Budget: Maximum Mortgage Payment

Photo by David Veksler on Unsplash

You are in the market to buy a house. You have found a house that you really like. The price of the house is within your range. Now it comes down to determining if you can afford the monthly mortgage payment that includes principle, interest, real estate tax and insurance (homeowners insurance and private mortgage insurance, if applicable). These are called PITI. Let’s take a look at the….

15 / 20 / 25 Mortgage Plan

15-Year Mortgage

The interest you will pay over the 15 years is substantially lower than the interest you will pay for a 25-year or 30-year mortgage. Additionally, you will accumulate equity much faster with a 15-year mortgage since most of your early monthly mortgage payments are applied to interest … not principle.

20% Down Payment

You will start off having equity in your house if have at least a 20% down payment. You won’t be required to purchase private mortgage insurance (PMI). This will save you hundreds of dollars a year until the PMI is no longer required.

25% of Net Income to Mortgage Payment

There is one thing everyone needs to understand: mortgage lenders will allow you to bury yourself with mortgage debt.

As a rule of thumb, mortgage lenders will grant you a loan if the monthly PITI mortgage payment does not exceed 28% of your gross income.

I, and many other financial gurus including Dave Ramsey, believe that your PITI mortgage payment should not exceed 25% of your net after-tax income. If it does, you will not have the money necessary to maintain your house as needed. You will also have to think twice about going out for a special dinner with your spouse or friends, taking a nice vacation or buying a newer car.

Photo by Helloquence on Unsplash

Real Life Example

To start by making some assumptions to see if the potential buyer qualifies for a mortgage or can afford it within the 15 / 20 / 25 Mortgage Plan guidelines.

  • $150,000 Purchase price of house
  • $ 30,000 Down payment (20%)
  • $ 80,000 Annual household gross (before taxes) income
  • $ 64,000 Annual household net (after taxes) income or $5,333 monthly
  • $ 3,000 Annual property tax
  • $ 1,200 Annual cost of homeowners insurance
  • 3.30% Mortgage interest rate on a 15-year mortgage
  • 720+ Credit score

The first thing the assumptions illustrate is that the potential buyer is able to meet the 20% down payment objective.

The potential buyer has a history of being able to manage their money. This is documented by having enough money to make a 20% down payment and by having an excellent credit score. This indicates the potential buyer has the ability to pay for a 15-year mortgage that requires a higher monthly mortgage payment over a 30-year mortgage.

A mortgage loan in the amount of $64,000 at a 15-year fixed rate of 3.30% results in a total monthly mortgage payment of $1,196.12 or 22.4% of household monthly net income. The potential buyer qualifies for a mortgage. The 25% maximum monthly mortgage payment to monthly net income objective is met.

The potential buyer is nervously excited because he/she is close to being the new owner of the home they want and have been saving for.

Note on Calculating Net Income

There are special items that need to be deducted from gross income in calculating net income to arrive at an accurate and credible number.

  • Self-employment tax for self-employed individuals
  • Health insurance if individually purchased
  • Any court-ordered alimony and/or child support obligations


The same 25% monthly payment-to-net income applies to renters as well.

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Perspectives on Life (Blog)
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Living Frugally and Simply

For most people, living frugally and simply is an optional life choice. For a few us, due to a variety of reasons, living frugally and simply is a necessity.

Over the last two years I have developed three life-changing, life-threatening health issues that requires living a more frugal and simple life. While I have been successful in being frugal with money, I have come to realize that frugality applies to more than just finances and that simplicity is a way of thinking and living. Let’s take a look at some simple definitions of frugality and simplicity according to Dictionary.com:

frugality: the quality of being frugal, or prudent in saving; the lack of wastefulness

simplicity: freedom from complexity, intricacy, or division into parts: simplicity

Due to my reduced abilities, I am learning that frugality not only applies to my money, but extends to:

  • Time
  • Energy (physical and mental)
  • Activities (work, personal and social)

In all reality, I only have four to five “productive” hours a day. This means I must “budget” my time, energy and activities so what needs to get done, actually gets done within this allotted time. Since the demands of my time, energy and required activities could care less about my reduced abilities, I have been required to better prioritize and organize what is important and what isn’t. I am utilizing two working tools I used in business for 32 years:

  • Daily and Weekly Calendars
  • To-Do List

While I have tried using smartphone calendar and to-do-list apps, I prefer paper calendars and to-do-lists for their ease of-use and flexibility. That is probably because of my past work experience and age (63).

When it comes to finances, I utilize automatic (electronic funds transfer) payments as much as possible. I always pay myself first by making contributions to my savings accounts when income is received via online transfers. I pay bills the same day they are received. Both of these practices prevent a bill “falling through the cracks”.

As an interesting note, I live in a developing country with very limited and unreliable mail service. Hence, all bills for utilities, insurance, etc. are delivered via email with a PDF attachment of the actual bill.

I cherish routine in schedules and activities. Not having to take the time to organize events and activities that occur daily or frequently saves time and energy.

There is another practice that my parents drilled into me as a youngster that has served me well … especially now with limited physical and mental abilities”

Everything has its place,
Everything in its place!

All of the things presented above have added frugality and simplicity to my life at a time in my life when it is needed most.

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Perspectives on Life (Blog)
Taking a Closer Look

Life Under Change
Quotes that inspire, challenge and comfort us.

A Life Within (Blog)
Journal of a Highly Sensitive Introvert

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Spending Less and Accumulate the Savings

What does it mean to save money? According to WordWeb, it has two meanings relating to money:

  1. Spend less; buy at a reduced price
  2. Accumulate money for future use

Note the subtle difference. While one definition is about spending, the other definition is about accumulating money. I ask this question:

Can you spend a dollar and save that same dollar at the same time?

Obviously, you cannot.

But … you can do the next best thing: stash the amount of money you saved away and save it for a rainy day fund or a special need down the road. Example:

You see an item you’ve had your eyes on but wouldn’t pay regular price of $500. It is on sale now at 25% off. Hence, it only costs $375 now and you buy it. You spent $125 less for the item by waiting until it was on sale.

What you do with the $125 you saved determines how frugal you really are. If the $125 you saved on the purchase remains available to be spent along with your other expenses, that is fine. You successfully delays buying the items until it was on sale. Congratulations!

However, you are only going to experience the benefit of spending less. (definition #1)

If you decide to put away your $125 savings for future use, you will be able to experience the benefit of accumulating cash for future use instead of relying on credit or doing without. (definition #2)

I use a glass jar for this purpose. The photo shown at the top is my “Savings Jar”. If I save $5.50 at the grocery due to discounts, I put that $5.50 into my savings jar. When the money amounts to more than $1,000 in my savings jar, I deposit $1,000 into my co-op savings account.

This is the only way I know to spend less and accumulate savings from purchases over the year.

I would like to hear how you find little additional ways to add to your accumulated savings. When it comes to saving and accumulating money; a little bit often adds up to a lot!

My Other Websites

Perspectives on Life (Blog)
Taking a Closer Look

Life Under Change
Quotes that inspire, challenge and comfort us.

A Life Within (Blog)
Journal of a Highly Sensitive Introvert

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Budget – Part 2

50/30/20 Rule of Thumb for Budgeting

Many people will abandon a budget if it is too complex or requires more bookkeeping and analysis time than they can (or are willing to) spend. The 50/30/20 Budgeting Plan is probably the easiest to create and maintain. It is also flexible so you can update for changes in your income, changes in expenses or to update your budget to better serve your needs for a budget.

Before starting to create you budget, you’ll need to accurately calculate your monthly bring-home income. This is your gross income less all federal, state and local taxes and Social Security + Medicare withholding. Your personalized budget will be based on your family’s bring-home income income.

The 50/30/20 is as simple as it gets because there are only three top-level spending categories:

50% – Household needs

  • Housing
  • Transportation (including car payment)
  • Groceries
  • Utilities
  • Insurance

While 50% of your bring-home income sounds like a lot of money, this category includes some major expenses for most families.

30% – Wants

  • Shopping
  • Dining out
  • Hobbies
  • Charity

This generous amount will keep you from feeling deprived and abandoning your budget.

20% – Savings and Debt repayment

  • 10% minimum towards savings (emergency fund, education, retirement, etc.)
  • 10% towards paying off your unsecured loans. (Examples: credit cards, student loans, etc.)

Always pay yourself first before paying all other bills.

Note: The 50/30/20 Budgeting Plan is not the budgeting plan I used to get me, at the age of 40, on the road to financial freedom and security. My plan had five categories that separated out saving and housing (mortgage). Hence, the percentages are different. Other than that, the concept and simplicity are the same.

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Perspectives on Life (Blog)
Taking a Closer Look

Life Under Change
Quotes that inspire, challenge and comfort us.

A Life Within (Blog)
Journal of a Highly Sensitive Introvert

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Budget – Part 1

Budgeting allows you to take control of your finances. You work too hard for your money to not manage it. Budgeting is simply implementing a plan for your money.

A budget is a powerful tool to assist you in reaching your financial goals, whether that be an emergency fund, a down-payment for a home, education, retirement, or anything else that is important for you. Without having a budget, most people will spend more money than they earn and will always be enslaved by debt.

A personalized budget allows you to make and manage your personal finances like a business. Your spending will become disciplined instead of pure chaos with no idea where or how much of your income is being spent. Always keep in mind that:

Income – Expenses = Profit or Loss

To be successful in creating a budget, it is critical that you include your spouse. Budgeting is a family affair and your chances of success without involving your spouse is nearly zero. It’s also important to have a discussion with your children so they will understand the reasoning behind the money decisions you will be making.

There are several budgeting strategies that you can use that will assist you in reaching your financial goal(s). They range from super simple to very complex. Of course, the more complex models will require more of your time in bookkeeping and analysis. Some printable worksheets of several budgeting strategies are available online so you can select the strategy best suits your personality, the time you are willing to commit to bookkeeping duties or the amount of detail you want or need to fine tune your personalized budget.

I believe in KISS: Keep it simple and short. This simplicity encourages dedicated use and monitoring of your plan (budget) versus abandonment due to the time required in bookkeeping and analysis of more complex tools.


It is imperative that you track your income and expenses. Otherwise, there is no reason to have a budget because you’ll end up spending more than will be permitted to meet your financial goal(s). There are only three options when your expenses exceed your income and have you mentally and emotional starved of any peace of mind because you are unable to meet your financial obligations:

  • Increase your income,
  • Decrease your spending or
  • Finance your money shortage through additional debt … which should never be considered.

I will present a simple, easy-to-use budgeting strategy in Part 2 of this series that requires minimal effort and time, yet effective.

My Other Websites

Perspectives on Life (Blog)
Taking a Closer Look

Life Under Change
Quotes that inspire, challenge and comfort us.

A Life Within (Blog)
Journal of a Highly Sensitive Introvert

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