What can I afford with my salary?

This question is very genuine. It is actually tricky to know what you should be paying or spending in specific categories of expenses. We’ll try to cover at least the two major expenses within our lifetime in detail, which is housing and transportation, and try to pinpoint other expenses along the way.

Housing affordability

There’s many factors and many ways to calculate housing affordability. As a very general rule of thumb, you don’t want to spend more than 35% of the household net revenue on a rent or mortgage (taxes included).

That means that if your household monthly net revenue is 4.5k, you should not be spending more than 1,575 on a rent or mortgage with taxes. 

Also, another quick math would be to calculate the household gross revenue and multiply it by 3.6. This will give you a ballpark of the maximum house value that you should be allowing to have a healthy finance situation.

So if your household yearly revenue is 120,000, you could afford a house worth up to 432,000.

Of course, this is only a ballpark to give you a good idea of the house value. This also takes into consideration that you have no other debts, that you saved enough and that you are not overspending elsewhere.

Things to consider when calculating housing affordability:

• Interest rate - Hence why I prefer the 35% of net salary calculation.
• Cost of living (electricity, heat, etc.)
• Insurance cost
• Current spending and lifestyle (Know your expenses!)
• Current cash flow

Transport/Car affordability

Knowing that a car is the complete opposite of an investment, it is a requirement for most of us. When looking for a car, it is important to consider:

• If the depreciation value is beyond its peak - Which is usually after the 5 years mark.
• Is the car reliable? There’s many guides on car reliability out there.
• What’s the car cost of repair - Luxury brands have a higher cost of maintenance, even if you think you bought it at a cheap price!

If you want a car, but require a loan (Which is not suggested, because you are paying interest on a depreciating value), you want to make sure that the loan amount doesn’t exceed 5 years of length and is below 10% of your net monthly salary.

So someone with a 3k net salary should not pay more than 300 per month for a car loan or lease. That means the maximum value of the used car should be 18,000 (Taxes and interest included), that’s 300 x 60 months (5 years).

At some point, your career might require you to be as present as possible and it will prevent those garage visits. For those who want to afford a new car because they cannot afford unscheduled visits to the garage, there’s a general rule of thumb for you too.

First, instead of having a loan, focus on a lease. Leases are based on the vehicle depreciation value (which you also pay during a loan), so you’ll end up paying ONLY for the lost value of the car. You also get to pay the taxes and interests only on this part of value instead of the whole car, saving more there. This will drastically reduce the monthly payment and allow you to run a problem-free and warranted car.

General rule of thumb for a leased car is to have one which is a maximum half of your gross salary. Meaning that if you make 60k gross, the maximum car value should be 30k. Trying to keep it as close as possible to your 10% of net salary for the monthly payment.

Other factors that needs to be considered when purchasing a new car:

• Insurance cost
• Gas consumption and price
• Maintenance cost

Total up of all car expenses should not exceed more than 20% of monthly net salary.

Other personal expenses affordability

For the rest, a general rule of thumb is to remain below 15 or 20% of your net income for personal expenses.

This includes any type of subscriptions like music, video and gym. Also included are restaurants and any alcohol expenses, basically anything that is not required to live.

Based on your priorities, it is up to you to define what you want to spend your money on, as long as you don’t overspend.

Conclusion

As you can see, it can be hard to know what to afford. A good plan would be to adopt a budgeting strategy that fits with you. Our app Miza uses the Budget Splitting strategy to easily position you in your spending. We also have those limitations per category if you want to closely track the spending in detail.