The cost of paying for a place to live is usually the largest single monthly expense for any household, whether you own or rent your home. Consequently, paying too much rent can really chew up the rest of your budget. The percentage of your income that should go toward rent is up for debate, with little agreement on what the magic number should be. Obviously, the larger the percentage, the more your rent will hamstring the rest of your finances. While you have some flexibility over most of your other budget items such as food, gas and utilities, your rental payment is set in stone once you sign the lease agreement.
Most financial experts suggest that no more than 30 percent of your income should be spent on rent. That percentage is not universally recognized, however. Some experts put the ratio at 35 percent, while others say it should be 25 percent to 30 percent. Many of these suggestions use the cost of house payments as a benchmark. For example, financial writer Dave Ramsey uses the cost of buying a house as a definition and recommends that no more than 25 percent of your family income should go toward housing.
According to data from the Bureau of Labor Statistics, the cost of housing for the average American household was $16,803 a year as of 2011, while the average household income before taxes was $63,685 a year. That works out to about 26 percent of income spent on housing, and breaks down to about $1,400 per month on housing.
Consequences of Paying Too Much
As the 20SomethingFinance website points out, the percentage of income spent on housing can vary greatly depending on how much income a household produces. Those with lower income levels might spend nearly 40% on housing. The main risk of spending too much on housing is that if your financial situation should suddenly go south, you might find yourself unable to meet your monthly rental payment. This might happen if you lose your job, face a medical emergency or encounter another type of financial setback.
Planning For When Things Happen
Keeping your rent down to 30 percent or less of your household income gives you some wiggle room if you face a financial crisis. You are not only better able to save money for emergencies, you also face less financial pressure if you find yourself in dire financial straits. For example, suppose you earn $50,000 a year, or $4,167 a month. If 35 percent of your income goes to rent, you'll be paying about $1,458 a month. But if only 25 percent goes to rent, the monthly payment is about $1,042 -- a savings of more than $400 a month.
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