Most people have hear the rule that your monthly housing costs shouldn’t be more than 32% of your gross monthly income, but I’m a bit more hardcore than that. This rule can still lead to House Poor Tragedy.
The reason? It’s calculated on your gross income, which means before tax. Well, 32% of your gross income can translate to between 45 – 55% of your after tax income, just for your house. No food, no debt payments, no toilet paper. Your after tax income is what really matters because that’s the money that hits your bank account. So, stop thinking about your income before tax, and only plan based on what your take home pay!
GOLDEN RULE: Make sure that all of your monthly fixed costs are 50% of your household monthly AFTER TAX income. This means, all housing costs, utilities, debt payments, transportation costs and groceries are only 50% of what you actually take home every month.
If you are a first time homebuyer and this feels too tight, you can push it up, but under no circumstance should you be higher than 60% of your after tax monthly income.
This way, you’re ensuring that at least 40 – 50% of the money that hits your bank account is left over for you to actually save and spend!
Usually, when I see house poor, fixed monthly costs are as high as 80%. This is when there’s no money left over for saving and barely any for fun and consumer debt levels start to climb year after year!
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