The Monthly Rent Benchmark That Might Make More Sense Than the 30 Percent Rule
Thirty percent: It’s the number you hear the moment you fill out your first rental application. Don’t spend more than 30 percent of your income on rent. No, you can’t rent this apartment if your income isn’t three times the monthly rate.
However, if you live in a high cost of living area, or anywhere for that matter, you’ve probably wondered whether this rule still makes sense. As housing costs continue to soar, is it even reasonable to expect to pay less than 30 percent to keep a roof over your head?
Some city dwellers who understand the reality of renting (and buying) these days are considering a new benchmark: Never live somewhere you can’t cover with one paycheck.
To see if this rule of thumb is financially feasible in the eyes of the experts, I asked personal finance and real estate professionals for their two cents. Here’s what they had to say.
“It depends on your phase of life.”
Catherine Alford, author of Mom’s Got Money, says it’s not a black and white answer — there are many areas of gray. “It depends on your phase of life and your current level of responsibility,” she explains.
For her target audience of millennial women, the 25 to 30 percent rule still holds strong, primarily because of the bevy of other financial responsibilities on their plate, including student loans, investing for retirement, paying for daycare, and saving for a rainy day. “For them, spending an entire paycheck on rent doesn’t leave much room for other needs and wants in life,” she says.
On the other hand, she notes that an urban young professional without a car or family has more flexibility in whether they allocate an entire paycheck towards rent.
In either situation, looking at the long term should come into play. “Personal finance is about looking at your life as a whole and deciding where to prioritize funds based on what you value most,” Alford says. “For some people, that will be where they live and, for others, they might live in a more affordable location to better reach other financial goals, like traveling, investing in retirement, and paying off high-interest loans.”
“Put 50 percent of earnings towards basic needs” with the 50/30/20 rule.
Johannes Larsson, the CEO of Financer.com, acknowledges the 30 percent rule is outdated, but says it was put into place with good intentions. It was designed to help balance living expenses with other financial goals like paying down debt and saving for retirement, as well as enjoying life.
Instead of designating an entire paycheck for housing costs, however, he advises others to put the 50/30/20 rule into place, with 50 percent going to necessities. Larsson says, “Put 50 percent of earnings to the basic needs, including food and rent, 30 perccent to your wants, and 20 percent to your savings and debt repayments.”
“I paid off my student loans early by keeping housing costs to less than 15 percent.”
Eryn Schultz, founder of Her Personal Finance, a financial education platform for high-earning women, was able to pay off $184,000 in student loans thanks to below-average housing costs.
“Many millennials are putting 10 percent or more each month to student loans. If you’re also spending more than 30 percent of your income on housing, it’s tough to make ends meet,” she says. “I paid off my student loans early by keeping housing costs to less than 15 percent of my pre-tax income. Sometimes that meant living in a group house to pay $750 per month, but it was worth it!”
“It boils down to your lifestyle and what you prioritize.”
While rules are great for setting a framework, Colleen McCreary, chief people officer at Credit Karma, adds, “How much you put aside monthly for rent boils down to your lifestyle and what you prioritize. Determine the lifestyle you want to lead, calculate your budget, and set your savings goals to get an accurate picture of how much rent you can afford each month.”
She says the key is to be honest about what you spend and where you spend it. You may be able to spend an entire paycheck on rent — but that will come with cutting other areas, like travel, dining, or entertainment.
In high cost of living areas, “Rent is incredibly expensive, but incomes also tend to be a little higher.”
Jonas Bordo, the CEO and co-founder of rental site Dwellsy, talks to renters across the country daily, so he hears plenty of on-the-ground input on housing cost rules.
He notes that it usually boils down to the state of the market. “In New York or San Francisco, it might be completely rational to spend 50 percent of income on rent,” he says. “In those markets, rent is incredibly expensive, but incomes also tend to be higher, so many renters can make this work.”
Still, many renters in other cities can find great places for less than 30 percent of their income — and should do so to keep other financial priorities in balance.
“Rule or not, it’s already happening.”
To end with a reality check, Adam Garcia, founder of The Stock Dork, says, “Rule or not, it’s already happening: reports are showing that many, in fact far too many Americans are spending over half of their income on rent. But, keep in mind, ‘is’ and ‘should’ are two different things.”