Don't be house poor!

Mark knows that Dave recommends your mortgage payments be no more than 25 percent of your monthly take home pay. He asks if this figure includes insurance and property taxes. Dave responds and explains why this is a good idea.

QUESTION: Dave recommends that your monthly mortgage payment be 25 percent or less of your take-home pay. Mark asks if that figure includes property taxes and insurance.

ANSWER: Yes. I’m trying to keep you from being house poor. You can qualify for a house payment, with taxes and insurance, that’s close to half of your take-home pay. And that’s what we call house poor. You don’t have room in your budget to do anything else with a house payment that large. When you go to get a car, you have nothing saved and you take on car debt. You haven’t saved up for when your kids are ready to go off to school, so you and your kids go into debt for that. If you need a new couch, you go into debt for that too, because you haven’t saved anything. All your money is going out the door for your house, and that’s what we call house poor.

When your income minus your basic living expenses equals almost nothing, it means your basic living expenses are way too high. I’m trying to get you to where you can get the house and everything paid off so you can become wealthy. Your most powerful wealth building tool is your income. When we talk about driving some old hoopty, not going out to eat, or not going on vacation — those are temporary things. It’s all about living like no one else, so that later you can live and give like no one else.

My house, of course, is paid for completely debt-free. The monthly expenses are a very small percentage of my overall net worth because I’ve become wealthy doing this stuff. I’m not bragging; I’m just saying it works. You reach a point later where 25 percent doesn’t even enter the equation because you don’t have a mortgage!