![]() See Also: How much house can I afford? Benefit #3: It lets you treat yourself. If the final number comes in way above the guidelines, it’s likely to put a significant strain on your finances. They’re not based on your financial best interests, and therefore they shouldn’t be used to calculate whether you can actually afford something.Ī much better way to determine whether you can afford a house or a car is to insert the payment and other associated costs into a hypothetical 50/30/20 budget. Benefit #2: It keeps your home and transportation expenses in check.Īnother good use of the 50/30/20 budget is to help determine whether you can really afford big purchases such as a home or a car.Īs I’ve noted frequently on this website, lender guidelines - such as how much house you can “afford” - are designed to maximize the lender’s profit. If so, that could be an area in which you need to focus on changing your habits - whether that means saving more money or cutting back on your spending. When you look at your current income and spending, do you find that one budgeting category is far above or below the recommended guideline? No matter where your finances are right now, measuring your current expenses against the 50/30/20 budget is a helpful exercise. Here are some of the reasons why this type of budget might make sense. Opt-in below to receive the free PDF guide instantly. Get financial control with our step-by-step goal-setting workbook. For example, if you have high-interest debt, you’d want to devote this entire 20% towards getting rid of it. You can use the baby steps framework for figuring out which goals you should be focusing on. Contributing to IRAs, 401(k)s and other retirement accounts.This is the money that goes towards achieving your financial goals, which may include: The next number to think about in this budget formula is 20%. Non-essential shopping (new golf clubs, a new Kate Spade purse, etc.).Premium and streaming TV (like HBO and Netflix).Entertainment (concerts, plays, sporting events, etc.). ![]() Here are some of the common expenses that get classified as “wants”: It includes things you want but could certainly live without. This is what some people think of as the “fun” category. They’re the things you need to survive at your current standard of living. The items in this category cover the basics of life.
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