During a recent client meeting, we were reviewing the family budget. This is a couple with 2 young children. At present only 1 parent works. I assured them that their budget was in the ballpark, that they were not spending in an outlandish way. Still, one of the parents felt that the amount they spend every month was a lot. He then asked me: what kind of jobs do people have to spend that amount every month?
Indeed! That was a very astute question, and got me wondering. And being the data geek that I am, I went home, got pencil and paper, and started crunching numbers. His question has stayed with me since he asked it. And please forgive me, but this blog post is going to take you around and around the mulberry bush, for those of you old enough to remember that rhyme.
Why the dance around the mulberry bush? Well it has to do with percentages. Let’s pretend for a moment that you are applying for a loan at the bank. In order to assess if you are a good candidate for a loan the bank will want to know your income and how much debt you have. They look at percentages of debt to income.
Let’s get 1 thing straight here. Debt DOES include your mortgage. And me being a cautious and prudent financial planner, I am much less generous than the bank when it comes to that crucial percentage. And this is because I want you to have more than water and crackers on your dinner table.
The range of debt to income should be between 30-35%. So here is the mulberry bush dance. A lot of people have the following as debt: Mortgage, car loan, credit card, or line of credit. When a wage earner starts listing their monthly spending scheme, starting with the fixed expenses it might look something like this:
Mortgage 20%, car loan payment 10%, line of credit payment 5%, credit card 2%. property tax etc etc. If those categories exceed the recommended percentage you know that the other categories are going to suffer. Or the only debts that will get paid are the mortgage and car loan. Because if you look at the overall percentage you should have, and see the categories that must be included in the debt to income ratio you might start to feel like it is a dance around the mulberry bush. Or the wage earner will start to feel his or her boss is underpaying him or her, because he or she thinks that a higher salary is the answer.
From my years of observation, to live in Calgary you would need the following yearly salary: Single $40,00-$60,000, no mortgage. Couple no kids, or mortgage $70,000. Family $90,000 with a mortgage. The bank will not look at anyone who wants a mortgage unless they and their spouse have close to 6 figures. Feel free to debate me on these observations.
So if you want a review of your family budget I am happy to oblige. Believe me after 16 years in the profession, I have seen a lot of budgets. That experience is invaluable to you.