Knowing how much of your income should go towards rent can be key to a better financial future, and it may also help you to decide the answer to the frequently asked question, “Should I rent or buy a house?” Generally, if you plan to stay in the same place for eight years or more, buying is the cheaper option, saving an average of over $103 month.
So, how much of your income should go towards rent?
The general rule has long been to spend no more than 30% of your income before taxes on total housing costs, including rent and utilities, so you’ll want to spend well below that 30% depending on how much utilities typically run in the area. If you spend too much of your paycheck on rent, that could mean that you’ll come up short when trying to cover other expenses, not to mention saving for a down payment on a house, paying off debt, retirement goals and so on.
Where Does the 30% Figure Come From
The 30% figure is a percentage that the government has used for nearly 40 years to decide who qualifies for public housing programs – households that spend more on their total housing costs are considered to be cost-burdened.
Is 30% a Hard and Fast Rule?
But 30% isn’t necessarily right for everyone as it doesn’t account for the size of the household or cost of living. For example, a person who is single might be able to spend more than that and still have enough left over, but someone who supports a family may need to spend less. In some cases, a family may need to spend more to be within reasonable commuting distance to work, especially if living farther away is going to cost them more overall. However, it may be harder to find a place to rent as many landlords follow this guideline when deciding who to rent to.
If you’re a high-income earner who makes $250,000 a year or more, spending 30% on rent probably doesn’t make sense either as that’s nearly $4,700 a month. You’d be much better off sticking more money in savings or investments so that you can potentially retire early.
Some experts suggest throwing the 30% out with the goal to spend 50% of take-home pay on housing, utilities, groceries, transportation, and other essentials. Then budget 30% of after-tax income for non-essentials like entertainment, with the other 20% going toward paying off debt, saving for retirement and other financial goals.