After years of doing mortgages for clients I had looked at hundreds of credit reports. I had “seen it all”. I saw the amount of debt people incurred for cars, homes, RV’s, timeshares, credit cards…you name it. The reports showed the amount of each debt, the total monthly payment and how many late payments had occurred. I also had to know the clients’ annual income in order to approve their financing. After a few months on the job I was able to quickly analyze if a client’s financial situation was healthy or in a state of panic. It was extremely fascinating to me.

No two people are the same. I’ve worked with really high credit scores with hardly any assets and, inversely, I’ve seen low credit scores with tons of assets.

I’ve seen people take out over $100,000 in loans just for RV’s and other toys. Personal loans for vacations? Yep. 401k Loans to make mortgage payments? Check. $900/month car lease on 50k annual income? Oh, yes.

Here’s what is most interesting to me. Everyone compares their monthly expenses to others but rarely their own expenses vs. their own income.

We ask each other how much your car payment is or how much your mortgage is but we haven’t the slightest insights into a person’s total financial situation. We are only comforted by the hope that our car payment isn’t as high as someone else’s payment.

It’s your own personal financial situation that determines whether a monthly payment is reasonable or outlandish, not the payment itself. It’s a rather simple concept but one we easily lose sight of.

Take car loans for an example. What’s the average monthly car payment in the US? $515 for a new car, according to CNBC.

Now, how did you react to that information? You either sighed with relief or shuttered, depending on which side of the fence you find yourself.

Isn’t that a weird measure? Comparing yourself to people you don’t know?

What’s wrong with this viewpoint?

Well, a couple of things. First off, I think we need to look at why we want to know what our friends pay for their cars, houses, groceries, student loans (the list goes on – am I right?).

It’s got to be that we are attempting to make excuses for our own spending habits, right? A way to justify or satisfy our desires to be better than others?

The other reason that comparison is dangerous is that you don’t know exactly how much money someone makes or doesn’t make. You can guess based on their lifestyle and career but you don’t really know. They might have exuberant amounts of medical bills due to a condition. They might have lost a lawsuit. They might make a million dollars a year. Point is, you don’t really know.

So, stop telling yourself “it’s okay to spend $500/month” because your buddy has a $600 car payment. That’s dumb.

How do you know if you are on track?

It’s my personal opinion that breaking down each budget category is a bad idea because your money situation can change quickly and you might obsess over details that aren’t worth obsessing over. I do, however, think you need to initally account for every dollar that goes out THEN simplify.

Don’t just do this:

• House: 30%
• Cars: 10%
• Phone: 2%
• Alcohol: 4%
• Groceries: 10%
• Savings: 5%
• Health Insurance: 7%

That’s freaking exhausting. INSTEAD. Lump the dozens of categories into three. I like the 50/30/20 rule because it keeps it simple. I also like that you can quickly analyze your monthly spend and make sure you’re on track. Side note: if don’t have a full monthly budget with EVERY expense, do that first. Then categorize into needs/wants/savings and extra debt payoffs (see below).

Do this:

• 50% of net income for Needs
• 30% of net income for Wants
• 20% of net income for Savings and Debt Payoffs (extra payments)

Needs would be your housing, electric bill, groceries, gas to work, health insurance. Wants would be your new iPhone and going out to eat on Friday nights.

Isn’t that easier?

So the next time you analyze if you can afford a new car payment, don’t ask your friend what he pays. Instead, ask yourself if that car payment puts you out of the boundaries of the 50/30/20 rule.