Blog: Can you can afford your expenses on your income?
Monroe (MI) on a Budget
20 December 2011
One of the decisions that families need to make when household income drops is how and where to cut expenses.
We’ve talked a lot about coupons, frugal living concepts and assistance programs on Monroe on a Budget. Depending on the circumstances, a few of these money-saving or money-stretching ideas might be just enough to give you the wiggle room to get by on the lower income.
But at some point, you need to look over the big picture and make sure you have a lifestyle that fits your income.
You’ll see and hear a lot during January in the news media and blogosphere about budgeting and personal finance topics. In addition to the changeover for the calendar year, January is when tax filing season starts and when college financial aid application season starts.
But if the process of reviewing every single expense for the past few months seems daunting, a quick way to check whether you can afford your expenses is to focus on the biggest expenses.
Crown.org has an online Budget-O-Meter that will analyze your income in comparison to spending in what the its finance plan calls “budget budget” categories: housing, auto, and debt.
Another formula Crown uses on its more detailed household spending plan chart asks you to look at Housing, Food, and Auto. “If these three combined percentages exceed 70 percent of your Net Spendable Income, then it will be almost impossible to have a balanced budget,” the instructions say.
The staff at GreenPath Debt Solutions, which is the consumer credit counseling agency serving southeast Michigan, gave me a stack of resources and links awhile back that I’m going to be working through in the next few weeks.
The links at the GreenPath University online library include a Home Budget Calculator where you can compare your actual expenses to their target suggestions.
But a detailed discussion also is found in a print brochure I have called “Mortgage Delinquency.” Here’s that snippet:
If you have had a reduction in income, you are probably struggling to keep up on your payments. To give you some general guidelines, you need to understand what the experts recommend to spend on housing.
Front-end ratio: This ratio shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance should not exceed 28 percent of your gross monthly income. To determine that figure, multiply your annual salary by .28, then divide by 12 (months). The answer is your maximum housing expense.
Back-end ratio: The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, monthly credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 to 40 percent of your gross income. To calculate your maximum debt-to-income amount, multiply your annual salary by .36, then divide by 12 (months).
If you’re spending too much on housing and debt payments, you’ll find it very difficult to budget for the essentials like groceries, utilities and gasoline.
Both Crown and GreenPath have decades of experience working with families to set up workable budgets. That’s why I have long referred to their resources when it comes to talking about the process of budgeting rather than what you can do with the money you have.
I realize that a lot of consideration goes into housing choices beyond the monthly rent or mortgage. For example, the location you live as compared to where family members go to work or school will have a huge impact on transportation expenses.
I also realize a lot of my southeast Michigan readers are in upside down mortgages or have homes that won’t sell.
But even with that hurdle, you often have more of a choice on whether you take out one car loan at a time or two; whether you use tax refunds and bonus checks to pay down debt or go on vacation; or whether you limit your spending in other categories during tough times to give yourself as much breathing room as possible.