The uneducated household budget.
By: Robert Obodzinski
Tags: Mortgage, Money, Budget, Personal Finance, Savings

How do you budget your household cash flow? Make more money than you spend, right? I’ve heard a lot of tips and tidbits over the years; have a plan, set goals, avoid impulse spending, direct deposit some money into savings separately. The list is long, but how do you really know if you’re doing it well, how do you measure your success?

If you’re like me, you have some sort of spreadsheet with a few formulas sprinkled in to help you visualize your strategy. Is this the best method? That depends. If its working then you’ll know. If it isn’t working, you’ll probably figure that out sooner or later too. Do you have money left over at the end of the month when your next check arrives, or are you leaning on credit cards for that last grocery run or full tank of gas before the next direct deposit?

No plan is ever perfect. What worked for you in June may not work next summer. This 2020 holiday season feels a little different than last year for some reason. The important thing is that you have an idea, stick to it, and track your progress towards your goals.

Speaking of goals, what are those exactly? Are you looking forward to buying that new truck next year? What about a bigger TV? I can say with certainty that sooner or later I am taking my family on a nice little vacation to anywhere with a clean hotel room close to a decent beach or pool, and some fun stuff for my kids as well.

Do you ever really think about the effectiveness of reaching those goals? If you can save for it and pay for it without using the credit card to supplement, then that’s great. From time to time I lose sight of the longer term goals and focus on the near term, but what are healthy long-term goals? More importantly, how can you turn those long term goals into short-term ones?

Debt is a thing that many of us struggle with. It cleans out your checking account and makes a great big paycheck turn into a little one. It becomes hard to look forward to getting paid when you know it’ll all be spent before the check clears. How much does it cost your household to owe that money each month? No one ever thinks about what they are giving up while having that interest payment on debt. What would you spend that extra money on if you had it? I occasionally wonder where I would be today if I had been better at managing my monthly debt payments in the past. Here’s a number to put in your budget spreadsheet- the sum of all the debt payments with interest you hand over each month.

I wish I could tell you a simple solution and inspire that eureka moment; buy xyz stock, invest in gold, mutual funds, etc. The get rich schemes are countless, but they all have one thing in common: a strategy can work for those who have a plan and stick to it long enough. I’m happy for those people, but for the rest of us life happens and plans change. You don’t get that promotion, you are hit with an expensive car repair, unanticipated medical bills, divorce, layoffs, unplanned pregnancy, and infinite other expensive surprises.

I can tell you with certainty something we all know to be true, the less debt you have the better. I can also tell you that the more money you have saved up, the better.

“Thank you, Captain Obvious.”

Well, how much less debt should we aim for? What is the target? How do you know what to base your plan off of? Well again, its obviously the higher you can set the bar, the better. All you really need to consider though, what is just enough to afford healthy and comfortable lifestyle. The term “comfortable” is subjective, but I’m pretty sure many of us would come pretty close to each other.

43. Its the first significant number. 43% Debt To Income (DTI) ratio is the highest debt ratio you really want to have in your budget. That is, 43% is the ratio of your debts to your gross monthly income. I’m not talking about your gym membership or your streaming video subscription. This number is your debt payments; money you owe to a bank, creditor, or other legally mandated financial obligation such as child support or court judgement. I’m talking mostly about car payments, rent or mortgage payment, credit card minimum payments, and student loans. When you get that debt ratio below 43%, big doors start opening for you. Think of it as your ticket to get through security at the airport. 43% is where you start to become eligible for decent home loan products. Don’t be discouraged if your DTI is higher than 43% in many cases we can get you your loan, but the circumstance becomes complicated and I don’t want you to depend on all those complications going right to get your loan if we don’t have to.

36. This is the other number I want you to know. At 36% Debt to Income (DTI), all the doors ahead are open. Think of this as your first class ticket, it gets you the fully reclining seat with your own personal entertainment system, a top notch inflight steak dinner, and unlimited complimentary beverages. It doesn’t get much better than this. With 36%, you have the best options to pick from. If the sum of your total household debt payments are less than 36%, you are in good shape.

28. 28% is the last important number, and something that you shouldn’t overlook. Your mortgage payment to the bank, your housing expense, should not exceed 28% DTI. Your housing expense is your PITI- Principle, Interest, Taxes, and Insurance. If you are looking to buy a home, do some math to figure your PITI. Sit down and work the numbers out before you go house shopping. You can prequalify for a much higher mortgage amount than you may actually be able to comfortably afford. Your mortgage lender can help you figure this out, or get a hold of me and I would be happy to help you work these numbers out for free. I’ve been house poor before, it stinks, and I don’t want anyone to have to go though that.

As long as the plan you have keeps you below 43% DTI, you’ll have access to some solid loan products. Things might be tight, especially for first time home buyers. Don’t sweat it, your income will grow over time, that’s almost a guaranteed rock solid fact for almost all industries and career paths. However, pay attention to your DTI as your income grows, find ways to improve it, expect setbacks, and be flexible. Once you get below 36%, you’ll start to generate room in your budget to make those extra payments on your home loan. You can kick in enough cash to reduce your mortgage term by half or more, you can save enough cash to make a large down payment on a decent car or bigger home, and you’ve given yourself options.

Most of us will fall somewhere in between, because life happens. We need a target. Build yourself a solid back stop in order to weather a bad storm, and live within your means. I don’t know about you, but living life on the edge to financial ruin and going check to check is not a fun place for me. I’ve been there and don’t want to go back, ever. So if you take away anything from this, just remember that there’s a minimum bar to meet and higher standard to aim for. Just because you can adult like Brennan Huff in the second half of the movie Step Brothers, it doesn’t mean you can stop there and start splurging when you have left over money after your short term savings goals are met.