How Much Should You REALLY Be Spending and Saving?

  • By Vera Gibbons, MarketWatch
  • July 07, 2015

spending saving

You know that the key to financial freedom is to save more and spend less. But how much should you be saving? And how much spending is considered too much? Here are some important numbers you should know:

Credit Card Debt
On your credit cards, aim to keep your balances below 20 percent of your credit limit — on each card — so you aren’t likely to be penalized for a high debt usage ratio, says Gerri Detweiler, director of consumer education for, a free credit education website. This is important because debt usage is a major component of your credit score. “If you stay below 20 percent, you’re safe; above that and your score can suffer.” In the market for a major loan? Consider playing it “ultra safe,” says Detweiler, using just 10 percent of your available credit, or less.

Retirement Savings
How much of your pre-tax income should you be saving for a comfortable retirement? It depends when you start saving, says Carrie Schwab-Pomerantz of Charles Schwab. “Starting early is a huge advantage.” For example, if you start in your 20s, and you save just 10 percent -15 percent of your gross income for the rest of your life, you’ll have a comfortable retirement, she says. But if you wait until your 40s to save for retirement, you’d have to increase that to 25 percent - 40 percent of your gross income; and if you’re getting an even later start — you’re 45 or older — you’d have to set aside 40 percent -60 percent.

Home Debt
The hard cap for housing-related costs (which include things like your mortgage, principle, interest, insurance, taxes, and anything else that is required for you to live in the home) that is looked at — and used as a guideline — by lenders, is 28 percent. We’re talking 28 percent of your monthly gross (pre-tax) income. So, if your gross income is $4,000/month, a lender would approve the loan if the housing expenses were less than $1,120/month ($1,120/$4,000 = 0.28). Some programs do allow for higher housing ratios, says Keith Gumbinger, vice president at, a consumer loan information site. “In the case of FHA-backed mortgages, the so-called “front-end ratio” is 31 percent, so ask your lender if there are any budget-stretching options available to you.”

While guidelines suggest that you shouldn’t spend more than one third of your gross income on housing, the reality is that more than half of all renters are spending more than that threshold, according to the Joint Center for Housing Studies at Harvard University. It’s about supply and demand. “The competition for those homes that are available can often be fierce, driving up prices and contributing to worsening affordability,” says Stan Humphries, Zillow’s chief economist. “More construction will help ease the crunch, and getting a mortgage is also getting easier, which will help more current renters transition to homeownership and further ease rental inventory shortages. But these fixes won’t happen overnight.”

All Debt
If you went to a bank and asked for a loan, one of the first things they would want to know is what your debt-to-income ratio is. What is this, you ask? It’s your monthly debt payments (money you pay out every month for your mortgage, including taxes and insurance, credit card payments, car and other loans) as a percentage of your gross monthly income. This number should be no more than 36 percent, says Schwab-Pomerantz. Ideally, it should be around 10 percent, but if it’s less than 20 percent, you’re still considered to be in pretty good shape. “Ratios aside, it’s also important to think about what constitutes ‘good’ versus ‘bad’ debt — the good being things like a mortgage or student loan; the bad are things like credit card debt or a car loan. My advice is always to avoid bad debt as much as possible.”

This article originally appeared on and is reprinted by permission from, ©2015 Dow Jones & Co. Inc. All rights reserved.

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