How Much of Your Take-Home Pay Dave Ramsey Says Should Go Toward Your Mortgage
In the world of financial advice, one of the top experts is fast-talking Dave Ramsey, a personal finance expert who has made a name for himself by publishing eight books on finance. He also hosts “The Ramsey Show,” where he dishes out practical advice on everything from budgets to retirement, and appears on numerous TV shows doing the same. Finally, he’s CEO of his own company, Ramsey Solutions.
One of Ramsey’s strongest pieces of financial advice centers on how much of your money you should put toward a mortgage payment each month, which, for many people, is the biggest monthly bill they have. This advice varies a bit among experts, but Ramsey caps this amount at 25%.
The reason Ramsey suggests this is that if your mortgage is no more than 25% of your income, you should be able to pay for all the rest of your expenses each month without a problem. In other words, you will not find yourself stuck with a mortgage payment you can’t pay, or not on time.
This 25% figure should come out of your net pay, the money you have left after other deductions such as taxes, retirement contributions or benefits have been taken out of your income. As Ramsey says on his website, “I want you to buy a home that’s a blessing, not a burden. And the only way to do that is to understand your home-buying budget and stick to it!”
To put this into perspective, Ramsey explains that if you take home $5,000 per month after taxes, according to his 25% rule, you should pay no more than $1,250 per month for a mortgage payment (and that includes the principal payment, property taxes, HOA fees and interest).
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According to The Motley Fool, if you make $50,000 a year, and you live in the pricey state of California, you might think that means you can afford to pay $1,041 per month on a mortgage (though, frankly, there are few California cities where you can find mortgages that low). But, you first have to pay your federal and state taxes, and that would actually only leave about $830 per month for a mortgage. This is not especially sustainable in California! In other states, where housing is less expensive, this is a more realistic goal.
So, even though Ramsey’s ratio is definitely on the conservative side, achieving it still might mean rethinking where you live. If you have a lot of other expenses or debt to pay off, however, it’s a very good rule to live by.
Other experts push Ramsey’s mortgage payment ratio higher, ranging from 28% to 35%, but that would likely require you to have a more sizable income, or live in a more affordable city, or both.
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