1) Emergency Fund: You need to maintain or set aside in liquid form at least 3 months (Dual Wage Earner family) or 6 months (single wage earner family) worth of money to cover your Nondiscretionary expenses. Nondiscretionary expenses include only those expenses that do not go away if you lose your job for example debt, utilities, food
2) Your Housing Debt sometimes referred to as Front End Ratio should be less than or equal to 28% of your GROSS income. Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance
3) Your Housing Debt plus other Recurring Debt should be less than or equal to 36% of your GROSS income. Other Recurring debt include Auto, Student Loans, Credit card and all other type of monthly debt while Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance.
4) Your expected time to stay in a house should determine whether or not you should Buy or Lease all other things (finances) being equal. If you intend to stay in a house for a short period (1 to 3 years) your better option is to lease but if you plan on staying there more than three years, Buying will be the better option. Also if your main goal is to “Build Equity”, then buying a house is the better option.
5) Your monthly Consumer debt payments should be less than or equal to 20% of your NET Income.
