Your personal situation will off course be unique and have its own complexities. The second area you will not want to negotiate is saving, unless of course you want to eat dog food when you’re 65. One area you cannot negotiate is tax rates as they are set by the government. Spending less on a home may easily free up the shortfall. Can some of these areas be trimmed? The next area I would look at is housing. First, it may be worth looking at where you’re spending your money every month after savings, taxes, housing and insurance. If you are reading this and feel overwhelmed because you spend way more than that every month, that’s okay too. Perhaps you have car loans, student loans and daycare expenses. Congratulations, please save and invest the difference! Some people reading this may think, that’s way more money than necessary to live every month. This will be used to cover food, utilities, gas, clothes, travel, entertainment, gifts and charity. This is probably a reasonable number though.Īfter saving, taxes, housing and insurance, our household is left with $30,000, or $2,500 per month of discretionary income. This number can be highly variable based on employer benefits, health needs and driving record. Add these up and insuring a household will be about $16,800 per year. Additional Life and Auto insurance might run another $400 per month. Health insurance for a family of 4 will cost about $1000 per month. In addition you may need life insurance and car insurance. Many people have health insurance taken out of their paychecks and never realize they are paying for it. This number is in your control!Īfter savings, taxes, and housing, our household is now left with $46,800. Remember, you do not have to spend this much on a house. The minimum down payment for a conventional loan is 20%, which would bring our purchase price up to about $668,000 with a down payment of $133,000. A 30 year loan at a fixed 5% rate with a monthly payment of $2,875 is about $535,000. If we assume property taxes and insurance of about $650 per month, this leaves $2,875 left for loan repayment. In our case here, the most that should be spent on housing is $42,000, or $3,500 per month. This number should be under 28% of your pre-tax income and will include loan principal and interest, property taxes and insurance. When purchasing a home, in order to qualify for a conventional loan, a lender will look at your housing expense ratio (HER). This now leaves our household with $88,800, but we still need a place to live. While taxes are different for everyone, we will estimate the annual tax liability to be about 20%, or $22,200. Most states will also charge an income tax (3.07% in Pennsylvania) and you may also have to pay a local tax (usually about 1%). Our new tax rules would put your Federal Income Tax at about 15%. (Income – Pre-tax Investing – Standard Deduction = Taxable Income). If we take our savings and the standard deduction, our taxable base is now $111,000. In our scenario for a couple who files jointly, the standard deduction is now $24,000. Usually taxes are withheld directly from your paycheck. If your employer offers a match, this will be higher, but you should still save 10%. So if you are earning $150,000 a year, you will be saving $15,000. The good news, if you do this with an employer sponsored plan, you can also lower your income taxes. I feel 10% is the minimum people should be saving for retirement. No matter what, make sure you put money aside for yourself. This is one of the first rules in building wealth. Let’s apply some of these basic rules to a couple with an income of $150,000 who file taxes jointly. This doesn’t mean you can’t follow some basic rules, rules that can be applied to any income level. Building a budget is a unique process for everyone. Everyone has a different salary, lives in a different part of the country and in short, is different.
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