I wasn’t sure if he was going to have a nervous breakdown right there at my desk or not. He kept saying over and over, “but, they said that I could afford it.” His wife looked at me with pleading eyes to comfort him as she went in the other room to tend to their children. Finally, I mustered the courage to tell him what the numbers said. As gently as I could, I told him, “buddy, I don’t care what they told you. Your housing expenses are 42-percent of your income and the reason you are in my office today is YOU HAVE TOO MUCH HOUSE.” He left shortly thereafter and I never saw him again. He had gained the missing piece of the puzzle.
Unfortunately, as budget coaches, we see this more than we care to. There are a lot of formulas out there to figure out what you can afford. Most of them focus primarily on the mortgage itself or many banks look at your overall indebtedness. Our approach is to look at all the house expenses as one overall housing cost and then look at that number as a percentage of your net spendable income.
We recommend that your housing cost is at max– 30-percent of your spendable income.
That includes rent or mortgage, utilities (including phone), insurance, taxes, and maintenance as well as any miscellaneous housing expenses like housekeepers or lawn care.
Net spendable income is just what it sounds like. Your take-home pay minus any non-negotiable items you may have items like daycare, child support or giving. Sidenote- many families do subtract generosity contributions before figuring out how much they have to spend on the rest of their lives.
For a simple example, let’s say you make $50,000 a year. That means you gross $4,166 a month. After taxes (25-percent for illustration) you bring home $3,125 a month. So your 30-percent housing allowance would be $937.50 per month. THE KEY HERE IS THAT THE $937.50 IS FOR ALL HOUSING EXPENSES. That puts you in a decent apartment in some markets.
We will continue to roll out the recommended percentage in the future but the biggest category is housing and if you can hit the 30-percent max it really helps the rest of your budget. Don’t let the lenders entice you into buying too much house. We will look at some of the other categories later but here a few key ones that add up to 72-percent of your spending plan.
- Housing: 30-percent
- Groceries/Eating Out:15-percent
- Insurances: 13-percent
Run your housing numbers before signing the lease or taking on the mortgage. Don’t forget to include the other housing cost. That way you won’t be in my office wondering why you got too much house!
About The Budget Guys:
For the last 10 years, The Budget Guys have been helping families and individuals get their financial lives together. Tim has been married to Terri for over 30 years and Chris has been married to Tiffany for over 20. We have both had our share of knock-down-drag-discussion over finances. So, we bring some experience. We would love to sit down with you at your kitchen table (metaphorically speaking, we actually meet in our offices), and lend a fresh set of eyes to your situation. For more info and budget help, check out TheBudgetGuys.org.