Finding the perfect home requires more than just a beautifully designed or well-appointed place. A property’s location and the area’s living costs play important roles in what home you buy. Determining how much of a home you can comfortably afford is key to your success and financial wellness.
With the cost of living continuously rising in today's economy, it is essential to have a clear understanding of your financial capabilities before you start the home shopping process. Calculating what you can afford not only allows you to set realistic expectations but also helps you avoid potential financial pitfalls in the future.
TCU recognizes the importance of this step. We are here to provide valuable strategies and tips to help you make informed decisions about your homeownership journey.
What Does Cost of Living Mean?
The term cost of living describes the amount of income a household will need to pay for basic living expenses within a certain geographic area, such as a town or city. When budgeting for a home purchase, buyers must know how much it will cost to live in that area.
Creating a budget is essential to determining your cost of living. To start, compile your monthly expenses for housing, utilities, groceries, transportation, work and entertainment. Also include savings and emergency expenses to get a more accurate picture of where you stand when budgeting for a home.
Things to Include in a Budget
Here are the main costs that you should factor in when determining your cost-of-living budget:
- Housing: Housing costs include mortgage or rent, which typically is the largest expense on the list. According to the 2021 U.S. Census Bureau Data, the average cost of housing per month ranges from $1,360 to $2,649 in California. Calculate how much home you can afford using a mortgage calculator like the one found at Travis Credit Union to estimate your monthly payments.
- Utilities: Living comfortably means keeping the lights on, maintaining a cozy room temperature, having running water and staying connected to the Internet. All these necessities must be paid for, and in California, these utilities tend to have a higher cost. According to Bankrate.com, California residents pay 29% more than the national average for utilities. Research your desired neighborhood and consider how much utilities you will be paying there.
- Groceries: Food is an essential part of life that has gotten more expensive due to inflation. This monthly cost comes to $322.08 per person, per month, in California says SoFi.com. According to Bankrate.com, California residents pay an average of 12% more for food than the national average.
- Transportation: Transportation can add up quickly, especially if you need to commute to work from your new home. On average, Californians spend 37% more on transportation than the national average, according to Bankrate.com. In addition, California residents pay on average $2,190 per year on car insurance compared to the national average of $1,771. Ensure you have a good estimate of your transportation costs and include those in your cost-of-living budget.
- Entertainment: Entertainment expenses are usually discretionary activities such as going to the movies, attending sporting events or concerts, visiting museums or going to amusement parks. According to SoFi.com, an estimated average of $29,704 is spent per year on entertainment expenses by Californians. If you plan to live in an area with lots of attractions and things to do, be sure to factor entertainment into your budget.
- Emergency Expenses: Life has unexpected expenses that unfortunately require you to pay up front either with cash or credit. Having an established savings plan allows you to have funds ready for this rainy day. According to Bankrate.com, 4 out of 10 Americans do not have enough funds saved to cover a $1,000 emergency expense. Maintaining an active savings habit can help eliminate the stress of the unexpected expense.
How to Calculate the Cost of Living
Calculating your cost of living is not difficult. To start, compare all your monthly expenses with your monthly income. If your income covers all expenses, you are in good shape. If not, you will need to identify areas to cut back or save, especially before you buy a home. If you want a more detailed calculation, you could use an online home budget, cost-of-living or other calculators.
Once you know how much of a home you can afford based on your income, be sure to research other possible required expenses, such as any homeowner’s association fees, special tax assessments by the town, city or state or even monthly landscaping costs.
Travis Can Help
Travis Credit Union can help you improve your financial wellness as well as save for your new home with our Certificates and Money Market Accounts. These accounts provide a secure and reliable way to grow your money, helping you reach your financial goals.
Once you are ready to buy, our knowledgeable mortgage loan consultants can identify the best home loan to fit your unique financial situation. To begin your homeownership journey, visit TCU’s Mortgage Hub. This online resource offers valuable information and tools to help you navigate the home-buying process. Whether you are a first-time homebuyer or are a previous owner, Travis is here to support you in your homeownership journey.