Have you’ve ever spent just a little more than you planned to? Well, you’re not alone, we all have. Sure, we don’t mind spending a few bucks more for that fancy coffee machine. After all it’s cool, shiny, and makes a great cup of joe! Now that you’re thinking of buying a home, it’s important to be a little more mindful, because unlike a coffee machine, not understanding how much you should spend, can cost you more than a few bucks.
In this article we’re going to share a little formula that I use with my customers. It’s very simple and it’s a great way to set a “base” to see what you should be spending on your next purchase. So, let’s get started with our imaginary couple Joe and Susan.
Ok, here we have Joe and Susan, they both have good jobs, enjoy being active, and have found a house they really love. But, they want to make sure they can still enjoy life and not feel overwhelmed with their new mortgage payment. In comes the RULE OF 43%.
Step 1: Joe and Susan figure out their Gross Monthly Income
Joe’s monthly income is $5,000
Susan monthly income is $8,000
So together they make $13,000 / month
Step 2: Now Joe and Susan apply the rule of 43%
$13,000 X .43 = $5,590
Step 3: Joe and Susan calculate their new monthly commitments
- New Home Principle
- New Home Interest
- New Home property Tax
- New Home Insurance
- New Home Utilities
- Existing Car Payments
- Existing Credit Cards
- Existing Student Loans
- Monthly Food
- Monthly Gas
- Monthly Entertainment
Let’s say that Joe and Susan’s Total Expenses = $7,173
Step 4: Joe and Susan now compare numbers
Susan and Joe take the $5,590 from the Rule of 43% and compare it to their total monthly expenses
If Rule of 43% < Total monthly commitments Joe and Susan are in good shape
In this scenario, Joe and Susan’s monthly commitments are greater than the rule of 43%, so they have a few choices.
- Find a new house
- Figure out a way to reduce their other expenses
After careful analysis, Joe decides to cut out a few non-essential hobbies and Susan decides to cut out some stuff too. At the end their new monthly expenses total $5,210. Not bad! Now Joe and Susan feel more comfortable purchasing their new home. Hey, did you really think this story was not going to have a happy ending?
Here’s a short video that further explains the rule of 43%.
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Lenora is a full-service San Diego real estate agent, serving residents county-wide, and those looking to live in San Diego. She specializing in Metro and Coastal San Diego, with a Masters Degree in Marketing and over 10 years in the real estate industry, Lenora offers top tier, professional service that gets results.