Most people know how much income they make. What they might not know is how much of their income goes toward certain purchases. People tend to get paid, pay their bills, maybe put a little away for a rainy day and repeat the process with every paycheck, not really paying attention to where their money is going. Knowing what percentage of your income is spent on certain expenses can help you in a variety of ways. Calculating the percentage is relatively easy once you know exactly what you are looking for.
Reasons To Figure Out a Percentage of Income
A person may need to know a percentage of their total income for several reasons. One such reason is determining how much of their income is dedicated to expenses such as utilities or credit cards. Knowing this is important if someone is looking to purchase a vehicle, buy a house or even rent a new apartment. Mortgage companies and landlords prefer that a person's housing payment be no more than a certain percentage of their income. To know how much of your income that equals, you have to do the calculation.
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How to Calculate a Percentage of Income
Let's say you found a terrific two-bedroom apartment you would like to rent. The landlord states that the rent for the apartment cannot exceed 30 percent of your total monthly income. The rent for the apartment is $800, and you have a monthly income of $3,000. To calculate whether or not you can satisfy the landlord's income requirement, multiply $3,000 by 30 percent. This will give you a total of $900, $100 more than what the landlord requires.
Maybe instead of renting an apartment, you are looking to buy a house. A lender is willing to work with you provided the mortgage payment is no more the 30 percent of your income. In the above example, if you have $3,000 a month in income, your mortgage payment would need to be less than or equal to $900. Now you know to target your home search to homes with estimated mortgages of less than $900.
How Much Do You Spend?
You want to create a budget and you need to know what percentage of your income goes to eating out every month. You count up your receipts and determine you spent $700 on meals the previous month. If you divide $700 by your monthly income of $3,000 you'll get 23.3percent. You can repeat this method with other expenses such as utilities, credit cards and other miscellaneous expenses. Once you can see where your money is going, you can better control how you spend it.
If you want a better handle on your money, knowing what percentage of income you spent on certain items is a good idea. Not only will it give you the opportunity to change your spending habits, but it will also help you plan for future goals such as buying a car or a house or investing in your retirement.