Welcome back folks it’s Wednesday and that means another blog post. So, you saw the title it’s not click bait (well maybe a little) but obtaining wealth is one of the more important endeavors many of us pursue. Is wealth the key to happiness? No not really. Does wealth give you more options to achieve happiness? Yes! So, as we journey through life and into adulthood there are a couple of key metrics you can measure to figure out if you will obtain wealth at some point.
To be clear, wealth doesn’t mean tens of millions of dollars. I mean it could mean that for you but wealth, in my view, is having enough income to enable you to pursue things that make you happy. Yes, having a 100 Million dollar yacht might make you happy, so might a 15K bass boat. Hopefully you get the picture here. The point is there are a couple of important aspects of adulthood we all have to deal with. This one key metric I reference in the title is one of the most important to determine if you have a chance to obtain wealth. “Well Karac what is it?!?!?”
How much of your income do you spend on housing.
Everyone has to live somewhere unless you are in dire financial straits. Your housing costs usually represent a huge chunk of your income. The principle here is pretty simple, the more you spend on your four walls the less money you have to spend on other things. Over time this has a debilitating effect on your wealth. To put it simply, if you are spending most of your money on rent you don’t have money left to invest, pay off debt, accumulate items you want etc., so on.
So how much should you be spending on housing? You should try and land somewhere between 25%-33% of your net income (take home pay, not gross). Now the important thing here is to remember your income can change over time. So, you might be getting a mortgage in 2023 and it is 33% of your income. You project that in a few years your income will increase 10-20% (for argument’s sake) and therefore the % goes down. You always want to start as low as you can on the curve and hope your income increases over time.
You may also lose income at some point, that happens. You may also get to the point where you do not pay for housing (you paid off your house). So, to be extremely clear here the metric for housing is the actual payment you make every month for rent or a mortgage. We aren’t talking about electricity, sewer etc. JUST HOUSING. Ideally you keep your housing costs at 25% of your net income through your adult life with the goal of someday having a house paid for with no mortgage.
At 24 that might not be realistic but let me leave you with this example. You are 24 you make 60K a year. Depending on where you live, taxes, benefits you chose etc. you will probably take home approx. 45,000 (these are rough estimates based on probable outcomes for the U.S.) So that equals $3750.00 a month. 33% of that (the high end) =$1,237.50. That’s the max amount of rent you should be paying to ensure you obtain wealth. Remember the numbers I used here are to give an example. For you here is how you do it.
Take home pay multiplied by number of annual pay periods = net income. Net income multiplied by 25% – 33% = housing cost you should be paying.
We don’t want to spend more than a third of our take home pay on housing because we need our income to pay bills, reduce debt and invest. The lower your % of housing cost the greater chance you will have to build wealth over time. Housing is likely the biggest monthly expense we face as we go through our adult lives. Keeping its cost in perspective as a % of take home pay is the key metric.
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