Posts Tagged ‘Budget’
Are you ready to move into your first apartment/home?
How much will it cost to get your apartment and more important how much to do you have to make to “swing” the payments/monthly costs? One indication you are ready to make this move is doing the homework to “count the cost” and see if you make enough money to make it work. Taking this step is a sign of maturity.
Estimate Your Cost of Living:
I have done some basic leg work to help you but more importantly I want you to have an idea of what you need to know before you take this big step. So this article will give you some framework of knowledge about what to consider. It took me about 1.5 hours of work on the internet and the phone to get these figures/estimates. You will want to do the work to get these specific costs for where you live or want to live because they certainly will vary depending on your location. Also, you need to think about what is important to you and what it costs to know if you can afford it.
Here are some of the cost you will want to estimate. First, your biggest expense will be your housing costs; your monthly rent, insurance, utilities, cleaning etc. In addition you will need to pay for groceries and other supplies. You will need to pay to get to work, so that will likely include a car payment, insurance, gas and tolls. You will have these expenses unless you live in a city with reliable public transportation and you can get to and from work without a car. Then you will need to figure out how much your transportation will cost you. In addition, you will have the cost of a phone, clothes, entertainment and there will always be the unexpected other expenses. You can count on the unexpected.
I gathered an estimate of the current cost of renting an average 1 bedroom, 1 bathroom apartment in McKinney, TX and the cost for a 21 year old single male purchasing a 2003 Honda Civic 4 door for $8,900 (more on that later) and driving between 12,000-15,000 miles a year. Following are the average/estimated monthly costs:
Utilities $150 electric, water, trash
Car Payment $338
Car Insurance $130.5
Groceries $ 250
Other Supplies $35
Cell Phone $80 average rate T-Mobile
Deposits $100/mo for total of $1,200
Your annual estimated expenses would be $35,118
Let us consider a couple of things to give you some insight. First, you can get a 2003 Honda Civic 4 door for about $8,900 plus about $2,000 for tax, title and registration. It is always the tax, title and registration that will catch you by surprise. The salesmen will not even count that for you until you agree on the price of the car. Starting out you may want to get a much less expensive vehicle but then you will have higher repairs which I did not include in the above estimate. Second, when you first rent an apartment or a house you will have a security deposit and deposits for the utilities. In this case you can add about $1,200 to your first year out of pocket costs for deposits. Again, these are estimates and you may find you will pay more or less. You need to know yourself and check out what these costs will be for you. A couple of costs that can vary tremendously are entertainment, food, clothing and the car expenses we already mentioned. Realize too you will also eventually have out of pocket costs for the dentist, eye doctor and other health professionals. You will find you can also get a less expensive apartment but consider carefully what you will get and the condition it will be in. For me to lower my costs I started with an efficiency apartment rather than a one bedroom. You may find you can save significant money by getting roommates to share an apartment or a house.
Last of all, when you develop a budget after doing all the legwork it is recommended that you also pay yourself first by putting some money from each paycheck into savings. You may want to set a goal to work on getting at least 6 months of living expenses in savings in case of emergencies. What happens if you lose your job, which is not a rare occasion today? Consider what I have shared with you and I hope you will find yourself equipped to succeed financially and get your own apartment/home.
Calculate How Much You Will Need To Make to Cover Your Costs:
Now the big surprise. To pay for the out of pocket costs for your first year of $35,118 you will need to make roughly $43,000. That will net you about $35,200 after taxes and a 3% contribution for to a 401k retirement account at work. Your employer will withhold income taxes, social security and medicare from your gross pay and the 3% contribution to the 401k and probably more for health insurance. If they do not provide health insurance then that is another costs you may need to account for.
Do Your Own Homework:
I recommend that you do your own homework by going to look at apartments and asking what they cost and don’t forget to ask about utilities. The above costs do not include any parking. So make sure you ask a lot of questions. I would make a list before you go. Also, make a trip to the grocery store to buy your own food and see how much it costs and how long it lasts.
Are You Ready For the Responsibility?
That brings up one final point you need to consider to determine if you are ready to make this move. Are you ready to cook for yourself and pay your own bills on time? Do you know what happens when you are late on your payments? When you make your payments late you have to pay late fees. Are you ready for that responsibility? What about cleaning? If you are a 21 year old single male are you ready to cleanup after yourself? Try cleaning your parents home every week for at least a month to see if you are ready for it.
To get use to the monthly payments, pay mom and dad every month for rent to see if you can make it. They may be willing to hold this money for you to use when you get started and have to pay for those deposits and also to pay for getting furniture, which I also did not include in the above estimates. I found that in the US you can get used furniture for next to nothing on craigslist. But check that out for yourself.
Make It Work:
Finally, you may find you need your parents to help you get into your first apartment. Most complexes will check your credit history and if you do not have one they may require your parents to provide some pledge that they will be responsible if you do not pay your rent or damage the property. I recommend you first establish your own credit by getting a credit card and paying off the balance monthly and then get a small car loan and make the payments on it and the insurance for at least a year.
Remember this was just an exercise. You can be creative to figure how to make this happen and to determine when you are ready to successfully make it happen. You should now have an idea what information you need to get to know how much it will cost you to live on your own. You should probably try to figure out how can you get a car that is paid for or find a situation where you do not need a car. If you find you are not ready today, figure out what you need to do and set a goal to make it happen by a certain time. Knowing what it takes empowers you to successfully make it happen eventually.
If nothing else I hope you learned from this what it takes to be financially responsible for yourself and appreciate what your parents have been providing for you. But perhaps now it is time for mom and dad to help you to learn to be financially responsible. Your parents may be able to help you do some of the homework and give you some insight as well based on their own experience and knowledge of the area.
You may want to take a bigger first step in your financial growth than renting your first apartment. I am planning another blog about other options that could help start developing streams of income using real estate even beginning with your first home.
Remember I prepare tax returns for people for a living. When you first get a job and then an apartment you will probably want to and be able to prepare your tax return. However, if you start your own business and “set the world on fire” with success you will likely want me or another tax professional to do your taxes for you. Also, please call before you start a business as I can help you avoid many surprises and save you money. Feel free to contact me using the information below.
Jeff Haywood, CPA
I prepare the following types of tax returns:
Federal and State Returns
I especially enjoy discussions about you, your business, your dreams and goals.
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As always keep in mind that the content provided on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
If you have a comment to share about this post or for me, please email me at email@example.com.
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.