- There’s a rule of thumb that Americans should spend no more than 30% of their income on housing costs.
- I’ve followed this rule since renting my first apartment in New York City, and stuck to it when I moved to Los Angeles and ever since.
- I’ve had to make some concessions along the way, like living with multiple roommates and taking the “worst” bedroom for a lower price.
- By keeping my long-term fixed housing costs to less than 30% of my take-home pay, I can be way more flexible with the rest of my budget.
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It’s been just over five years since I went looking for my first post-college apartment in New York City.
I knew rent could be a wallet-buster in NYC, but I didn’t want to ask my parents for help even though I was earning a low hourly rate as an intern. It was time to flex my frugality muscle.
I had some cash set aside from graduation gifts and decided part of it would go toward a security deposit and part would become my emergency fund. That meant monthly rent and utilities would come from my paychecks (as it does for most people). Rent in college was dirt cheap, so I had no idea how much I should be spending in the real world.
After some Googling, I found a rule of thumb recommended by financial experts and upheld by the US government: Aim to spend no more than 30% of your gross income on housing.
This concept was developed in the 1930s when the government began measuring housing affordability. It was originally lower, but by 1981, 30% became the standard. Americans who spend more than 30% of their pretax income on housing costs, including insurance and property taxes, are considered “burdened.” The calculation is based on the cost of other goods and services, like groceries, healthcare, and education.
Mortgage lenders can be even stricter – many don’t like to see a potential homeowner spend more than 28% of their income on housing.
I did some back-of-the-envelope math using my take-home pay instead of my gross income because I wanted to account for taxes. The 30% benchmark seemed to fit well with the rest of my budget. I’d have enough to cover my other expenses, like food, transportation, and some entertainment, plus stash a little bit in savings.
Right then I committed to the 30% rule, and I’ve lived by it ever since.
How I followed the 30% rule in expensive cities
Apartment hunting sounds fun in theory. In practice it can be tedious and frustrating, especially if you’re on a strict budget. But a good enough apartment always crops up eventually, even if it doesn’t tick every box on your wish list.
After about a year and a half living in New York, I moved to Los Angeles. I jumped from one increasingly expensive city to another.
To stick to the 30% rule, I had to make some concessions. In both places I lived with at least two other roommates and always took the worst room, which translated to the cheapest rent. In New York City, that meant a windowless bedroom in a railroad-style apartment in one of the outer boroughs. In my first apartment in Los Angeles, I took the most inconvenient parking spot and the only bedroom without an en suite bathroom (this is nothing to complain about, I know).
Rent isn’t the only housing expense, though. Internet has typically cost an extra $30 or so each month, but water and power can be more unpredictable. These costs are hard to control when you’re living with roommates, since you can’t police their energy usage or shower time. In fact, I’ve had minor crises in the past – a $500-plus electric bill just about floored me.
In these cases, I tapped my emergency fund to pick up the slack, which I’m convinced I have been able to maintain precisely because I’ve been so strict about keeping my fixed housing costs low.
Keeping my housing costs low has opened up room for savings
Each time I’ve moved apartments – a total of three times since that first New York City apartment – I’ve been at a higher income level. I do a new calculation every time to see what 30% of my post-tax income is, and won’t sign a lease unless what I’m agreeing to pay is below that amount.
Housing is not a very liquid expenditure. You can’t cut back on a dime because most leasing agreements last around 12 months. But you can quickly cut back how much you spend on shopping or lunch. I realized how important it is to be mindful of how much I spend on housing, since it’s usually a long-term commitment.
By controlling my housing costs, I’m able to be way more flexible with the rest of my budget. It’s worth noting that I didn’t have student loans to repay and have always avoided credit-card debt, so my expenses outside of housing were already pretty flexible.
As my income has gone up, I’ve put the money toward other categories of my budget, like upgrading my gym membership, traveling more comfortably and conveniently, and saving more money.
I’m particularly focused on funneling as much money as I can into my 401(k) so that it has decades to grow before I retire. I also want to make sure I’m prepared for unexpected costs that arise now. Instead of moving into a nicer apartment in a nicer neighborhood each time I get a pay raise – therefore eating up my newfound cash with housing costs – I bump up my 401(k) deferral rate and add to my emergency fund.
The 30% rule won’t work for everyone
Like any other personal-finance rule of thumb, the 30% rule is more of a guideline than a mandate. You might have less choice than I did about exactly which city or neighborhood you live in and how many roommates you have, or you might prefer to spend more budget on your house and less on food and travel.
For me, the 30% rule provided a good foundation for crafting a spending plan. Keeping my fixed, long-term costs low means I can be nimble with everything else.
Tanza Loudenback, CFP®, is the personal-finance correspondent at Business Insider. She writes most frequently about saving money, planning for retirement, taxes, debt management, and strategies for building wealth. Have a money question for Tanza? Fill out this anonymous form.