At one time there were charts everywhere recommending
X percent of income should be spent on food and not more than X
percent of income should be spent on housing. Where can I find that
info? Do you make recommendations about this?
Lenders have loan origination or underwriting standards that limit
the amount of income that can go to housing expenses. Called the front
ratio, it is 28 percent of income. The back ratio is housing plus
other contractual expenses. The underwriting standard in mortgage
lending for the back ratio is typically 36 percent of income, but
lenders have become more flexible concerning the back ratio.
If you know your marginal tax rate, you know how much
of your next dollar of income is going to pay Uncle Sam. If you're
in the 25-percent marginal tax rate, then 25 cents are going to
federal income taxes. Add on state and local taxes, Medicare and
Social Security taxes and you're in the 30 percent to 40 percent
range. The IRS Web site has a convenient table
of marginal tax rates, and so does Bankrate's
So, if one-third of your income is going toward taxes,
and roughly one-third of your income is going toward housing and
other contractual expenses, you only have one-third of your income
for other living expenses, discretionary spending and investing
for your future.
101 worksheet lets you lay out your monthly income and expenses
and then shows you how you stack up against the average American
that earns about what you do in annual income. Looking at where
you outspend or underspend your peer group may give you some ideas
on how you need to adjust your spending.
If you don't have an emergency fund and you aren't
setting aside funds for your future, then it's likely you're spending
too much of your income. An automatic investment program can put
investing at the top of the list. Most financial institutions or
mutual funds have this type of program.
The person that makes $15,000 a year is going to spend
a higher percentage of his income on food, for example, than someone
making $55,000 a year. Global rules of thumb just don't work in
this area. That's why the Bankrate worksheet is tied to income.
If you're concerned that you're spending too much on dinners out,
then you no doubt are. You don't need a rule of thumb to tell you