The 8 Percentages You Should Live Your Life By
July 20th, 2010 | 
Author: The 8 Percentages You Should Live Your Life By
Life is hard right now. Some people are without jobs some have lost their houses and most people have lost money in investments and the value of real estate. With the country being in debt to itself and foreign nations and its people borrowing money like there is no tomorrow its hard to know how much is too much.
How much debt is too much?
Can you afford to buy that new car? House? Rental Property?
Are you saving? Are you investing enough?
Below Ive outlined some rules of thumb that you should be living your life by. If youre not then try to shift your behavior into meeting the guidelines. The views below might not be popular or easy but they are a necessity to making sure you dont end up in financial trouble.
Consumer debt should not exceed 20 of your monthly take home net pay. If you are already above that limit cut your budget to the bones and pay that debt down/off. Consumer debt credit cards being the leader in this area has a strange habit of sucking the life out of you and its not until youre debt free that youll realize this. Pay off all of your consumer debt and feel the difference if you dont feel relieved / ecstatic / free that you dont owe anyone anything just go out and get more debt.
Mortgage debt should not exceed 28 of your gross monthly pay.
If you have an ARM Adjustable Rate Mortgage this could get you in trouble quicker than you think. Picture the scenario you can easily afford your mortgage when you get it you / your spouse loses their job your rate adjusts and suddenly your payment is now 55 of your take home pay. How to avoid this? Theres no failsafe to avoid this but aim to get a fixedrate mortgage on a 15year mortgage and have it fall under the 28 guideline.
Your total debt payments should not exceed 36 of your gross monthly pay.
If you find that it is make it your primary goal to get below this limit. The reason that 36 is considered too much is that you then wont have any extra cash to save up for purchases invest into retirement accounts pay for necessary expenses etc. However remember that these percentages are rules of thumb and you situation is unique.
Always put at least 20 down on a real estate transaction. If you cant you cant afford the house youre about to buy. You know that part of the American dream where you can only be happy and fulfilled if you own your own home? Thats a lie. If you own your home instead of renting but you cant afford to eat or pay the light bill then the American dream just became a nightmare. With over 20 down youll avoid PMI Private Mortgage Insurance which is like an insurance premium that you pay to ensure your mortgage lender against a loss if you should default on the loan. When you put over 20 down on a property you become more invested financially and emotionally in the property and less likely to walk away.
Rental real estate aim to have 50 equity and a large cash cushion 1 year of mortgage payments. Want a quick lesson in how a foreclosure works? Buy a rental property with 0 down hope your tenant will pay you every month and dont have any cash reserves. They dont pay you have no cash and then the bank forecloses on you. This situation is like walking on the edge of the cliff youll stress that everything will work out and when it doesnt your life will start to unravel around you. A rental property should be an investment that doesnt keep you awake at night and if it does maybe its time you sell it.
Vehicles the value of your cars/bikes/boats should not exceed 50 of your annual income and you should aim to pay cash for all of them. Speak to an investment professional and outline this investment. Im going to finance an asset put 25 down pay off my investment over 4 years and it will be guaranteed to lose at least 40 in that time.Theyll look at you as if youre crazy. Thats what you do when you finance vehicles barely any vehicles go up in value only collectibles do so buy a reliable car and drive it for as long as you can. If you have to finance it pay it off within a year.
Aim to Invest 15 of your take home pay into retirement accounts. These days not many of us will retire with a pension to cover all of our financial needs. So well need some other funds that will support us. Most if not all of you will be familiar with 401ks and IRAs but are you saving enough into them? If you dont know and dont want to do a retirement income projection then aim to do 15 of your net pay. This will be a tough goal if youre not used to it. If 15 is too big of a goal to start with then aim for 10 and then increase it by 1 every 6 months.
The most important: Tithe or donate to charity 10 of your take home pay. Money plays weird tricks on people. The more you have the more youll fear losing it. Do something awesome with your money and instead of buying something else for yourself ask a local charity what you could buy to help them. The joy youll feel from helping someone out with your money with be far and above the feeling youll get from obtaining your new possession.
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