I know that you’re supposed to stay around 30% of your income for housing costs per month. Is that 30% of net or gross, and is that only for the housing, or do they recommend staying under 30% for housing and all utilities?

This is an interesting question without a straightforward answer. “They” say many things, but from what I can tell from talking with some other financial types and consulting my common sense, the basic rule is 30% of your pre-tax (or gross) earnings, and that doesn’t include utitilies.

That said, here is what I, personally, think:

Try to keep your housing payment to 28% of your net monthly income.

Many mortgage lenders, if you want the best mortgage interest rate, have what is known as the 28/36 qualifying ratio. This means that your mortgage payment should only be 28% of your monthly income and no more than 36% of your monthly income should go to total debt (mortgage + other obligations). I suspect that this is even more common in the current economic climate.

I think that you would be wise to keep your housing payment — mortgage or rent — to 28% of your net income, rather than relying on your pre-tax income. (Our mortgage payment is 25% of our net income.) It might get you qualified, but you want to be able to afford the home without being “house poor” . I would even go so far as to include PMI and property taxes in the category of “mortgage payment”. We’ve done this, and our total housing expenses (including utilities and maintenance) is less than 30% of our monthly income.

What do you think is a reasonable percentage of your monthly income to make for housing?

image source: sxc.hu

Post from: EveryJoe

30% Housing Costs: Net or Gross?

And, interestingly, most of us would prefer to have the status money can buy. I came across this on Slate.com:

A more convincing answer is that we work hard because income is linked to our desire for status, which is collectively insatiable, because status is largely relative. A famous survey by economists Sara Solnick and David Hemenway found that many Harvard students (although few Harvard staff members) would rather have an income of $50,000 in a world where most people were poorer than an income of $100,000 in a world where most people were richer.

Of course, this survey is 10 years old, and it was merely confined to Harvard, and is not a true random or representative sample. But it is telling. And I do think it is somewhat applicable in our society. Aren’t we always comparing who has the bigger TV or the nicer car or the cooler laptop?

My husband, said, “Of course I’d rather have the $100,000! Who cares whether someone makes more, as long as I am comfortable with what I have?” But he also has no ambitions beyond getting a job that he likes and being able to buy what he wants when he wants it. And he wants to be able to spend the evenings and weekends doing relaxing and fun things (and sometimes doing nothing at all). I’m fairly similar. And we don’t have particularly expensive taste. So we’re already more than halfway there.

But the survey caused me to stop and ponder money as status. Do we look at what others have and judge ourselves according to whether or not we have it? Or conversely, how many of us committed to frugal living look at others and judge ourselves according to what we don’t have? Do we feel smug because we spend less money and have fewer things? It’s a sort of two-edged sword, money and status.

Do you think money and status are related? How do you feel about money?

Post from: EveryJoe

Money and Status: Do You Want More Than the Joneses?

But something needs to be done about a deficit that seems to be growing exponentially every time a politician opens his or her mouth with a new plan to “save” the economy. And, quite frankly, the American people will probably not go for a hike to their income taxes. Just letting the Bush tax cuts for the wealthy expire isn’t going to solve the problem, either. The government has a serious revenue problem. It’s too big for an income tax to solve. The VAT may be just the thing to solve it — since it guarantees and documents that taxes are collected every step of the way. Here is what Fortune has to say about VAT:

The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn’t arouse nearly the uproar caused by increasing income taxes. …

[T]he VAT would be better than the other likely alternative: A higher retail sales tax. If the national sales tax were raised to, say, 20%, consumers would cheat by paying cash to avoid it, and retailers would submit because they’d sell more goods by cutting the price 20%.

VAT hasn’t really been introduced as a serious option yet. Mainly because VAT can actually act as a drag on the economy. One of the ways that VAT may create a slowdown in the economy — at least initially — is by increasing the cost of goods. Charging higher prices is a surefire way to encourage people to carefully think through their purchases and maybe spend less. Wait a minute. Maybe that would be a good thing. Consumers spending less (using mainly debt, of course) and disciplining their purchases…

At any rate, the VAT may become a reality here in the U.S. The income tax is not even close to being enough to cover the amount of spending going on — I’m not even sure how long it will be enough to cover the interest on our massive national obligations. Even seriously cutting programs won’t work. And, unfortunately, the most expensive programs are those that we now consider “essential” (Medicare, defense spending, etc.).

So VAT may be the solution. But one thing at a time. There are still Important Things to throw money at. The government hasn’t time yet to think about where that money will come from.

Post from: EveryJoe

Taxes: Are You Ready for VAT?

While there are ways to avoid penalties on the money taken out for 401k retirement accounts, it still reduces the overall money you save for retirement in the end. The 401k is preferred because it is easier to access that Roth accounts and pension plans.

MSN Money reports on a study done on the subject by that Center for American Progress:

“They don’t necessarily pay penalties. But the penalty is that they have fewer retirement savings,” said Christian Weller, an author of the study.

As economic conditions grow bleaker, the number of people dipping into retirement money will only rise, he added.

Post from: EveryJoe

Americans Turn to Retirement Accounts for Income

Simply: If you want to earn income, you have to work for it; that is, income is active. The IRS may call certain things “passive income,” but the term itself is a lie.

And really, I tend to agree. No matter what you do to set up your revenue stream, you still have to do work. Whether it’s a retirement account, rental property or advertising on your blog. And there is always work to maintain that income through proper management, no matter how easy that work may seen.

Bottom line: if you want to make money, you have to put forth some level of effort. You can’t just hastily set something up and expect someone to magically hand you some money.

That’s called an inheritance.

image credit: sxc.hu

Post from: EveryJoe

Can You Really Earn Passive Income?