What Percentage of My Income Should Go to Paying Bills & Debt?

by Jerry Shaw
Figure out a budget to make bill and debt payments easier.

Figuring out the percentage of your income for living expenses starts with your particular financial situation. You can use an approach that works best for you once you have a budget plan. That’s easier than you think if you separate your needs from your wants. It doesn’t mean you have to do without the gadgets or activities you really love. Just focus on the necessities first and then enjoy what truly matters to you even more.

Expenses Differ

You might live in an area that costs more for transportation because of the location of your school or job. Or the rents might be higher than normal where you live. You could need 30 or 50 percent of your income for bills and debts, more or less. Devising a plan helps you now, but it also guides you on your future. You learn to change your plan just as your lifestyle changes when you graduate from school, enter the job market or move to a new area.

Readjust Budget

Various budget plans available online can be used as guidelines, and you can readjust them to fit your needs. One budget plan might set aside 30 percent of your income for housing, such as rent or a mortgage later on. Transportation costs could account for 18 percent with food costs taking up 15 percent. In this plan you would need 5 percent each for utilities and debts, as well as 5 percent each for clothing, recreation, medical emergencies and savings. That leaves 7 percent for activities you enjoy.

Simple Approach

A simple 50/30/20 approach is touted by financial experts like Harvard’s Elizabeth Warren and MSN Money’s Liz Pulliam Weston, according to DebtGuru.com, an Internet domain of American Credit Foundation, a consumer credit counseling organization. You focus on your general needs with 50 percent of your income lumped together for rent, insurance, transportation, groceries, utilities and the debts you have for minimum credit card payments, car payments or student loan payments. You have 30 percent for pleasure, such as cable TV or online services, dining or nightlife, hobbies, sporting events, gym memberships, or other entertainment activities. That leaves you with 20 percent for your savings and an emergency fund to use if anything unexpected pops up.

Calculate Debt

It’s a good idea to keep your debts at the forefront of your planning at this point in your life. You can find debt-to-income ratio calculators online. You include your recurring monthly debt and your gross monthly income to arrive at the debt-to-income ratio. Bankrate reports that a score less than 36 helps you financially and also shows you can have a good credit rating with lenders. If you make $1,600 a month and have $300 in debt, you have a 19 percent debt-to-income ratio, which is great. However, if your debts are $600 a month or more with that income, it goes above 37 percent and you need to readjust your budget planning.

About the Author

Jerry Shaw writes for Spice Marketing and LinkBlaze Marketing. His articles have appeared in Gannett and American Media Inc. publications. He is the author of "The Complete Guide to Trust and Estate Management" from Atlantic Publishing.

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