Are You Living House-Poor?
According to the U.S. Census Bureau, in the second quarter of 2009, 67.4% of citizens were homeowners. But at what cost are we getting the keys to our own pad? The scary statistic is that as of 2007, the number of households paying more than 50% of their monthly income towards housing was 18.5 million – over 100% more than the 8.9 million in 1991. On average in 2007, American households spent 43% of their budget on their homes. (Read about three simple questions you should consider when weighing retirement decisions, in Retirement Living: Renting Vs. Home Ownership.)
Generally speaking, the recommendation is for no more than 35% of your income to go towards housing, with 33% being a recurring magic number. However, there are a few important points that you must remember about this figure:
- 1. It is an estimate.
Remember to look in your price range. What you can get for the amount you want to spend may surprise you – just don't look above your price point if you can help it. If you can stay under that amount and still be happy and comfortable where you live, why wouldn't you?
2. Higher income = more flexibility.
The problem with budgeting by percentages is that it does not take into account the effect of your remaining income. If you make $2,500 a month (or $30,000 per year), housing costs at 33% of your income would be $825 per month. Factor in the averages that Americans spend on food (15%) and transportation (18%), and your spending is now $1,650 per month – 66% of your income before debt repayment, entertainment, clothing, gifts, internet and your cell phone.
The more important number to remember is what is left over – in this example, $850. If you do this same calculation with someone who is making $84,000 a year (or $7,000 per month), the leftover 33% is $2,310, which is a much more manageable number.
3. It is a percentage of your gross income.
When you create your budget, you can use either your gross income or your net (after-tax) income. It's usually easier to use your net income because you don't have to factor in taxes and payroll deductions. However, it is important when you hear budget advice to ask if "gross" or "net" is implied, and to adjust your numbers accordingly.
4. It includes all related, recurring housing costs.
The magic 33% must include all of your housing costs, except repairs and upgrades (for which you should budget separately!), including but not limited to utilities and condo fees. Sit down and make a list of costs that will apply to you and factor them into your rent or mortgage immediately. That way, you won't be surprised when the first bill comes after moving day.
If an honest appraisal of your budget reveals a housing cost percentage that you are uncomfortable with, don't panic. Selling is not the only alternative. First, go through the rest of your budget. If you under-spend in other categories, your housing costs may not be out of line. If that isn't the case, consider possible additional sources of income or parts of your budget that could be reallocated towards your home. Remember, if your budget (and spending) reflects your personal life priorities, you'll be just fine – as long as that budget balances. (Can you have perfect abs in just six minutes a day? Maybe not, but you can have a solid budget in six months. Find out more in 6 Months To A Better Budget.)