Wednesday, December 19, 2012

How Much "Home" Can I Afford?

“A house is not a home unless it contains food and fire for the mind as well as the body”
                                ~Benjamin Franklin
No doubt that whenever the topic of personal finances is to be approached, one cannot simple dismiss the potentially largest expense a person will ever had…their home.  Whether you’re paying rent for an apartment or a mortgage on a home, you’ve probably asked the question “How much home can I afford”?  This simple question has caused many people to live in financial straits and is usually “solved” through a trial and error process throughout your life.  Well, here’s my own two cents that may help you avoid some of the lessons at the school of hard knocks.
To cut to the chase, generally speaking your total rent/mortgage should not exceed 50% of your after tax net income.  This is a mantra I’ve always strived to live by (although with varying degrees of success throughout my life), and it will do your wallet some good to strive for this too.  Consider the salary of someone making $50,000/year.  This is a very good salary and you should commend yourself for making more than the average family of 4 in the United States.  Assuming taxes take up about 30% of your gross income, you are no left with $35,000/year.  If you divide that by twelve, you get $2,916/month, and half of that is $1,458.  This is your absolute highest expense you should pay for living in your dwelling, and most cities will easily accommodate a 1 bedroom apartment for this price.
When it comes to home ownership, make sure you take into consideration the hidden costs of upkeep into your monthly expense mix.  Say you have a $1,458 mortgage that includes your property taxes and home owner’s insurance, and now you have to replace your roof (a $15,000 job).  How are you going to fund this?  For home owner’s, that $1,458 should a monthly savings that you put away for home repairs and maintenance.  It might even be good for you to create a savings account specifically for home repairs that automatically links to your pay check through a direct deposit.  Thinking ahead like this will save you big time in the future.
You might be new to a city or starting out on your own.  Financial lessons such as “How much can I afford or should I spend on housing” are usually only learned the hard way.  I know, I’ve been there.  If you think about your income and do a little math, chances are you will be much better off than most people who first start out on their own. 
Wonderful Moment of the Day: Got my first A1C test back from being diagnosed a type 1 diabetic in October.  I got a 7.2% down from 11.5% two months prior (normal is below 7%).  On my way to living a healthy life!

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