How Much Should You Pay for Rent?
November 10, 2017 by Marty Orefice | Real Estate
You may have heard the widespread rule of thumb that states you should spend no more than 30 percent of your income on housing. By following this rule, you ensure that your housing is affordable.
The 30 percent rule comes from the Brooke Amendment (1969), which limited the amount of money that people receiving aid from public housing authorities needed to pay for rent each month to 25 percent. Congress raised that amount to 30 percent in 1981. Those particular percentages were established because, at the time, most people did spend less than 30 percent of their income on housing.
That is still true today. According to a 2015 Harvard study, 54 percent of renters ages 25-34 pay less than 30 percent of their income as rent.
Typically, people with lower incomes are more likely to spend more than 30 percent of their income on housing, while people with higher incomes are more likely to spend less than 30 percent of their income on housing.
Should You Follow the 30 Percent Rule?
Many people criticize the 30 percent rule. They say that the 30 percent rule is arbitrary. Honestly, the logic behind it is. Just because the majority of people do something a certain way, does not mean that they are all doing it correctly. The makers of the Brooke Amendment could have just as easily chosen 35 percent or 40 percent because an even greater majority of people spend less than that on housing.
However, 30 percent is the standard that most housing authorities use to determine how much people with section 8 vouchers and other types of housing aid should contribute to rent each month. It’s also part of the formula that many mortgage lenders use to determine if a mortgage is affordable for you. Realtors use it to figure out whether to rent to prospective tenants. Regardless of how arbitrary the number is, it has seemed to work for a lot of people.
As random as the number may be, 30 percent is a good place to start when you’re trying to figure out how much you can afford to pay in rent each month.
How Much Should You Pay For Rent?
Rather than using the 30 percent rule as a rule you always follow, consider it as a point of reference. Analyze all your other expenses to determine if you need to spend less on housing or if you think you can afford to spend more. Adjust accordingly.
For example, if you are considering taking a job in New York City, compare the cost of housing that you're interested in to the amount of money you will be making from the job. If housing is too much more than 30 percent of your income, you may consider not taking the job or negotiating more money. Nevertheless, if you've always wanted to live in New York City, you might be willing to pay a little bit more than 30 percent rule.
The other 70 percent of your income should be able to cover car expenses, food, medical and other discretionary spending. Whatever is left over should ideally go into a savings account.
It’s important to note that you should aim to spend LESS than 30 percent on your rent. The less money you’re paying for a property that meets your needs, the better.
If you rent a property that’s less than 30 percent of your income, you should put the extra money in a savings account for a down payment on a future home. That way the full 30 percent of your income is actually going toward housing. Your goal should be to eventually buy your own home because once you’ve paid off a mortgage, you do not need to worry about housing expenses anymore. At that point, the 30 percent rule goes from arbitrary to irrelevant.