Not all budgets are created equal.
Whether you’ve been working a budget for years or are just getting started, it’s important to check your budget’s pulse with some common ratios to determine if you’re spending too much money in certain areas.
What are those areas? Great question.
In this article, we’ll look at your housing expense pulse, consumer debt pulse, and total debt pulse. So, pull out your calculator and find out if your budget is healthy, needs some lifestyle tweaks, or requires major surgery.
Check Your Housing Expense Pulse
Let’s check to see if you have too much money going toward housing. Here’s the calculation:
Principal: $ __________
Interest: $ __________
Taxes: $ __________
Insurance: $ __________
Subtotal: $ __________
Gross Monthly Income: $ __________
(Divide Subtotal by Gross Monthly Income)
Housing Expense Pulse Total: $ __________
The Housing Expense Pulse Total should be less than or equal to 28%. If this number is much more than 28%, you are paying too much for housing.
You have a couple of options if your total is greater than 28%. First, you could choose to sell your home and downsize your mortgage. If you’re renting (you can use a similar calculation if you’re renting), you could move or consider getting a roommate. Another option is to raise your income as fast as you can so that your total moves at least below 28%.
Don’t let your housing stop you from paying other necessary bills. Remember, just because you qualify for a loan amount doesn’t mean you should take it. Likewise, just because a landlord will rent to you doesn’t mean you can really afford it.
Check Your Consumer Debt Pulse
Consumer debt is non-mortgage debt such as – but not limited to – auto loans, credit cards, student loans, and personal loans. Let’s see if too much of your paycheck is going toward consumer debt payments:
Consumer Debt Monthly Payment Total: $ __________
Net Monthly Income: $ __________
(Divide Consumer Debt Monthly Payment Total by Net Monthly Income)
Consumer Debt Pulse Total: $ __________
Your Consumer Debt Pulse Total should be less than or equal to 20%. This amount should be heading toward zero – in other words, don’t add new consumer debt at any point in time! If you have a ratio that is higher than 20%, it’s time to make some drastic changes. You could trade in vehicles that have high loan values, or sell a bunch of stuff you don’t need in order to pay off debt.
Check Your Total Debt Pulse
So, what about your total, overall debt? Is your financial plan suffering because you’re taking on way too much debt? Here’s the calculation:
Total Debt Monthly Payment: $ __________
Gross Monthly Income: $ __________
(Divide Total Debt Monthly Payment by Gross Monthly Income)
Total Debt Pulse Total: $ __________
Your Total Debt Pulse Total should be less than or equal to 36%.
Understand, as a CFP® I love to see no debt but these calculations can help you determine how deep the hole is if you have debt. These numbers can help you identify trouble areas that need additional focus!
For example, let’s say you have little debt but your housing pulse is over 28% . . . you really might want to consider downsizing or increasing your income.
However, before you plunge right into paying off your debt or working on other financial goals, make sure you are focusing in on the right step in your financial plan. Check out Phase 1: The Foundation Phase and start with some simple steps to get you moving in the right direction.
Also, make sure to check out the Foundation Phase Workbook to help you calculate the additional numbers you’ll need to give you clarity while starting your journey to financial health.
So, how healthy is your budget? Leave a comment and let us know!