How much should you spend on housing?

No more than 35% pre-tax. and that excludes bonus

pre-tax?

Yes pre-tax.

Riversider, you'd exclude bonus? Just to account for stability I'm assuming?

100K pre tax
65K after tax
35K housing
30K for food, transportation, entertainment

0K for savings? :)

seems like paying almost $3k for rent on 100k salary is super tight. I'm not even comfortable with that and I am a bit above that base (not including bonus).

I concur with 35% max. If that percentage makes you uncomfortable, choose a cheaper apartment, but be prepared for how much less that can get you in this city. Personally, I like to keep total debt payments to 35% of pre-tax, non-bonus income, but it hasn't always worked out that way.

why pre-tax?

I used 100 for easy calculations (percentage wise).

Right now I'm at 25%. I had a conversation with someone who refused to spend more than 20% but he lives in Harlem so I'd like to consider him an outlier. But when I started doing the calculation for others I knew, it was definitely at least 40%.

By the way these percentages are all assuming 100 for a base. I guess your bonus would then be relegated to savings making your savings more variable.

I spend about 14% of my gross on housing, and I feel neither rich nor poor. So 14% is the correct amount.

I'm debt free, and echo the post above, but one can only do so much.

And Thank you Dave Ramsey.

Lets assume you make 1 Million. Then how does this work out?

Funny!

Wad, I think $25K is about fine on that sort of income. On a monthly basis: $2K on housing, $2K on other stuff, $1K to savings, and $1K to retirement.

RS: "I'm debt free, and echo the post above, but one can only do so much."

If you have 30-year term loans available to you at below 3%, believe that inflation is running at 6%, and think gold is a great investment, why in the world would you be debt-free?

It depends on your lifestyle and your income, I guess. If you're a homebody or you like living on the edge, 35% gross is doable as long as you don't spend too much on entertainment or savings. Personally, I've never spent more than 25%, because I don't like ramen noodles, and I like to go out.

Inonada,
Explain how cost of carry works in your trade?

Yes, Dave Ramsey: We paid off $86K in 4 years by selling the winnebago & delivering pizzas. love that guy!!
But, seriously, I thought it was 25% to 28% of gross income.

Dwell, every situation is different, but here's one place that lists the 35% rule.

If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.

http://www.nytimes.com/2009/09/12/your-money/mortgages/12money.html?_r=1

Thanks, River. I want to be real conservatif & aim for 25%-28% of net income.
I see looming a reduction of mtg interest deduction, so all the better to keep housing costs as low as possible.

MI deduction isnt going away until housing market is fully recovered.

Dwell, If you don't itemize or get hit with AMT, then the deduction is irrelevant.

I've been as high as 33% at various points of my life, but I can be frugal where necessary and have never contributed less than $15k annually to retirement accounts. I've always worked at jobs with decent bonus histories, too, so there's a bit of a cushion when needed.

Right now, I'm at 24%, and it feels tight at times, but I am maxing out retirement accounts, putting 10% of my salary into company stock (for instant 15% profit), etc. Ratio drops below 20% with even a decent bonus.

I'm also in a 15-year mortgage in a co-op, so the sunk costs of interest + maintenance fees are really on 17% of my non-bonus gross income, with an additional 7% going into principal, which I view as forced savings. Accounting for the tax deductions, the ratio is down to about 13% of my income excluding bonus.

For this reason, I'm comfortable with 25-35% of income spent on housing, assuming frugal lifestyle and adequate savings, whereas I'd not be comfortable with more than 15-20% spent on rent. But, in this city, that doesn't get you much....

Juggs.com has an excellent calculator. Just measure the circumference of your mouth and it'll tell you how big a 'home' you can handle.

Budget= 50% necessities, 30% wants and 20% savings.

Or the 60% solution.
http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/ASimplerWayToSaveThe60Solution.aspx

Loathe Dave Ramsey; I think he gives terrible advice. Liz Weston is far better.

Obviously if you are renting you are spending a lot more on housing than if you bought and are paying a mortage.

less than 10%, for both homes.

lord i'm cheap.

Pre-housing bubble, my studio cost $179,000 plus $576 per month.
After too many years of Alan Greenspan to count, my studio grew to $515,000 plus $925 per month.
After Ben Bernacke's reign of monetary terror and countless rounds of QE, we're probably heading for $375,000 plus $1,400 per month.
Anyway you examine it, we can not deflate our way to prosperity. It's still a studio.

$180K is a lot for just one room.

Better than $800K for two.

or three

"Inonada,
Explain how cost of carry works in your trade?"

Your trade, not mine: you're the inflation + gold nut.

You have your $140K 30-year loan at 4.x%, deducted down to 3%. You buy 1 gold future contract and put up $6K margin for a notional exposure of $140K. That leaves you with $134K to use for paying mortgage, which is $7K a year. Even after 10 years, you have enough cash to withstand margin calls on gold's price dropping by half. You have also put $30-40K equity back in the home. During this same period, according to you, dollar's value will have eroded by 2x.

Many ways to structure it. If you actually had any conviction / gumption, you'd figure out something matching your risk appetite. Otherwise, why should anyone have any respect for anything you say?

lad: "...putting 10% of my salary into company stock (for instant 15% profit)..."

It is 'instant profit' only if you sell right away. I know quite a few people who ended up accumulating way more of their company stock than they should and lost a significant percentage of their savings when the stock tanked. Some even lost their job at the same time because the company wasn't doing well.

evnyc,
why don't you like Dave Ramsey?
Thanks, I'll check out Weston.

Sunday, I do sell right away, but the stock is deposited once quarterly even though the cost of it comes out of every paycheck. So, on a monthly basis, I have to make my expenses work with a 10% reduction in salary.

Are you supposed to subtract alimony and child support from the gross number?
I never understood why everyone does this calculation on gross income. My housing is about 30% of my take-home pay. If I subtract alimony & child support, it jumps to 36%.

Definitely less than 20%, pre-tax.

lad, smart. I only brought it up because of the number of times I have seen what I described above.

I'm also surprise at how many people don't take advantage of the employee stock purchase plan like you do, similar to how many people don't put enough in the 401k to at least get the matching from the employer.

Some people think they can go above 35% because they are just starting out in their careers and expect their salary/bonus to increase significantly in future years. What do you all think about that argument?

Dwell, I have no problem with several of his tactics (debt snowball, etc.) and many people find his advice useful, but I really object to his religious moralizing. The whole "may God's wrath strike you down if you don't repay every penny no matter what cost to your future" thing is just stupid. I couldn't even finish reading his book, and I read a *lot* of personal finance books, including plenty of bad ones. (I also dislike Suze Orman; I think a lot of her advice is inappropriate for 90% of the population.)

My perspective is is that you have to take a cold hard look at your finances as a whole, and that personal finance is, you know, personal. Figure out the parameters that let you sleep at night, take the necessary steps to achieve your goals, put savings on autopilot, and if drastic action is required, don't put it off because things won't get better if you wait. Weston is quite hard-headed and doesn't hesitate to tell someone when they've made a stupid financial decision, but she moves right on to practical advice about your options for dealing with it. My preferences are probably a personality thing. I recommend "Easy Money," although it looks like she has a new book coming out in January (oh, joy!).

Footnote: Burton Malkiel likes Liz Weston, too; he mentions her in the more recent editions of Random Walk.

my goal is to end up spending 5-10% on housing as the wealthier do. for the young, as i see it, minimizing carrying costs to increase investments is the only way to be less wage-slave. saving at least 30% of pre-tax income is doable if you lower housing costs.

and even if we eventually buy, i wouldn't like to end up like middle class Americans, where home equity is half their net worth (less than 10% for the rich). i'm more like the Swiss, put the energy building a good portfolio of investments, not on home equity.

one of the issues with the ratio the gov is using for so long, the 30% of pre-tax income for housing costs, is that it doesn't adjust for the collapse of discretionary income that USA had during the last 30 years. ultimately housing costs will have to adjust to discretionary income and go the opposite way it had gone during the last decade, down. that's unless wages recover (but i wouldn't bet on that one).

> Some people think they can go above 35% because they are just starting out in their careers and expect their salary/bonus to increase significantly in future years. What do you all think about that argument?

income increases are a conservative expectation for recent graduate students from certain careers (biz, law, medicine, IT), but not across the board regardless of field of study (how are recent graduates from journalism, music, philosophy doing?). not on this economy i'd say.