If you ask financial experts how much of your income should go toward paying your rent or mortgage, they will first tell you that there is no hard and fast rule. Then they will admit, although it isn't carved in stone, that the magic number is 30 percent. If you're paying more than this, the U.S. Department of Housing and Urban Development considers you to be house burdened. If you're paying more than 30 percent and don't make a few adjustments to your budget, you may struggle to meet your other financial obligations. You're not alone, however, as many people find it impossible to meet this mark.
In theory, spending 30 percent of your income on housing is right where you want to be. If you're spending 25 percent, you're doing very well and living conservatively. If you're spending 35 percent, you'll likely meet your financial obligations, but there won't be any wiggle room and you may struggle. When budgeting, calculate these figures based on your income before taxes and apply them to your direct housing costs only. Utilities and other expenses are not part of the 30 percent, which represents your monthly rental payment only. If you own your home, however, the 30 percent figure should include your total monthly mortgage payment, including mortgage insurance and real estate taxes.
The 50/30/20 Rule
To make mastering your expenses a bit easier, some financial gurus posit the 50/30/20 rule. According to this budgeting mantra, 50 percent of your income should go to costs that are absolutely necessary for your survival. These are generally fixed costs that stay the same over time, such as your rent, monthly utilities and car payment.
Thirty percent of your income in this model goes to your variable costs. You may spend a different amount every month on groceries, clothing, entertainment and other costs. These expenses are often made up of things you want but don't necessarily need. For instance, you may like buying potato chips at the grocery store, but they're not critical to your survival.
This plan devotes the last 20 percent of your income to savings. If you're in debt, however, this last 20 percent of your income should go toward paying it off. You can also split the difference, saving 10 percent of your income for a rainy day and using the remaining 10 percent for debt repayment.
Making It Work
In a perfect scenario, no more than 30 percent of your income would go toward your housing expenses. In reality, however, more than 12 million Americans spend more than 50 percent of their income on housing alone. As rental rates and property values soar in cities across the country, the 30 percent ideal becomes increasingly difficult in practice. In these cases, making the budget work requires some creativity.
If you have to pay more for rent than you would like, try renting close to work. This can save you on gas and transportation costs. If your apartment comes with a gym, remember that you can drop your existing gym membership. Recognize that you may need to make some sacrifices. It's important to distinguish between needs and wants. You can't live without food, but you can live without dining out or having food delivered. Cutting your cable bill and doing without your morning latte are little changes that can make a big impact. Things like hanging on to your used car a bit longer to avoid car payments can also help. Prioritize covering the essentials and saving money over unnecessary conveniences.
- U.S. Department of Housing and Urban Development: Affordable Housing
- The Motley Fool: How Much of Your Income Should Go Toward Living Expenses?
- Apartment Guide: What Percentage of Annual Income Should Go to Rent?
- Credit Counselling Society: How Much Money You Should Spend on Living Expenses - 2018 Budgeting Guidelines for Income
- What Percent of Income Should Go to a Mortgage?
- Home Budget Guidelines
- The Typical Monthly Budget & Expenses
- Recommended Budget for the Typical American Household
- Staying Within the Boundaries of Your Budget
- What Should an Average Household Budget Be?
- How to Budget 60K a Year
- Monthly Budget Guidelines