Welcome together, we're gonna explore our personal finances and figure out how to improve them. Whether you're just getting started in life on your finances, or you may already have a home and a car payment and you're struggling to get credit cards under control, are you getting a later start in life on saving for retirement, Reduce Debt Increase. Wealth.com is a podcast to educate those to improve personal finances, whether it's eliminating debt, or making smart investments. So let's now get started. Okay, this week I'm gonna talk about budget. But I'm not going to talk about in the past. In the past, I've always talked about setting up a budget, based on what you're already been paying. So now I'm gonna start focusing on how much you really should be paying. And we're going to start off with the housing and then we're going to go automobiles and then later on, we're going to go to food and clothing. That's the four basics. Your budget should be based on 50%. Need, needs, who would be such as housing, transportation, food, clothing, and whatever else falls into those categories. Then you want 30% once which could be an expansion of the needs. So if your housing goes over a little bit, you could claim that's part of your Once or if you need a second car or or fancier car or a more expensive car then that could be part of your once and then 20% for savings and paying down your line of credits and credit cards. But I would say 20% trickly to savings would be a good goal to onto. So needless to say I do have a article on the housing and member I've been saying in the past, my mother's always said your housing costs shouldn't be more than 25% of your of your income. Income I've already stated in the past should be your net income, which is your gross income is your total amount you make before taxes and any other deductions. net income would be your gross income less taxes. And in my case health insurance, and whatever is leftover is your net. And it should your housing cost should be factored on that percentage on that now I'm not dollar amount, which could be substantially less than your gross. So it could make a difference depending on your income tax brackets and how much you're making. I've always based it on my gross, but you could also be more conservative and base it off your net. And the goal here is to get you an idea of what you should be spending towards these categories. And if you keep within these parameters, then you shouldn't have any trouble paying off your debt. And you shouldn't have any trouble as saving money building up that emergency fund and read saving for retirement. Because remember tire meant is the only item in life you can't borrow money to pay for. So whisk it with the article now, this article from www.fool.com million acres a Motley Fool company, how much of my income Should I spend on housing by Murray Beckman contributor taken on too much house opens the door to a world of financial trouble. And here's where to draw the line. The decision to buy a home is huge. But many buyers make a major mistake in their excitement. They buy a property they can't actually afford taking on too much house is problematic in several regards. First, if you buy a home with a mortgage payments, you can't keep up with your risk falling dangerously behind to the point where you lose the property for closure. In a less extreme, but almost equally troubling scenario. You might scrounge up enough money to pay your mortgage, but fall behind on your remaining bills, racking up unhealthy debt and ruin your credit in the process. What's a better bet know how much of your income you can comfortably afford to spend on housing and use that number to guide your buying decisions. The 30% rule as a general rule, your housing cost shouldn't exceed 30% of your take home income. Now there are several interpretation of the words housing cost. At a minimum, they should include your mortgage payment, including private mortgage insurance if you're liable for it, property taxes and homeowners insurance. If you're bringing home 4,000 a month, the most you can afford to spend on those items combined is 1,200. dollars. Therefore you need to research property taxes in the area you're looking to buy in and get some quotes on a homeowner's policy. You should also use an online mortgage calculator to see what mortgage you can afford based on your down payment, and estimated taxes and insurance. Having that information on hand before you get too deep into your home search that will not only be useful that could prevent you from making a major mistake, there's another school of thought on that 30% rule. Some financial experts feel that 30% threshold treated should include not only your mortgage payment, property taxes and insurance, but also predictable maintenance. There's no easy way to determine what the upkeep will cost you. But among most homeowners spend one to 4% of their property values on maintenance every year. If you're looking at newer homes, you can veer towards the lower end of that range. If you're looking at older properties stick to the higher end if you're looking to buy a $200,000 home and expect to spend 3% of his value on maintenance that 6,000 a year or $500 a month. Going back to it example where your take home pay is 4,000 a month. That would mean you need to subtract 500 from your 1,200 monthly limit, leaving you with a more limited budget for buying a home. To be clear, the first interpretation of housing costs is more common than the second. But if you're able to keep your housing costs including projected maintenance to 30% of your income or less, you'll get yourself more financial wriggle room, you don't want to be house poor by spending more than 30% of the income on housing, your is falling behind on costs related to the home or on other essential bills. But even if you can, in theory, spend 40% or 50% of your earnings on housing and still keep up with your bills. Think about what that will do to your lifestyle. Chances are you'll have to give up luxuries you come to enjoy like dining out entertainment and traveling and there's a good chance at spending that much on housing with cars. You To fall behind on other goals like saving for retirement or establish a college fund for your kids that take away, don't let your housing costs eat up too much of your income. If you can stick to that 30% threshold or lower, there's a good chance you're managed to pay your loan without having to stress about other bills, or give up things that make you happy. Okay, this article says 30% of your net income. This be clear here, they're talking about your mortgage payment, plus your real estate taxes that you owe, plus your homeowners insurance. So those three things need to be included in that 30%. As far as maintenance, he can do that as you go. Maybe you can get by without including it. Now you should know what you're getting in for if you buy an older home, say a home that's 60 or 70 or 80 years old, you may take a look A lot more maintenance than a brand new home. Then, again, you're gonna be paying the difference in the price. A new homeowner, first time homeowner, he may have to include things like buying a lot more in yard tools plus, maybe vacuum cleaners and stuff. Those are one time costs you may be replaced every five or 10 years washer and dryer refrigerator, so stuff like that. You need to factor that in more or less your purchase price. If you're buying a house and you're thinking about putting a big down payment. If you need to put refrigerator, stove and other stuff don't use all your money on the downpayment, save some of your money, make a little bit smaller downpayment. And so you have the money to buy these things are you going to be coming up in the near future after you're close on your house? So as that said, at some words of wisdom As far as maintenance, other than painting the house fixing gutters, light bulbs, I really don't have a whole lot of maintenance costs on the time, you know, day to day basis, month to month basis. And using a percentage of your income to apply to maintenance or 3% of the cost of your home for maintenance assistant arbitrary number, you're probably won't ever use anything close to that. And you'll pay for it as you go because it'll be too small little things as you go week to week, month to month. And do you know you can kind of put $100 amount in your budget for maintenance and you might get by on that if you may be a little older home where you might have some other problems. He definitely not going to factor in the cost of a new roof because a new roof is gonna cost you anywhere from five to $20,000 depending on this size of the roof and where you live, that's a major improvement and you're most likely would have to borrow money. So if you're buying a house that may need a new roof in the next five to 10 years, you may want to make sure the value of the house has gone up so you have some equity so you can have an equity line of credit to pay for a new roof as to some thoughts I have with that going forward. And now we're going to talk a little bit about your transportation. transportation costs has to be the your car payment, your car insurance, your maintenance, your gasoline, everything you pay, or put into that car for that car. And also can include if you live in a big city, your public transit costs such as a monthly pass to ride a bus, or the subway and or taxi cabs and stuff like that. That's all should be a transportation costs. And I have an article that talks about all these things. So we're going to do that next and then we'll make comments after that. This article is from the nerd wallet.com. What car payment can you afford how to budget for your ride by Philip Reed, it's smart to spend less than 10% of your monthly take home pay. But there's some flexibility with this budgeting approach. Before you hit the dealership, you should take a moment to decide what monthly car payment you can afford. To cut to the chase, it's smart to spend less than 10% of your monthly take home pay on your car payment so you can keep the total costs below 15 to 20% of your income. To cut to the chase too smart to spend less than 10% of your monthly take home pay on your car payment. So you can keep your total car cost below 15 to 20% of your income that might leave Feeling you can afford only a beat up you go. But there's an interesting covenant to this rule of thumb is called the balanced budget approach. here how it works balance your budget, your life and your car payment. nerdwallet recommends using a 50 3020 rule dividing your take home pay into three general spending categories 50% for needs such as housing, food and transportation, which in this case, your monthly car payment and related auto expenses more than that below 30% for once, such as entertainment, travel and other non essential items 20% for savings, paying off credit cards and meeting long range financial goals. The monthly payment for your auto loan definitely falls into the needs category. For many people. A car is a lifeline connected them to essential tasks such as holding down a job or traveling Putting the kids to school. However, there's some flexibility in the balanced budget approach. If you want a more expensive car, you could consider part of your monthly payment as spending on a once category, so as long as you keep the balanced budget overall. So while 10% of your take home pay for your car payment may sound restrictive. If you recognize and other budget areas you could choose to spend more on your car. Your payment isn't your only car expense. Don't forget that on top of your car payment or extra auto related expenses. This includes insurance, gas repairs and maintenance, parking and even tolls. Many financial experts recommend keeping total car cost below 15 to 20% of your take home pay. So while your car payment is 10% of your take home pay, you should plan on spending another 5% on car expenses. For example, your monthly paycheck is $3,000 your car payment would be about $300. Your plan on spend another $150 on automotive expenses. Avoid that costly car payment mistake. Once you determine the monthly car payment you can afford consider what goes under the hood when the lender calculates your payment factors include the loan amount, the annual percentage rate or APR then includes the interest rate, the length of the loan, you could waste a lot of money by focusing only on the monthly payment and ignoring your total financing costs. For example, take a look at how two vastly different loans can result in the same car payment. monthly payment $372 for both loans, loan amount first 112 thousand 504.5% APR 36 months total interest $886 second loan 18 Thousand 8.8% interest 60 months total interest $4,315. Also keep in mind that the interest rate on your auto loan would depend on your credit score and other factors. lower credit scores generally result in higher rates. It's smart to compare offers to find the most competitive rate on your auto loan, but it's especially important if you have bad credit. Additionally, while many people take out a longer loan to get a more affordable car payment, they often end up paying considerably more in interest over the life of the loan. nerdwallet recommends loans of no more than 36 months for use cars and 60 months for new cars. get what you want, but stay balanced. Now that you know that car payment you can afford and how it fits into your budget you're better equipped to negotiate a good deal. Well, most financial experts recommend economizing on auto expense if upgrading your right is important to do, and while most financial experts recommend economizing on auto expenses, if upgrading rise is important for to you go for it as long as the total budget remains balanced. Okay, the article talked about 10% of your take home pay or your net pay for your auto loan payment, another 5% for auto costs, such as insurance, gasoline maintenance, and they also include parking, tolls, etc. That would include all your car so if you have two cars, that would be both them combined. Gotta keep that in perspective, especially if you're a married couple with children and you're working on one income So as I stated in earlier episodes, you have a beater car to go back and forth to work and then you have a nice car that your wife drives that you use for family outings and travel and going places. So that could add up in a hurry. Now these are all suggested percentages. And it's an order to keep your budget under control. Your as article also talked about the 50% 30% 20% rule, and that's that's budgeting rules 50% for needs 30% for wants and for 20% for savings and long term goals and they also included credit card payments. If you keep everything under control, to start, when you're starting out in life when you're getting started and you keep close to these percentages you should keep your credit cards under control unless you just go wildly spending money that you don't have. So if you spend it today, you got to pay for tomorrow. So at some point in time, it's going to catch up to you. So that's why it's important not to go out of control with credit cards. Oh, I know that convent 19 has been going on. I've hasn't talked about a whole lot. If you're still lucky like I am, and you're an essential person and you haven't, you know, lost your job. You're still working. Good for you keep it up here on the right track. You should keep your goals in mind. If you were shut down for six or eight weeks, you get in a little bit behind. That's the importance of having an emergency fund. If you had emergency For a month, month and a half worth of your expenses, you would come close to not using it all up. And what if you did get unemployment, you would probably still be okay. You'd be able to pay your bills and, and eat and not be too financially hard off. But I know most of us don't have an emergency fund. I do now, but I want to most my life without one. So it's very important. So that that's the importance of the emergency fund and remember my strategy on paying off debt. As you pay the minimum amount on all your credit cards. You pay the minimum amount of all your loans. You have those three accounts, a savings, a checking, and a retirement. The three necessary accounts for financial security and you have a one month two months worth of savings. For an emergency, and not only the pay of like your car breaks down, but in case you get laid off now that we all been through that we know what to expect and why it's important to have an emergency fund. So I'm not gonna harp on that too much. Next week, we're gonna do the other budget concerns, food and clothing and whatever else I can think of the throw in at what percentage is an idea of using these percentages, especially when you're just getting started? before you buy that first home, it's important to stay within those ranges. And you could go a little bit over and then if you get pay raises, you get in the range and then you get a pay raise you it's comfortable, and you can increase your savings. So that's the importance of doing all that. If you're a person that already has a mortgage Buying a home have maybe two cars, married have a couple children. You got to look at if you're outside of these ranges, your refinancing options, if you could refinance your mortgage say the same amount of time say so you got a 30 year mortgage, you've been in the house for five or six years. So if you can refinance and get a 25 year mortgage, a little bit lower interest rate and get your payment down. And if you can get that payment down, that puts you in your range, that would be a good thing to do. Yeah, you got there. One way or another. Whether you're both were working when you've got bought the home. And when you had children, you figure it out that childcare costs cost too much the wife stays at home or even working part time. So you ain't comes down a little bit that could throw you outside of that 30% range aim though you might have been in it when you bought the house to start with. So you know, life goes on. So with that said, if you could refinance to get you closer to your range, I would do it. I wouldn't add don't borrow any more money because if your goal is to get out of debt, if you add more time and borrow more money, how's it getting you out of debt? It's not. I know you got dumb, pesky credit cards. Maybe if you got a bunch of high interest rate, you could pay some of that off. Okay, well, you could do that. I tried to refrain from doing that. I've done it. It just takes you forever to pay off the house when you keep refinancing and adding to it so you got to get equity in a house so you can have a line of credit. So if you do need a new roof, you got a line of credit you can pay for it and still be within your budget range. It's got a lot of people have trouble with this. Stay in within the range. It is a challenge. So it's a work in progress. So you gotta always look at your spending. You gotta keep track of what you're doing. That's why when I started this podcast, I didn't focus on these percentages, how much you should spend for housing, how much do you spend for your car, you know, 30% for housing 10% for a car payment 5% for maintenance on the on the automobile. I didn't focus on that, because that's not important. The most important thing is keeping track of your finances, keeping track of your money, money in money out, the more that goes out, worse off, you're gonna be then you start using credit cards well, even at 15 or 17% interest rate. That's pretty hefty, so it gets expensive in a hurry. So you want to avoid doing that. So pay them Minimum on your credit cards, I cannot stress that enough. put money aside in your savings. build up an emergency fund have small amount, large amount, it's all up to you build up some more, make a big lump sum payment on a credit card, whether it's the one with the lowest balance do or the one with a highest interest rate. It's up to you. Maybe pay off the smallest balance one first. So you get get that done, then start concentrate on the higher rates and go from there. So next week we're going to cover Like I said before, food, entertainment. Clothing costs what that percent of your budget that should be. That's the end of another episode. I hope you found it useful. And if you'd like to share this episode with your friends, please do so i'm open for any suggestions for improvement or for information that you would like to talk about in future episodes. You can go to my Facebook page and leave me a message more than glad to comply. To find my Facebook page go to Reduce Debt Increase Wealth.com and click on the Facebook icon to go to my Facebook website.