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Buying a home isn’t just about qualifying for a mortgage—it’s one of the biggest financial decisions of your life. Too often, people jump into a purchase based on what a lender says they can borrow, without considering what’s truly sustainable for their lifestyle and long-term goals.

The right home budget should allow you to:

  1. Maintain financial flexibility
  2. Protect your savings rate
  3. Continue spending on the experiences and values that matter most to you

In this post, I’ll walk through a 4-step framework to help you align your home purchase with both your finances and your priorities.

Step 1: Understand Your Current Spending

Your spending tells the story of your lifestyle. When considering purchasing a home, ask:

  • How much does it cost to live the way I live now?
  • Are my dollars being spent on the things I truly value?

It is critical to identify where you are currently spending your money before taking on any new financial commitments.

If you’re unsure of your current spending, tools like Monarch Money can quickly categorize expenses and give you clarity. For example, after tracking their cash flow, one couple (let’s call them Alex and Jamie) realized their monthly spending averaged $12,000, largely driven by childcare and travel. With that insight, they were ready for the next step.

Step 2: Calculate Your Savings Rate

Once you understand your current spending, identify your current savings rate, another important metric to ensure your future goals stay on track.

Savings Rate = Annual Savings ÷ After-Tax Income.

Personally, I encourage clients to target a 20% savings rate across all sources. 

For Alex and Jamie:

    • Household income: $400,000
    • Estimated taxes:     $110,000
    • After-Tax Income:    $290,000      
    • Annual Savings:      $  58,000 (20% of After-Tax Income)
    • Annual spending:    $144,000
    • Annual Surplus:    $  88,000

After prioritizing savings and accounting for other lifestyle expenses, they have $88,000 leftover. 

Divide this by 12 months and their total monthly housing budget (including insurance and property taxes) could be as high as $7,333.

Given that they have allocated 20% of their income to savings, if they experience an unexpected expense, they have enough margin to temporarily reduce their savings rate to cover this expense without taking on debt. 

Step 3: Model the Impact of Different Home Prices

Just because a bank approves you for a certain mortgage doesn’t mean it fits your life. The key is to model different home prices against your cash flow and savings rate.

Remember, your monthly rent is the highest your housing costs will be. Your monthly mortgage payment is the lowest your housing costs will be.

Once you own a home, you must maintain it. This comes with an additional cost, which I typically advise allocating 1% of the home value each year to general maintenance for your home.

In Alex and Jamie’s case:

  • A $1M home would be at the high-end of their price range to keep their monthly housing costs < $7,333. 
  • An $1.2M home would reduce their savings rate to ~15%. They felt okay with this, knowing childcare costs would drop in a few years and they plan to send their kids to public school. 
  • A $1.7M home, however, would wipe out their savings entirely at their current income and spending.

This forced important values-based conversations:

  • Are they willing to cut back on travel or dining out to afford a home in their desired neighborhood?
  • Could they increase their incomes to afford a more expensive home?
  • Could a liquidity event for their company make their dream home feasible?

There’s no “right” answer—only what’s aligned with your priorities. For Alex and Jamie, their lifestyle mattered too much to sacrifice, which meant their dream home was out of reach unless their income increased or they received liquidity for their equity currently held in private companies.

Step 4: Choose Your Target and Create a Plan

After modeling the scenarios, you’ll know your options. Typically, the decision falls into one of four paths:

  1. Reduce spending in other areas
  2. Lower your home budget
  3. Save longer or wait for a liquidity event for a larger down payment
  4. Increase household income

For Alex and Jamie, the math showed they would need about $450,000 of annual income to comfortably afford the $1.2M home while maintaining a 20%+ savings rate. That meant pursuing career growth opportunities became part of their home-buying strategy.

Key Takeaways

  • Awareness is everything. Know your spending and how it aligns with your values before shopping for a home.
  • Protect your savings rate. Strive for at least 20% of after-tax income—even after accounting for higher housing costs.
  • Run the numbers. Model multiple purchase scenarios and see how they affect your long-term goals.
  • Focus on what you can control. Your income, spending, purchase price, and down payment matter more than trying to predict interest rates or housing markets.

Buying a home is more than a financial transaction—it’s a lifestyle decision. The right home budget allows you to enjoy your life today while building a secure tomorrow.