Make a budget to stay out of the ranks of bankrupt
Disposable income is being spent at a record pace. Plasma TVs, digital cameras and talking navigation systems are coaxing the almighty dollar out of consumer wallets.
With low financing and scores of temptations, it’s no surprise that household debt has reached record highs. Research by the Federal Reserve found that about 14% of disposable income was used for debt payments in 2002.
How does rent figure into the mix? Usually, it’s the largest slice of the monthly budget, consuming 25% to 30% of gross income, according to federal housing guidelines.
The problem is that using that figure may get a tenant in trouble. Luxuries unheard of a decade ago, such as laser printers, cellphones, hand-held computers and laptops, are taking ever-larger slices of the pie. So are the accessories, such as high-speed Internet connections and surge protectors. Factor in batteries and rechargers, add car payments and the price of gas, and renters may find themselves in a financial corner.
With too many consumers stretched thin, the American Bankruptcy Institute reported that non-business bankruptcy filings have reached an all-time high, with more than 1.6 million consumers hitting bottom as of the fiscal year ended Sept. 30.
How big a slice should you budget for rent? To find out, get a handle on your finances. Take out paper and pencil and chart a budget. Without counting rent, start with fixed expenses, then variable expenses. Gross and net incomes come later. For the last 12 months, pull out checkbook registers, bank statements, credit card bills and pay stubs for reference.
Fixed expenses, such as car payments and insurance, health premiums or loan debt, should be listed on the left side of the page in priority order. As a fixed expense, consider putting aside 5% to 10% for savings too.
Families have extra fixed costs, such as child care and education. Factor in the cost of public school versus private, if that’s a choice you’re making.
Next, examine your lifestyle. Some variable costs are fickle. For example, are you the steak dinner type? Or is peanut butter more your style? When it comes to clothes, is drip-dry or dry-clean on your list?
If travel, movies and fine wine are a priority, factor those costs into your budget. Write them down under “variable expenses” in detail, in case they need trimming later.
Unexpected costs, such as medical, car repair and insurance deductibles, can be put under “variable costs.” After listing actual expenses, total your fixed and variable expenses from last year at the bottom of the page.
Then realistically assess your steady annual gross or total income. Bear in mind that gross income is a somewhat mythical number found on paychecks. The actual dollar amount received, called “take home” or “net pay,” is what’s available to spend after deductions are taken.
If you’re working part time or in a seasonal industry, be realistic about net earnings for the entire year ahead. Incomes in the entertainment industry, for instance, can be unpredictable. Backup savings or employment is vital to your financial health.
For the self-employed, income assessment is more complicated. It’s a do-it-yourself enterprise, including deducting your Social Security (at 15.3%) plus applicable state and federal taxes.
State taxes vary from nothing to 11%. Ironically, the higher the income the less money is taken home. Federal tax rates are based on five levels of income, with a top withholding rate of 35%. Rates also are based on a filer’s status as single, married filing jointly or married filing separately. Consult an accountant or tax expert for details.
Once expenses are totaled, subtract expenses from net income. Then ask yourself, “How much rent can I afford and still keep my lifestyle?” The answer is in the numbers and how you choose to use them.
But above all, don’t make financial commitments you can’t keep.
H. May Spitz is a Los Angeles-based freelance writer. Reader comments may be sent to hmayspitz@AOL.com. Attachments cannot be opened.
