By: Cassandra Laymon
The rich rule over the poor,and the borrower is slave to the lender. ~ Proverbs 22:7
Last week we talked about spending less than you earn, and today’s topic is a continuation of that discussion. What happens when you don’t spend less than you earn? You find yourself in debt. It’s interesting to see how very acceptable living in debt is these days. Since we rarely pay cash for anything, it’s easy to ignore our spending and focus on the short-term gratification of fulfilling all of our desires right now.
A question you should be asking is: Is it reasonable to assume that we, in today’s economy, can live without debt? I’ll answer that first as a financial planner. The rule we are taught as CERTIFIED FINANCIAL PLANNERS TM is this: families should spend no more than 28% of their gross income on housing expenses (including mortgage payments, home insurance, property taxes, maintenance and condo fees), and a maximum of 36% on total debt service (i.e. housing expenses + other debt such as car loans and credit cards).
If you earn $50,000 per year and follow the 28/36 Rule, your housing expenses should not exceed $14,000 annually or about $1,167 per month. Your other debt payments should not exceed $4,000 annually or $333 per month.
Rick and I purchased a house this year, and that’s one expense that is hard for anyone raising a family to pay cash for. We believe it makes sense to purchase a house and then pay it off as quickly as possible. Until you become well-established, cars may fit in that category, too. But let’s go back to my example above where you are paying $4,000/year in debt payments. I don’t know about you, but I could give many, many examples of things that I was excited to purchase in the moment, but soon lost interest in them. It is not only annoying, but also wearisome to be paying for those items for months and often years. Many times, when you look at those big credit card bills you don’t even remember what you purchased.
You know who my happiest clients are? Those who are debt-free. And there are many of them! They have made many short-term sacrifices for long-term stability and peace of mind. They have learned to be content with and live on a lot less. And, you should also note, they are also generous givers.
I encourage you to find an accountability partner (that would be your spouse if you are married) whom you can discuss purchases with before pulling out the credit card. If you are single, your financial planner would be happy to have those discussions with you.
When trying to evaluate what is a want vs. a need, I like to remember this old song by Steve Ivey that reminds us that “You never see a U-Haul pulled behind a hearse!”