How To Manage Your Expenses
Are you considering taking your first mortgage? Or already have one and is looking to get hold of how you can manage your debts so that you can have enough money left to enjoy your life?
Like me, I’m sure you must have read it too that debt is bad. Persons like Warren Buffett- world’s richest man also advocates not having credit card debt. But I honestly don’t consider debt as bad thing unless
You are too careless! And if you are too careless, it is most certainly that your life is already messed up. And if your life is already messed up, it’s time — at least think on what is wrong and how to correct it.
First time mortgage owners- people like you who are young with very small deposit to pay as down-payment, often face the challenge of getting mortgage on their terms. It’s either that you get lower amount or higher interest because you are too risky for banks as first time customer.
When you apply for your mortgage specially, your mortgage provider will calculate a simple ratio called debt to income ratio.
Debt to income ratio defines how much of your take-home income is being paid as debt — either on credit cards, student loans (if you have any) or any other loans. Your mortgage provider will only decide your application if, after adding your monthly new mortgage payment into your debt-to-income ratio, it is below 30%.
This ratio can vary from bank to bank i.e. some banks may consider 50% debt to income ratio as acceptable level and more conservative banks would stick with 30%.
By keeping this ratio at lower level, banks actually wants to you retain more of your disposable income with you rather than paying off it as debt.
If most of your income goes towards debt repayments, you will have less money available to meet your day to day expenses therefore your chance to default increases. Banks, therefore, developed this very simple measure to keep a check on your debt level.
However, good thing is you can also use this simplest technique to manage your finances well.
How? Read on!
Keep check on your expenses
You can easily use this simple measure to avoid making budgets and painstakingly recording every penny you spend.
Simply, at the end of each month, calculate this ratio (Just see this YouTube video to learn how you can easily calculate it) and if it is greater than 30%, it means you have less money available to you to save and spend.
Let’s say, your total monthly debt payments are 40% of your take home income, it means, you will have 60% available to spend and save. Now if you don’t want to compromise on your spending, simply reduce the amount you want to save next month or vice versa.
Or if you want to save 10% of your income and can reduce some of your expenses, you can easily rebalance your spending and saving priorities.
It can also help you to keep a check on your debt payments
Let’s say you pay £500 each month towards your credit card and other debt and wants to get your first mortgage.
By using this simple measure, you can calculate how much monthly mortgage payments you can afford. Here are the simple calculations:
Your debt to income ratio = 30%
Your income = £ 3000 per month
Current debt payments = £500
Monthly Mortgage Payment you can afford = (0.3 x 3000) — 500 = £400
If you do nothing- I mean don’t follow any other advice for debt reduction and simply focus on minimising your debt to income ratio, you can easily manage your debt at acceptable level.
Try to keep it below 30% and if it exceeds, it’s time to either reduce your expenses or increase your income.