How the wealthy hanging onto their money actually makes everyone else poorer, according to a new study

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  • A Chicago Booth Review report looks at the link between the wealthiest saving their money and inequality.
  • Wealthy people’s savings are used to finance household debt for everyday Americans.
  • As debt grows for the lowest-earning Americans, the wealthy having more savings just fuels the cycle further.
  • See more stories on Insider’s business page.

The wealthy sitting on their savings may be helping finance the debts of poorer Americans and therefore play a role in rising inequality, according to the Chicago Booth Review.

Researchers Amir Sufi, Ludwig Straub, and Atif Mian looked at the growing savings of America’s wealthiest residents, and found it isn’t going into what they call “productive” investments, like building roads or new research. Instead, the stockpile is going toward financing debt from everyone not in the top 1%.

Prior to the financial crisis in 2008, such savings financed “almost a third of the rise in household debt owed by the bottom 90%.” After the housing crash, they began to take on a greater role in subsidizing government debt (although the continued debt from lower-earning Americans is still financed from those savings).

How does that work, exactly? Rebecca Stropoli at Chicago Booth Review uses the hypothetical of a corporation issuing equity to a wealthy shareholder, but the proceeds don’t go on research or equipment but into a deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. The wealthy are financing bank lending to average Americans, in other words.

When the poorer take on more debt – especially when they’re incentivized by low interest rates – that’s less money they have to spend on other things.

During the pandemic, wealthy savings climbed, along with their fortunes

On the whole, the personal saving rate – the amount that Americans have left over from their income after paying off bills – has climbed during the pandemic, although it shot down in April 2021. But, as Time’s Alex Gailey reports, an increased savings rate may not show the whole story. Poorer Americans, Time reports, continued to spend at levels just a little below pre-pandemic rates, while their wealthier counterparts held on to more money.

The wealthiest Americans saw their net worths grow during the pandemic as widespread economic devastation and unemployment ravaged the country. From March 18 to December 30, 2020, the world’s billionaires added $3.9 trillion to their net worths; that’s enough to pay for the world’s vaccines and to keep everyone out of poverty.

In the US, billionaires got 44% richer throughout the pandemic, Insider’s Lina Batarags reported. That stands in marked contrast to the millions of Americans facing down unemployment and poverty.

The researchers note that the pandemic has cleaved an even deeper divide between the top 1% and the bottom 99%. Low-wage workers and workers of color were disproportionately impacted by the pandemic’s economic devastation, which took the shape of a K – high-earning workers saw jobs and incomes grow, while those at the bottom experienced the opposite.

“Mian, Straub, and Sufi see in the data a widening wealth gap and more saving by the rich, thus more money being turned into loans and lent out to consumers,” Stropoli writes.

The methods by which the ultrawealthy hang onto that wealth have come into greater relief this week, too, as a bombshell ProPublica investigation revealed that the wealthiest Americans are paying an incredibly low rate of taxes proportional to their wealth. That’s all legal, but it could finally kickstart reform targeted at America’s highest earners.

In the meantime, the savings of the wealthy will sit in bank accounts, fueling more debt for the rest of the country.

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The pandemic changed everything about how affluent millennials view wealth

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Wealthy millennials view wealth differently thanks to the pandemic.

Wealth no longer means what it used to for high-net-worth millennials.

The pandemic has caused the wealthy to alter their lifestyles and reassess their priorities, changing how they perceive wealth in the process, a new report by Boston Private found. The report, titled the Why of Wealth, surveyed high net-worth individuals with at least $1 million of assets.

Millennials, who turn ages 25 to 40 this year, changed their perceptions of wealth the most. More than three-quarters (89%) said the pandemic altered the way they define wealth. The generation was also most likely to say the pandemic shifted their wealth priorities and their emotions about wealth, with 85% of respondents feeling this way about each change.

Both Gen X and Gen Z felt fairly similarly, with at least three-quarters of each cohort identifying in the same way for nearly all these sentiments. However, it’s a sharp contrast from baby boomers and the silent generation. Less than a quarter (24%) of both generations combined said the pandemic changed their perception of wealth. The report attributes this to their age, as they’ve already experienced significant cultural milestones and being more settled into a certain mindset.

More millennials (as well as Gen X) associate wealth with success and happiness, whereas boomers and the silent generation are more likely to view wealth as peace of mind and independence. “For these younger generations, wealth is a key contributor to creating a comfortable, happy life, and is directly related to achieving important goals, having a good family life and being a positive contributor to community and society,” the report reads.

Older generations feel less able to use their wealth on enjoying life as much as they’d like to right now, according to the report, whereas younger generations are possibly using their wealth to enjoy life more than they feel they should.

What’s more is that this shift in perception of wealth has also affected millennials’ wealth goals – 78% said the pandemic changed how they planned to use their wealth in the future, compared to 26% of baby boomers and the silent generation.

Saving has been up across the board during the pandemic, as the US household net worth hit a record in the fourth quarter, up 5.6% from the third quarter. Many wealthy Americans were able to tuck away excess cash, with wealthy millennials tucking away as much as $3,000 a month. Some have increased their retirement savings or readjusted their financial plans plans as a result.

But whether this shift in wealth perception and goals is temporary or permanent remains to be seen.

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America is getting ready for its post pandemic glow-up

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Americans need to spend to help the economy recover.

  • America is reopening, and coming out of its pandemic shell could mean an economic boom. It’s a glow-up.
  • They’re already spending on outdoor activities, transit, restaurants, clothes, and beauty.
  • But America will also look different, and spending in other areas is weak. We don’t know what will emerge.
  • See more stories on Insider’s business page.

America is getting ready for its post-pandemic glow-up.

Peak sweatpant has passed and high heels are hot again, in the ultimate symbol of an economy ready to let loose. Americans are booking beauty services, buying going-out clothes again, and readying for a “hot vax summer” as they emerge from lockdown looking and feeling different than they entered, helping the economy roar back to life in the process.

It’s the result of vaccination rates revving up, big cities reopening, and Americans sitting on a ton of cash. Between three stimulus checks and the decline in discretionary spending that accompanied a pandemic shutdown, Americans were holding $2.6 trillion in excess savings as of mid-April, per Moody’s Analytics.

And that’s why so many economists are predicting that a lockdown lift will see the biggest boomtime in a generation, potentially ushering in a new era in the US economy. Moody’s Analytics expects the US economy to grow 6.4% in 2021 after shrinking 3.5% in 2020.

But to power such an economic transformation, Americans need to keep spending.

BofA’s head of North America Economics, Ethan Harris, wrote in March that the US’ economic fate will depend on whether Americans view their excess savings as wealth or deferred income. His team sees the savings being treated as the latter, which should “help support exceptional growth this year in addition to the tailwinds from fiscal stimulus and an improving virus picture.”

Mark Zandi, chief economist at Moody’s Analytics, agrees. “An unleashing of significant pent-up demand and overflowing excess saving will drive a surge in consumer spending across the globe as countries approach herd immunity and open up,” he wrote in a note. He sees 20% of excess savings being spent in 2021, and another 20% next year.

Credit card spending is already up, but it’s just the beginning. Inflation, unequal savings distribution, and an uneven economic recovery may prove to be challenges in spending enough to fuel an economic boom.

Spending on outdoor activities and a ‘hot vax summer’

“The snooze is over,” wrote BofA’s Michelle Meyer, head of US economics, in a note published on Thursday. BofA’s card spending showed a massive uptick in consumer spending for the week, up 45% year-over-year and by 20% over two years previous.

The third stimulus has already impacted Americans’ bank accounts, per Bureau of Economic Analysis data. As incomes climbed by 21.1% last March – a record monthly income leap dating since 1946 – consumer spending rose with it, increasing by 4.2%. Americans haven’t spent that much since June. Total consumer spending, not adjusted for inflation, has now exceeded pre-pandemic levels.

In consumer spending, still leading the way is solitary leisure solo activities that Americans turned to in the social-distancing era as previous forms of leisure, especially hospitality and entertainment, fell off dramatically. Spending on sporting goods such as golf, campground, and bike equipment, is continuing its momentum with activity above pre-pandemic norms, per BofA.

But we’re also starting to see a resurgence in the activities of pre-pandemic yore. Spending on transit, restaurants and bars, department stores, and clothing have all increased by over 100% on a daily basis over the past 10 days, per BofA.

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Beauty services are seeing a flood of bookings.

Retailers are gearing up for a “peacocking effect” and dress sales on the rise, while jeans are making a comeback, Insider’s Avery Hartmans reported. Blazers, stylish tops, and brightly colored sandals are all seeing signs of life. Retail CEOs everywhere from Gap to Urban Outfitters have noted signs of an incoming retail boon, with the latter already seeing an uptick in purchases of going-out clothes.

The post-pandemic beauty boom has also arrived, as The Atlantic’s Amanda Mull reported. From eyebrow threading and hairstyling to mani-pedis and cosmetic injections, she wrote, people are booking up beauty services for their own personal glow-up. Beauty sales increased by 31% for for the week ending April 24, per BofA, compared to 2019.

The start of this spending is already making a difference. GDP grew at a 6.4% annualized rate in the first quarter, the Commerce Department estimated on a preliminary basis.

Economists have thus upped their predictions for economic growth every month of the year, according to Bloomberg’s latest monthly survey, forecasting an annualized pace of 8.1% GDP growth in the second quarter.

An unequal recovery and unequal savings

While Americans have already begun swiping their cards, there are still holes in the economy to fill and challenges to overcome.

Entertainment and airline spending are improving, but still weak, per BofA. More Americans intend to travel as the weeks go by, with some already booking vacation rentals and hotels, and airlines just saw their busiest weekend since pre-pandemic, but travel’s comeback is a gradual one.

That might partly be because the economic recovery across America hasn’t been uniform. BofA spending analysis finds the South and parts of Midwest are faring better economically than the West and the Northeast. That’s likely because the latter regions had longer lockdowns and a slower easing of restrictions in an attempt to curb the spread of the coronavirus.

Also unequal is the share of savings built up during the pandemic. Zandi said in the Moody’s note that this would limit an even bigger boom in spending. “Much of the excess saving has been by high-income, high-net-worth households who are likely to treat the saving more like wealth than income, and will thus spend much of less it, at least quickly,” he wrote.

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Airline spending has improved, but is still weak.

Nearly two-thirds of the excess savings in the US is by households in the top 10% of the income distribution, per Moody’s data, and three-quarters is by those in the richest 20%.

Consumer spending accounts for 70% of the American economy, and half of that is from the top 10% of American households, per estimates from Goldman Sachs and Deutsche Bank, respectively. That means about one-third of US GDP comes from spending by the top 10%. In other words, the US needs spending from wealthy households the most.

But there’s a side effect that may come with unleashing pent-up demand: inflation. While experts don’t think the economy will overheat like it did in the 1970s, some goods and services have begun to get more expensive amid the supply shortages that have come with reopening. The unpredictability of inflation could cause consumers to curb their spending.

A world with baggy jeans and remote work

In a post-pandemic world, though, America will look a little different. The point of a glow-up, after all, is transformation.

And while Americans whiled away their quarantine days baking bread and reorganizing their closets, new trends emerged. Clothes are brighter, wide-legged jeans have replaced skinny jeans, side parts are no longer cool, and the “ugly fashion” movement has seen its pre-pandemic popularity accelerate as shoppers increasingly purchase things like grandpa shoes and Crocs

Urban areas too, will look a little different. While experts and the data are pointing to big cities like New York making a comeback, they will likely function in new ways. Urban theorist Richard Florida previously told Insider he thinks major cities will be reshaped and revived by a newfound focus on interpersonal interaction that facilitates creativity and spontaneity. He said the community or neighborhood itself will take on more of the functions of an office.

The work-from-home revolution could bolster new cities’ real-estate markets, as more broadly shared prosperity counteracts decades of increasing regional inequality, but spending within cities themselves could suffer. For instance, economists estimate spending in downtown areas will be 10% depressed – or more in the case of Manhattan – because of the remote-working revolution. So the fashions on the street will look different, and the cities will probably be a bit emptier.

People are also buying more stuff for inside the home. Spending in home categories was up 50.3% over 2019 for the week ending April 24, according to BofA. Americans have learned to spend in a more private way during a year inside. The glow-up is on, but Americans will have to keep spending for a truly impressive makeover.

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Americans are sitting on $2.6 trillion in excess savings from the pandemic that can help power a recovery, Moody’s says

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Americans built up extra savings over the pandemic as spending opportunities were limited.

Americans have built up excess savings worth $2.6 trillion since the start of the coronavirus pandemic that will help power the economy’s recovery from the crisis, according to Moody’s Analytics.

The US has amassed the most excess savings of any country, with the cash pile amounting to 12% of gross domestic product.

Around the world, people have built up extra savings worth $5.4 trillion, equal to around 6.5% of GDP. Savings have shot up as opportunities for spending have been limited by lockdowns but central banks and governments have pumped money into economies to support employment.

“An unleashing of significant pent-up demand and overflowing excess saving will drive a surge in consumer spending across the globe as countries approach herd immunity and open up,” said Mark Zandi, chief economist at Moody’s Analytics, a sister company of the credit ratings agency, in a note.

Zandi said Moody’s expects 20% of the US excess savings to be spent in 2021, adding 2.4 percentage points to real GDP growth in 2021. The analysis company expects the US economy to grow 6.4% in 2021 after shrinking 3.5% in 2020.

A further 20% will then be spent in 2022, Moody’s predicted, adding another 2.4 percentage points to annual growth, which is set to come in at 5.3%.

However, Zandi said the unequal nature of the savings built up in the US would limit an even bigger boom in spending.

“Much of the excess saving has been by high-income, high-net-worth households who are likely to treat the saving more like wealth than income, and will thus spend much of less it, at least quickly,” he said.

Moody’s data showed that nearly two-thirds of the excess savings in the US is by households in the top 10% of the income distribution, and three-quarters is by those in the richest 20%.

Excess savings are defined as extra savings on top of what households would have put aside had coronavirus not occurred and their behaviour been the same as in 2019.

Earlier this month, JPMorgan strategist Karen Ward said the large build-up in consumer spending could lead to stronger-than-expected inflation, which could in turn cause volatility in stock markets.

“The US consumer is generally not known for its reserve and thriftiness at the best of times,” she said.

Ward said she thought it was likely that inflation averaged 3% over the next decade. Core personal consumption expenditure inflation, the Federal Reserve’s preferred measure, stood at an annualized 1.4% in February.

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Americans unleashing pent-up savings could drive up inflation and rattle parts of the market, JPMorgan’s chief strategist says

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Americans have built up savings during COVID that could be unleashed.

US consumers unleashing their pent-up savings in a huge wave of spending could drive up inflation and rattle some parts of the stock market, JPMorgan Asset Management’s chief strategist for Europe has said.

Karen Ward said in an online presentation this week that JPMorgan estimates Americans have built up extra savings worth around 8% of US GDP during the COVID-19 pandemic, when their spending options have been limited.

Ward, a former top economic advisor to the UK’s finance ministry, said she thought most of this would be unleashed in a spending spree. When combined with Joe Biden’s $1.9 trillion stimulus bill – worth around 9% of GDP – that is likely to push inflation higher, she said.

“I’m not talking about runaway inflation of the 70s,” she said. “But I just think the risks in my view are more skewed towards inflation averaging 3% over the next 10 years, rather than inflation averaging 1% over the next 10 years.”

Core personal consumption expenditure inflation, the Federal Reserve’s preferred measure, stood at an annualized 1.5% in January.

Ward said that a rise in inflation was likely to generate volatility in parts of the stock market as investors reacted to the new situation. She added that confusion around the Fed’s new tolerance of higher inflation and employment would also create uncertainty.

Economists expect the US economy to boom in 2021, following the worst contraction since World War II in 2020. Yet they are divided on what this means for price levels, which is a key question for markets, given the importance of inflation to assets’ values and returns.

Whether or not inflation rises persistently “is the big question that nobody knows the answer to,” said Nasdaq chief economist Phil Mackintosh.

Rising growth and inflation expectations have already pushed bond yields sharply higher, with investors demanding a bigger return to account for price rises.

The move up in yields shook many investors in February and March. The tech stocks that did so well during the pandemic fell sharply, as bonds and stocks that are set to do better from strong growth and inflation started to look more attractive.

Ward said she thought bond yields would rise further as inflation picked up, and would probably generate further volatility in some parts of the market on the way.

The JPMorgan strategist said the Fed’s new mandate to tolerate higher inflation and employment may also cause problems.

“Not only do they want to reach full employment, but they also want inclusive employment. So what exactly does that mean?” she said. “I think that has the potential to generate us some volatility.”

Yet, she said the global stock market as a whole was unlikely to be majorly troubled because stronger growth should support companies’ earnings.

Many analysts believe inflation will remain low, however, that is partly because unemployment is set to remain higher than it was before the crisis in the medium term.

The Fed itself has signaled it does not think inflation will be damaging, with chair Jerome Powell reiterating that message on Thursday.

Jan Hatzius, Goldman Sachs’ chief economist, predicted in a note on Monday that US inflation would remain “well below the Fed’s 2% target, consistent with an economy that remains well below full employment.”

He added: “All this has increased our confidence that Fed officials will be able to stay the course in exiting only very gradually from their highly accommodative stance.”

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Americans have saved $1.6 trillion since the pandemic started and it poses little inflation risk, the Fed says

Capital One ATM
A man uses the ATM at a Capital One bank in Midtown Manhattan on July 30, 2019 in New York City.

  • Americans’ savings rose by $1.6 trillion during the pandemic thanks to stimulus and weak spending.
  • Some experts fear households will quickly spend their savings and fuel runaway inflation.
  • Studies suggest most will hold onto the cash even after the US reopens, Fed researchers said.
  • See more stories on Insider’s business page.

Gradual reopening and widespread vaccination have economists wondering how Americans will spend in a post-pandemic economy. Researchers at the Federal Reserve Bank of New York see little cause for concern.

Americans enjoyed a savings surge during the pandemic as government stimulus hit households and lockdown measures cut down on spending. Estimates suggest people held on to roughly $1.6 trillion in savings since last March, when the health crisis first slammed the economy.

The sum highlights the scale of the government’s support throughout the coronavirus recession. Yet some experts fear that, if too much of these savings are spent too quickly, the recovery will be disrupted as rampant inflation takes hold.

Such a demand bounce is unlikely, professors and economists at the New York Fed said in a Monday blog post. For one, Americans who kept their jobs still haven’t spent nearly as much as they would in a pre-pandemic economy.

“Increased purchases of furniture, electronics, and other goods have compensated only in part for this reduced spending on services,” the economists said. “As a result, overall consumption has fallen for many households, even if their income is more or less intact.”

The roughly $5 trillion in stimulus passed by President Donald Trump and President Joe Biden over the last year also contributed to the savings boom. Relief doled out in direct payments and expanded unemployment benefits was used to pay down debts and cover living costs, but some was tucked away as savings.

It’s also possible that some households increased their saving habits as a precautionary measure due to uncertainty around how the economy would fare, the researchers said.

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Source: Federal Reserve Bank of New York.

The very nature of excess savings suggests they won’t be unwound too quickly. Stimulus recipients spent roughly one-third of the government support, according to Fed estimates. The rest was mostly saved, likely by households that already enjoy a financial buffer. It’s possible that circumstances change and force Americans to tap their savings sooner than expected, but the economy’s steady recovery should lead habitual savers to keep holding on to their funds, the team said.

Even when the economy fully reopens and Americans have more ways to deploy their cash, the researchers don’t expect a sudden rise in spending. Many are sure to dine out more often or take a vacation that wouldn’t have been taken otherwise, but there’s a limit to how much a household can boost its discretionary spending, the team said.

“It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited,” the economists said.

This conclusion – and likely outcome – is a key reason why, as Insider’s Hillary Hoffower reported, a full economic recovery depends on the wealthiest Americans spending much more than they did over the last 12 months of the pandemic.

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Nobel laureate Paul Krugman predicts a swift, sustained economic recovery once vaccines are rolled out

paul krugman

  • Paul Krugman expects the US economic recovery from the pandemic to be “much faster and continue much longer than many people expect,” he said in a recent New York Times column.
  • The Nobel Prize-winning economist predicts mass vaccination, pent-up demand, greater household savings, technological progress, and the Biden administration’s backing to fuel a jobs boom.
  • Americans grew their personal savings by 173% year-on-year between March and November last year, as disposable incomes ballooned by $1 trillion and household spending tumbled by $535 billion, a New York Times analysis shows.
  • “I’m in the camp that expects rapid growth once people feel safe going out and spending money,” Krugman said.
  • Visit Business Insider’s homepage for more stories.

Nobel laureate Paul Krugman predicts the US economy will enjoy a strong, sustained recovery once the pandemic threat recedes.

Krugman, who won the Nobel Prize for economics in 2008, warned in a recent New York Times column that the next few months “will be hell in terms of politics, epidemiology, and economics.” However, he expects the economic rebound to be “much faster and continue much longer than many people expect.”

The economics professor and writer anticipates that once vaccines are rolled out nationwide, a combination of pent-up demand, increased household savings, technological advances, and the Biden administration’s support will underpin a jobs boom.

Read more: Ready to invest in 2021? A new platform backed by investing heavyweights that oversee over $2 trillion cuts through the jargon, demystifies the investing process and aims for positive change – Here’s how it works

Krugman laid out a “clear case for optimism” in his column, arguing the US economy will bounce back much faster than it did from the financial crisis.

There was a “Wile E. Coyote moment” in 2007 when consumers and businesses woke up to sky-high house prices and vast sums of household debt that promptly tanked the economy, he said. However, the private sector doesn’t appear significantly overextended this time around, he added.

Indeed, a New York Times analysis found that Americans’ personal savings grew by $1.6 trillion or 173% year-on-year between March and November last year, as disposable incomes rose by $1 trillion and household spending fell by $535 billion.

Unemployment insurance benefits, stimulus checks boosted savings, and the Payment Protection Program shoring up incomes, while lockdowns and virus fears hammered spending on flights, cruises, and other services.

“I’m in the camp that expects rapid growth once people feel safe going out and spending money,” Krugman said. While the pandemic has devastated the livelihoods of millions, the average American has been “saving like crazy,” he added.

Read more: Deutsche Bank says you need to own these 10 telecom stocks as vaccine progress spurs a 2021 recovery for beaten-down sectors

Krugman doesn’t expect the economy to require as much support as it did under President Obama. Moreover, he predicts technological advances in sectors such as biotech and renewable energy, coupled with a president who is “actually interested in doing his job” and not anti-science or obsessed with fossil fuels, to drive growth.

The economist also took a parting shot at Republicans for undermining the legitimacy of the recent presidential election.

The party’s members “keep demonstrating that they’re worse than you could possibly have imagined, even when you tried to take into account the fact that they’re worse than you could possibly have imagined,” he said.

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I’ve followed the ‘30% rule’ since renting my first apartment, and 5 years later I’m seeing the impact

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I committed to the ‘30% rule’ in my early 20s and have lived by it ever since (author not pictured).

  • 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.
  • Sign up for Personal Finance Insider’s email newsletter here »

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

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