Personal Finance Rule of thumb - Page 3 - RedFlagDeals.com Forums (2024)

FrugalTrader wrote: ↑This is a hard one for a lot to grasp, but I think that a mortgage should not be any greater than 2x annual family income. If the house is not affordable with that rule of thumb, then you need to save more cash.

It's true but what happens if minimum houses are 800K?

e909 wrote: ↑Rule of Thumb:

Minimum Downpayment House : 20%
Minimum Downpayment Car: 100%

Agree with both.....

Would only add another rule to save 10% of your income and you are on your way!

candyfactory wrote: ↑Didn't really think about this, but coincidentally my mortgage is about exactly double my income. Initially when we took out the mortgage 7 years ago, it was the same as it is now. Mind you my wife stayed home, we have 3 kids, a finished basem*nt, a 2nd car paid off and a lot of RRSP, but my mortgage hasn't moved. At a 2% variable rate, I'm OK with that.

Where did you get 2% from

Rule of thumb

Pay down debt
never borrow to invest
buy a used car less than 4 years old, never new.
pay at least 20% down payment for a house and pay off as soon as possible.

Heatware

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koft wrote: ↑Rule of thumb

Pay down debt
never borrow to invest
buy a used car less than 4 years old, never new.
pay at least 20% down payment for a house and pay off as soon as possible.

Not sure about that, I've used equity in one rental property to buy another cashflowing rental property and it was a fantastic move. I think you mean "borrow to invest only where you can strategically manage the risk".

Carebra wrote: ↑It's true but what happens if minimum houses are 800K?

Again, either save more cash, choose a lower cost house/condo, or rent.

I didnt follow the 2x income mortgage rule by when I look at the numbers thats exactly what we have.

I would say if you are dual income, try to save 1 income (post tax) and the other half can go to your spending needs.

candyfactory wrote: ↑Not sure about that, I've used equity in one rental property to buy another cashflowing rental property and it was a fantastic move. I think you mean "borrow to invest only where you can strategically manage the risk".

Yep. I did the math, and it made more sense for my cash-following rental property to pay half a new mortgage on a family home with my spouse than selling the rental.

Freakonomics I tell ya!

Carebra wrote: ↑It's true but what happens if minimum houses are 800K?

Then it's a luxury... it's somewhat saying you need a Ferrari to drive to the office.

You don't need a 800k home to live a good life in Canada.

Well guess you can say the house can be an investment, but if it's your primary residence, even if you did sell it, you'd need to then buy another one, unless you downsize and/or use your equity for a LOC. Then those present their own problems.

dontplaywithfire wrote: ↑Rule of thumbs are silly. They are generalizations that apply only in the general case. Imagine someone who spends $20,000 each year on airplane tickets. Say income stays constant but your expenses change. Compare the big airline spender to someone who doesn't spend 20K on airline tickets. Why shouldn't the person who doesn't spend 20K on airline tickets have a mortgage for 20K more? The rule of thumb has to be modified for every individual case, making it no longer a "rule of thumb", thus defeating the purpose of the silly thumb.

Why should a mortgage be 2x the income if some people spend a lot of their income on air tickets and other people don't? what if you spent a lot of your income on a Porsche? It's all about income and expenses, not just income itself. Making a rule of thumb, for income, rhymes with dumb.

There are also some people with exactly the same incomes, but completely different eating habits. Some people eat out at expensive restaurants over twice a week and buy expensive wine/champagne each time they eat. Grocery bills vary widely. If someone is spending $10,000 more on food and dining each year, and the other person is spending 10,000 less on food, why shouldn't that person who eats out less and buys different groceries have a mortgage for $10,000 more?

Let's take another case: you have the exact same income as someone else, but you have four kids. It takes lots of money to feed those kids and take them on trips to disney land. Why should someone who is single with the same income, and no kids, have the same mortgage? It's a completely different situation so the rule of thumb no longer works. They might be able to squeeze 2.5 times their income for a mortgage, or even 3 times their income.

"Rules of thumb" are dumb. If the rule of thumb starts to consider everything in detail, it's no longer a rule of thumb.. hence defeating the purpose of thumbs. Thumbpalm.

I'm pretty sure that poster was referring to not going beyond 2x income on your mortgage and then aligning the rest of your lifestyle similarly.

He/she does have reason though, as myself I am finding that amount to be around my comfort zone. Suppose an approx. 180k mortgage for $2xxxxx condo...

Mortgage payment: 825 @ 2.69%
Condo fee and other misc. bills: 400
Tax: 150

Your housing bill is 1375/month

+ another 125 for phone and a gym pass
+ 300 for groceries
+ 200 for eating out (conservative, as if you like Starbucks to work, that's already another 100+ a month)
+ 300 for fuel
+ 300 for insurance
+ 300 for car payment
+ 150 for anticipated car maintenance
+ 150 for other misc. little expenses

So you go through 3200 a month...

If you net 5000 a month (90k a year, which is half your mortgage), you can save 1800 a month, which is a comfortable amount, as you can take a sudden few hundred dollar kick to the nuts if your car breaks down or you get sick and miss a couple to few days of work, and still come forward with some savings.

Following this framework, if on average you save 1500/month on the long run, in 10 years investing at about 8% return you'll have about $280k, which is a comfortable amount to have, and $2.2M in 30 years.

candyfactory wrote: ↑Not sure about that, I've used equity in one rental property to buy another cashflowing rental property and it was a fantastic move. I think you mean "borrow to invest only where you can strategically manage the risk".

Equity is something you own. it is yours to lose. but I am talking about margin call etc.

Heatware

popbottle wrote: ↑$89,000 down gets you this 1 bedroom unit with monthly payments on a 25 year amortization with an interest rate of 2.5% payments of $1023 per month including maintenance and property taxes. It is close to a K7 school and daycare, along with shops, and several translink bus routes, one of which leads directly to downtown and the other to a skytrain station.
417 9009 CORNERSTONE ME, Burnaby, $254,990.00

It is 433 sq ft. In other words, 2.3 times the minimum size of a parallel parking space in Ottawa.

Living in just over two parking spaces, it probably doesn't matter how close the nearest school is. There would be no space in the apartment for a child.

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