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Do you spend more than 25-30% of your gross pay on your mortgage? If so, then you are most likely living in more home than you can afford.
Buying more home than you can afford has been a common phenomenon in the last decade. Long gone are the days when 20% down payment was the minimum in order to purchase a home. Putting no money down and borrowing more than can be afforded, combined with a stagnant job market has plunged too many families into foreclosures and short sales.
Are you counting on two incomes in order to make your mortgage payment? Are you spending more than 35% of your gross income just to pay your monthly note? Would you be in deep trouble if you experienced a reduction in income (e.g. going from two incomes to one, having hours cut, having pay reduced, etc.)? If the answer is yes, you may be paying for more home than you can afford. Here are two rules of thumb to follow in regards to your mortgage:
– Stay within 25-30% of your gross income
– Are you a two-income family? Buy as if you had just one income. This way you are creating margin in case of job loss
Living beyond your means can be overcome.
It isn’t an issue of not earning enough, but an issue of reconciling your spending habits with your income. Understanding your spending and correcting waste will lead you to financial freedom!
Here are few basic checkpoints for making a major purchase while keeping a long-term mindset:
1. What will be my TOTAL cost after paying the price and interest rate combined? Don’t be fooled by JUST your monthly payment amount.
2. How will the payment impact my monthly cash flow?
3. What if I lost part or all of my income tomorrow? Can I still afford to pay for that item at a lower income rate?
4. How will this purchase impact me long-term?
Thinking long-term is a great habit to develop if you want to achieve long-term, lasting financial freedom. Get in the habit of asking yourself these few key questions before making major purchases and soon you’ll not only see a difference in your finances, but you’ll also be in the position of helping others become wiser.