One Number
Whenever someone asks me for financial advice, there's one number I immediately try to get from them to help me understand their approach to life and potential tension level. Want to guess what it is? Nope, not income. Nope, not debt balance. Nope, not retirement portfolio.
Their house payment as a percentage of their take-home income. Here's an example. If a family has a $2,200 housing payment (rent or mortgage) and a $7,000 take-home income, their number is approximately 31%. For me, that's the magic number. That number alone tells me most of what I need to know.
The higher that number is, the couple has fewer options, less margin, and probably a lot of stress/tension. The lower that number is, the couple has more options, improved margin, and probably a lot less stress/tension. Ideally, this magic number would be less than 25%, but in higher cost-of-living cities, it could be a bit higher.
If I meet with a couple who want to get right with money, but their number is 45%, that's a tough hill to climb. It's going to be awfully tough to pay off debt, set aside money for savings, give, and contribute to retirement. If one single category of life costs almost half of one's take-home income, it puts immense pressure on all the other areas of life. Some would call that being "house poor."
Conversely, if I meet with a different couple who want to get right with money, but their number is 15%, they have a multitude of options! With that level of margin on their largest expense, there's likely money to spare for other, more important categories. Debts can get repaid. Savings can be built. Investments can gain momentum. Generosity can flow. So many options!
I regularly have people tell me that this number isn't a choice. Rather, it's just a reflection of an uncontrollable reality. Never before has that myth been as front and center as it was a few weeks ago, when I met with two couples on the same day. Both couples live in the same town and have similar household incomes (approximately $9,000/month take-home income). One couple's monthly housing payment is $1,800 (20%), and the other's is $4,200 (47%).
Same income, same town! Here's the kicker. The couple with the $4,200 payment, which equates to 47% of their take-home income, was insistent that they are merely a victim of the times. There's nothing they can do to lighten the load, they claim. The other couple, with an $1,800 house payment that accounts for 20% of their take-home income, shared that they intentionally chose to live below their means so they could build a strong financial foundation and follow their callings.
One final thought. Nothing is permanent. If you're in one living situation, there's no law on the books that says you must stay there. Often, this single (weighty) decision can be the inflection point for so much amazing life change. Don't let the world convince you that you're merely a victim of circumstance. Yes, crap happens. Yes, we might be on the receiving end of some negative outcomes. However, that doesn't have to cement your fate.
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