In the often turbulent seas of personal finance, having a reliable compass can mean the difference between sailing smoothly and capsizing under waves of debt. Enter the 28/36 Debt Rule – a time-tested guideline financial advisors have recommended for decades. But what exactly is this rule, and why should it matter to you?

WHAT’S THE 28/36 RULE AND WHY SHOULD YOU CARE?

The 28/36 rule is a simple yet effective framework designed to help you manage your debt-to-income ratio, particularly regarding housing-related and overall debt. It’s a beacon of light in the often-murky world of personal finance, guiding you toward a more stable and secure financial future.

DECODING THE NUMBERS

The 28/36 Rule consists of two critical percentages that serve as boundaries for your debt.

1. 28% RULE: This rule states that your total housing expenses – including mortgage payments (principal, interest, property taxes, homeowners insurance, etc.), should not exceed 28% of your gross monthly income.
2. 36% RULE: This rule takes a broader view, encompassing all your monthly debt payments – including housing, car loans, student loans, credit card debt, and any other recurring debt. It suggests that these total debt payments should not exceed 36% of your gross monthly income.

These aren’t arbitrary numbers. They represent the sweet spot where you can manage your obligations while still having room to save, invest, and actually enjoy your life.

WHY USE THE 28/36 DEBT RULE?

1. Clarity and Control: The 28/36 rule provides a clear, actionable framework for debt management. It helps you understand your financial limits and avoid taking on more debt than you can handle.
2. Prevents Overborrowing: By adhering to these percentages, you can prevent your debt from spiraling out of control, safeguarding your financial stability.
3. Improves Loan Approval Chances: Lenders use this rule as a benchmark for mortgage approval, making it easier to secure a loan if you stay within these limits.
4. Peace of Mind: Knowing you’re managing your debt responsibly can significantly reduce financial stress and improve your overall well-being.

APPLYING THE 28/36 RULE TO YOUR FINANCES

Step 1: Calculate your Gross Monthly Income

Start by determining your total income before taxes and deductions. For example, if you earn $6,000 per month, this will be the base number for calculations.

Step 2: Calculate Your Housing Expenses

Add up your mortgage payment or rent, and divide by your gross monthly income.

Step 3: Calculate Your Total Debt Payments

Add up all your monthly debt payments, including housing, and divide by your gross monthly income.

Step 4: Compare Your Ratios

Compare your calculated ratios to the 28% and 36% guidelines.

28% RULE:

• Multiply your gross monthly income by 0.28 to find the maximum housing expenses you should have: $6,000*0.28 = $1,680.
• This means your monthly mortgage payment, taxes, and insurance should not exceed $1,680.

36% RULE:

• Multiply your gross monthly income by 0.36 to determine your total allowable debt payments: $6,000 × 0.36 = $2,160.
• This means all your monthly debt obligations (mortgage, car loan, student loans, credit card payments, etc.) should not exceed $2,160.

Step 5: Adjust as Needed

If your ratios exceed the recommended percentages, take steps to reduce your debt or increase your income.

WHAT IF YOU EXCEED THESE LIMITS? 

If your ratios are higher than the guidelines, don’t despair! Here are some strategies to consider:

1. Increase Your Income: Explore opportunities for side hustles, freelance work, raises, or career advancement.
2. Reduce Your Expenses: Cut back on non-essential spending and prioritize debt repayment.
3. Pay Down Debt: Focus on high-interest debts first and create a debt repayment plan.
4. Negotiate with Creditors: Contact your creditors to negotiate lower interest rates or payment plans.

WHEN THE RULE BENDS

Like any financial guideline, the 28/36 Rule isn’t one-size-fits-all. In expensive housing markets like San Francisco or New York, sticking to the 28% housing limit might be nearly impossible. Similarly, you might aim for even lower percentages if you’re debt-averse or pursuing aggressive savings goals.

The rule also varies based on your income level. Higher earners can often exceed these percentages and still maintain financial health, while those with lower incomes might need to be more conservative.

YOUR PATHWAY TO FINANCIAL BALANCE

The real power of the 28/36 Rule isn’t in the specific numbers but in the mindset, it encourages – intentionality with debt. It prompts important questions:

• Do I need to refinance or consolidate existing debts?
• Should I reconsider my housing situation?
• How can I increase my income to better balance these ratios?

By using this rule as a benchmark rather than an unbreakable law, you gain a valuable tool for evaluating financial decisions and keeping debt in its proper place – a tool that works for you, not against you.

The 28/36 Rule isn’t about restriction; it’s about freedom. Freedom from financial stress, freedom to pursue opportunities, and ultimately, freedom to build the life you want rather than one dictated by debt.