The Carr Report: How much of my income should I allocate?

How much of my income should I allocate to rent/mortgage, cars, emergency and retirement savings?

by Damon Carr, For New Pittsburgh Courier

What percentages of my net pay should I spend on: housing, motor vehicles, emergency savings, and retirement savings per month?

~ Michika

 Damon says:

I like the fact that you referenced the percentage of “Net Pay”. A lot of Banks and Financial Advisors make all of their recommendations and approvals off of gross pay —income you make before taxes and other payroll deductions.  When it comes to budgeting, you can only spend, save, and invest according to what’s in your paycheck or your net pay.

Net pay is money received in your paycheck after Uncle Sam pimped you for a portion of your hard earned money. Then you have Health Insurance taking enough out of your paycheck to make you sick among other deductions.

To your question, what percentage of your net income should you spend on housing, cars, emergency and retirement savings? I wrote on this subject years ago. The article is titled “Budget Sculpting”. I encourage you to google Budget Sculpting by Damon Carr. In the Budget Sculpting article I share precise budget percentage targets for all spending categories. I’m going to take a slightly different approach here. Here, I’m going to focus on the big bills. The bills that take up the bulk of our money.  I’m going to put some guardrails in place that will help us avoid making boneheaded decisions when it comes to our money. Making the wrong decisions on these spending categories can cause major financial setbacks. 

Housing: Payment on rent or mortgage should never exceed more than 30 percent of Net Pay. In this case, particularly if you’re paying rent, less is more. Less than 30 percent of your take home pay going to housing equals more money in your pocket to spend on other goals and responsibilities. When it comes to purchasing a home, the purchase price should not exceed 3x your annual income. You want to consider 15-year fixed rate mortgages—never take on a term greater than 20-years. 30-year terms are the most commonly held mortgage hense the meaning of the origin of the word mortgage “Death Pledge.”

Cars: Payment on all automobiles should never exceed more than 15 percent of Net Pay. Total value of all cars owned should never exceed 50 percent of annual salary.  Never take on a car payment with payment terms longer than 3-years. Do not purchase a car by way of car leases. Car leases = Forever Payments. If you’re not wise when it comes to purchasing cars, SUV’s, trucks, boats, or any other vehicle with a motor, you’ll learn the hard way that automobiles can drive you broke.  

College: You can send a kid to college but you can’t make him or her think. It’s time to put your thinking on Joe College. The cost of higher education seems to get higher and higher every year. But starting salaries after you graduate from college remains stagnant. You can’t control the cost of college but you can control how much debt you go into in your effort to obtain your degree. Debt free degree is the optimal way to go by way of scholarships, grants, work study programs, employer tuition reimbursement programs, etc. At all cost, you want to avoid or minimize student loan debt. I’m reminded of a meme that pictured this 100-old man celebrating because he’s accomplished a milestone in his life. He wasn’t celebrating his 100th birthday. He was celebrating making his last student loan payment. If you must take out student loans, do not allow the total amount of student loan debt accumulated during your college days to exceed your anticipated first year’s salary after graduation. How do you know that number? Do some research—aspiring Mr. or Ms. College Student before you sign the loan.

Credit Cards: As my mother used to tell me, “don’t play with plastic! Plastic can smother you!” You’d think most people think that paying double digit interest rates is hazardous to your wealth. Apparently not. Americans have a love affair with credit cards. Everyone you meet will say, I pay my balance off in full every month. Vision me side-eyeing as you read my next words. Sure you do! Let’s assume you do pay your balance off in full every month. Here’s a rhetorical question, why carry a balance every month that needs to be paid? In an effort to encourage you not to get buried in credit card debt, here are some guardrails.  Stay away from department store credit cards. The interest rate on those cards are in the mid-20 percent range. Never carry more than two credit cards with a $2,000 credit each. Never allow the credit card balance to be more than 30 percent of the limit. Therefore, you’ll never have a balance higher than $600 on either card at any given time.

Emergency Fund: Ideally a fully funded emergency fund should be 3-6 months worth of living expenses. If you’re self employed, single, elderly, or a family with one source of income, you can consider 7-12 months of living expenses in an emergency fund. Anywhere from 3-12 months of expenses stashed away in a savings account earmarked for emergencies sounds good in theory. People are so strapped paying rent, car notes, student loans and credit card bills, there’s no wiggle room in the budget to save for emergencies—hence the guardrails detailed above. As a result, I recommend you first create some wiggle room in your budget by reducing expenses and/or increasing your income. Then create a starter emergency fund of $1,000. From here, you use the wiggle in your budget to accelerate paying down your debt. Once the debt and the corresponding debt payments are out of the way, it’s more practical to save a fully funded emergency fund.

Retirement Savings: When it comes to saving and investing money, use gross income to calculate how much to save. It facilitates saving more money. Ideally you want to save 15 percent of gross income. When you’re trying to pay off debt, saving 15 percent isn’t practical. You do want to get the retirement savings going and growing. If money is tight, start with saving anywhere from 1-3 percent of your income towards retirement. If your company matches your contribution, that’s an extra amount on top of what you’re saving. Each year as you get a pay raise, increase your contribution by 1 percent. Over time, with consistency and focused purpose, you’ll see your debt payments go away and your retirement contribution go to 15 percent and more.

(Damon Carr, Money Coach can be reached We 412-216-1013 or visit his website at


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