Should you buy a house (or sell the one you have)?

It is more than obvious that there are a lot of people out there who cannot afford the houses they live in. If you are in the market, though, how do you know whether you can afford to buy? If you already own a house, how do you know whether you should consider selling the house your are in?

It all comes down to knowing how much you make and how much you can spend. If you have never put together a budget, now is the time to do it. You can track your expenses with a program like Moneydance, Quicken, or a spreadsheet, or you can just sit down with a pencil and paper.

Make a monthly budget. On the left are all the expenses you will incur in one month. On the right, all your income in one month. For yearly expenses like Christmas presents, divide what you spend by 12. For yearly income like an end-of-year bonus, divide the payment by 12. Be pessimistic.

After adding the usual things–groceries, dining, entertainment–don’t forget things like tax payments/returns (estimate), gas, medicine, cable, internet, credit card payments, etc. For now, leave off rent or your mortgage as well as home maintenance expenses like utilities.

Add up both columns. Hopefully your monthly income is greater than your monthly expenses. If it is not, consider moving back in with your parents.

If it is, find out how much extra money you have every month to spend on your mortgage, utilities, home repair, and other costs of homeownership (I would throw in an extra $100/month as a miscellaneous “home maintenance” category). Compare that to the cost of renting. So can you afford to buy (or continue to own)? The answer at this point should be fairly obvious. Don’t put your home on a credit card, and don’t wait for a notice of foreclosure. If you don’t expect a major change for the better in your income stream in the next few months, don’t buy. If you already have a house you cannot afford, consider putting it on the market.