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30 Second Real Estate Analyzer

10.08.2010

Living within your means

Don't bite off more  HOME than you can chew. How much house can you comfortably afford?

For most people the answer is a house with a purchase price of no more than 4x their annual household income. Rationale: the cost of a home includes much more than the monthly mortgage payment. It's also property tax, insurance, upkeep, etc.

Typically these costs run 2%-3% of the price of your home each year. Assuming a 20% down payment, a 5 year fixed rate mortgage, amortized over 35 years, and interest rates in the 4%-5% rate, the 4x your income rule of thumb will translate into total housing costs of roughly 30% of your gross income.

Don't let your CAR drive you to the poor house. The same logic applies to your car.

Most people can comfortably afford a car that is one-third of their annual income. If you make $60,000 you can comfortably afford a car that costs $20,000. If that seems low - now you know why so many people are in financial trouble. They are driving it. A car has many other costs than simply the monthly payment. There's insurance, gas, parking, maintenance, etc.

If you follow this rule of thumb, your total transportation costs should be 10% or less of your gross income. Read
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