Josh-D. S. Davis

Xaminmo / Omnimax / Max Omni / Mad Scientist / Midnight Shadow / Radiation Master

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Money stuff
Josh 201604 KWP
joshdavis
Without searching the web first, just give me your gut reactions.
I'm not asking for what you *have* done or what your levels *are*, just what you think is ideal.
DO NOT provide your actual financial status. This is a public post, and comments are not screened.

This was prompted by seeing the national debt as compared to GDP, and just got me wondering what people think, when they're not reading Google.

What income percentage do you feel is acceptable to put towards housing (excluding utilities, repairs, decorating, home goods, etc)?
What income percentage do you feel is acceptable to put towards transportation (public transport costs, car payment, car rental, insurance, fuel costs)?
What income percentage do you feel is acceptable to put towards education loans?

What do you feel is an acceptable total monthly debt repayment to monthly income ratio?
What do you feel is an acceptable total debt to yearly income ratio?

What's an ok repayment term for car loans (you can say zero)?
What's an ok repayment term for student loans?
What's an ok repayment term for general loans and/or revolving debt?

How many months worth of income is an appropriate amount to have saved up, excluding retirement?
How far into debt is OK to make up for having no reserves?

At what point in reserve depletion or debt accumulation should someone consider cutting expenses?
At what point in reserve depletion or debt accumulation should someone consider finding cheaper housing?
At what point in reserve depletion or debt accumulation should someone consider finding cheaper transportation?

What is an percentage of national debt as compared to yearly GDP?

*END*

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I'll answer with 'acceptable' versus 'ideal', since the ideal answers are all variations of '0'.

Housing + Transportation should be less than 50% of net income.

Accepted wisdom says 3-6 months of reserve expenses as a cushion, and I tend to agree with that.

Yeah, pretty much this is the answer I was typing overly longly before I gave up.

On the FB thread, I'm getting very opposite input.

The trend there is that it's better to have zero cash on hand and a lower revolving credit balance than to have cash on hand and a higher balance.

The argument seems to be that "making payments on" is the same as "paying down" or even "paying off".

Further, one can "always just pull money back out of the card."

I'm pleased and amused with "all variations of '0'"

And yah, I'm along the same views.
3958 semimonthly
2436 net

39% goes to tax, retirement, medical, and medical savings.
39% goes to housing (mort, tax, ins, hoa) and that's a little high.
2% to cars (insurance, repairs) but I haven't worked out gas. Depends on who drives what car.

This is still a little tight. I'd like housing to be under 30%, but my earnings are lower since 2008.


Argument copied from Facebook thread:

Person 1: You would be much better off with the purchasing potential of the revolving credit and less money in the bank than to allow the revolving debt to grow just to pad a bank account for the potential of having to deal with unemployment. I carry 0 revolving debt but have a lot of revolving credit.

Me: If I had a $24k emergency, I wouldn't dump my whole operating reserves into that just to keep from carrying a balance. I can feed my family with cash on hand, but I can't feed them with suspended revolving credit.

Reserves are there to sit and always be there, never to be spent unless there is literally no other option to keep food and shelter.

Also, if someone is say, 30, and still doesn't have operating reserves, then it's by choice of budget, not by temporary problems. Forcibly building up reserves may encourage them to stop spending beyond their means.

Person 2: [A credit card is] a pre-approved loan. Which means, at least for the time being, it's close to cash as far as spendability goes. So if you've got $24k in the bank earning 5%. and $24k in credit card debt that you're paying 16% on... assuming that your cards won't be closed once the balance is paid, it makes more sense to pay them. You still have $24k in "cash" you can spend, but it's costing you less to have it.

[K]eeping $24k in cash reserve instead of paying off part of a mortgage makes sense... because you can't feed a family on a partially paid off mortgage. A fully paid off mortgage will (sort of, because you can live for "free"). And a credit card with available balance can feed a family.

Me: People who maintain zero balance on their credit cards will most likely have operating reserves as well except in dire circumstances.

For everyone else, what really happens is that all free capital except half a month of income gets dumped into revolving debt, and it's still not paid off. So now, there are debt service payments AND no operating reserves.

To make it worse, the debt isn't a one time expense. It's still accruing. The card is still in the wallet, still tied to Amazon.

In an emergency, the credit line is not guaranteed, and it's not the consumer's money. Even if the access is retained, an extended interruption to cash flow would quickly would come down to pulling money off of one credit card to pay the minimums on another card to avoid default.

When that happens, the 16% APY is compounded by 4% monthly for each balance transfer. Invariably, there will be 2 chunks swapped each month.

The first assumption is, "that will never happen to me, so it doesn't matter that I'd have to pay 80% APY on the minimum payments, and 16% on everything else if it does."

The second assumption is, "I'm paying down the cards, so it's OK to not have reserves."

My standpoints are that A) it's never OK to pay 80% APY on any loan, regardless of its duration, and B) It's a lie to ones' self that debt is being paid down if after 5 years, the balance is no lower, C) The only way to guarantee cash flow when income is interrupted is by having savings.

Edited at 2010-10-26 09:06 pm (UTC)

Thank you for these questions! They are very thoughtful.


>>What income percentage do you feel is acceptable to put towards housing (excluding utilities, repairs, decorating, home goods, etc)?

If buying/paying off a loan, 80%. If renting, only 40%


>>What income percentage do you feel is acceptable to put towards transportation (public transport costs, car payment, car rental, insurance, fuel costs)?

No more than 10%


>>What income percentage do you feel is acceptable to put towards education loans?
Loans should be paid off from highest to lowest interest rate. There should not be a Debt/income ratio of over 1/3. Extra income can be put to pay off loans up to 80%.

>>What do you feel is an acceptable total monthly debt repayment to mothly income ratio?
33% with house of residence, or 18% without house

>> What do you feel is an acceptable total debt to yearly income ratio?
Same


>>What's an ok repayment term for car loans (you can say zero)?
24 months

>>What's an ok repayment term for student loans?
60 months

>> What's an ok repayment term for general loans and/or revolving debt?
For personal loans, four-eight years. For low-interest loans such as mortgages, 15-25 years.

>> How many months worth of income is an appropriate amount to have saved up, excluding retirement?
3-8 months, emergency funds

>> How far into debt is OK to make up for having no reserves?
zero. no reserves is stupid under most circumstances.

>> At what point in reserve depletion or debt accumulation should someone consider cutting expenses?
at the start. As soon as budget is not balanced.

>>At what point in reserve depletion or debt accumulation should someone consider finding cheaper housing?
at the start. As soon as budget is not balanced.


>>At what point in reserve depletion or debt accumulation should someone consider finding cheaper transportation?
immediately


>>What is an percentage of national debt as compared to yearly GDP?
the GDP is slightly behind the national debt

These are all net-income answers after retirement, insurance, and taxes. They are not based on gross income.

Ah, ok, that makes sense.

Though, still, 80% for housing seems high. 20% for transport, utils, expenses, etc seems thin.

Up to 80% for paying off mortgage early, if you can.

20% for transport and expenses.. well I am a little weird in this area, admittedly.

80% income to housing? Gross income, not net after other expenses.

For loans, that seems to be a common mindset, pay highest interest first; however, cash flow restrictions might make paying the smallest balance off first and minimums on all of the others.

I like your view on reserves. I've run into a few people who believe it's ok to have zero reserves when paying down debt to ensure a lower amount paid to interest. The justification was furthered by the possibility to "always be able to pull money out of a credit card."

The national debt thing was typoed - it should have asked "what's an OK percentage..."

Right now, public debt is 66% and gross debt is 94% of GDP. Doesn't make me too happy. We're very much on the wrong side of the budget hump right now.

>>80% income to housing? Gross income, not net after other expenses.

I just mean its o.k. to pay up to 80% of net income on principle-only prepayments, IF you have the reserves to do it. Generally, paying off debt is as good an investment as stocks right now.


>>I've run into a few people who believe it's ok to have zero reserves when paying down debt to ensure a lower amount paid to interest. The justification was furthered by the possibility to "always be able to pull money out of a credit card."

Well, see, thats how they get-cha ;-). If you run into an emergency who is to say it won't be followed by another one? Its the gambler's fallacy, basically. An optimist would assume the trials are independent. So, after having an emergency, the odds of having another one have not changed. Personally, I think the odds get worse right after an emergency bc of stress, and medical issues that may come up affecting personal performance.


>>Right now, public debt is 66% and gross debt is 94% of GDP. Doesn't make me too happy. We're very much on the wrong side of the budget hump right now.

Very informative. Good discussion!

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