Carl\'s first job out of college pays annual salary of $50,000 plus benefits. He
ID: 2658370 • Letter: C
Question
Carl's first job out of college pays annual salary of $50,000 plus benefits. He has student loans of $10,000 spread out over monthly payments of $400 a month. He shares an apartment with friends and his share of the rent is $650 including utilities. Carl would like to stay within the 20-10 rule for debt.
a- Are Carl's monthly student loan payments more or less than the 20-10 rule states is appropriate, given his monthly income? By how much?
b- When Carl's aunt get a new car, she says she will sell her old car to him. Carl has $4,000 in savings, but his aunt know she ccan get $6,000 for the car. She agrees to sell it to Carl, taking the $4,000 as a down payment and makes Carl sign a promis to pay her the other $2,000 as soon as he can. According to the 20-10 rule, is his overall debt more or less than the appropriate amount for his yearly income?
Explanation / Answer
A: Monthly income= 50000/12 = $4166.67
Maximum monthly payments allowed as per 20-10 rule= 10%* 4166.67 = $416.67
Monthly loan amount= $400
Hence Carl is within the rule given the monthly income by $16.67 (416.67-400)
B:Total annual income= 50,000
Total loan = Student loan + Car loan = 10,000+2000 = 12000
Maximum loan under 20-10 rule= 20%*Annual income = 20%*50,000 = $10,000
Since total loan after taking car debt is higher than the maximum, Carl is not meeting the 20-10 rule.