Plan Your Lifestyle With Your Take-Home Pay
Generally speaking, for the average American, our housing and cars are the biggest monthly expenses we have. A majority of people base rent/mortgage and car payments off of their gross salaries. I personally don’t think that’s the best way to go about planning your lifestyle. I know apartment complexes and mortgage lenders typically use gross salary when determining whether someone can qualify for a loan or approval for renting. It’s a standard rule of thumb, but when you’re trying to be great with your money you have to use different rules. For example, let’s say Shawn was grossing $4,833 a month and rented an apartment for $1000 a month. Shawn got paid twice a month and after paying social security, Georgia taxes, federal taxes, health insurance, along with 6% 401k contributions his take-home pay was $3,347 a month.
So Shawn made sure he didn’t rent anything that was more than 30% percent of his take-home pay. If he had taken 30% of his gross monthly salary, technically he could afford an apartment for $1450 a month, but that’s 43% of his take-home pay $1,450/$3,347. With a $1450 per month apartment if the rent increased by $100 he’d be spending half of his take-home pay on rent. But Shawn kept his rent at around 30% of his take-home pay, because by that rule if his rent were to increase year by year it wouldn’t hurt him as much. Furthermore, because of Uncle Sam, we will never get to see all of our gross salaries, so why plan a lifestyle around it? Does that make sense
When you’re calculating how much home you can afford, do not compare it to renting. Buying a home includes way more than just the mortgage payment. You have to budget for property taxes, PMI, homeowners insurance, and most importantly maintenance. You no longer have a landlord when you become a homeowner and sometimes home repairs can be pricey. I’m pretty sure your local bank and lenders may qualify you for a certain amount, but don’t plan based off of what they tell you. Banks are in the business of making money and as soon as you can’t afford the payments they will foreclose on your home.
So plan according to your take-home pay. Figure out how much of your take-home pay you want to allocate towards a home and shop for a loan based off of that figure. The same goes for cars too. Americans we love brand new vehicles!! The average new payment is $523 per month, according to CNBC
The key to optimizing your money and building wealth is to reduce debt, live within your means and invest. When most of your take-home pay is not going towards housing/rent, cars and debt, it frees up your number 1 wealth-building tool which is your income. It’s much easier to save, spend money on hobbies and vacations when you’re living within your means. Take a look at where your money is going and see where you can cut back or make a few changes that will optimize your financial future and lifestyle. Don’t settle for the average be great with money.