WalletHub’s 2018’s Best & Worst Cities at Money Management is out!
WalletHub, a comprehensive internet source of personal finance data, ranked 2,500 cities based on their financial acumen. Ten key indicators of money management including median credit scores, debt-to-income ratios and average number of late payments were calculated and ranked. Cities in California grabbed the top 3 spots. Texas doesn’t make the cut until #46 with Southlake falling within the 98th percentile.
How do you compare in your own household?
Here are Clarity Financial’s and Real Investment Advice’s debt guardrails to consider:
Mortgage Debt-to-Income Ratio:
There’s that rule you’ve heard about how much to spend on an engagement ring based on three months’ salary. I’ve created a threshold that’s worked for me and clients for years. Feel free to enhance it to relate to your personal situation.
House Mortgage = 2X Gross Salary or 200%.
It’s simple. To the point. It gets to the heart of my comfort factor. It separates emotion from the decision.
For example, per the boundary, if you earn $50,000 a year, a mortgage obligation should not exceed $100,000. To be clear, this isn’t the house purchase price, it’s the mortgage or debt on the property. For most, it’s going to mean a reset of expectations, a greater down payment or a smaller abode. I would stray from the rule at great risk to your long-term financial health.
Student Loan Debt-to-Income Ratio:
Keep loans limited to one year’s worth of total expense, tuition, room & board, everything.
You can divide the money across the full experience, 4-5 years, or all at once. However, no more than a year’s worth of expenses should be taken in the form of student loans. I’ll probably catch slack for this, but so be it. All I seek to do is get you thinking boundaries.
Student Loan = 1X 1 year’s college expense or 25%.
Credit Card Debt-to-Income Ratio:
Today, credit cards are used for various reasons – convenience, cash back, travel reward points and the most unfortunate, to meet ongoing living expenses in the face of structural wage stagnation.
Credit Card Debt = No greater than 4% of monthly gross income.
If your household gross income is $50,000 then credit card debt shouldn’t exceed $2,000. Per WalletHub’s study, Texas ranks 46 with $2,848 in average credit card debt.
Car Loan Debt-to-Income Ratio:
Cars are required like breathing here in Houston and Texas, overall. However, they are not investments. They do not appreciate in value. If anything, auto values decrease as soon as you drive away from the dealership.
Car Loan Obligation = No greater than 25% of monthly gross income.
For example, a household bringing in $60,000 a year shouldn’t have more than $15,000 in outstanding auto loan debt. In my household, the ratio is 18%.
So, what do you think?
What rules regarding debt do you follow in your household? I’d love to hear them and share on the radio.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter.