Earlier this week I mentioned that one of the most often ways people get themselves into a struggling financial situation is they allow their car payments or house payments to be larger than what they can afford.If you did not read the post on Car Payments you can check it out here.
The stage of life that I am currently in (early to mid 20's) is extremely foundational. I find that a lot of financial (mis)behavior habits go into effect around this time in a person's life. Usually after graduation you will find yourself with more cash than you ever have had before. For the first year or two you are allowed much freedom and seem to spend money on whatever you want, whenever you want it.
However, this might work out for the first year or two but this develops a habit that is not easily broken. As you get into later years you begin to commit to more financial obligations, which leaves you strapped and in a tight situation. This is the turning point and usually people will resort to using unsecured debt as an option which puts them in bondage that they cannot break free of for many many years.
More times than not, this "financial obligation" that leaves you in a tight situation is usually caused by the house. Because your house payment might end up being too much for your take home pay, it leaves you extremely tight in all other areas of life. And if this is combined with a lack of adamant budget and preparation its seems like there is no other choice but to turn to debt.
Now on the flip side I want to offer a guardrail to guide your house buying decision that may come up in the near future. This is not scriptural this is just what I believe to be wise after listening to many financial "guru's" over the years.
House Rule #1: Do not have a house payment that is more than 25% of your household take home pay.
When I get opposition to this from people my age it is always because they want to have a standard of living that is comparable to what their parents have. The only problem with that is it took their parents 20+ years to obtain that, which should not be obtained within the first few years of working.
I want to provide an easy to understand grid that might help put some skin on this rule. The assumptions to this grid is 100% financing (which I do not recommend but will talk about later) and an interest rate at 6.5%.
30 Year Fixed Loan
| Annual Income | Monthly Income After Taxes | Monthly Payment | House Value |
| $30,000 | $1,875 | $468.75 | $74,161.32 |
| $35,000 | $2,188 | $546.88 | $86,521.54 |
| $40,000 | $2,500 | $625.00 | $98,881.76 |
| $45,000 | $2,813 | $703.13 | $111,241.98 |
| $50,000 | $3,125 | $781.25 | $123,602.20 |
| $55,000 | $3,438 | $859.38 | $135,962.42 |
| $60,000 | $3,750 | $937.50 | $148,322.64 |
| $65,000 | $4,063 | $1,015.63 | $160,682.86 |
| $70,000 | $4,375 | $1,093.75 | $173,043.08 |
| $75,000 | $4,688 | $1,171.88 | $185,403.30 |
| $80,000 | $5,000 | $1,250.00 | $197,763.52 |
| $85,000 | $5,313 | $1,328.13 | $210,123.74 |
| $90,000 | $5,625 | $1,406.25 | $222,483.96 |
| $95,000 | $5,938 | $1,484.38 | $234,844.19 |
| $100,000 | $6,250 | $1,562.50 | $247,204.41 |
15 Year Fixed Loan
| Annual Income | Monthly Income After Taxes | Monthly Payment | House Value |
| $30,000 | $1,875 | $468.75 | $53,810.82 |
| $35,000 | $2,188 | $546.88 | $62,779.29 |
| $40,000 | $2,500 | $625.00 | $71,747.76 |
| $45,000 | $2,813 | $703.13 | $80,716.23 |
| $50,000 | $3,125 | $781.25 | $89,684.70 |
| $55,000 | $3,438 | $859.38 | $98,653.17 |
| $60,000 | $3,750 | $937.50 | $107,621.64 |
| $65,000 | $4,063 | $1,015.63 | $116,590.11 |
| $70,000 | $4,375 | $1,093.75 | $125,558.58 |
| $75,000 | $4,688 | $1,171.88 | $134,527.05 |
| $80,000 | $5,000 | $1,250.00 | $143,495.51 |
| $85,000 | $5,313 | $1,328.13 | $152,463.98 |
| $90,000 | $5,625 | $1,406.25 | $161,432.45 |
| $95,000 | $5,938 | $1,484.38 | $170,400.92 |
| $100,000 | $6,250 | $1,562.50 | $179,369.39 |
Use this grid as a guideline when deciding how much house too buy. I do not care how good of a deal you get on a $200,000 house. If you cannot afford it, it will end up put you into a financial mess. When this is the case you cannot even enjoy living in the awesome house because things are so tight financially.
