On my way to work yesterday, I found myself stopped behind an older pick up truck that looked like a scene straight out of the Dust Bowl era.
This truck had so much STUFF in the back that I could have sworn the wheel wells in the back were resting on the rear set of tires. The coil springs and leaf springs (if they even existed) were totally taxed beyond their capacities.
I think there was a refrigerator, an old mattress, a dresser and maybe even a lawn mower all tied down in a manner that made me decide that I should probably try to be in front of the pick up truck. As soon as it was safe, I overtook it (which was not hard to do since it moved at a turtle’s pace) and went along my merry way.
Well as merry as anyone can be going to work.
But it got me thinking about STUFF that slow people down when it comes to their journey to financial independence. The stuff that we all carry is debt. Some people have more stuff in the truck bed than others. And we all have different size trucks and are therefore able to take on different sizes of debt.
How do we know if we have too much in the back?
The best way to know if your “truck bed” has too much “stuff” in the back is to find out what your debt-to-income ratio is. The calculator results will basically tell you if you can keep going with your current income versus the amount of debt you have to pay every month. The lower the percentage result means that your truck can keep you going to your destination at a desirable speed.
The magic numbers
But if you decide that you can take on a little bit more stuff in the bed of the truck, please be careful. A lot of people decided to add a mortgage to the stuff they carried in the back. I do hope that they used a calculator like this to get a good idea of how much monthly payment they can afford. Nowadays, banks will do the calculation for you and will approve your home loan based on what your projected debt-to-income ratio will be. If the house payments will be more than 28 percent of your monthly income, then you will most likely get denied. And if all your monthly bills total more than 36 percent of your income, then you will most likely get denied.
The 36 percent is the maximum and really should not be used as a target because that would mean you are living on the threshold of having too much debt. Rather you should try to make your bills decrease and/or your income increase. That would be ideal.
Even a Toyota Tundra can only safely carry 27 percent of its total weight in the back. Maybe we should all strive to have all our bills equal to only a quarter of our total income. That would be ideal.
If you add up all your bills (rent, credit cards, phone, groceries, etc.) would it equal to 36 percent of your income? If so, do you think it is easier to lower the bills or increase your income?
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