Budgeting Basics

Has anyone ever told you how much of your monthly paycheck should go to bills or mortgage? Do you have a firm understanding of how you should budget your money so that you stay on top financially rather than going under into deep debt?

Well, today I'm going to provide you the bare bones basics of budgeting. I encourage you to use this information as a guideline to measure your spending habits and establish a monthly budget for yourself if you don't already have one. This guidance is shared by many, but is only to be used as a reference. Please review your own financial situation and decide if this is a model you can transition to. If you have any questions or concerns, please seek expert advice. I disclaim any liability for any damages or loss which is incurred as a result of implementing these basics.

Now that the legal stuff is out of the way...Let's get on with it. Here's a standard suggestion of how you should balance your monthly income:

1. Housing - Mortgage, rent, utilities, insurance, taxes and home maintenance.

2. Transportation - Car payments, public transportation, auto insurance, maintenance, gas, parking, & license and registration fees.

3. Debt - Loans, credit cards, taxes and medical bills

4. Other - Everything else (incl food, clothing, childcare, etc.)

Here's the big question: How much are you saving each month? You should aim to save at least 10%.

On to the next one....Buying a house. Do you know how much is "affordable"? I don't mean how much the bank says you can borrow. While the half million dollar house may be beautiful and tempting, you don't want to find yourself in a foreclosure because you can keep up with the payments. Use this guideline: 28% of your gross monthly income (before taxes). So if your monthly income before taxes is $4000. Then you should only consider purchasing a house if your payments are 4000 * 0.28 or $1120/mth. So you're probably thinking, how much is that in regards to a house price. Well, I'm glad you asked:

At $1120/mth with a 6% fixed interest rate on a 30 year mortgage, total house cost equal $186,500. That means if you make $4000/mth gross income before taxes, you should only look at houses that are $186,500 and under.