One... Two... Three... Charge!

I'm sure by now most of us would agree that having no debt at all would be the optimal experience, right? That's not always the case. No, the summer heat and lack of rain hasn't thrown me for a loop... Let's take a look at what I'm talking about. 

The "need" theory

My grandpa, or "papa" as we referred to him, was a very smart, and very frugal man. Even a bit more frugal than me if that's even possible. He despised "owing" anyone money, and often paid cash for items he purchased. He was able to do so by using one simple theory...not purchasing anything he couldn't afford, or for that matter "needed". Those are the key words here: afford and need. 

While I "needed" the Michael Kors large travel tote I purchased this past weekend which I got for a heck of a deal, I didn't truly need it. However, I could afford it by not frequently splurging on unnecessary items. So as I walked to the register, carefully cradling my new gorgeous find, I did what anyone not planning on making a sizable purchase would do...I threw the plastic out onto the counter. Now before you call me a complete hypocrite, let me explain my "why".

Strengthening your credit score

While carrying balances on credit cards is something I completely disagree with, keeping a good credit score is something I fully back. Credit is not a bad thing. It's actually a really helpful, useful, and often necessary thing in the world we live in now. By using it correctly, it can be a positive experience.

You see, I regularly use my credit cards to keep an ongoing relationship with my credit score. Yes, even someone as tight and bossy as I am can hold down a relationship... I also pay them off each month. This makes the relationship a positive one.

When my grandpa passed away, the cards my grandmother had in her wallet were under his credit. When trying to apply for one under her own name, she was denied. Why? She had no "credit". So while she had plenty of cash sitting in the bank, she couldn't get a credit card.  

Establishing your own credit

This is not uncommon.  I've been in the finance industry for almost 22 years (I'm really not that old, I started early...), and actually it happens more often than you think. The way to avoid this is to establish credit in your own name. The way to continue it going in a upward direction is to keep it nice and tidy. (Side note: To establish your own credit, try a share secured loan)

Your total debt payments

So where is that fine line between good and bad credit? Let's take a look. The figure that most financial planners and credit counselors consider as "good" is calculated using a rule of thumb for consumer debt of 20% or less of your net monthly income. Your net income is the amount of your paycheck after taxes. So if you bring home $3000 per month, your car payment, insurance, credit cards and anything other than a mortgage or rent payment should be no more than $600.

In addition, your mortgage and rent should total no more than 28% of your gross income. This is income before taxes taxes are taken out. So if you have 20% of your income taken out for taxes, your gross income would run $3750 (from the example above). This means that your mortgage/rent should be no more than $1050.

Another calculation you want to look at is your total debt (both consumer and mortgage/rent debt), which should be 36% or less of your total gross income.  

If all of these percentages have you confused, don't worry... you are in great company with about 85% of people. (Yep, I used another percentage!) So to make it a little easier, multiple your total gross income by 36% (for the example above $3750 times .36). If your expenses total less than that, you're doing good. (Using the example above of $3750 of gross income, you could expect $1350 in expenses.)

Reducing your spending

Yep, that's it... Spending more than that? You're still running with the 85 percentile of people... Since we're not in high school anymore, break free from the popular crowd! To do that you need to reduce spending and increase savings. How do you do that? Read! I have plenty of other posts explaining how...

So where do you put the other 64% of your income? Message me and I'd be happy to give you my address to send a check, which you can make payable to "Michelle's vacation fund"! Or, and not as attractive to me, you could start your own. 

Planning ahead

While you may spend a little more that 36% on your bills, make sure to include a savings plan for emergencies, retirement, a new car, vacations, etc in your "expenses". This will ensure you won't get caught off guard with an expensive car repair, large appliance purchase, or medical expense.

So instead of purchasing a designer bag now, design your portfolio to hold more value for your future. You'll be happy you did!


Want to see more ideas about saving money? Check out my other posts on The Money Diet, and follow me on Facebook.

"Image courtesy By vectorolie, published on 07 November 2013
Stock Image - image ID: 100215846"

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