I found this article on Inman news which is disturbing. According to the article 15% of US homeowners carry mortgage payments which are at least 50% of their gross monthly income.
Let’s look at the math on this:
Let’s take a household that makes $75,000 per year. This translates to $6,250 per month.
Monthly gross income: $6,250
50% housing payment: -$3,125
Income taxes (25% + 7%): -$2,000 (Household in Oregon pays both federal and state taxes)
Tax benefit of mortgage: +$400
Money leftover after mortgage and income taxes: $1,525
Utilities, Water/ Sewer, Phone: $200
Food: $800 (this assumes no eating out, groceries only @ $200 per week)
Gas for car: $200 (this assumes only $50 per week for gas)
Car Insurance: $75 (this is cheap!)
Money leftover after these expenses: $250
This household has $250 leftover each month to save for retirement, college savings, unbudgeted expenses such as car repair, house repair, etc.. What is absent from this budget?
*Debt payments: We’ve assumed that they own their cars outright and have no credit card debt even though they have very little margin in their monthly cash-flow.
*Clothing/ Personal care: Among paying for everything else the $250 leftover each month would need to buy clothes, haircuts, etc.
*Cable/ Internet expenses.
I think it’s pretty clear that the only way this household can survive is by taking on debt which turns into a vicious cycle.
The lending community needs to do a better job of being financial educators to our clients by stressing the importance of simply exercises like budgeting. Furthermore consumers need to take responsibility and make better financial decisions.