For most people, managing debt can be a daunting process. According to NBC News, the 25% strategy might be a good starting point for those unsure about good financial management. The first step is to create a household budget and separate your before tax income into four equal baskets:
Basket 1 – Tax
There is no way of avoiding tax so it’s essential that you factor it into your household budget. A moderate earner should expect to pay approximately 25% of their income for various taxes including Medicare.
Basket 2 – Housing
Whether or not you own or rent your house, your monthly household payments should be no more than 25% of what you earn in a month. If, for example, your monthly earnings are $5000, your rent or mortgage should be no more than $1250.
Basket 3 – Debt
Your monthly loan repayments should also be no more than one quarter of your pre-tax income and generally speaking, a lender is less likely to approve a loan if your repayments are more than 25% of your monthly income.
Basket 4 – Living expenses
This final basket will need to cover everything else you need to pay out, including any savings you require. If that seems like an impossible task, it’s time you look at reducing costs in baskets two or three (unfortunately taxes always stay the same). This could be done by downsizing or bringing in a flat mate.
