qualify for a USDA loan. The United States Department of Agriculture Housing Program was designed to aid rural development and is aimed at low-income families. USDA loans offer 100% financing with low interest rates.
Here are the eligibility requirements you must meet to qualify for a USDA loan:
When buying a home it must be within the USDA’s boundaries: Although this loan targets rural areas, some suburban areas may still qualify. You can look at this map on the U.S. Department of Agriculture’s website to see if your location falls within the USDA’s geographical boundaries.
Your household income can’t exceed a certain threshold: This applies to everyone living in the household, even if they won’t be listed on the mortgage. For instance, if you have a parent living with you who collects Social Security, this counts toward the gross income of all members of a household. The maximum household income varies by state and county so you can find out if you qualify here.
See also: Best Home Loans for Low-Income Borrowers
4. Lease-Option
A lease-option (also known as rent-to-own) allows you to rent a home with the option to buy it at a predetermined price after a certain period. A portion of your monthly rent may be applied toward the purchase price or down payment. This can be a solid option if you need more time to save for a down payment or improve your credit.
5. Seller Financing
In some cases, the seller may be willing to finance the property for you, allowing you to purchase the home without a traditional mortgage. This arrangement typically requires a contract outlining the terms of the loan, including the interest rate, payment schedule, and any potential penalties.
Seller financing can be a viable option if you have a strong relationship with the seller or if the seller is having difficulty selling the property.
6. Crowdfunding
Crowdfunding is a method where you raise money from multiple individuals, typically through online platforms. You can set up a campaign to raise funds for your down payment or even the entire purchase price. This method may work best if you have a strong network of friends, family, and supporters who are willing to contribute to your home-buying goal.
7. Shared Equity Agreements
Shared equity agreements involve partnering with an investor who provides a portion or all of the down payment in exchange for a percentage of ownership in the property. When the property is sold or refinanced, the investor receives a return on their investment based on the agreed-upon share of equity. This can be an attractive option if you can’t afford a down payment but are willing to share future appreciation in the home’s value.
8. Housing Assistance Programs
There are numerous local, state, and federal housing assistance programs that offer grants, low-interest loans, or other forms of financial support to help eligible individuals purchase a home with no money down. These programs often have specific requirements, such as income limits, property location, or first-time homebuyer status. Be sure to research and apply for any programs for which you might be eligible.
Low Down Payment Loans
If you’re unable to buy a house with no money down but can afford a small down payment, consider these low down payment options that can help make homeownership more accessible.
1. 97% LTV mortgages
97% LTV mortgages is a loan program that is offered to first-time homebuyers by Fannie Mae and Freddie Mac. They require a 3% minimum down payment and private mortgage insurance.
Here are the guidelines for the program:
You’ll need a credit score of at least 680
One of the borrowers must be a first-time homeowner
Manufactured housing isn’t permitted
Gifts, grants, and other funds may be used toward the down payment
2. Federal Housing Administration (FHA) Loans
The Federal Housing Administration (FHA) was established in 1934 to reduce the requirements to qualify for a mortgage. This government-backed mortgage program offers flexible requirements, making it an attractive option for first-time homebuyers.
Here are the guidelines you’ll need to meet to qualify for an FHA loan:
Credit Score Requirements
The minimum credit score required to qualify for an FHA loan is 500. The specific down payment requirements depend on your credit score:
If your credit score is between 500 and 579, you’ll need to make a 10% down payment.
If your credit score is 580 or higher, you’ll have to make a 3.5% down payment.
Seller Contributions
FHA loans allow sellers to contribute up to 6% of the closing costs. This can help reduce the upfront costs for the buyer and make it easier to afford the purchase.
Mortgage Insurance Requirements
Mortgage insurance is required for an FHA loan, protecting the lender in case the borrower defaults on the loan. However, once you build 20% equity in the home, you can refinance to a conventional loan to eliminate the mortgage insurance requirement.
Debt-to-Income Ratios
FHA loans accept high debt-to-income (DTI) ratios, allowing borrowers with significant existing debt to still qualify for a mortgage. The FHA typically requires a maximum DTI of 43%, but exceptions can be made for borrowers with compensating factors, such as substantial savings or a history of making large payments on time.
3. HomeReady Mortgage
The HomeReady mortgage is a Fannie Mae program designed for low-to-moderate-income borrowers. It requires a down payment as low as 3% and offers flexible underwriting guidelines, making it an attractive option for first-time homebuyers or those with limited credit history.
4. Home Possible Mortgage
Similar to the HomeReady mortgage, the Home Possible mortgage is a Freddie Mac program that allows for a down payment as low as 3%. It is designed to help low-to-moderate-income borrowers achieve homeownership and offers flexible underwriting guidelines.
5. State and Local Homebuyer Assistance Programs
Many state and local governments offer homebuyer and down payment assistance programs that provide grants or low-interest loans to help cover down payment and closing costs. These programs typically have income and property location requirements, so be sure to research and apply for any programs for which you might be eligible in your area.
Each of these low down payment mortgage options has its own set of eligibility requirements and potential benefits. Be sure to research and compare these options to determine which one best aligns with your financial situation and home-buying goals.
Preparing for Homeownership
Before jumping into the home buying process, it’s essential to prepare yourself financially and mentally. This section covers tips for improving credit scores, creating a budget, and managing debt to make the home buying process smoother.
Credit Score Improvement Tips
Improving your credit score involves checking your credit report for errors and disputing any inaccuracies. Ensure that you pay your bills on time and reduce outstanding debt as much as possible. Keep credit card balances low, avoid opening new credit accounts, and consider requesting a credit limit increase without increasing your spending.
Creating a Budget
Creating a budget requires tracking your income and expenses to understand your spending habits better. Categorize your expenses and set realistic limits for each category. Allocate funds for saving and investing, including a down payment and emergency fund, and regularly review and adjust your budget as needed.
Managing Debt
Managing your debt effectively involves prioritizing high-interest debt and paying more than the minimum payment. Consider debt consolidation or refinancing options to secure a lower interest rate. Avoid taking on new debt before applying for a mortgage and create a debt repayment plan that you can stick to.
Understanding the Total Cost of Homeownership
Understanding the total cost of homeownership means factoring in property taxes, insurance, maintenance, and utility costs. Estimate homeowners association (HOA) fees if applicable and consider the costs of furnishing and updating the home. Prepare for potential increases in expenses over time, such as property tax hikes.
How to Choose the Right Mortgage Option
With various mortgage options available, it’s crucial to select the one that suits your financial needs and long-term goals. This section discusses factors to consider when choosing a mortgage, such as loan term, interest rates, and mortgage insurance.
Fixed-Rate vs. Adjustable-Rate Mortgages
Fixed-rate mortgages have a consistent interest rate for the loan’s duration, providing stability and predictable monthly payments. In contrast, adjustable-rate mortgages (ARMs) have an initial fixed-rate period followed by periodic rate adjustments, which may result in lower initial payments but potential rate increases over time.
Mortgage Term: 15-Year vs. 30-Year
The mortgage term plays a crucial role in determining the overall cost of your mortgage. 15-year mortgages typically have lower interest rates and allow for faster equity buildup, but require higher monthly payments. 30-year mortgages offer lower monthly payments, but result in more interest paid over the loan’s lifetime.
Mortgage Insurance Considerations
PMI may be required for conventional loans with less than a 20% down payment. Loans backed by the federal government, such as FHA, VA, or USDA loans, may have different insurance requirements or fees.
Assessing Your Long-Term Goals
When choosing a mortgage option, consider how long you plan to live in the home and whether your financial situation or housing needs may change. Evaluate the potential for home value appreciation and the impact on your future financial goals.
Planning Your Next Steps
Assess Your Financial Situation
The amount of money you choose to put toward a down payment is a personal choice. If you feel ready for homeownership but know that a 20% down payment isn’t feasible for you, there are many options available to help you.
The best place to start is by looking at your monthly budget and seeing what you can realistically afford. Use a mortgage calculator to reverse engineer your goal and find your ideal home purchase. Consider factors like property taxes, insurance, and maintenance costs, as well as any debts you currently have.
Get Pre-Approved
Get pre-approved for a mortgage before you start house hunting. This will give you an idea of how much you can afford, and it will show sellers and real estate agents that you’re a serious buyer.
To get pre-approved, you’ll need to provide your lender with documentation such as pay stubs, bank statements, and tax returns. They’ll then assess your credit score and financial history to determine how much they’re willing to lend you.
Shop Around for the Best Mortgage
Shop around for the best mortgage rates and terms. Don’t just settle for the first lender you come across. Compare different lenders and loan programs to find the best fit for your financial situation. Look for competitive interest rates, low fees, and flexible repayment terms.
Work with a Knowledgeable Real Estate Agent
A good real estate agent can help you find a home that fits your needs and budget. They’ll also guide you through the home buying process, making it less stressful and ensuring you don’t make any costly mistakes.
Attend First-Time Homebuyer Classes
Consider attending first-time homebuyer classes or workshops. Many local organizations and government agencies offer educational resources for first-time homebuyers. These classes can help you understand the ins and outs of the home buying process and give you the knowledge you need to make informed decisions.
Save for Unexpected Expenses
Even if you’re able to buy a home with no money down, it’s a good idea to have some savings set aside for unexpected expenses. These might include moving costs, home repairs, or furnishing your new home.
Build an Emergency Fund
In addition to saving for unexpected expenses, it’s also important to have an emergency fund in place. This should be enough to cover three to six months’ worth of living expenses in case you lose your job or face another financial emergency.
Be Patient and Stay Disciplined
Home buying is a complex process, and it can take time to find the right home and secure financing. Stay focused on your goals, be disciplined with your spending, and remember that homeownership is a long-term investment.
Conclusion
Buying a home with no money down is possible, but it may not be the best choice for everyone. Consider your financial situation, your long-term goals, and the various mortgage options available to you before deciding on a zero down payment mortgage. With careful planning and preparation, you can make your dream of homeownership a reality, even if you don’t have a large down payment saved up.
Mortgage rates moved higher for all types of loans compared to a week ago, according to data compiled by Bankrate. Rates for 30-year fixed, 15-year fixed, 5/1 ARMs and jumbo loans increased.
After surpassing 8 percent in late October, mortgage rates have somewhat retreated. One big driver: Inflation has cooled, which means the Federal Reserve might end its rate increases. The Fed last hiked its key interest rate in July, which increased borrowing costs on a variety of financial products, including mortgages.
The central bank decided to hold firm at its November meeting, indicating it expects rates to stay on the higher side for the foreseeable future.
“Expectations of slower economic growth, moderating inflation and no more Fed interest rate hikes have been a downward influence on mortgage rates,” says Greg McBride, CFA, chief financial analyst for Bankrate.
The slight decline in mortgage rates comes alongside appreciating home prices. Home values have now climbed for eight months in a row, according to the S&P CoreLogic Case-Shiller index for September 2023.
Rates last updated December 5, 2023.
These rates are Bankrate’s overnight average rates and are based on the assumptions indicated here. Actual rates displayed across the site may vary. This story has been reviewed by Suzanne De Vita. All rate data accurate as of Tuesday, December 5th, 2023 at 7:30 a.m.
30-year mortgage rate moves higher, +7.53%
The average rate for a 30-year fixed mortgage for today is 7.53 percent, up 753 basis points over the last week. A month ago, the average rate on a 30-year fixed mortgage was higher, at 7.83 percent.
At the current average rate, you’ll pay a combined $701.27 per month in principal and interest for every $100,000 you borrow. That’s an increase of $701.27 over what you would have paid last week.
The popular 30-year mortgage has a number of advantages:
Lower monthly payment: Compared to a shorter term, such as 15 years, the 30-year mortgage offers lower, more affordable payments spread over time.
Stability: With a 30-year fixed mortgage, you lock in a set principal and interest payment, making it easier to plan your housing expenses for the long term. Remember: Your monthly housing payment can still change if your homeowners insurance premiums and property taxes go up or, less likely, down.
Buying power: With lower payments, you might qualify for a larger loan amountor a more expensive home.
Flexibility: Lower monthly payments can free up some of your monthly budget for other goals, like building an emergency fund, contributing to retirement or college tuition, or saving for home repairs and maintenance.
Learn more: What is a fixed-rate mortgage and how does it work?
15-year mortgage rate moves up, +6.80%
The average 15-year fixed-mortgage rate is 6.80 percent, up 680 basis points over the last week.
Monthly payments on a 15-year fixed mortgage at that rate will cost around $888 per $100,000 borrowed. Yes, that payment is much bigger than it would be on a 30-year mortgage, but it comes with some big advantages: You’ll come out several thousand dollars ahead over the life of the loan in total interest paid and build equity much more rapidly.
5/1 adjustable rate mortgage rises, +6.78%
The average rate on a 5/1 ARM is 6.78 percent, ticking up 678 basis points over the last 7 days.
Adjustable-rate mortgages, or ARMs, are mortgage terms that come with a floating interest rate. In other words, the interest rate will change at regular intervals, unlike fixed-rate mortgages. These loan types are best for those who expect to sell or refinance before the first or second adjustment. Rates could be much higher when the loan first adjusts, and thereafter.
While borrowers shunned ARMs during the pandemic days of super-low rates, this type of loan has made a comeback as mortgage rates have risen.
Monthly payments on a 5/1 ARM at 6.78 percent would cost about $651 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loan’s terms.
The average rate for a 30-year jumbo mortgage is 7.59 percent, up 759 basis points since the same time last week. Last month on the 5th, jumbo mortgages’ average rate was higher, at 7.82 percent.
At the current average rate, you’ll pay $705.39 per month in principal and interest for every $100,000 you borrow. That’s $705.39 higher compared with last week.
Mortgage refinance rates
Current 30 year mortgage refinance rate climbs, +7.63%
The average 30-year fixed-refinance rate is 7.63 percent, up 763 basis points compared with a week ago. A month ago, the average rate on a 30-year fixed refinance was higher, at 7.96 percent.
At the current average rate, you’ll pay $708.14 per month in principal and interest for every $100,000 you borrow. That’s an extra $708.14 compared with last week.
Where are mortgage rates heading?
Mortgage rates have done a 180 as of late, falling back under 8 percent. With inflation cooling and 10-year Treasury yields declining, the 30-year fixed mortgage could head into the 6 percent range by next year, said Lawrence Yun, chief economist of the National Association of Realtors, at the group’s conference in November.
“I believe we’ve already reached the peak in terms of interest rates,” said Yun.
The rates on 30-year mortgages mostly follow the 10-year Treasury, which shifts continuously as economic conditions dictate, while the cost of variable-rate home loans mirror the Fed’s moves. These broader factors influence overall rate movement. As a borrower, you could be quoted a higher or lower rate compared to the trend.
What today’s rates mean for your mortgage
While mortgage rates fluctuate considerably,, there is some consensus that we won’t see rates back at 3 percent for some time. If you’re shopping for a mortgage now, it might be wise to lock your rate when you find an affordable loan. If your house-hunt is taking longer than anticipated, revisit your budget so you’ll know exactly how much house you can afford at prevailing market rates.
You could save serious money on interest by getting at least three loan offers, according to Freddie Mac research. You don’t have to stick with your bank or credit union, either. There are many types of mortgage lenders, including online-only and local, smaller shops.
“All too often, some [homebuyers] take the path of least resistance when seeking a mortgage, in part because the process of buying a home can be stressful, complicated and time-consuming,” says Mark Hamrick, senior economic analyst for Bankrate. “But when we’re talking about the potential of saving a lot of money, seeking the best deal on a mortgage has an excellent return on investment. Why leave that money on the table when all it takes is a bit more effort to shop around for the best rate, or lowest cost, on a mortgage?”
More on current mortgage rates
Methodology
Bankrate displays two sets of rate averages that are produced from two surveys we conduct: one daily (“overnight averages”) and the other weekly (“Bankrate Monitor averages”).
The rates on this page represent our overnight averages. For these averages, APRs and rates are based on no existing relationship or automatic payments.
Learn more about Bankrate’s rate averages, editorial guidelines and how we make money.
Inside: Are you finding yourself struggling to cover unexpected expenses? This guide will teach you how to create a financial plan and budget that will help you avoid costly surprises.
Life is full of surprises, and not all of them are pleasant. Sometimes, these surprises come in the form of unexpected expenses, hitting when one least expects them.
This can leave you devasted financially. Over the years, we have been slapped with unplanned costs and left scrambling.
However, you can successfully navigate through the rollercoaster ride of money management.
The key is knowing “What are unexpected expenses?’ Along with the knowledge equips you to avoid or mitigate them.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
What are Unexpected Expenses?
In the realm of personal finance, unexpected expenses are costs you haven’t foreseen or budgeted for. They strike out of nowhere, leaving you scrambling to balance your finances.
These expenses differ from other cost categories such as fixed expenses (weekly, monthly, and recurring costs like rent) and variable expenses (those that do not happen regularly but vary in cost like groceries).
The crux lies in not being able to anticipate these unplanned expenses, making them disruptive to financial plans.
What is an example of unplanned spending?
Unplanned spending often occurs when there’s an unforeseen event that demands immediate financial attention.
Picture this scenario: You take your car for a routine inspection; however, the car fails the inspection due to a defective part that needs immediate repair. Initially, you hadn’t allocated funds for this, but now you have to deal with this unforeseen cost – a classic case of unplanned spending.
Common Examples of Unexpected Expenses
Unforeseen financial events can leave many unprepared and struggling, adding unnecessary stress. This section will delve into examples of typical unexpected expenses that individuals often encounter, providing key insights into how to efficiently incorporate these into your financial plan.
By understanding and preparing for these unexpected expenses, one can effectively mitigate the surprise factor they pose, promoting a healthier and more secure financial state.
We have overcome many times and you can too!
1. Medical Emergencies and Healthcare Costs
Medical emergencies are prominent examples of unexpected expenses. Even with health insurance, costs can amass, thanks to high deductibles, co-payments, and therapies not covered by insurance.
One factor is paying for the medical costs, but the other weighing factor is loss of income when dealing with medical emergencies or critical diseases like cancer.
Overcome this by:
Contributing the max each year to your Health Savings Account (HSA). This way you have a bucket of money just for medical expenses.
Look into short-term disability insurance that can cover part of your lost wages while you can’t work.
2. Automatic Home or Vehicle Repair Needs
Home and vehicle repairs often sneak up as unexpected expenses. Time, accidents, natural disasters — all can cause wear and tear that demands immediate repair. The consequences of ignoring these repairs can be hefty.
Similarly, significant home repairs such as fixing a faulty HVAC system or leaky roof can set you back by thousands of dollars.
Overcome this by:
Be proactive with routine maintenance. Take care of your house and car before problems escalate.
Save the same amount each month for home and vehicle repairs separately.
Personally, we save $100 monthly for car repairs as one is a beater car. This amount will be increased to $350 to start saving for a new car. Conversely for home repairs, we keep a minimum of $1000. This amount will fluctuate depending on when we last did a major repair. Since we just replaced our HVAC, our funds are lower.
3. Natural disasters
Natural disasters, such as hurricanes, earthquakes, wildfires, and floods, lead to unexpected spending. The impact of these events can cause significant damage to homes, cars, and other property, leading to repair and replacement costs.
Furthermore, these situations might also necessitate expenses for emergency supplies, temporary shelter, and other necessities. For instance, Hurricane Katrina inflicted a staggering $196.3 billion in damage, illustrating the overwhelming cost of such unpredictable events.1
Overcome this by:
Make sure you have proper insurance whether it is renter insurance or flood/wildlife insurance. Also, make sure you have the proper amount of insurance. As highlighted by the Marshall Fire where most people were underinsured. 2
Storing cash on hand at home in case of an emergency. A cushion of money will always be helpful.
4. Increase in Bills
Monthly bills are a constant in our lives, but what’s not constant is their amount. Landlords may raise the rent when leases are up for renewal, utility companies could increase their rates, and insurance premiums may also inflate periodically.
All these scenarios lead to higher monthly expenses. For example, the U.S. energy costs per household rose by 13% in 2022 reaching the highest percentage increase since it was measured. 3
Being unprepared for these increases can cause significant financial strain.
Overcome this by:
Get one month ahead on your bills. Then, you will start building a cushion. Also, known as aging your money – thanks to YNAB.
Be proactive and realize that with inflation high. All of your bills will likely increase in cost.
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5. Overlooked Taxes
Overlooked taxes pose another source of unexpected expenditure.
A higher than expected tax bill can indeed surprise and unbalance your budget. This happened to my friend when she started her own fitness coaching business.
Uncertainties in estimating the exact tax amount, mathematical errors in filing, or an overlooked quarterly tax payment often culminate in an escalated tax bill. An audit from the IRS, though it may find no additional taxes owed, can lead to expensive fees from a CPA or tax attorney.
Overcome this:
Use a tax calculator to know what your estimated tax payment due.
Understand the common reasons you may owe higher taxes this year.
6. Pet Emergencies
Pet emergencies can bite a large chunk out of your budget without warning. For instance, if your cat suddenly starts having seizures or your dog gets hit by a car, the medical costs associated can spiral rapidly.
Emergency vet care can range between a few hundred dollars to several thousand dollars. For instance, a poisoning can range from $200-$3000. 4
Overcome this by:
Prevention methods like pet insurance can help you manage these costs effectively.
Decide in advance the maximum you are willing to spend on emergency vet care.
7. Delayed payments
Delayed payments may not be an external expense, but the repercussions can be just as financially challenging. This affects your income stream, potentially leading to difficulty in managing your financial obligations.
For example, if an employer goes bankrupt, salaries might be delayed or even indefinitely withheld. According to research, late payments can cost businesses $3 trillion globally, affecting both personal financial planning and business operations.5
This is a highly stressful situation.
Prepare yourself financially by:
Aging your money. By getting one month ahead of your bills, you can scrap through a delayed payment. YNAB coined this term.
Start saving for a large rainy day fund.
Raisin
Simply select one of the high-yield savings products offered by their network of federally insured banks and credit unions to begin your savings journey.
You can open a free Raisin account in just a few minutes!
Compare Rates
8. Gifts and Special Occasions
Commemorating special occasions can lead to unexpected expenses. Life events such as birthdays, weddings, baby showers, and retirements, traditionally require gift-giving.
While typical gift giving on Christmas or birthdays should be part of your planned variable expenses. Saying yes to being a bridesmaid can definitely set you back a few thousand dollars. These are costs that we often fail to factor into our budgets.
Overcome this by:
Setting aside money monthly to cover gifts and special occasions.
If saying yes to a special event will hamper your finances, then you may have to politely decline the invitation.
9. Unexpected Travel Costs
Unexpected travel costs can significantly impact your budget, particularly when they arise from unplanned events such as attending a funeral or a wedding. The costs of last minute travel can vary widely depending on the destination, distance, and mode of transportation.
To manage these expenses, consider driving or taking public transportation for shorter trips, exploring less expensive lodging options, and creating a meal plan that limits dining out.
Overcome this by:
Setting aside a regular amount in a travel fund can help prepare for these unexpected costs that tend to crop up every year.
Decide if taking the unplanned trip is something you can feasibly manage with your current financial situation.
10. What You Forget to Budget for
Some subtle but regular expenses often sneak past our budget plans. This is why we have a full list of budgeting categories so hopefully, you don’t miss anything!
Consider online subscriptions and memberships: Many services offer free trials, but the charges kick in if not canceled. Other overlooked budget items may include pet care, parking fees, and toll fills—small amounts that may seem insignificant but can considerably dent your budget over time.
Overcome this by:
Review your checking account and credit card bills to see all of your expenses for the past year. Write down those unexpected expenses that came through.
Now, make a plan for how to spend your money in advance with your findings.
This helps you prepare for unexpected expenses
Here are simple tips to make sure you employ the habits of a financially stable person.
Tip #1 – Building an Emergency Fund
Building an emergency fund is a fundamental strategy to brace for unexpected expenses. This fund acts as a financial buffer, providing the economic security to cover unexpected costs without tapping into monthly budgets or savings aimed at other goals.
As a starting point, aim to save $1000 and then work your way up to save a month’s paycheck. Start small and build over time – every penny set aside helps to mitigate future financial stress.
Tip #2 – Properly Utilizing Sinking Funds
Sinking Funds are a sagacious tactic to prepare for larger, infrequent expenses. They allow you to systematically and gradually save up for anticipated financial obligations such as vacations, holiday gifts, car maintenance, etc.
By assigning a specific amount to save each month, by the time the need arises, you’ll have a pool of money ready. With platforms like YNAB, creating sinking funds becomes easier, letting you monitor your progress month by month.
This is how we have less frequent unplanned costs than we did in our 20s.
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Tip #3 – Saving for the Larger Rainy Day
Beyond smaller emergency funds and sinking funds, saving for the ‘larger rainy day’ is a crucial tactic to avoid financial duress caused by unexpected expenses. This refers to padding your savings to cover larger, more substantial financial shocks that might require more than just a few months’ worth of expenses.
It may take time to build such a fund, but even a small contribution each month can result in substantial savings over time.
Tip #4 – Pick up a Side Hustle
One way to strengthen your financial resilience against unplanned expenses is to start a side hustle. This could mean picking up extra shifts at work, selling handcrafted items online, or using skills like photography or writing for freelance work.
With the rise of the internet, making money online is really easy and simple to get started. We have a few side hustles to shield against unforeseen costs.
Tip #5 – Budget Properly and Stick to It
Budgeting is an essential line of defense against unexpected expenses. By tracking your income and comparing it against both predictable and variable expenses, you can calculate how much money can be saved each month.
Regular budget check-ins help ensure you’re staying on track, steadying your financial footing.
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Birds-eye view of your complete financial picture.
Conveniently download your spending activities, and automatically categorize them (Quicken connects to over 14,000 financial institutions).
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Cons:
Little complex to use at first, the learning curve is moderate.
Yearly subscription-based model to use the platform.
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Tip #6 – Regular Review of Financial Plans
Regularly reviewing and updating your financial plans can serve as a preventative measure against unexpected expenses. Consider changes in income, expenses, and lifestyles, and adjust your savings and spending plans accordingly.
Tip #7 – Utilizing Digital Banking Features for Money Management
Digital banking tools have revolutionized financial management and can be part of a robust strategy to avoid unexpected expenses.
Features such as instant account balance checking, transaction alerts, set-and-forget savings transfers, budgeting tools, and proactive spending categorization help you grasp where your money is and how it’s being spent.
Tools to Ward Off Unexpected Expenses and Not Go into Debt
Unexpected expenses are inevitable, yet going into debt to cover these costs can lead to financial strain due to accumulated interest and fees.
Here are crucial steps in preventing unexpected expenses from turning into debt.
Dealing smartly with Credit Cards options
Credit cards can serve as a lifeline during a financial crunch but should be employed judiciously.
To smartly deal with unexpected expenses, consider options like 0% or low-interest credit card offers – these are particularly useful if you can pay off the balance during the introductory period. But tread with caution: high-interest rates can cause difficulties if you can’t pay off the balance in time.
Profit from Asking for a Paycheck Advance
In times when emergency expenses arise, asking for a paycheck advance can help. Some employers offer this as part of their policy to assist employees dealing with abrupt financial needs. A salary advance allows you to ‘borrow’ from your future earnings and repay the amount through future pay deductions.
Budgeting apps like Chime not only help in tracking expenses, but they also enable early access to your paycheck, up to two days before payday. This feature ensures you avoid running short of money at the end of the week or month, allotting you ample room to plan, track, and adjust your spending and savings.
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Exploring Personal Loans for Emergency Situations
Personal loans are a convenient option during urgent monetary needs. They are unsecured loans and therefore don’t require collateral.
However, they’re typically accompanied by relatively high-interest rates. Consider using online prequalification tools for personal loans to determine if you’re eligible and view potential interest rates.
Explore different lenders, but be wary of the terms and conditions to make sure you don’t invite more financial trouble.
Which of the following is true regarding unexpected expenses?
Unexpected expenses are costs that are not anticipated or planned for, such as sudden car repairs or medical emergencies.
To efficiently manage unexpected expenses, it’s recommended to make them a part of the monthly budget. A suggested approach is to analyze past “unexpected expenses”, then estimate their costs and timing, which can provide an estimate of how much should be saved each month.
While basing future expenses on past ones only furnishes savings guidelines, this method can prevent an unexpected expense from turning into a severe financial emergency.
Planning for unexpected expenses by setting aside money from each paycheck can protect individuals from unforeseen financial difficulties.
Understanding what types of unexpected expenses might occur can help in the development of strategies to handle them successfully, reducing the impact of any unpleasant financial surprises.
Yes, all of the statements above are true.
What is not true about unexpected expenses?
Unexpected expenses are entirely out of our control.
Unexpected expenses can be completely avoided.
These unanticipated costs only occur irregularly or infrequently.
You can’t prepare for unexpected expenses.
All of these statements are not true. While the occurrence of these expenses might be unexpected, they’re not entirely unpredictable. Many times, they are the result of poor financial planning or management as they are often unforeseen costs that were not anticipated or included in a budget.
Frequently Asked Questions (FAQ)
It’s advisable to aim for at least 3 to 6 months of living costs for an emergency fund. This acts as a buffer to cover unexpected expenses and offers financial security during unexpected life events like job loss or serious illness.
However, the “right” amount to save varies depending on your personal situation, lifestyle, and financial obligations. Always remember: saving something is better than saving nothing; start small and increase gradually as your income allows.
Financial experts generally advise having an emergency fund equivalent to three to six months of monthly expenses. This guidepost factors in expenses such as food, housing, utilities, transport, healthcare, and other necessities.
However, if you are in a volatile occupation or the sole breadwinner of the family, aiming for a larger fund may be prudent. Whichever your situation, remember it’s not about reaching the benchmark overnight; the key is consistency in saving.
Managing urgent financial liabilities without incurring debt hinges on proactive financial planning.
Building an emergency fund: Start small and deposit to accumulate enough to cover at least three to six months of essential expenses.
Proper budgeting: Maintain a budget, ensuring you live within your means and regularly contribute to savings.
Insurance coverage: Adequate insurance coverage can help circumvent the financial impact of medical emergencies or catastrophic events.
Extra income: Consider a side hustle for additional income to bolster your budget and increase your savings.
Plan Ahead to Avoid Unforeseen Expenses
While unexpected expenses are an inevitable part of life, their financial stress isn’t.
Through effective planning and budgeting, you can cushion their blow, ensuring they don’t throw you into financial turmoil. Around here at Money Bliss, we strive for our readers to have less stress with money.
No matter how well you plan, unexpected costs can still arise from time to time. They can happen quite regularly, which is why it’s crucial to include them in budget planning.
By setting aside a portion of each paycheck in a savings account, you can be better prepared for such costs when they arise.
Remember, every dollar saved is a step towards greater financial stability, helping you to navigate life’s uncertainties with confidence and peace of mind.
Now, make sure you are financially sound.
Source
NOAA.gov. “Costliest U.S. Tropical Cyclones.” https://www.ncei.noaa.gov/access/billions/dcmi.pdf. Accessed December 1, 2023.
Colorado Public Radio. “Most people who lost homes in the Marshall Fire were underinsured, Colorado insurance regulators say.” https://www.cpr.org/2022/05/02/most-people-who-lost-homes-in-the-marshall-fire-were-underinsured-colorado-insurance-regulators-say/. Accessed December 1, 2023.
U.S. Energy Information Association. “U.S. residential electricity bills increased 5% in 2022, after adjusting for inflation.” https://www.eia.gov/todayinenergy/detail.php?id=56660. Accessed December 1, 2023.
BetterPet. “Average emergency vet costs: what to expect.” https://betterpet.com/emergency-vet-costs/. Accessed December 1, 2023.
Mastercard. “Your real-time guide to real-time payments.” https://www.mastercard.com/news/perspectives/2023/real-time-payments-what-is-rtp-and-why-do-we-need-instant-payments/. Accessed December 1, 2023.
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Your home’s equity is the portion of your home that you own free and clear. For example, if your home is worth $400,000 and your mortgage balance is $225,000, you have $175,000 in home equity. That’s money you can tap into to help you pay off high interest debt, make home repairs or cover a wide range of other expenses.
A home equity loan is one of the best ways to access your home equity. These loans, also called second mortgages, typically come with fixed interest rates and payments. Moreover, rates on these loans are usually very competitive because the lender uses your home as collateral.
But it’s important to understand the costs before you tap into your home’s equity. After all, you’ll need to pay your home equity loan back over time.
Access your home’s equity with a home equity loan today.
How much do home equity loans cost per month
The monthly cost of a home equity loan depends on the total amount of the loan as well as the interest rate your lender charges you. The average interest rates on home equity loans in today’s market are as follows:
10-year fixed home equity loan: 9.09%
15-year fixed home equity loan: 9.12%
Considering these averages, here’s what you can expect to pay on a home equity loan based on your loan’s value and duration (data courtesy of the First National Bank of Omaha home equity loan payment calculator):
$25,000 10-year home equity loan: $318 per month
$25,000 15-year home equity loan: $255 per month
$50,000 10-year home equity loan: $636 per month
$50,000 15-year home equity loan: $511 per month
$100,000 10-year home equity loan: $1,272 per month
$100,000 15-year home equity loan: $1,021 per month
It’s important to keep in mind that interest rates and home equity loan amounts can vary. So, your monthly payment may be higher or lower than the payments quoted above.
Find out how affordable your home equity loan can be now.
How to cut the cost of your home equity loan
As mentioned above, the cost of a home equity loan varies depending on the amount of the loan and the interest rate the lender charges. Of course, when costs can vary, there’s typically an opportunity to save. Here are a few ways you can cut the cost of your home equity loan:
Compare your options
Financial institutions are free to charge whatever interest rate they’d like when they issue a loan — within reason, of course. As a result, interest rates are one of the primary ways financial institutions compete with each other for your business.
“As with any loan, borrowers should research the best loan for their unique financial situation,” says Austin Niemiec, chief revenue officer for Rocket Mortgage.
So, if you want the lowest interest rate possible, it’s important to compare your options. Don’t just apply for the first home equity loan you find. Instead, look into at least three options to find the lowest interest rate possible in your unique situation.
Opt for a longer loan term
“Looking for a longer term can help” you save money on payments, says Niemiec. “Opting for a 20-year loan instead of a 10-year loan can help keep monthly payments low.” It’s worth noting, though, that while a longer term may reduce your monthly cost, it will likely increase the overall interest you’ll pay over the life of the loan.
Improve your credit score
Chances are that your credit score will play a significant role in the interest you pay on your home equity loan. Those with a strong credit profile typically pay better rates than those with a poor one.
“Another way to save money is by working to increase your credit score before applying for the loan. A higher credit score can help you get a lower interest rate which can save a lot of money in the long term. Even a quarter of a percentage point can save thousands of dollars,” Niemiec says.
So, it may be advantageous for you to take steps to improve your credit score before you apply for a home equity loan. Some things to consider doing to improve your credit include:
Pay down your credit cards to improve your credit utilization and debt-to-income ratios.
Settle any past-due debts.
Make it a point to make all of your loan payments on time.
Consider purchasing discount points
When you purchase a home, you typically have the option to purchase discount points that reduce the overall interest on your mortgage. Some lenders also allow you to purchase discount points when you take out a home equity loan.
In most cases, discount points cost 1% of the total value of the loan and bring the interest on the loan down by 0.25%. Although the 1% up-front fee may seem relatively high, you could save a significant amount of money over the life of your loan by purchasing discount points if you plan on making minimum payments. However, discount points may not be worth it if you plan on paying your loan off early.
Don’t miss out on today’s best deals. Lock in your home equity rate now.
The bottom line
Home equity loans are relatively inexpensive, especially when compared to unsecured lending options like credit cards and personal loans. Moreover, there are a few things you can do to further reduce your cost of borrowing against your home. Tap into your home equity today to access the money you need.
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Joshua Rodriguez
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids, three dogs and 10 ducks.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
The debt snowball method is a repayment plan that involves paying off debts in order of lowest to highest principal sums. As you pay off small loans, you gain the confidence and money needed to repay larger ones.
Paying multiple debts is a juggling act. On one hand, paying all debts at once is tempting but expensive. On the other hand, paying one at a time is more affordable, but that takes long-term financial management. Thankfully, you can use the debt snowball method to simplify your debt payoff plan..
The debt snowball method is a debt repayment plan in which you quickly pay off small debts to focus on larger ones. Even though it’s simple in concept, you may have questions about the execution. To help you out, we’ll explain the method in detail, walk you through its steps and share a few best practices.
Table of contents:
What is the debt snowball method?
How to snowball debt in 4 steps
Snowball method example
Best practices for the snowball method of paying off debt
The snowball method vs. avalanche method of debt consolidation
Pay off debt and improve your credit with Lexington Law Firm
What is the debt snowball method?
The snowball method is a debt repayment approach where you pay off debts in order of smallest to largest principal sums. After making the minimum payment on all debts, spenders invest all they can into debts with the smallest principal. Once you pay off these small debts, you can roll funds over to the next highest.
Unlike other debt consolidation and payoff strategies, the snowball method doesn’t factor in interest rates. Instead, this approach focuses on principal payments. With each debt repaid, you should feel better equipped to tackle the next in line.
Who should use the snowball method?
Anyone juggling multiple debts should consider the snowball method. It provides a simple strategy for organizing your debts. As you knock out small debts, the snowball effect offers the momentum and confidence you need to get out of debt.
Pros of the snowball method
The snowball method of debt repayment offers distinct benefits over other approaches. The main advantages include:
Actionability: Small changes to your budgeting make this approach actionable. It doesn’t come with any prerequisite or additional charges. As a result, jumping in is fast and straightforward.
Empowerment: If you can’t pay your bills or keep up with debt, the snowball method mentally and financially empowers you. With every small debt cleared, you see progress and stay motivated as you pay off greater debts.
Simplicity: The snowball method is easy to wrap your head around. It also breaks large chunks of debt into smaller, approachable pieces.
Cons of the snowball method
Despite its strengths, the snowball method comes with a few downsides, including:
Interest accrual: If your larger loans have a higher interest rate, the snowball method may not work as well. According to these credit facts, if you follow the strategy, higher interest rates may cost you more over time.
Emphasis on small debts: This approach works best when knocking out small debts back to back. You won’t see the same immediate results if you’re juggling a few large loans.
Inflexibility: The snowball method doesn’t leave much room for customization. You may want to consider another option if you want a malleable strategy you can modify.
How to snowball debt in 4 steps
Thanks to its simplicity, you can implement the snowball method in only four steps. This is the process in detail:
Step 1: Take a debt inventory
The first step of the debt snowball method is to list all your debts from smallest to largest. While you can keep interest in mind, focus on the principal balance. If two debts share a similar principal, you can place the one with a higher interest rate first.
Step 2: Make minimum payments on all debts
Make the minimum payment on each of your debts every month. This step is crucial because you don’t want to incur any fees or penalties for not making payments on other debts even as you focus on one in particular.
Step 3: Pay down your smallest debt
On top of the minimum payment, invest as much as you can into your lowest principal balance. While you want to pay it off quickly, don’t forget to set money aside for:
Savings
Groceries, laundry and other household costs
Day-to-day expenses like eating out or investing in your hobbies
Step 4: Repeat until debt-free
As you pay off each debt, you can roll more money into larger ones. When you aren’t juggling as many debts, you’ll have the resources to focus on paying down the highest sums. Eventually, most or all of your debts should get paid off.
Snowball method example
To help explain the snowball method, here is an example of how you budget for it. Assume you make $2,500 a month and have to manage these expenses:
Rent: $700/month
Utilities: $150/month
Student debt: Minimum payment of $120/month (total principal: $21,000)
Medical debt: Minimum payment of $60/month (total principal: $4,500)
Auto debt: Minimum payment of $40/month (total principal: $1,800)
Credit card debt: Minimum payment of $15/month (total principal: $900)
You would implement the snowball method of paying off debt like this:
Pay necessary expenses like rent and utilities. This brings you down to $1,650.
Pay the minimum balance on all debts. Your spending money drops to $1,415.
Pay down your lowest debt. In this case, it’s the credit card debt. Let’s say you pay $500 and bring that principal down to $400. Your remaining balance comes out to $915.
Spend the remainder of your money on day-to-day expenses. Remember to save as much as you can. It never hurts to have an emergency fund ready.
Once you pay off the credit card debt, move on to the next lowest principal sum. So, you would pay off auto, medical and student loans in that order.
Best practices for the snowball method of paying off debt
To see the best returns on the snowball method, follow these tips:
Don’t base repayment order on interest: Anyone trying the snowball method should focus on principal balances. This approach relies on small wins to build up to bigger debts. Large, high-interest loans get in the way of that.
Mitigate high interest with lower rates: While focusing on small loans, try to reduce interest on larger ones. Negotiating a lower interest rate will help save money in the long run.
Track spending over time: You should avoid wasting money that could go toward paying off debt. Additionally, track the amount you spend on debt repayment. That way, you can stay on track as weeks or months pass.
Don’t fall behind on bills: Falling behind on bills or loans can lead to fees or a higher interest rate. In the long run, this will slow down your repayment.
Set aside emergency funds: You shouldn’t invest every cent in settling your debts. An emergency fund can help you avoid more debts after home repairs or health issues.
The snowball vs. avalanche method
The avalanche method is another way of paying off debt that determines payment order by interest rate. In both the avalanche and snowball approaches, you make minimum payments on all debt each month. From here, they diverge:
The avalanche method has spenders pay off the debt with the highest interest rate first. Once customers pay off this loan, they move to the one with the next highest interest rate.
The snowball method ignores interest rates to focus on principal payments.
While the snowball method quickly pays off small debts, the avalanche approach is slow and steady. It may take you longer to pay off your debts, but you will accrue less interest. So, depending on your interest rate and principal sum, you may pay less overall, which could make this option more appealing.
Which method is right for you?
The avalanche and snowball methods can both help with debt repayment. The right approach for you depends on personal preference and your financial situation. To find the right strategy, ask yourself:
Do you need help staying motivated to pay off debts? If so, the snowball method offers more small wins to keep you going.
Is your financial management style analytical and patient? Then the avalanche method will complement a slow and steady approach.
Do you have several small loans or a few high-interest loans? The snowball method suits the first situation, and the avalanche method fits the second.
Work to improve your finances and your credit with Lexington Law Firm
Whether you need to rebuild your credit or get out of debt quickly, the debt snowball method can help. Unlike other strategies, the snowball approach is easy to jump into. While paying off debts can take time, this method gives you the confidence and direction to pay down debts one by one. While using any debt repayment plan, you don’t want to forget about maintaining or even improving your credit. Stay current on all your bills, create a budget and track your spending. If you’re working on repairing your credit, Lexington Law Firm could help you on your journey with our credit repair services.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.
Inside: Are you struggling to keep up with your variable expenses? Whether it’s groceries, gas, or rent, managing these costs can be daunting. This guide will teach you how to budget for variable expenses and reduce the strain they put on your wallet.
Understanding and effectively managing your variable expenses is a crucial aspect of maintaining financial health.
These are expenses that fluctuate on a monthly basis, such as groceries, fuel, and entertainment. Their inconsistency can make budgeting a challenging task.
For many people, this is where they give up on budgeting because variable costs can sway too much for the average budgeter to know what to do.
Around here at Money Bliss, we know those who efficiently manage their variable expenses tend to fare better in achieving their financial goals. Furthermore, it empowers you to anticipate, plan and manage costs better, and avoid unnecessary financial stress.
Our focus here will be on explaining how variable expenses can make notable changes to your personal budget and offer strategies to manage them effectively.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
What is a Variable Expense?
A variable expense is a cost that changes from month to month.
Unlike fixed costs that are paid at regular intervals and may endure only slight fluctuations, variable expenses undergo a higher degree of fluctuation depending on consumption or quantity used. These expenses can comprise costs such as groceries, entertainment, and fuel for your car.
What primarily distinguishes a variable expense is its potential to vary from one period to the next, making it an important calculation in accounting for a comprehensive monthly budget.
Knowing the intervals of these variable costs can enhance the accuracy of your budgeting, turning this challenging aspect into an opportunity to reduce costs.
What is an Example of a Variable Expense?
Variable expenses typically entail a high degree of personal discretion and vary substantially between individuals. While one person may see dining out as a variable expense, for another, it may be a rare treat. Either way, it is still an example of variable expenses.
Here are a few typical examples:
Groceries: You decide what food to buy, and it depends on your food preference, the number of people at home, and special dietary needs.
Gasoline: This expense is dependent on how much and how far you drive.
Utilities: Electric, water, and gas bills fluctuate based on usage.
Clothing: The cost can vary each month depending on how often and how much you choose to buy, such as seasonal shopping, special occasions, or replacing worn-out items.
Gifts: Costs can fluctuate depending on the occasion, person, and your personal budget for the period, making them unpredictable and potentially impacting your monthly budget plans. Especially for Christmas gifts.
Entertainment: Costs such as movie tickets, concerts, or amusement parks may vary depending on your social life.
Repairs: Costs for home and car repairs are unpredictable and can markedly vary. Essentially, any expense that is not fixed (like rent or car payment) can be considered a variable expense.
Taxes: Yes, even your taxes are variable based on your income.
Don’t forget to use a savings account with one of the popular money saving challenges.
Difference between Fixed and Variable Expenses
Understanding this difference is a significant step toward setting realistic savings goals
Fixed expenses are constant costs that remain the same each month, like rent, insurance premiums, car payments, or childcare. They’re predictable, making them easier to incorporate into your budget without unexpected surprises.
On the contrary, variable expenses fluctuate month-to-month and include items like groceries, utilities, gas for your car, or entertainment. The unpredictability of these costs can cause potential challenges in budgeting and limit the consistency of your financial output.
Nevertheless, variable expenses often present more opportunities for saving.
You have greater control over these costs, giving you a chance to limit expenditure and prioritize savings.
How to Budget for Variable Expenses
Personal budgeting is an essential tool. Despite variable expense’s unpredictability, it is possible to plan for these expenditures by applying practical tactics and strategies.
From using budget apps to examining previous spending patterns, this type of budgeting enables you to maintain control over your finances and make adjustments as necessary.
50/30/20 Budget: An Effective Approach
The 50/30/20 budgeting approach is a simple yet effective method that can help you manage both fixed and variable expenses.
This method suggests you divide your after-tax income into three categories: 50% on necessities, 30% on wants, and 20% on savings or debt repayment.
By categorizing this way, you ensure your most critical outlays (the necessities ) first. You then allocate your income towards discretionary spending (your wants), and finally squirrel away a portion for savings (hopefully 20%) or paying off debts. This budget calculator strategy can serve as a foundation to guide your spending, helping you to stay on top of your finances.
Quicken
Personal finance and money management software allows you to manage spending, create monthly budgets, track investments, retirement and more.
I have used this platform for over 20 years now.
Pros:
Birds-eye view of your complete financial picture.
Conveniently download your spending activities, and automatically categorize them (Quicken connects to over 14,000 financial institutions).
Track investments with it’s features like portfolio analytics, retirement goals, and market comparison.
Cons:
Little complex to use at first, the learning curve is moderate.
Yearly subscription-based model to use the platform.
Zero-Based Budget
A zero-based budget is a technique where you make a budget from scratch or “zero” and allocate every dollar of income towards different categories of expenses until they sum up to zero at the end of the month.
This budgeting strategy, very popular due to the budgeting app, YNAB, can be a rewarding technique that solicits justifying every expense’s worth as you give every dollar a job.
Distributing money toward fixed costs is usually shoo-in, but budgeting for variable costs can be tricky because you won’t know how much you’ll spend on them. The solution is to estimate as closely as possible.
The beauty of a zero-based budget is that it ensures your money is purposefully allocated, leaving no room for unexplained spending especially when used with sinking funds.
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
Envelope Budgeting System
The envelope budgeting system is a successful method for managing variable expenses. By dividing your income into envelopes assigned to different categories like entertainment, groceries, or transportation, control over fluctuating costs is established.
With each paycheck, you determine a specific amount for each category and stuff that envelope with cash. By strictly adhering to this limit, you thereby avoid overspending.
This hands-on approach provides an exact idea of available cash and creates a stronger sense of financial accountability. In fact, recent data indicates that the envelope system has successfully helped many people stay within their budget, primarily by making expenditures more tangible and easier to track.1
What is most likely the reason variable expenses should be planned after fixed expenses?
When preparing a budget, it’s typically suggested to plan for fixed expenses first before variable expenses.
The primary reason is that fixed expenses are generally non-negotiable costs that are essential to your daily life and take up much of your budget. These costs are predictable and regular, making them easier to budget for.
Variable expenses, on the other hand, tend to fluctuate and often include discretionary spending like dining out, shopping, or entertainment. This category, despite its variability, carries a certain upside as you possess more control over these expenses than your fixed ones.
By planning for fixed expenses first, you ensure to cover your essential needs before budgeting for lifestyle choices and discretionary spending, which can flex more easily around your remaining income.
Tiller Money
Your financial life in a spreadsheet, automatically updated each day.
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Tips to Control Variable Expenditures
Managing and controlling variable spending is an essential aspect of sound financial planning.
Honestly, the more proactive you are in monitoring the continuous changes in variable expenses and introducing strategies to suppress any unnecessary hikes, the faster you will reach your goals.
This section will provide insights into various effective methods to control variable spending, as well as the behavioral adjustments needed for successful implementation.
Tip #1 – Save on fixed and variable costs
Everyone wants to save money and here are a few tips on reducing both fixed and variable costs:
Fixed costs: Considering these costs are more constant, savings can usually only be achieved by longer-term changes. This could be refinancing your mortgage for a lower rate, negotiating a lower car insurance premium, or switching to a cheaper phone plan.
Variable costs: Changes in habits can lead to significant savings. For instance, cooking at home instead of dining out, carpooling or using public transport to save on gas, or unplugging electronics when not in use to save on utilities.
By scrutinizing both types of costs, you can identify opportunities to cut back and increase your savings over time. Being frugal green is a huge topic! Remember, the little things can add up!
Tip #2 – Set expense limits and find ways to save
Budgeting requires discipline, and setting limits on your variable expenses is a big part of that. You can do this in three ways:
Start by reviewing your spending patterns: examine your transaction history to identify areas of overspending. Once you’re aware of these, set spending limits that align with your financial goals. Drawing from my experience, I can assure you that awareness of overspending areas, followed by setting spending limits, can significantly align with your financial goals.
Consider taking part in a no spend challenge. Personally, that is when I realized I spent a lot of money on things that didn’t matter to me in the end.
Adopt practical money-saving habits like adopting DIY approaches (e.g., home repairs, sewing, cooking), utilizing coupons and cash backs, shopping secondhand, or carpooling.
Remember, you have control over your variable expenses, and setting restrictions doesn’t mean depriving yourself. It just means making informed decisions and prioritizing your spending according to your financial goals.
Tip #3 – Use Sinking Funds
A sinking fund is an effective money management strategy that can help handle variable costs. It’s a fund where you regularly set aside a certain amount of money for a specific expense. For instance, you might establish a sinking fund to cover property taxes or unexpected costs (but they will happen) like car maintenance, vet bills, or holiday gifts.
When the time comes for these expenses, you won’t have to scramble to find the money because you’ve already collected a fund over time.
This approach can ease financial stress and prevent unplanned debts, making sinking funds an excellent remedy to unexpected variable expenses. For us, this is when we maximize the placement of our hard-earned money across multiple bank accounts.
FAQs about Variable Costs and Budgeting
While all expenses matter, we generally advise budgeting for fixed expenses first. These are critical costs that typically stay constant month-to-month, like rent or mortgage payments, insurance, and fixed utilities.
Allocating money toward these essential costs first ensures that you’re covering your necessities. Once you’ve accounted for these, you can then budget for variable expenses which are discretionary and fluctuate based on personal usage.
Thus, it helps you realize your spending habits and identify areas where you can cut back if needed.
Yes, entertainment is typically considered a variable expense. These costs vary month-to-month based on your discretionary spending habits.
For instance, your spending on concerts, movies, dining out, or subscriptions can fluctuate based on your lifestyle, events, or personal choices. Remember, since entertainment costs are discretionary, they can often be trimmed when looking to make budget adjustments.
Ready to Master your Variable Budgets?
Understanding the ins and outs of variable expenses and strategizing accordingly can empower you to manage your money more effectively.
By distinguishing between your fixed and variable expenses, budgeting effectively, and identifying potential savings, you’re setting yourself up for financial success.
Whether you’re using the 50/30/20 budget approach, a zero-based budget, or sinking funds, the goal is to ensure your money is being used wisely. It’s all about creating a balance that nurtures a comfortable lifestyle while paving the way toward your future financial goals.
So review your inconsistent costs, implement new financial strategies, and take control of your variable expenses.
The key takeaways is a well-planned budget is not just beneficial for controlling spending, but also integral to your financial freedom.
Source
Ramsey Solutions. “How to Budget With the Cash Envelope System.” https://www.ramseysolutions.com/budgeting/envelope-system-explained. Accessed November 28, 2023.
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Long-term personal loans can be an attractive option if you’re facing large expenses like medical bills or home repairs. By spreading out repayment over a longer period of time, long-term loans may allow for lower monthly payment amounts that can make major costs more affordable.
However, long-term loans can have drawbacks, too. They may have higher cumulative interest than short-term loans and can be difficult to qualify for since they’re often unsecured.
Here’s what you need to know if you’re deciding whether or not a long-term, unsecured personal loan is right for you:
What Is a Long-Term Loan?
As its name suggests, a long-term loan is one whose repayment period, or term, is fairly lengthy. Generally, long-term personal loans carry terms between 60 and 84 months, or five to seven years.
Mortgages and student loans are also examples of long-term loans. Mortgages, for instance, are frequently repaid over as many as 30 years.
For the purposes of this article, we’re talking about long-term, unsecured personal loans, which borrowers can use for a variety of things. These loans can allow consumers to make big purchases or pay expensive bills by paying the total off over several years’ time. 💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.
Benefits of Long-Term Personal Loans
There are plenty of reasons why a long-term loan might be a worthy consideration for large expenses.
Large Loan Amounts
While short-term loans and credit cards may cap out at a few thousand dollars, long-term, unsecured personal loans are available at much higher amounts — up to as much as $100,000.
So depending on what you need the money for, a long-term personal loan might give you more leverage than other types of funding.
Affordable Monthly Payments
Since long-term personal loans are paid off over many months, the monthly payments are often lower than they would be with a shorter-term loan.
However, that doesn’t mean a long-term loan is less expensive in the long run.
Flexibility
Unlike secured loans, which are tied to a physical piece of collateral or the need to be used for a specified purpose, unsecured personal loans can be taken out for a wide range of intended purposes. Common reasons borrowers take out personal loans include:
• Home renovations or repairs.
• Medical expenses.
• Wedding loans or funeral expenses.
• Debt consolidation.
Affordable Monthly Payments
Since long-term personal loans are paid off over many months, the monthly payments are often lower than they would be with a shorter-term loan.
However, that doesn’t mean a long-term loan is less expensive in the long run.
Drawbacks of Long-Term Personal Loans
There are also some drawbacks worth considering before you apply for an unsecured personal loan.
Potentially Higher Interest Rates
Although long-term, unsecured personal loans may have smaller monthly payments, they may carry higher interest rates than shorter-term, unsecured personal loans. And even at the same interest rate, they cost more over time.
Personal loan interest rates can range from as little as 6.99% to as much as 35.99% APR.
For example, imagine you take out a $10,000 loan at an interest rate of 10%. To repay the loan in a single year, you’d have to pay a whopping $879 per month, but you’d only pay a total of $550 in interest over the lifetime of the loan.
To repay the loan in seven years, you’d pay only $166 per month, but you’d also pay $3,945 in interest along the way.
So while long-term, unsecured personal loans can make large purchases feasible, factoring in the total cost over the lifetime of the loan before you sign those papers is also important.
Long-Term Debt
Along with higher interest rates, long-term loans do, obviously, mean going into debt for a longer period of time — unless you plan to pay off your loan early. A thorough review of the loan agreement will disclose prepayment penalties or other fees that can be costly in their own right.
Furthermore, the future is unpredictable. Five to seven years down the line, that promotion you were counting on might fall through or another life circumstance might supersede your repayment plans.
If you find yourself in a situation where you need to borrow more cash, it can be difficult to increase your personal loan amount.
Although unsecured personal loans can be helpful when life throws big expenses your way, they’re still a form of consumer debt, and, ideally, minimizing debt is a smart thing to do.
Qualification Difficulties
Long-term, unsecured personal loans may have more stringent qualification requirements than other types of credit. That’s because, from the lender’s perspective, they’re riskier than loans for smaller amounts or those that come attached to physical collateral.
Along with your credit score and history, a potential lender might also require proof of income and employment or a certain debt-to-income ratio. Depending on the stability of your financial situation, you may or may not qualify for the best interest rates and terms or be considered eligible to take out the loan at all, at least without a cosigner or co-borrower. 💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.
Alternatives to Long-Term Loans
Ideally, the best way to pay for a large purchase is to save up the cash and pay for it without going into debt at all. Of course, this may not always be possible or realistic.
If you’re not sure about taking out a long-term, unsecured personal loan, there are other alternatives to consider. However, each of these comes with its own risk-to-reward ratio as well.
You might consider borrowing money from friends and family, but those important relationships can suffer if your repayment doesn’t go as planned. A written repayment agreement can go a long way toward making the transaction as transparent as possible, with expectations of both parties clearly outlined.
Another option might be saving part of the money you need and applying for a short-term, unsecured personal loan for the remainder. This means delaying a purchase until savings can accumulate, and might not work if the money is needed sooner rather than later.
The Takeaway
Long-term loans are those whose repayment periods generally span between five and seven years, which can help borrowers fund expensive purchases while making affordable monthly payments.
However, the longer-term can also mean more interest charges over time, making these unsecured personal loans more expensive relative to shorter-term lending options. And like any form of consumer debt, they carry risk.
Your credit score and/or personal financial situation can suffer if you find yourself unable to repay the loan.
That said, when used responsibly, long-term, unsecured personal loans can be a smart financial choice, particularly if you shop around for a lender who offers affordable, fixed interest rates, low fees, and great customer service to ensure you’ll always be in the know and in control.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
Photo credit: iStock/Melpomenem
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.