How To Keep Your Costs Down and Improve Your Financial Health

Your financial health is the first thing that you need to get in order before you begin searching for lenders. For many people, this is a given in their daily lives, as they habitually maintain a clean bill of health when it comes to their finances.

I outlined in another article what you need to do in order to help get yourself approved with a lender. That article included topics such as getting pre-approved, having funds in your savings account (or any kind of account where you can quickly access the cash), and improving your credit score.

What I didn’t touch on in that article, however, was how you can achieve getting pre-approved, how you can build the funds you need in order to have them ready and available for when you are finally ready to purchase a property, and how to improve your credit score.

Getting pre-approved is a fairly simple process where a lender takes a “snapshot” of your financial situation and then pre-approves you for a certain lending limit. Getting pre-approved will tell you roughly how much you can afford (the amount the bank is willing to lend to you given other criteria like income, debt-to-income (DTI) and credit score) and the rate that will accompany the amount of money you will eventually borrow to make a purchase. 

Pre-approval is a good first step because it will show you exactly what you are working with. However, if you haven’t been mindful of your spending, savings, and income prior, you may be in store for some surprises. The lender will require important documents and details of your financials that you never considered before and that you may have probablyneglected. The pre-approval process is not a hard pull of your financials, that comes later once the deal is found and the lender will request all kinds of documentation from you to prove what you declared during the pre-approval process. They will pull your credit score, confirm that you work where you say you work, and review your taxes to confirm that your income is the amount that you say it is, amongst other things.

Before any of this is done, you will need to have all your financials in order to have a chance at getting pre-approved. You will need to be mindful of your spending, your income, your assets, your credit score, and the amount of debt you have taken out. Depending on where you are financially, it might take weeks, or it might take years to get to where you need to be in order to purchase a home in your target market. 

Some of these items are easier to fix than others. It’s easy to say “Just get a higher paying job,” in order to increase your income to appear more favorably to lenders. It’s also easy to tell someone to improve their credit score. Though both of these things take time. Your credit score does not jump 50 points overnight. It can take weeks or months to improve your credit score to a figure substantially different than where it already is. 

Then again, if you’re not too far off, a few weeks is all that might be necessary. 

I’ll begin with debt and spending, because these two items are the most immediate to improve given a slight change of habit. 

You will need to monitor all of your spending for this part. As well as use the snowball method for paying down debt, for example paying down the smallest items first, then using the money you save by paying off the smaller debts to pay down the larger debts faster. The most important consideration for lenders when investors go to get approved for a loan is their Debt-to-income (DTI) ratio. The interesting thing about this is that lenders do not care much about your total debt so much as they care about the monthly payment on that debt.

For example, if you make $10,000 a month, have $10,000 in credit card debt, but your minimum monthly payment on that $10,000 is only $35, the $35 is what the lender is going to deduct from your income to come up with your monthly DTI. For this reason, it makes sense to use the snowball method to pay down debt so that you can get rid of these monthly payments as fast as possible by paying down your smallest debts first and then working your way up to your biggest debts.

Aside from rent obligations, auto payments are usually the largest monthly expense for people who are looking to be approved for a loan or mortgage. Your car payment should not be more than 10-15% of your monthly income. If it’s more, trade it in and get a cheaper car. You’ll be able to drive all the fancy cars you want once you build a solid real estate portfolio.

By paying down your debt you will also be increasing your credit score. A big factor in your credit score is your credit utilization, the amount of debt you are taking out as a fraction of your total credit limit.

One “hack” to increase your credit score quickly is to apply for a debt limit increase with your credit card provider. By increasing your credit limit while keeping your debt the same your credit card utilization falls in your favor.

In order to afford a down payment, as well as closing costs for purchasing a property, you will need to save. You should be setting aside a certain portion of your paycheck to your real estate fund. For some people this means 30% of their paycheck, for others this means 70%. It really all depends on how much you can afford to save and how fast you want to reach your goal.

I personally put away as much as I can every month towards my savings so that I can purchase more real estate faster. The more real estate I purchase, the faster I can save more money. The faster I can save more money, the faster I can purchase real estate.

I currently save about 60% of my paycheck, which translates to thousands of dollars a month. I house-hack and have no housing expense. I make about $1,100 a month in rental income, after my mortgage is paid.

One option is to put your money in a self-directed IRA. You wont be able to pull this money out, cutting off the urge to want to spend it. You will however be able to invest this money in real estate. More on self-directed IRA’s here.

I looked at all my spending and habits and realized that I spend the most money going out. I like to hang out in coffee shops. I like to eat out. I’ve changed this habit to brewing coffee at home and cooking instead of going to restaurants for three meals a day. Where I was spending $50 a day I now spend only $10-20. I’m not missing much, as I realize that I don’t need to spend much money to live a comfortable life. 

Small items add up. You don’t realize it while you’re spending. $5 here, $10 dollars there. But do them every single day and they accrue into thousands if not tens of thousands of dollars.

For example, I would drink 2-3 coffees a day. Assuming I spent even $3 dollars on a coffee, that would still equate to $9 a day. $9 times 7 for every day of the week and you have $63. Multiply that by 52 and you have $3,276 dollars that you spent all year on coffee. Had you brewed at home you would save thousands of dollars. Believe it or not, $3,276 dollars is all you need in some markets to purchase a home.

You can buy an extra property a year if you just stop buying coffee. And that’s not even including tip.

Add breakfast, lunch and dinner to that equation, and all other miscellaneous daily expenses that people treat themselves to, and you can see where I’m going with this. Assume just $10 a meal for 3 times a day for $30 dollars. $30 times 7 times 52 = $10,920 a year. This is on top of all your other obligations like your car payment, insurance, gas, transportation expenses, subscriptions, cable & internet, phone, and so on.

Look at your daily expenses, and make the calculations yearly so that you can see the bigger picture. Once you look at that large dollar figure, you will be more inclined to change your daily habits. 

Become creative with it! Meal prep at home. Buy a lunchbox and prepare your meals for the week. Make your coffee at home and bring a large mug to work. See how much you actually consume and spend just a few hours a week preparing everything. It’s fine to treat yourself every once in a while, but not every single day, especially if you have goals that you want to achieve.

Call your insurance company and see if you can lower your rate. I use Drive Safe & Save with State Farm and just driving the way I normally do shaves close to $500 off my payment every 6 months. Call your internet provider and see if you qualify for assistance to lower your monthly payment. Switch energy providers. Start mowing your own lawn (if you have one). House-hack.

Invest in things that will help you on your journey to save as much money as possible, such as an air fryer which makes cooking an easy task. Make large purchases only when you really need them. Refinance your loans, or take out loans with lower interest to pay off larger loans with higher interest. Consider getting rid of Netflix and other services. Look at your app subscriptions and see which ones have free alternatives or which ones you can cut out altogether.

The first step, of course, is to realize everything you’re spending money on and write down your expenses.

There are services you can use to do this seamlessly, which you can link your accounts with, both checking and credit accounts, and the service will tell you exactly where your money is going. Once you’ve done this you can build a plan of attack. Separate your necessities with your desires. You obviously cant stop buying food, but you can choose the supermarket over a restaurant. You cant stop drinking coffee, but you can start brewing it at home. You have to pay for gas, but consider a car that will both lower your monthly payment, your insurance payment, and your gas expense. What can you lower the cost of? Instead of $7 iced lattes, consider getting regular filtered coffee, and then from there it will be easier to start making coffee at home. 

Spend your money only on things that will help you save more money or make more money.

If that air fryer is $100 but it will motivate you to cook your meals at home, saving you thousands in the long run, then it is a worthwhile purchase. Use apps that give you cash back, such as Upside, which offers cash back deals on gas and restaurants, and Clover, which builds points to the places you frequent and offers deals when you’ve gathered enough points.

There are other apps like these. Look for them, look for lower rates, look for opportunities to save money and get in the habit of doing so.

Value your bank account stacking up with cash more than you value comfort. Value investment more than spending.

The way I look at it is, once I’ve built my real estate portfolio to where I can retire, my life will be more comfortable then if I hadn’t built that portfolio at all and instead spent that money frivolously.