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If you’re looking for an apartment to rent or a home to call your own, don’t overlook all of the costs involved. A good rule of thumb? Do not spend more than 30 percent of your gross monthly income on housing (if you have 70 percent or more leftover, you’re more likely to have enough money for your other expenses).

My question

Seems pretty reasonable, right? The problem: Renters and homeowners are having trouble sticking to this rule. In fact, more than 11 million renter households spent more than half of their incomes on housing in 2015.1 Not only does that mean having less money for necessities like food and healthcare, it also makes it more difficult to achieve financial confidence and save for other goals. Spending too much on living expenses can disrupt how much money you dedicate to what truly matters to you.

The 30% rule up close

Looking to buy? In addition to principal and interest, don’t forget to consider property taxes, private mortgage insurance, homeowners insurance and homeowners association fees when you’re determining how much house you can afford. 

My solution

If your housing costs look like they’re going to exceed 30 percent, then that home is probably not for you. However, if a temporary circumstance (such as a job loss) means you have to live above the 30 percent mark for a bit, here are some ways to cut costs:

  • If you’re renting, don’t forget to factor in the cost of renters insurance, which can help cover items that would be a financial burden to replace in case of loss or damage.
  • Explore your public transit, walking and/or cycling options, which could help you spend less on gas (or just choose to not have a car altogether).
    • Getting to and from work is a large monthly expense for a lot of families, which is directly tied to where they live. A house in the burbs might look like a good deal, but the price increases when you factor in commuting costs.2

Challenge: Track your spending in other areas so you understand where you can cut in order to save/have the proper amount for housing.

Keep in mind: The 30 percent rule ultimately depends on your financial situation. For example, if your yearly income is $500,000, you might be able to pay 40 percent for housing expenses and still have adequate money left over. But if your yearly income is $30,000, 30 percent might be pushing it.

Ask yourself: Are you really comfortable spending 30 percent of your income each month on housing? After considering your other payment obligations and how you want to spend and save your money, does it make sense for you? If not, come up with your own rule—maybe 25 percent feels better, for example. Only spend what you feel comfortable and confident with on housing (while trying to stay below 30 percent).

3 Key Takeaways
  1. Try not to spend more than 30 percent of your monthly income on any housing-related expenses.
  2. Find ways to save if your housing costs look like they’re going to exceed 30 percent.
  3. Only spend what you feel comfortable and confident with on housing.

Challenge yourself

Once you have your housing costs set, keep reading to learn how your remodeling plans can increase its equity.

1 “Growing Demand and Tight Supply are Lifting Home Prices and Rents, Fueling Concerns about Housing Affordability,” 2017, Joint Center for Housing Studies of Harvard University

2 “Housing’s 30-Percent-of-Income Rule,” July 17, 2014, Bloomberg

This content is educational in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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