In the world of financial advice, one of the top experts is Dave Ramsey, a personal finance expert who made a name for himself by publishing eight books on finance. He also hosts “The Ramsey Show,” where he gives practical advice on everything from budgets to retirement, and appears on numerous TV shows doing the same. Finally, he is CEO of his own company, Ramsey Solutions.
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One of Ramsey’s most solid financial tips involves how much money you should spend each month on a mortgage payment, which for many people is the biggest monthly bill they have. This advice varies a bit between experts, but Ramsey caps this amount at 25%.
The reason Ramsey suggests this is that if your mortgage doesn’t exceed 25% of your income, you should be able to pay the rest of your expenses each month with no problem. In other words, you won’t be stuck with a mortgage payment that you can’t or can’t pay on time.
That 25% figure should come from your take home pay, the money you have left After other deductions such as taxes, pension contributions or benefits have been taken from your income. As Ramsey says on his website, “I want you to buy a home that is a blessing, not a burden. And the only way to do that is to understand your home buying budget and stick to it!”
To put that into perspective, Ramsey explains that if you take home $5,000 a month after taxes, according to his 25% rule, you shouldn’t pay more than $1,250 a month for a mortgage payment (and that understand principal payment, property taxes, HOA fees and interest).
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According to The Motley Fool, if you make $50,000 a year and live in the expensive state of California, you might think that means you can afford to pay $1,041 a month on a mortgage (although, frankly, there are few cities in California where you can find such low mortgages). But, you have to pay your federal and state taxes first, and that would actually only leave about $830 per month for a mortgage. It’s not particularly sustainable in California! In other states, where housing is less expensive, this is a more realistic goal.
So even if the Ramsey ratio is definitely on the conservative side, reaching it could still mean rethinking where you live. However, if you have a lot of other expenses or debts to pay off, this is a very good rule to follow.
Other experts push Ramsey’s mortgage repayment rate higher, ranging from 28% to 35%, but that would likely require you to have a higher income, or live in a more affordable city, or both.
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This article originally appeared on GOBankingRates.com: How much of your take home pay, according to Dave Ramsey, should be spent on your mortgage