The 28% Rule

Those of you who are not yet homeowners are probably renting (or camping out in an abandoned part of town like I keep trying to convince my wife to try). If you are renting and want to save up some money for a down payment on a house, here is a useful tip that I have been trying. The first thing you need to know is what percentage of your income should be going toward your rent. Most experts will tell you that you shouldn’t spend more than 28% of your monthly gross income on your rent. So if you are making $5,000 a month, then you shouldn’t be paying more than $1,400/month for your rent (or mortgage payment).

So, Now What?

This brings us to my suggestion: if you should be able to afford $1,400/month and you are only paying $900 then it makes sense to put the extra $500 under your mattress to help save for that happy home you hope to have. Now, if you are in a 12 month lease, and you tuck your money under the mattress, you will come up with an extra $6,000 to help with that house down payment (or closing costs, or finder’s fees, or whatever you anticipate paying for in connection with that perfect picket fence).

Boost Your ReturnAssuming you want to get a better return than your mattress can offer (and a cheaper chiropractor bill), here is what you can do: save the first 6 months for a total of $3,000. Put this amount into a six month Certificate of Deposit and continue saving during this last six month period. This will give you a small boost in your savings while keeping it nice and safe.

Photo by Megan Ruth Stay

If you already own a house, use this money to make those much-needed renovations you’ve been thinking about. Go ahead, get the wallpaper.

Want more ideas on building your budget and planning your financial future? Visit me at www.stefuinvesting.blogspot.com