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Mortgage Ratios…

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I was listening to Dave Ramsey last night while taking Hutch for a run and was flabbergasted as a man told Dave he couldn’t survive on what he was making. The man was pulling in just over $6,000 net each month and was carrying a $2,400 mortgage.

Dave said it was a tight budget but he should be able to survive on it.

‘Are you absolutely kidding me?!?!?’ I shouted as I ran.

I can’t imagine these kinds of outbursts make me popular with the neighbors – nor does it give them any sort of confidence in my sanity… but what else is new?

Without giving away too much about our income or mortgage amount, I’ll just put it this way, my husband and I make less than $6,000 net a month and our payment on the first mortgage alone is more than $2,400 a month. Not only do we survive on this, we reduce debt – and we’ve been doing it for two years.

Forgive me for being callus, but if you can’t survive on $3,600 a month after paying a mortgage, there’s a bigger problem than the mortgage.

BUT, I’m trying to change my paradigm and reduce the judgmental side of my personality. Do you need more than $3,600 to survive after your mortgage is paid? If so, why? (Not counting any medical problems or child care. The guy didn’t have medical problems and didn’t pay for child care)


21 Comments

  • Reply victoria |

    My total income for the month is less than his ‘remaining’ after mortgage.

    This is an example of a ‘higher level of poverty.’ I am guessing his house is bigger so more associated heating and cooling costs. His car(s) are bigger/more expensive so require more gas, higher repair bills. His taste in clothing runs to more than the bargain brands. His idea of eating a cheap meal out is probably closer to 15.00 a plate than 5.00. The list just goes on.

  • Reply [email protected] |

    Beks,
    I think you were right to be a bit judgmental. It’s all lifestyle. If he actually brings home 6,000 per month, then his before tax salary is probably around 100,000. I think there is a mentality around that six figure number that can lead people astray. They think, “I make six figures, I can afford to do that!”. But it’s just not true.

    I’m not saying that 100,000 or even 72,000 is not a ton of money, because it is. But our juvenile ideas of what those kinds of salaries would mean we could afford to do are just wrong. And that’s why Dave will never be out of a job. 🙂

  • Reply Refugees on a Budget |

    Did he say that he has any other debt (other than his mortgage)? Totally agree with the previous comment.. he’s probably living beyond his means. When it comes to money/spending he’s probably thinking ‘I am making 100K, I can afford it”, instead of “I have X dollars in the bank, maybe I shouldn’t be buying that”. That kind of thinking got me and my family to where we are – in debt!!! But we’re changing it and that’s all that matters :))

  • Reply Maggie |

    @Nichole, you are correct, My Hubby fell into that trap and dug a huge credit hole for us after he graduated with his Bachelor’s degree and his income soared. But now I am in charge of the finances and and digging us out.

    I agree the caller could be doing much better but I am sure he cannot comprehend the idea of scaling back his lifestyle. My hubby had that problem also. “What, give up my cable TV?” or “I have to have my alarm service and my smart phone for work”. Contract can get in the way, but they can be dealt with.

  • Reply Tiffany |

    My guess is he has a lot of “essential bills” that maybe not all of us would consider essential. He may have a very nice car he is making payments on, fancy cell phone, cable or satellite TV, gym membership, etc etc.

    It sounds like he might be a single guy, so it’s possible he’s not big into cooking, so he eats out a lot, which takes up a lot of money.

    I’ve known a few people like this, who are also struggling to get by even though they are making a significant amount of money. Often times the only difference between them and I was our views of necessities. They have a lot more wiggle room in their budget and quickly enough luxuries become necessities.

    My gut reaction is always the same as yours though.

  • Reply JMK |

    My initial reaction was, of course you can live on less than $3600/mth excluding mortgage. Then I added up my planned basic spending for the next month and it comes to ~$2700. That’s just gas, groceries, utilities, life/house/car insurance, property taxes and $60/wk to cover random incidentals (haircuts, clothing, kids field trips, pet food etc).

    The only way we keep our expenses down to that level is by not having cable, virtually never eating in restaurants, and having no car payments. That also assumes $300 for electricity but when the temperatures plummet to -35C in Jan-Mar I’ll be paying between $700-1000/mth. So if this were January and I had a couple of car payments like many people do, then yes I would need that amount.

    My $2700/month for the essentials also doesn’t include setting aside money for house and car maintenance, savings for retirement or kids education, or paying down the mortgage early. It also doesn’t include vacations. That $2700 is just the fixed monthly bills plus gas and groceries. We have no consumer debt so no repayment costs in that either. We live massively below our means and in a typical month stick at least $3000 a month into savings or extra mortgage payments. Without a lot more information on the caller including the local cost of living, number of people they are feeding, the number of kids they are funding in university, and the level of savings they are attempting to achieve it’s hard to judge. If on the other hand the struggle to manage is because they have a couple of giant car payments, 500 channels and monster TVs, eat out constantly and are making payments on a mountain of stupid consumer debt, then I feel no sympathy!

  • Reply Mike Dunham |

    Well, to play devil’s advocate for a minute, we don’t know his situation. Maybe he’s shoveling $1200 a month out the door for school loans. His utilities are probably significant for a house that size. Maybe he’s got eight kids. Who knows.

    I agree he should be able to be just fine, but he obviously needs help, which is why (presumably) he was calling Dave in the first place.

  • Reply Anon |

    I think you’re being a smidge judgmental. We couldn’t make it on that much. With the mortgage and two student loans, plus all the other mandatory bills (propertry taxes, food, gas, electric, heat, etc) $3600 just wouldn’t be enough. Everyone is in there own situation, and while this persons situation may not seem right to you, you don’t know what else is going on. I’d say back off a little.

  • Reply Andy |

    I often listen to Dave in the afternoons and have to agree that there are times when people call in for help and when Dave gives them advice they respond “I can’t do that” or “that won’t work with my family”. At that point I would like to shake them and say “what the heck!?!?” – yes that makes me judgemental, and it is wrong – I know this.

    That being said, I could’ve been this caller two years ago. DH and I each make more by ourselves now than we did combined when I was in school. And somehow we managed, and actually better than we do now. It’s amazing how things that we wouldn’t have dreamed of buying while I was in school are now somehow “necesities” (cable, car payment, eating out ect.).

    It wasn’t until we realized more was going out than coming in every month that we were able to put this whole phenomenon of lifestyle inflation (I think that is the term I am looking for?) into perspective. We really sat down and discussed and examinded what was a need vs. want.

    I hope this guy gets everything worked out, but sometimes you can’t help people until they are ready to help themselves.

  • Reply hithatsmybike |

    This is probably the wrong answer but frankly, if someone has a $2400 mortgage, then they:

    a) bought an unnecessarily gigantamous house. I think we need to learn to live in smaller homes, rather than trying to beat the Joneses with a new mcmansion

    b) bought a house they couldn’t afford. Shouldn’t your mortgage payment be around 30% of your income or less? The bank shouldn’t even approve mortgages that eat up nearly half of someone’s take-home pay.

    That said, I think if your mortgage payment is less, say $1700, but you’re throwing $2400 at it because you want it paid down faster, then that’s awesome — but that’s a choice and therefore the number is flexible so if you ever needed extra money you could simply pay less or skip a payment one month.

    I think it’s ridiculous that everyone’s harping on this guy for not being able to afford to live on $3600/mo but think it’s perfectly acceptable to own a home that costs $2400/mo. WTF.

  • Reply Dream Mom |

    I am a Professional Organizer and often help women with their home office and in some cases, their budgets. I have seen people struggle with net incomes of $10,000 per month and no mortgage (house was paid in full). The bottom line is that until you decide to control your spending, there will never be enough money. Most of the time, I am astounded by how much money people “think” they need. I try not to judge but rather talk to them about general money management and their goals. A lot of the time, no one has ever had many conversations with them about money.

  • Reply Janelle |

    Not trying to be a meanie here, but if the guy has kids, that changes everything. We have four kids, two preteens and two hungry boys and they eat through my food bill like little giants. We eat out maybe once per month, and I cook a lot! We are frugal, but I can tell you feeding a lot of mouths can nuke your budget, even when you are super frugal. It would be no surprise for me that $1,000 of that $3,600 is for food alone if he has a larger family of 6 or more.

    Now, if he is single or married with no or maybe one child, then he most likely just has too many expenses that he is not willing to cut (like cable, gym, etc.).

  • Reply Connie |

    My husband and I barely make it on $1k after our mortgage (massive pay cuts and layoffs in 2009) is paid…I can only imagine what type of lifestyle this guy is living….probably two new cars-full coverage insurance-maybe teen with car or maybe teen with caviar taste on a teenagers budget…I know these are big assumtions to make but jeezzzzz……..

  • Reply Karen |

    Wow things sure are different in California. I support myself and my child on $1600 a month. And no I do not receive help from the state.

  • Reply Dylan |

    This reminds me of a conversation my mom had with my aunt about 25 years ago – where my aunt complained bitterly that she couldn’t possibly live on only $5,000 a month. This was for a family of 4 in a semi-rural community.

    At the time, our family of 4 was living on less than $2000 a month – and that’s a generous estimate.

    No wonder my cousin’s retirement plan is to die young…

  • Reply chacha |

    I’m kinda shocked that Dave Ramsey said it was a tight budget. I hope he is being sarcastic.

    We also have a larger mortgage than that and take home a net pay around that amount. We are saving and also reducing debt – but, it’s challenging. However, my mortgage with taxes & ins is $3200. Plus car loan, and student loan. If I was being really frugal, I’d probably cancel cable, have cheap DSL & landline, cancel Y membership, etc. Those things add up and not everyone is willing to drop them.

    Also some states have high energy costs – have to factor that in. $300+ electric bills for A/C in states like Texas. Winter gas bills in northern states, etc. Also commuting costs – I spend several hundred a month on gas alone (car gets 30 mpg).

  • Reply Alexandria |

    I think this is very judgemental. I could not imagine paying a $2400 mortgage, for one. But, living in an expensive area, I don’t think that is a huge spending problem at all. (We probably live on about that much after our mortgage). We have no debts, and we live very frugally. Our health insurance costs about $1k per month for our family. (NO health issues – it’s just how much it costs and we don’t have any employer benefits). Plus, raising kids is a whole other story aside from being single. My single/childless friends can be very judgemental about our spending sometimes. Sorry, but I am supporting FOUR people. IT costs a wee bit more than when it was just me alone.

    Our health insurance bills reminds me that not every budget is equal (or even similar).

  • Reply Alison |

    I have three young children and it’s more than we would need to survive. Previous comments have made it clear that there’s a lot of missing information, and in his situation, $3600 may very well not be enough. That said, I’m sure I would have had the exact same reaction that you did. 🙂

  • Reply Helen C. |

    I listen to Dave Ramsey pretty regularly for years, and whenever issues like this come up, he uses the guideline of using PROPORTIONS relative to your income, not flat figures – meaning, your housing should not be greater than 25-30% of your net (housing to include HO insurance as well, but not repairs – that should be a separate line item in the budget).

    $2400 of $6000 is 40%, and in Dave’s book, that is too high. If 40% of your take home pay went straight to keeping a roof over your head, leaving you to live on 60% for expenses/savings/charity, that would make the rest of your budget quite tight. Unfortunately, this is all too common case in some areas like California, which is why too many homeowners are considered “house poor” because they have too much of their money tied up in housing.

    If people ran the numbers this way towards their own situation, it would make more practical sense and be more useful to see if a comfortable balance is being achieved in their lives.

  • Reply David |

    I think Helen has hit the nail on the head. When your mortgage is more than 25%-30% of your take-home it is really hard to get ahead paying off debt and saving regardless of income. Unfortunately it is much easier to achieve this in North Carolina vs California.

  • Reply Paul |

    Try surviving with a 6500.00 net with a 2400.00 mortgage payment on long Island. Property taxes are 13,000 a year plus one of the highest utility cost in country, as well as 400 a month railroad commuting costs. Throw in two college aged students with parent loans. After cutting cable, internet, driving to used cars and eating Ramin noodles a few times a week for dinner we still are under water. Earning 120K on Long Island doesn’t get you much believe it or not. If we could, we’d move. Perhaps soon-

So, what do you think ?