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 a 42% 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 be at max- 30% of your spendable income. That includes rent or mortgage, utilities (including phone), insurance, taxes and maintenance as well as any miscellaneous housing expenses like housekeeper 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% 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 recommend that your housing cost be at max 30% of your spendable income.
We will continue to roll out 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.
Groceries/Eating Out- 15%
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!