Chpt 10.3 Rule 20/10 Calculating Responsible Credit (Safe ...



Chpt 10.3 Rule 20/10 Calculating Responsible Credit (Safe Debt Load) 35433002178050020/10 Rule Follow the 20-10 RuleThis general "rule of thumb" helps you understand how much credit you can afford. Credit cards are loans, so avoid borrowing more than 20 percent of your monthly take home pay on all of your loans (not including a mortgage). And payments on those loans shouldn't exceed 10 percent of your monthly net income.How Much Can You Safely Borrow? (The 20-10 Rule)20: Never borrow more than 20% of yearly net income10: Monthly payments should be less than 10% of monthly net income** Mortgages don’t countEXAMPLE: never borrow more than 20% of your yearly net incomeIf you earn $400 a month after taxes, then your net income in one year is:12 x $400 = $4,800Calculate 20% of your annual net income to find your safe debt load.$4,800 x 20% = $960So, you should never have more than $960 of debt outstanding.Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%.monthly payments shouldn’t exceed 10% of your monthly net incomeIf your take-home pay is $400 a month:$400x10% =$40Your total monthly debt payments shouldn’t total more than $40 per month.6057900181610582930018161056007001816105372100181610514350018161049149001816104686300181610445770018161042291001816104000500181610377190018161035433001816103314700181610308610018161028575001816102628900181610240030018161021717001816101943100181610171450018161014859001816101257300181610102870018161080010018161057150018161034290018161011430018161020/10 Rules Practice Problems ( highlight math problems and show your work)Using the 20/10 Rule for calculating responsible credit (safe debt load):How much can they safely carry?Most people can afford a certain amount of credit and stay within a safe budget. This amount is called a “safe debt load.” The following exercises will give you practice determining safe debt loads based on various incomes and fixed expenses.DirectionsRead each of the following scenarios and determine the largest amount of debt each person can safely carry. Write your answers in the blanks provided. Use the space below each question to show how you arrived at each answer so show your work. Highlight key words in each example.David has a monthly net income of $1,360. His fixed monthly expenses is a student loan payment of $116. ?David would like to buy a new television set using a credit card. What is the largest monthly payment David can afford and still be within a safe debt load? Francine and Pierre have a combined monthly net income of $2,700. Their fixed monthly expenses include $220 for Francine’s student loan payment, and $82 for the stereo they bought last month. ?Francine and Pierre would like to buy a new car. How much can they currently afford for monthly car payments and still maintain a safe debt load? ? Miyoshi has a monthly net income of $1,625. Her fixed monthly expenses include $68 for the furniture she bought last month and a car payment of $167. Are Miyoshi’s expenses within a safe debt load? ? How much can they safely carry? answer key TOC \o "1-3" Word did not find any entries for your table of contents.Most people can afford a certain amount of credit and stay within a safe budget. This amount is called a “safe debt load.” The following exercises will give you practice determining safe debt loads based on various incomes and fixed expenses.Key Starts HereRead each of the following scenarios and determine the largest amount of debt each person can safely carry. Write your answers in the blanks provided.Use the space below each question to show how you arrived at each answer.David has a monthly net income of $1,360. His fixed monthly expenses is a student loan payment of $116. ?David would like to buy a new television set using a credit card. What is the largest monthly payment David can afford and still be within a safe debt load? ?$20.00 ?$1,360 x 10% = $136 $136 - $116 = $20 Francine and Pierre have a combined monthly net income of $2,700. Their fixed monthly expenses include $220 for Francine’s student loan payment, and $82 for the stereo they bought last month. ?Francine and Pierre would like to buy a new car. How much can they currently afford for monthly car payments and still maintain a safe debt load? ?Francine and Pierre are already above their safe debt load and need to reduce their debt load before being able to afford the car. ?$2,700 x 10% = $270 $220 + $82 = $ $302$270 - $302 = - $32 6. Miyoshi has a monthly net income of $1,625. Her fixed monthly expenses include $68 for the furniture she bought last month, and a car payment of $167. Are Miyoshi’s expenses within a safe debt load? ?No. ?$1,625 x 10% = $162.50 $162.50 - 235 = - $72.50 ?Right now Miyoshi is over committed and is not within a safe debt load, and she should not commit to further debt. ................
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