Debt Free

Think of your income as pie; what ever your favorite is, I don’t care. How should you cut it to make sure everything gets paid? More important is to make sure everything is balanced. You don’t want for example, to be spending 50% of your income on a car payment, it would leave precious little for the rest of your expenses.

Here are some budget figures compiled from various lending institutions, government agencies and financial experts. 

Housing – Prevailing financial wisdom is that your home should be 2.5 – 3 times your annual gross income. The problem here is that in many areas of the country that won’t buy you a nice, 2-car garage, never mind a house to go with it. In more expensive metro areas such as Boston, New York, Seattle, San Francisco, Los Angeles, San Diego, and Washington DC / Northern Virginia, an average 3 bedroom, 2 bath home will cost you $350,000 and more. In cases such as these, you may have to reallocate your budget a little bit, otherwise you’ll need to earn well in excess of $100,000 annually to be able to purchase even a basic home.

Transportation – About 15% of your annual budget allocation should be targeted at getting you where you want to go, according to experts. You can use this taking the train, if you live in New York, or work in NY, but live in Connecticut, for example. With this allocation, you can purchase a nice, sensible Accord Hybrid from American Honda if you only make $34,500 after taxes. This assumes you left off the optional nav system, got 7% new car financing, traded in a vehicle with a $7,000 trade in value, and put $2,500 down in cash. You could do better or worse. Seems like a lot of car for someone who makes only about $45,000 a year. Maybe 10% would be better. Reallocate the extra 5% for housing so you can afford to buy a home, or put it your savings / investment accounts.

Consumer Debt Such as Credit Cards and Revolving Accounts – 10% of your monthly budget should be spent here. Another advantage of getting debt free is that this is another 10% that could contribute to your housing or retirement savings. You could also pay for such things as vacations in cash, rather than with credit. Here’s an idea; forgo traveling away for a vacation for just one measly year, then save the money to pay cash for your vacation next year. This will allow you to always save cash for your vacation, rather than plopping it on the Visa again.

Living expenses such as food, clothing and entertainment – These should eat up no more than 20% of your budget. Here’s another reason to shop at the warehouse food store. You’ll eat so much better if that 20% can encompass such niceties as fish and organic chicken, instead of just mac & cheese and oatmeal. That could even pay health dividends down the road, in addition to the pleasure it’ll bring into your daily life. Buy your clothes at Value Village instead of Macy’s or Nordstrom. Hell, half the clothes at VV are from those stores anyway. Value oriented (used) stores are great, especially when you’re shopping for your kids. They outgrow stuff so fast anyway, it just doesn’t make sense to shop at a full priced store for all new clothes. Who cares what your snotty friends think? They probably have huge credit card bills every month anyway.