By: Laura Walton AFC®
I wonder at what tension setting my spinning instructor has her bike set? Not that I could match it, she’s a very fit long-distance rider, but it would give me something to shoot for. Financial benchmarks can help us in the same way – something to shoot for. Let’s review a few of them.
I recently met with a couple who spend $2000 a month on groceries and restaurants. It’s a lifestyle choice for them and within their budget but I wondered – if they knew what a typical couple spends on food for a month, would it change their behavior? The USDA’s Cost of Food at Home, July 2015 chart shows that this couple could eat three meals a day for 30 days on a “liberal” food plan at a cost of $709.83 a month. I doubt this couple would choose to slash their spending by $1300 but, at the same time, they might be encouraged to shift a couple of hundred dollars from their food budget to, say, their vacation budget.
What about debt? If you are carrying too much debt, you might find yourself juggling monthly bills, unable to cover an emergency expense and certainly not able to save. One benchmark to consider is the debt ratios used by mortgage lenders:
- The ratio of your gross monthly income to your mortgage payment (principal, interest, taxes and insurance) should not exceed 28%.
- The ratio of your gross monthly income to your mortgage payment (as above) plus all other debt obligations (car loans, child support and alimony, credit card bills, student loans, installment loans, condominium fees, etc.) should not exceed 36%.
If your ratios are higher than 28% and 36%, lenders see you as a greater risk. With a higher percentage of your gross income going toward debt, a job loss or emergency expense could cause you to default on your mortgage payment. Check out the “Income Required for Mortgage” calculator at bankrate.com to see how changes to your debt load can affect your ability to qualify for a loan.
Do you wonder how your overall spending compares to others? The Bureau of Labor Statistics tracks averages from year to year. For an average income before taxes of $69,000, spending averages were as follows: food $6,700, housing $17,800, apparel $1,800, transportation $9,000, healthcare $4,300, and entertainment $2700. For higher incomes, view this pdf from the Bureau.
Benchmarks simply provide measurable goals that can help you achieve long-term financial goals.