Anyway, keep in mind that Consumer Reports says 36% of gross for DEBT payments. I wouldn’t consider utilities on the house or gas for the car ‘debt’ (unless you put them on a credit card that is…). I of course agree with you that everybody should look at their own numbers, but then again, what do rules of thumb exist for but for basic reference to get you in the right general neighborhood? If you make $1,000,000 a year, your acceptable level of debt may be a much higher percentage than somebody making $30,000 per year. Also, I think it would be wise to not wish that everybody could run their own numbers, because if they could, who exactly do you think would be reading this?!

Also, I find it very unrealistic that everyone uses gross income as a basis for estimation. I personally use net for all of my expenses and I think that if you use the 36% rule applied to net income, most people will not have too much trouble. For example, if you made $30,000 per year take home, you could (according to CR) use $10,800 per year towards debt. This leaves you with $19,200 per year for food, clothes, gas, utilities, savings, recreation, and health purposes. Since the average American (I’m assuming you’re single in this example) spends less than $6000 per year on food (source is a U.S. census, I can provide a link if you want) this leaves about $13,200 per year for those other things. If you say $700 per year for clothes, $500 recreation, and $2000 for health, you are left with around $10,000 for gas, utilities, insurance, savings, and other miscellaneous things. That $10,800 would get you a fair apartment (here in Austin, TX, a one bed one bath apartment in a nice, central part of town will run you about $650 a month for a two year contract) and a bit left over for a used car. I think this is perfectly reasonable so long as you are single and don’t have particularly high end tastes. I’ll shut up now, and sorry for writing such long comments, I just find this topic one of particular interest.

Second example, I have always heard 28/36% front end/back end ratio (28 housing, 36 total). The common and usually excepted method for determining housing is mortgage payments/rent plus property tax (if applicable) plus insurance. I almost never see utillities included in that 28% as they are so variable from person to person, while mortgage payments or rent are not usually (obviously, credit rating will affect the mortgage rate… but I don’t won’t to write an article here, only a comment). So, this way, 28% of $50,000 on housing (typically buys around 2.5 times your salary, depending on interest rate and how much you put down) leaving you with $4000 for vehicles. If you still have that $2000 for a down payment plus the extra for the added fees, you could buy around an $18,000 vehicle on a 60 month loan, or about $15,500 on a four year loan. I think this should be enough for just about anyone to find a satisfactory vehicle. Maybe not new, but certainly not a rust bucket.

Another factor is, say you buy a new $20,000 vehicle on a four year loan. With $2000 down, your monthly payment will be about $430. If you keep the vehicle for, say, eight years, you can save 48(number of months after the loan ends) * $430 (monthly payment that you could hopefully afford during the loan period) = $20,640. Suddenly you can afford to pay cash for your next vehicle. If you then keep that vehicle for eight years, you only need to save 1/2 * 430 = $215 per month to pay for you next one in cash (or alternatively, your next vehicle could be $20,640 * 2 = $41,280, ignoring higher insurance and other costs that that would bring). This is ignoring inflation because I am assuming you put the money in a CD, bond, or low risk mutual fund to hopefully at least keep up with inflation, if not exceed it.

Thank you for the article and keep up with the good work.

10% of gross income will buy almost everyone a reliable used car.