How Much Can I Afford to Spend on House and Car?Financial
Before we go any further, I want to give your the formula NOW for how much you should spend on a home and car.
Why JUST home and car?
Because 90% of the financial problems we incur are caused by those two decisions and if we can get these two decisions right, we are headed in the right direction!
So, how much should you spend on a home and vehicle?
- HOME - No more than 20 percent of your gross income on mortgage or rent.
Although you may be able to borrow more than this, sticking to this percentage will allow room for other financial responsibilities.
- CAR - No more than 7 percent of your gross income on car financing
It is actually best to pay cash for a car however we know that's not an option for everyone. If you have to finance a car, I suggest you stay within this percentage and finance for no more than sixty (60) months. Some dealers will stretch loan payments up to 84 months to get your monthly car payments where you would like them. In the long run, stretching payments out over longer terms will cost you a lot more money. Staying within these guidelines will best position you for success financially.
You currently spend more than that?
I know exactly how you feel. Carol and I found ourselves in the same position several years ago when our mortgage was almost 50% of our income. It was very difficult for us to carry such a high burden each month and this was a major factor in us accumulating over $100,000 in personal debt.
As drastic as it was, we knew the best decision was for us to downsize our home. It felt uncomfortable and embarrassing at the time, but it helped us to balance our budget and to eventually pay off over $100,000 in debts.
If you are currently way over these guidelines and it is having a major negative impact on your finances, it's time to make a drastic change.
What are your options?
If your car is the issue, consider selling your current car and saving to pay cash for a less expensive car or secure financing with a low-interest rate.
If your home is the issue, look at refinancing your home loan to get a lower rate or monthly payment. Maybe selling your home or moving into a lower rent home is a good option. Is taking in a roommate to share the rent an option?
I know from experience this can be a hard decision to make however following these guidelines long-term provide the best environment to live on a balanced budget and become financially free.
I would love to hear from you! What sacrifice have you made or are considering making to achieve your financial goals?