Ashley Effinger The mysterious numbers that can make or break your financial dreams are credit scores.
We’ve all heard of them; for many, they’re shrouded in confusion and anxiety.
But fear not, my financially savvy friends, because today, I will unravel the secrets of the credit world and introduce you to a game-changer – the 28/36 rule.
Imagine this rule as your trusty sidekick, helping you navigate the treacherous waters of credit scores with ease.
In this blog post, we’ll break down what the 28/36 rule is, how to use it like a pro, and even throw in some real-life examples, strategies, and solutions to supercharge your credit game.
So, grab your cape (or just your reading glasses), and let’s dive in!
What is the 28/36 Rule?
Before we jump into the nitty-gritty details, let’s define the 28/36 rule. This financial superhero is a guideline used by lenders to assess your ability to manage your debt responsibly.
It’s like a litmus test for your financial health, and it consists of two critical components:
1. The 28% Rule: This is about your housing costs, including your mortgage or rent, property taxes, and homeowners’ insurance.
This rule says these costs shouldn’t exceed 28% of your gross monthly income.
This ensures you have enough cash to handle other expenses and save for a rainy day.
2. The 36% Rule: This one takes a broader view of your financial life.
It considers your housing expenses and other recurring debt payments, such as credit card debt, car loans, student loans, and personal loans.
The total of these monthly payments, along with your housing costs, shouldn’t exceed 36% of your gross monthly income.
Think of it this way: 28/36 is your financial GPS, guiding you toward a credit score that will make lenders praise you and offer you the best deals.
Now that you know what it is, let’s explore how to make it work for you.
How to Use the 28/36 Rule to Your Advantage
So, you’ve met the 28/36 rule and are ready to harness its powers.
Here’s a step-by-step guide to help you become a credit score maestro:
Calculate Your Gross Monthly Income
First, you need to know how much moolah you’re working with.
Calculate your gross monthly income, which is your earnings before taxes and deductions.
This includes your salary, bonuses, side gig income, and any other cash flowing into your bank account.
1. Determine Your Housing Costs
Next, figure out your housing costs. This includes your rent or mortgage payment, property taxes, and homeowners’ insurance.
Remember, this should be at most 28% of your gross monthly income.
For example, if you earn $5,000 monthly, your housing costs should stay below $1,400 (28% of $5,000).
2. Account for Other Debt Obligations
Now, tally up your other debt obligations. This includes minimum credit card payments, car loans, student loans, and other regular debts.
These, combined with your housing costs, should not surpass 36% of your gross monthly income.
If it does, you should rethink your financial strategy.
3. Fine-Tune Your Budget
If your housing costs or other debt obligations push you beyond the 28/36 limits, it’s time to reevaluate your spending habits.
Look for ways to cut unnecessary expenses or increase your income.
Remember, a balanced budget is the secret sauce to maintaining good credit health.
4. Keep an Eye on Your Credit Utilization
While the 28/36 rule focuses on your debt-to-income ratio, it’s essential not to neglect your credit card balances.
High credit card utilization can drag down your credit score.
Aim to keep your credit card balances below 30% of your credit limit to maintain a stellar credit profile.
Real-Life Example: Meet Victoria
Now that you’ve got the hang of it let’s meet Victoria, a fictional character who’s about to put the 28/36 rule into action.
Victoria earns $4,500 per month, so her housing costs should not exceed $1,260 (28% of $4,500).
She’s eyeing a swanky apartment with a monthly rent of $1,400.
Victoria wisely decides to look for a more affordable place that fits her budget.
Victoria also has some student loan payments and credit card debt totaling $600 per month.
To stay within the 36% limit, her total monthly debt payments (including housing) should be at most $1,620 (36% of $4,500).
Victoria explores options like refinancing her student loans at a lower interest rate and consolidating her credit card debt to reduce her monthly payments.
By making these adjustments and sticking to the 28/36 rule, Victoria manages her finances like a pro and keeps her credit score soaring.
Casting the 28/36 Rule Spell – Examples and Strategies
Now that you’ve got the incantation for financial success – the 28/36 rule – let’s dive deeper into the mystical world of examples and strategies.
Example 1: Alex’s Mortgage Magic
Alex, with a monthly income of $6,000, is on a quest for a new home.
According to the 28/36 rule, his housing costs should not exceed $1,680 (28% of $6,000).
Alex finds a cozy place with a monthly mortgage payment of $1,500.
This leaves him room to spare for property taxes and insurance, ensuring his housing costs stay within the magical 28% limit.
Alex makes extra mortgage payments towards the principal each year to further enhance his credit potion.
This helps him pay off his mortgage faster and keeps his overall debt-to-income ratio in check.
Alex, the mortgage sorcerer, is well on his way to building a fortress of financial stability.
Example 2: Max’s Credit Card Enchantment
Max, an adventurer with a monthly income of $5,500, loves the convenience of credit cards.
However, his credit card balances are starting to cast a shadow on his credit score.
According to the 28/36 rule, Max’s monthly debt payments, including credit cards, should not exceed $1,980 (36% of $5,500).
Max employs the snowball method to break free from the credit card curse.
He first tackles the card with the smallest balance while making minimum payments on the others.
Max redirects the freed-up funds to the next card in line as each card gets banished.
Before he knows it, Max has conquered his credit card foes and boosted his credit score.
Example 3: Phia’s Personal Loan Ballet
Phia, a successful event planner with a monthly income of $8,000, is gracefully waltzing through the world of personal loans.
Her current personal loan payments are teetering close to the 36% limit, standing at $2,880 (36% of $8,000).
Phia, ever the financial artist, decides to explore income-driven repayment plans.
By elegantly adjusting her repayment plan based on her income, Phia brings her monthly student loan payments down to $2,500.
This aligns with the 36% rule and allows her to direct extra funds towards her entrepreneurial endeavors.
Phia’s balletic finesse in managing her personal loans showcases the beauty of financial flexibility.
Example 4: Jeff’s Credit Card Opera
Jeff, a globetrotter with a monthly income of $12,000, revels in the world of credit cards.
However, his credit card balances are singing a dissonant tune, totaling $4,500 (36% of $12,000).
Jeff decides to conduct a grand credit card opera using the avalanche method.
Channeling the power of the avalanche, Jeff strategically pays off the credit card with the highest interest rate first.
As he conquers each card, he redirects the liberated funds to the next in line.
Jeff’s credit card opera orchestrates a symphony of debt reduction and propels his credit score to new heights.
The Extravaganza of Wealth Mastery – A Symphony of Larger 28/36 Rule Examples
As we dig even deeper into the intricate tapestry of financial mastery, let’s unveil more compelling examples that showcase the boundless potential of the 28/36 rule.
Our new characters, Emily, Michael, and Olivia, are about to embark on a financial symphony that echoes with grandeur.
Example 5: Emily’s Real Estate Sonata
Meet Emily, a high-earning professional with a monthly income of $15,000.
In pursuit of her dream home, Emily faces a 28% housing cost limit of $4,200 (28% of $15,000).
Emily secures a mortgage with a monthly payment of $3,500, leaving her with a comfortable margin for property taxes and insurance.
To add a crescendo to her financial symphony, Emily allocates a portion of her income to build a real estate empire.
By strategically investing in income-generating properties, Emily complies with the 28/36 rule.
She orchestrates a wealth-building sonata that echoes for generations.
Example 6: Michael’s Business Finale
Michael, a visionary entrepreneur with a monthly income of $20,000, orchestrates a grand business finale.
His current debts, including business loans and personal expenses, hover around $7,200 (36% of $20,000).
Michael explores refinancing options for his business loans to bring his financial symphony into harmony.
By refinancing at lower interest rates, Michael trims his monthly debt payments to $6,000, aligning seamlessly with the 36% limit.
This financial finale fortifies his business and positions Michael as the conductor of his financial destiny.
Example 7: Olivia’s Investment Overture
Olivia, a seasoned investor with a monthly income of $25,000, conducts a captivating investment overture.
Her housing costs, capped at $7,000 (28% of $25,000), leave ample room for her expansive investment portfolio.
To augment her financial symphony, Olivia explores diverse investment opportunities.
From stocks and bonds to real estate and startups, Olivia strategically diversifies her portfolio, ensuring a harmonious blend of risk and reward.
Olivia’s investment overture adheres to the 28/36 rule and transforms her wealth into a timeless composition.
The Magnum Opus of Financial Mastery – A Symphony of Diverse 28/36 Rule Examples
Our financial symphony continues to crescendo with even more illustrious examples, introducing characters at the pinnacles of their earning potential.
Let’s delve into Latoya and Justin’s financial sagas as they navigate wealth management’s grandeur with the 28/36 rule.
Example 8: Latoya’s Executive Ballet
Latoya, a high-powered executive, commands a monthly income of $60,000.
Her 28% housing cost limit amounts to a staggering $16,800 (28% of $60,000).
Latoya secures a lavish residence with a monthly mortgage payment of $15,000, leaving ample room for property taxes and insurance.
Latoya channels a portion of her income into an executive compensation plan to amplify her financial ballet.
This aligns with the 28/36 rule and positions Latoya as the prima ballerina in her financial theater, gracefully pirouetting through the intricacies of wealth management.
Example 9: Justin’s Entrepreneurial Symphony
Meet Justin, a visionary entrepreneur with a monthly income soaring to $120,000.
His 36% debt limit translates into a formidable $43,200 (36% of $120,000).
Ever the conductor of his entrepreneurial symphony, Justin realizes that strategic debt management is crucial.
To orchestrate his financial masterpiece, Justin meticulously reviews his business debts.
By consolidating high-interest loans and negotiating favorable terms, he trims his monthly debt obligations to a harmonious $40,000.
This adheres to the 28/36 rule and transforms Justin into the maestro of his entrepreneurial symphony, conducting a crescendo of financial success.
Strategies to Boost Your Credit Score
Now that you’re wielding the 28/36 rule like a credit score ninja let’s take it up a notch with some advanced strategies to supercharge your credit journey:
1. Pay Down Debt Strategically
If you have multiple debts, prioritize paying off the ones with high-interest rates or low balances first. This can free up more money in your budget to stay within the 28/36 limits.
2. Avoid Opening Too Many New Accounts
Applying for a new credit card or loan can lead to a hard inquiry on your credit report, temporarily ding your score. Be strategic about new credit applications.
3. Set Up Automatic Payments
Missing payments is a credit score buzzkill. Set up automatic payments for your bills to ensure you never miss a due date.
4. Diversify Your Credit Mix
A healthy mix of credit types (e.g., credit cards and installment loans) can boost your credit score. Don’t shy away from responsible credit use.
Strategies for Mastering the Financial Arts
Emergency Fund Elixir
Remember to stockpile the emergency fund elixir on your journey through the credit realm.
Having three to six months’ worth of living expenses stashed away can shield you from unexpected financial storms, ensuring your credit castle remains intact.
Annual Credit Check Ritual
Make it a habit to check your credit report annually.
Look for inaccuracies or suspicious activities that could cast a dark spell on your score.
Promptly address any issues to maintain a pristine credit aura.
Negotiation Charm
Don’t hesitate to negotiate with creditors. If you’re facing financial challenges, many creditors are willing to work with you on modified payment plans.
This proactive approach can save you from falling into the depths of credit despair.
Balance Transfer Sorcery
Consider the ancient art of balance transfers if you find yourself entangled in high-interest credit card debt.
Transferring high-interest balances to a card with a lower interest rate can be a powerful spell for reducing interest payments and accelerating your path to debt freedom.
Even More Strategies for Majestic Financial Mastery
Wealth-Building Crescendo
Consider allocating a portion towards wealth-building endeavors such as investments and retirement accounts as your income grows.
This not only fortifies your financial fortress but also contributes to long-term prosperity.
Financial Advisor Conclave
Engage in regular consultations with a financial advisor.
Their insights can be the guiding light in your financial journey, helping you navigate complex decisions and optimize your wealth-building strategies.
Mastery of Investment Spells
Explore the magical realm of investments.
Strategic investments can generate additional income streams, accelerating your journey toward financial freedom.
Legacy-Building Symphony
Consider crafting an estate plan to secure your legacy.
A well-thought-out plan ensures that your wealth continues to compose a symphony of financial security for future generations.
Philanthropic Harmonies
Infuse your financial symphony with philanthropic notes.
Establishing charitable foundations or contributing to causes you believe in enriches society and adds a soulful dimension to your wealth.
Mentorship Symphony
Engage in mentorship, both as a mentor and a mentee.
The exchange of wisdom and experience contributes to a symphony of personal and financial growth.
Still More Strategies for Unprecedented Financial Virtuosity
Global Investment Sonata
Consider diversifying your investment portfolio globally.
By exploring international markets and opportunities, you compose a financial sonata that resonates across borders, adding a layer of resilience to your wealth.
Executive Compensation Crescendo
Explore executive compensation strategies for high-earning executives, like stock options, deferred compensation, and bonus structures.
These instruments can create a harmonious blend of immediate income and long-term wealth building.
Technological Harmonics
Embrace technological advancements in financial management.
From robo-advisors to blockchain investments, integrating technology into your financial symphony can optimize efficiency and enhance returns.
Unleash Your Credit Superpowers
Congratulations, credit champions! You’ve just unlocked the secrets of the 28/36 rule and learned how to use it to your advantage.
With this financial superhero by your side, you’ll have the power to conquer your credit score and secure your financial future.
But remember, just like any superhero, the 28/36 rule is only as effective as the person using it.
So, take the time to craft a budget, make smart financial decisions, and keep an eye on your credit utilization.
With these tools and strategies in your arsenal, you’ll be well on your way to achieving credit greatness.
Now, go forth and make your credit score soar!
Your financial destiny awaits; the 28/36 rule is your trusty guide on this epic journey.
Your Assignment: Unlock Your Financial Freedom!
Ready to conduct your financial masterpiece?
Start by implementing the 28/36 rule in your life today. Remember, the sooner you take action, the faster you’ll see results.
Don’t let your credit score be a mystery—unleash your financial superpowers now!
Your brighter financial future starts now!
Yup, you guessed it. Sometimes I throw in those magical affiliate links that can whisk you away to credit utopia. But wait, there’s more! Each time you click on one of these bad boys and decide to snag a deal, a tiny trumpet-playing squirrel delivers a small bag of gold coins to our castle. In other words, I might earn a little something-something. Just know that I would never use a link that I don’t personally use myself and/or highly recommend.
About the Author
Meet Ashley Effinger, the Credit Queen and FreedomPath Advisor! Digital marketing royalty, I’m all about conversions and changing lives! By day, I improve credit scores, learn budgeting tricks, and build lasting wealth with my guidance. By night, I’m a rockstar wife and a supermom of 5 amazing kiddos! When not slaying credit myths, I indulge in my passions: reading, jet-setting, and sipping smoothies! Follow me for credit tips and a dose of laughter!
Drop me a line (say hi, ask a credit repair question, fan out, etc.): badcreditisexpensive@gmail.com
Ready to get started fixing YOUR credit? ashley@mycreditqueen.com
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