The most popular idea in a sphere of financial management is to increase savings and decrease spending. But how can you determine this relation? And on what level of spending will you be called a spender? All financial experts and advisors recommend keeping track of spending because to have a budget that works you should spend less money than you make.
The effective personal budget also includes savings, so you should calculate expenses to cover your necessary needs and to save money for retirement and emergencies. But we all have different income and financial situation so there’s a different amount to save and to spend for everyone. Here are some useful numbers that can clear up these questions for you.
Credit Card Debt
When dealing with credit cards you definitely know the credit limit for each card. So to avoid penalties due to high debt usage ratio you just need to keep the balance of each card below 20% of credit limit. It’s very important because your credit score is dependent on this debt usage ratio. In case you want to secure your finances, you can set your own limit in 10% and even have some reserve balance.
Also in case of financial emergency, you can fill short term loan application with no credit score check. Such assistance is necessary when your credit score doesn’t correspond to demands of your bank and you are rejected from ordinary credit.
Lenders set a definite level of your spending on house costs at 28 percent of your gross income. House-related costs include your mortgage, interest and taxes, insurance, principle and other possible spending related to your house. In some cases, you are allowed to exceed this level and get the maximum 31 percent for your housing ratio. So you need to talk to your lender in order to get this option of higher percents.
But if your house spending exceeds this 31 percent you should think about changing your lifestyle and start living frugally. You may also think about downsizing in case you can’t afford living in such an expensive house.
Savings for Retirement
The most important factor of retirement savings is your age when you start saving. Depending on your age it’s easier to calculate the percent of your gross income that must be saved.
In case you are a thoughtful person and start building savings in already in your 20s, you need just to set aside 10 – 15 percents of your pre-tax income. And the resulting sum will be enough to provide the same level of living after retirement. But if you wait till your 40s, the amount of savings must be increased dramatically – to 25 – 40 percents.
This shows the simple rule that you need to start saving from the first paycheck you get. It will make the saving process easier and less cumbersome.
When you need financial help and apply for a loan in your bank, the most important question will be about the ratio of your debt to your income. To calculate this ratio you need to take all debt payments, including house-related costs, credit card debt, car loan, taxes, and other spending, as a percentage of your pre-tax monthly income.
And this number should not exceed 36 percent. In the ideal situation, this number is about 10 percent, but it’s great if you can fit a 20 percent level.
Also, there are two possible types of debt in relation to the repayment period. When you have a mortgage or a student loan, these debts are considered as “good” ones. But having debts as your car loan or a credit card, you get a “bad” debt. So it’s recommended to avoid such “bad” debt to maintain healthy finances.