Housing naturally takes a big chunk of your monthly budget. But just how much should you spend on these expenses? And more importantly, are you spending too much to live where you do?
While everyone’s financial situation is different, one rule of thumb can help you answer these questions: the 30% Rule. According to this rule, you shouldn’t spend more than 30% of your gross monthly income on housing costs.
The 30% Rule, Explained
Okay, so you know the basics—your housing costs shouldn’t exceed 30% of your income. But what you might not know is what falls under the housing cost bracket.
Your mortgage payments are the biggest bill within this category, but they aren’t the only one. Below, this list shows just how far housing costs stretch:
- Utility bills (water, heat, gas, sewage, garbage pickup, etc.)
- Homeowners insurance
- Property taxes
- Condo or homeowner’s association fees, if you have them
- Regular home maintenance
You may have other expenses not listed here — don’t worry. Add anything that you must pay to live in or maintain your house.
These combined expenses should represent 30% or less of your monthly gross income. By the way, that’s your income before taxes and other deductibles come off your paycheck.
For example, if you earn $55,000, your gross monthly paycheck would be roughly $4,583. According to the rule, your housing costs should not exceed approximately $1,372. If you have a partner, add their salary to yours to figure out your combined threshold.
Why is This Rule Important?
After years of tough inflation, high interest rates, and a hot housing market, spending too much on your housing costs is too easy. The 30% rule sets a sharp boundary on this spending, so you don’t use all your money on the roof over your head. It frees up your budget to multitask on other financial obligations.
By following the rule, you will still have 70% of your income to spend on other essential expenses, like groceries, clothing, transportation, savings, debt payments, and more.
Savings is an especially important category for homeowners, as it helps you handle maintenance and repairs that fall outside the usual upkeep. You should save for a rainy day in case your furnace stops working or your basement floods. This way, you can tap these savings before you apply for a line of credit.
Don’t panic if your savings fall short in an emergency. Applying for a line of credit is simple and quick with fast online applications. If approved, you can draw against your line of credit to cover an unexpected emergency expense that exceeds your savings, so you don’t have to delay urgent repairs.
What if Your Spending Breaks the Rule?
So, you crunch the numbers and realize you go over the benchmark. What’s next? It depends on how much over this rule you are. A few percentages won’t make or break your budget, but you should start keying into your finances when your housing costs start to represent 40%, 50%, or even 60% of your income.
At these figures, your house may not be affordable. You likely have trouble building an emergency fund, paying down personal loans, or making other financial moves when half of your income goes to paying your mortgage and utility bills.
Check out the list below to help you lower your spending to 30%:
- Downsize to a cheaper home.
- Move to a cheaper neighborhood.
- Get a high-paying job.
- Refinancing your mortgage to a lower interest rate.
- Negotiate your utility bills and reduce your energy consumption.
The Takeaway:
Think of your housing cost percentage as your personal key performance indicator. Once you go above 30% on the KPI, you risk more challenges balancing the budget.
