Here’s a piece of advice many of you have heard before: When looking for a place to live, you shouldn’t spend more than 30% of your income on rent.
PBS News examined whether as housing costs continue to drive inflation today, is the 30% rule still realistic? The rule has caveats, experts told PBS News.
For “most everyday people,” the guideline remains useful, Redfin Chief Economist Daryl Fairweather said.
PBS offered a little history and perspective about the 30% rule’s history. How is it relevant in today’s housing market and what strategies might make more sense for renters now?
Here’s how that rule came to be.
‘A Week’s Wages for a Month’s Rent’
PBS said that in the late 19th or early 20th centuries, a rule of thumb that called for “a week’s wages for a month’s rent” came from studies about typical budgets for working class families, said Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies.
Reformers used the guideline through the Great Depression to determine the number of families who could not afford rent without spending more than 20% to 25% of their income.
That 25% standard was codified into some federal housing assistance programs in the 1960s, Herbert said, and remained there until the early 1980s. Then, Congress began looking for ways to cut back on housing program funding, he said.
The federal government saved money by raising the minimum people needed to contribute to 30%.
Herbert said that today, 30% is still what people who receive housing vouchers pay from their own income, and is the rent apportioning system for public housing as well as legacy, “project-based programs.”
Herbert said that the Joint Center for Housing Studies found that for people with modest incomes – roughly 50% of an area’s median income – the rule “wasn’t bad.”
On either side of the income curve, however, for very poor or very wealthy people, the rule becomes much less useful.
“If I’m Jeff Bezos, I could probably spend 99.9% of my income on housing and still have enough left over for everything else,” Herbert said. “If I’m very poor and I’m making [a] very little amount of money, then spending 30% of my income on housing might mean I don’t have enough left over for food, or everything else.”
PBS cited a 2018 report that analyzed the mean monthly household incomes, costs, and rents for three types of households in Cleveland, Phoenix and Los Angeles.
Two of Nine Scenarios Showed Housing Costs Covered
It said that in only two of the nine scenarios did families’ incomes cover their housing costs after all other bills. Both of those scenarios were two-adult households with no kids earning between 50% and 80% of the average income.
Eery other scenario — including single people earning between 30% and 50% of average area income and two adults with two children earning between 50% and 100% of average area income — the households’ projected costs outweighed their ability to pay. It some cases it was by hundreds of dollars per month, the report noted.
People living in cities where the average cost of rent is high — places such as New York, San Francisco, or Washington, D.C. — also might find it difficult to spend less than a third of their income on housing, said Kimberly Palmer, Personal Finance Expert at NerdWallet.
Who else might find it hard to follow the 3% rule? Young people, new college graduates, and people just entering the workforce, Fairweather said.
“Getting your career on the right track as a young person is really important, because it will set you up for your lifetime earnings, which will impact your ability to pay rent for the rest of your life,” Fairweather said.
PBS said all three experts agreed that the best way to figure out how much you can spend on rent is to create a budget.
“The thing that I would recommend to anyone is to go through their actual budget and figure out how much they’re currently spending on their necessities: groceries, transportation costs, health care costs, making sure they have enough money for emergency savings and retirement savings,” Fairweather said. “Then whatever money is left over is essentially how much you can spend on housing.”
Palmer said another guideline is the 50-30-20 method.
Needs and Wants and Savings, How Much to Spend
Try to spend 50% of your income on needs and 30% on wants, while putting 20% toward savings and debt payments. She said that rent would fit in the “needs” bucket along with food and transportation.
How can you save money if your rent is approaching or topping 30% of your income?
Fairweather recommends finding roommates, staying with parents or other family, or living near public transportation to go without a car, if possible.
Palmer also said that younger people are less likely to have large financial responsibilities — like an expensive car, or a child — and can therefore be a little more flexible with rent.
“You don’t want to overcommit your budget to rent, if you can help it. But if you’re a young person living in a high-cost city, it’s really hard to keep it below 30%,” Palmer said. “It’s certainly not something you should feel guilty about.”
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