The “30% Rule” for Paying Rent Isn’t for Everyone — Try This One Instead

If you’ve ever tried to figure out what you can afford in rent based on your monthly income, you’ve probably heard about the “30% rule.” This is seemingly age-old wisdom that claims you should plan to allocate about 30% of your income toward paying your rent. This is the the federal government uses to define affordable housing. However, in today’s economy, that rule may not be relevant to you or even possible to abide by.

That’s because it’s estimated that about half of U.S. renters in large metro areas are currently rent-burdened, according to Zillow, which means that they’re spending more than that suggested 30% of their income on rent and utilities alone. Right now, the median household rent in the United States is $2,145 — to put that in perspective, in 2014, that number was below $1,000.

And it’s not just rent that’s getting more expensive. Other costs of living and expenses are ballooning and affecting more and more of the population.

“Housing has changed a lot,” Carter Watson, a senior analyst with LPL Financial in San Diego, tells Apartment Therapy. “But so have other kinds of debt. Student debt, for instance, is much more of an issue than it was when that rule first came about.” (To put that in perspective, among all borrowers, the average student debt balance is almost $39,000 — and some 43.2 million Americans have federal student loans. Those payments can cost hundreds of dollars a month and eat into incomes, making it hard to pay for rent.)

Watson suggests that instead of considering your rent in isolation, to look more holistically at your finances to better understand what you can allocate toward your rent payment. He suggests that no more than 50% of your pretax income is spent on fixed expenses, which are costs that remain consistent from month to month. A fixed expense might be your WiFi bill, your car payment, your student debt payment, and yes, your rent or mortgage.

So, if you make $100,000 per year and $30,000 is going toward other types of fixed expenses, with Watson’s suggestion, you shouldn’t spend more than $20,000 per year on rent — and you should try to work within that budget.

“Back 50 years ago, rent may have been the most expensive fixed cost that a person would have,” Watson continues. “But today, you probably can’t adjust your student debt. Rent, on the other hand, you might be able to.” 

Even if you have very few fixed expenses, Watson still suggests keeping rent as low as possible. “You may not have any debt today, but you might in a few years,” he says. “So many people spend their entire income on housing, and then they have nothing left to save or invest. If anything were to happen to them, they would be screwed.” 

In addition to the nation’s $1.7 trillion of student debt and the average car payment at $735 per month, inflation has also changed the way we spend money. 

“Expenses are a product of inflation, and inflation is a product of the economy and a market that runs hot and runs out of control,” Watson says. “The last 10-plus years, we’ve been in a bull market. The market has been hot, people spend, and vendors have the ability to raise prices because people have been willing to pay. The offset is what we’re seeing now, with the Fed jacking up interest rates so people won’t spend as much.”

If you’re thinking about buying a home instead of renting, consider the fact that renting is currently the most affordable option in the 50 largest metro areas, according to a recent study conducted by Bankrate. It’s also worth mentioning that hidden costs of homeownership exceed $14,000 per year for the average U.S. homeowner. These shouldn’t necessarily be deterrents to owning, but rather costs to consider up front so you can accurately budget for the home of your dreams.