Housing at 25%

This course is called INCREASE! The presupposition is that instead of playing defense with our personal finances, we need to play offense. Instead of spending every waking hour focused on dividing our beans, we should spend the most time working to increase our income as we make smart financial decisions. I have given you 7 smart financial marks you can work to hit as you increase your income, but this 8th mark is the most difficult for most people. 

Our final mark of financial health is keeping our housing expense within 25% of our take home pay. This housing expense includes either your mortgage/rent, property taxes, and insurance. Collectively, those three categories make up your housing expense. 

You’re probably asking yourself if this is even realistic based on what the average American spends on their housing expense each year. I want to remind you that this is a financial TARGET. There is a reason why this is our 8th and final financial target on our Fuel Gauge. I know that if families can give 10%, invest 15%, and keep their housing within 25%, then they will have the most sturdy financial foundation to build off of and be the most generous people group on the planet. I believe that you can and will hit these targets, but to hit them will mean swimming against the current of society. 

In my insurance agency, I have the privilege of working with many of the best loan officers in my state. As I have lunch with them and talk about their businesses, I am always interested to know what their client’s DTI ratio is. DTI refers to debt to income ratio. Lenders have rules that they need to stick within when they approve a loan. If the debt to income ratio is too high, they can’t lend because the likelihood of that borrower defaulting is too risky for them and for the government who regulates the DTI ratios. The vast majority of people purchasing a home today have a debt to income ratio of 40-50%. What this means is that their debt payments are 40-50% of their income. Not their AFTER tax income, but their pre-tax income. Many people purchasing a home spend between 40-50% of their gross income on debt, the primary expense being their mortgage. 

The 2022 national average tax percentage was 24.8%. This means for a household making $100,000 a year, their take home pay would be $75,200. If that same person purchases a house with a 40% debt to income ratio, their mortgage and debt payments would be $40,000 per year. In this scenario, after their debt payments and their taxes, this family is left with $35,200 which is $2,933 per month or 35.2% of their income. If they were to give 10% and invest another 15% of their income, they would be left with 10.2% of their income which would be $10,200 per year or $850 per month. (If your not a math person, just think about trying to live on $850 a month… Not ideal!)

Using this same income level, if a household is making $100,000 per year, then their average take home income would be $75,200. In order to keep their housing expense within 25%, the monthly mortgage payment including taxes and insurance would need to be $1,567 per month. According to the national association of Realtors or NAR, the average monthly mortgage in 2022 was $2,317 per month. To give some perspective, if someone were to purchase a home for $300,000 with a 3% down payment at 8% interest, their monthly mortgage would be somewhere between $2,600 and $3,000 depending on the area. 

These numbers show the uphill challenge most Americans face when trying to get their housing expense to the ideal level of 25% of their take home pay or lower. This is a target, but as you can see, one that is most likely going to require an increased income to hit. 

What we have seen is that when this housing expense number isn’t at or below 25%, people aren’t giving and they aren’t saving for retirement. They are living month to month, trying to survive and make ends meet. That may be ok for a season, but I don’t want it to be my reality forever, do you? And so, we are going to pursue this financial target that ultimately is an income target. 

It is possible. I have seen people at varying income levels keep their housing expense within 25%. In the beginning, it requires them to buy right. They can’t purchase homes just because they are preapproved for a higher mortgage. You must buy right and get as close to that 25% target as possible today. If you purchase a home at 40% of your take home pay today, the road to get that down to 25% is pretty long. But if you can purchase or rent as close to 25% of your take home pay as possible, you’re in a very strong financial position that will allow you to grow into larger homes as your income increases. 

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Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.