This maximizes the bank’s bottom line, not your finances.
In other words, this is the largest amount of debt banks have found you can take on with a reasonable chance of paying it back. The purpose of the 28/36 Rule for lenders is to determine the largest amount of debt one can have. It’s important to look at this ratio from both a lender’s and consumer’s perspective. Then, total debt payments (housing + all other debt) should not exceed 36% of your income. The rule states that you shouldn’t spend more than 28% of your monthly gross income on housing (Principal, Interest, Taxes, and Insurance). Instead, it’s a rule lenders use to determine how much debt you can afford. The first thing you need to know about the 28/36 Rule is it’s NOT a rule used in financial planning. Many mortgage companies allow you to spend up to 36% of your income on debt (known as the 28/36 Rule).Īs I wrote in an article on financial ratios : Second, it’s easy to overspend with rent and mortgage. That creaky floorboard or other home maintenance can often be pushed back a month or two. Regular expenses, like mortgage and rent, can’t be put off. When money is tight, you need to know what you can and can’t put off. (Remember that budget category everyone needs? Those dire home repairs would fall into that.)įirst, it’s important to separate fixed and irregular expenses. Why not include other housing expenses such as repairs and home improvements? They’re not regular, they’re irregular. If you rent, this category would be your rent payment. I’ve found it best to have an entire category for one recurring monthly expense - my mortgage payment. This way you can view expenses by category, merchant or date.
The free app will pull your recent expenses to tell you where your money is going. This budget isn’t for anyone else but you and your family, so accurately tracking your expenses to develop these categories is key. If you spend $1,000 a month on food, don’t put down $500.
When approaching these essential categories, it’s best to be as accurate as possible. In other words, you can’t put them off until next month. These five categories are monthly obligations for most people. Still, there are some things all people should budget for. GET FREE ACCESS The Five Essential Budgeting CategoriesĪll budgets are different, as everyone has different needs. This allows us to survive whatever unplanned expenses hit that month. Any unplanned expenses go inside this category. This is the most important category in our budget. This term came from the popular budgeting software, You Need A Budget. In my family’s budget, we created a “Stuff I Forgot To Budget For” category. You don’t know what will happen, nor how much, but you do know there will be some unplanned expenses in the future. But here’s the thing - they happen every month. When these things happen they can wreck an entire month’s budget. Medical bills and health care costs accrue. Unplanned expenses will happen.Ĭars break down. Instead of hoping for the best, it’s best to plan for the worst. The One Personal Budget Category Every Budget Needs