Most consumers have no idea how much installment debt may be too much installment debt on items such as houses, car loans, 0% interest furniture or carpet deals, and credit card revolving balances. It can be too easy to just say “Where do I sign?” and take the items home on impulse, and increase credit balances.
A good rule of thumb is no more than 28% of your gross earnings should be spent on housing expenses. This figure includes loan or rental payments, insurance, real estate taxes, utilities, and routine property maintenance. Maintenance is the most forgotten routine homeowner household expense and can easily be an instant budget buster.
Everything wears out, needs repainted, updated, maintained, mowed, trimmed, repaired, or replaced on a home at some point. If you don’t have a clear handle on how much you are spending on this area, use 1-2% of the home’s value as a good annual “guesstimate” of what to allocate in this area for an average home. On a $100,000 home, in general, you need to set aside between $84- 168 a month for this ongoing expense.
Now the next level includes all your installment debts including credit cards, your child’s braces, those 12 months 0% interest furniture loans, etc. Now you should have no more than 33% of your income committed to housing and revolving debt type obligations combined.
The final installment debt level checkpoint adds auto expenses. Include loan payments, insurance, gas, repairs, tolls, parking, etc. You should have no more than 40% of your income committed at this point with housing, installment debt, and car expenses, and 40% of your gross income committed before you earn it is still going to make having ends meet fairly difficult to do.
Now, it is possible to be OK by the numbers on the housing expenses, and OK on the revolving debt expenses, and then discover you are way out of line when auto expenses are added. Changes must be made in one or all three areas to get back on financial track.
When it comes to pre-commitment of income before you earn it, in a debt situation, less is much better than more.
If you already have $400+ of every $1,000 a month gross you earn committed to only three budget needs, this financial arrangement does not leave a lot of money left over for anything else. Remember, the rest of your gross is subject to a minimum of 7.65% for FICA and Medicare taxes, then the Federal Income tax takes another bite of between 10-35%, and perhaps the state you live in, or local area has an income tax too that comes off the top.
Without realizing it, you could easily have 80% of your gross income already allocated each month before you earn it on only housing, installment debts, auto expenses, and income taxes.
All these items must be paid before you get to the other routine optional and variable expenses such as medical expenses, groceries, childcare, clothing, vacations, game tickets, hobbies, etc.
If you are having a hard time determining where to start making the right changes in existing or upcoming installment debts, or how to make successful changes in your spending choices, it is time to visit with a professional. Work with a Comprehensive Planner who can look at your debt structure, help estimate your actual expenses, project income tax withholding allowances and see how much is really available for savings too.
It’s not only OK, but it is also wise to ask for professional help to realign your finances to fit what should be your lifestyle, not someone else’s you cannot afford to be living anymore.
Finally, don’t be embarrassed about your present debt circumstances, schedule a visit anyway. Everyone has to start somewhere, and where you are now is a great place to begin. You won’t find harsh judgment on the other end of your life, but you will find solutions.