To be successful in personal finance (and pretty much everything else) you need to take control. You are in charge of where your money goes every month. You decide where to set the goalposts.

Nearly everyone in the US is broke. Most people have zero or negative net worth. Few people have a cash reserve. And, most people cannot afford to cover a thousand-dollar emergency. This is normal.

Being normal sucks. How awesome would it be if you could find a way to stop being normal?

One way to stop being normal is to find out how normal people make decisions… and then do the opposite.

Specifically, you can start by spending less than the maximum allowed on housing and transportation if you want to accomplish more than just making the minimum payment.

The ‘How Much Do I Qualify For’ Trap

If you ask a lender “how much do I qualify for,” then you need to be very careful of the answer.

Yes, this is an important question that you will likely need to know the answer to if you are buying a house or financing a car. However, just because you “qualify” does not mean it is a good idea.

For example, in the US, some lenders will let you borrow so much that 50% of your pre-tax income goes to debt payments. This is referred to as your Total Debt-to-Income ratio. Just for example, let’s look at some averages:

An Average Example

In the US, the median household income for a family of four is about $60,000 per year according to the Census. That’s about $5,000 per month before taxes. A 50% debt-to-income ratio would mean that your debt payments would equal $2,500 per month, including all debts: mortgage, vehicle, credit cards, student loans, personal loans, etc.

On average, a household making about $60k per year will have about 20% of their paycheck withheld for Federal Income Tax, Social Security, Medicare, and State Income Tax. That means a $5k per month income turns into a $4k per month take-home. With $2,500 in payments, that means this family only has $1,500 left for food, gas, electricity, internet/cable, cell phones, clothes, vacations, saving for college, saving for retirement… life!

In this example, there is essentially no way to make progress on any goals except the debt payment.

Instead, Ask Yourself How Much You Can Afford

I do not blame lenders for this. When you ask a lender “how much do I qualify for,” you are asking a very specific question: “What is the absolute most money I can borrow that your algorithms say I will still be able to pay you back?”

Well, if you ask that question, don’t expect them to reply with a number that has room for you to do anything except pay them back.

But, what if you decided to take control? What if you decided to set your own ratios?

Ask yourself how much you can afford while still achieving your financial goals.

Earlier, I posted an article with a few budgeting rules of thumb. In it, I suggested that your housing and vehicle expenses should not exceed 25% of your gross pay (15% for housing + 10% for transportation). So, in our example of $5k per month income, that means the total debt coverage should be less than $1,250 per month.

The budget in this example has a lot more room. $5k gross income turns into $4k take-home. Minus housing and vehicle payments of $1,250 leaves $2,750 of disposable income. That’s almost $3k disposable income out of $4k take-home.

That’s almost double what you’d have if you take the maximum payment you qualify for.

Most of the Year is Spent Trying to Earn Enough to Make Payments

Let’s look at this annually. A family makes $60k. They can qualify for up to $30k in debt payments. $12k is withheld for taxes. That means they have spent $42k before they even get home with their paycheck!

$42k is 70% of $60k. That means the earnings from working the first 255 days of the year are spent just on taxes and debt. So, you work until September 12 each year just to pay taxes and debt payments. Then September 13 – December 31 is for you.


Or, if you look at it monthly: Assuming they get paid twice per month, that means all of their first paycheck and 25% of their second paycheck is gone. The first 21 days of the month are spent working to pay down debt and taxes.

If you spend 21 days of the month just trying to catch up, then you only have 10 days left to accomplish all of your goals.

I want to make extra principal payments, build equity in my house, build wealth, get out of debt early, go on vacation, save for college, save for retirement. There is just no way to accomplish any of that if 70% of my pay is spent before I get home.

What if You Took Control of Your Own Ratios

In our example, a family making $60k per year can qualify for so much debt that their take-home disposable income is only $18k per year. But, if they limit their debt payments they can nearly double their disposable income to $33k per year.

What would you do with double your disposable income? What are your goals & dreams?

If your goal is simply to “have more money” I can almost guarantee you will fail. The goal is too soft, not specific enough, and has no deadline.

Spend some time thinking about your goals. Decide what you want to accomplish and when. Then, build a road-map of what it will take to achieve your goals. When you do, you will see that pre-spending half of your gross income on debt payments will only stand in the way of achieving your goals.

As a reminder, someone who starts at 30 can double their Social Security income by saving just $206 per month ($2,472 per year)… way less than the $15k extra disposable income in our example.

Or, if you start at 25 and max out a Roth IRA ($6k per year, still way less than our example), you’ll have over $1.6 million in your account by retirement.

Or, you can be normal and max out your debt and limit yourself to making minimum payments.

Maxing out your debt is literally keeping you broke… forever.

Final Thoughts

Debt can be a powerful tool that helps you purchase things now that you otherwise would have to wait for.

However, if you borrow the maximum amount your lenders will allow, then the best you can hope for is to simply pay back what you have borrowed.

I have bigger goals than to just pay back my obligations. I want to build something. And, I want to make progress toward doing better, having more, and living greater tomorrow than I do today.

In order to make progress toward those goals, I need to take control of my own spending and debt. To do that I need to set my own maximum debt-to-income ratio that is less than my lenders would allow.

I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.

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