At some point, you asked, “how much should I spend on rent?”. The basic rule of thumb is 25% or less. The 30% rule is way too high, and it’s especially high as you move up the income ladder. You should always be looking to live like a student even after graduating from college.
When I first graduated college, my base salary was $52,500. I paid $640 per month for my apartment in the city of Birmingham, Alabama. It was only a 7 minute drive from my employer so it was completely worth it to me. Quick math shows that my rent was only 14.6% of my gross income. Which was great!
After six months, they moved me across the state to good ol’ Texas, which meant my rent increased to a whopping $750/month in a very run down part of the city. My gross income increased to $56,000 and they tacked on an additional $29,500 bonus potential to go along with it.
However, my bonus wouldn’t kick in until 1.25 years later. That means my rent was still 16.1% of my gross income, excluding bonus. That still sounds good to me! What I found out was that I was overpaying by $50/month, which got corrected after 2 years. I decreased my rent to $699/month while my income increased to $70,000.
That means my rent went down even further to 12% of my gross pay. Hallelujah! When you’re asking, “how much should I spend on rent?” You do NOT need to be as extreme as me. I’m an extremely frugal person, more frugal than the next fellow. However, the rule of thumb should still be less than 25% of gross income.
The 30% rule of thumb is way too high.
Why The 30% Rule to Spend on Rent is Wrong
If you’re asking how much of your income you should spend on rent, it’s time to SMACK that social share button and post to your favorite social media! Your friends could use this article and if anything, share the article for me!
Moving on, ever wonder why it’s a 30% rule? In negotiation, there is a negotiation tactic called anchoring. If the rule of thumb says it’s 30% and you spend 25% of your income on rent, then hurray! You did better than the rule of thumb, so everything is peachy, right?
Nope. Spending 30% of your income on rent is way too high. For an average college graduate salary of $70,000 per year, that is $21,000 in rent, alone. What?! $21,000 is more than my entire yearly spending of 2021 or very close to it. The deals are out there, you just have to find it.
So with that said let’s get into the concrete reasons why the 30% rule is wrong.
1) It’s an Outdated Rule
The rule actually has roots in 1969 public housing regulations. It is attributed to Senator Edwards Brooke, who was a vocal proponent on affordable housing. However, that rule was established in 1969. That’s more than half a century ago. How can a half a century rule still be applied today? We’re living in 2022, people!
There are many popular rules today that has roots from decades, or even centuries ago. It isn’t applicable to the modern person because individual economics changed drastically since then. Landlords love this rule because it’s the sweet spot between balancing risk and return.
Ever wonder why most rental applications suggest having an income 3x your monthly rent? Some are flat out making it a requirement. It’s because they know that’s the maximum risk that they’re willing to take before realizing they are over-risking their venture. It’s not that hard to connect the dots.
Don’t answer, “how much should I spend on rent?” with an outdated rule!
2) It Doesn’t Account for High Earning Income
When you earn $50,000, spending $1,250 per month on rent is not uncommon. Heck, that’s 30% of income, right? However, what happens if you earn $100,000? Do you increase your rent to $2,500 per month? That doesn’t make sense unless you acquired 2x more stuff than before and therefore need 2x the space.
No, what’s more likely is that your stuff hasn’t multiplied in proportion to your income. The rule especially does not apply to high earning individuals. I currently earn ~$130,000. Does that mean as a rule of thumb, I should spend ~$39,000 just in rent alone? That would be insane! I don’t even live in New York.
I’m currently in the process of moving. And while I actually increased my income from $130,000, I’m actually pricing in a rental decline next year. For a slightly bigger apartment, at that. Shocker, right? Yes, the rule is “30% or less“. However, 30% is too high of a starting number to begin with.
How much you should spend on rent as a percentage of income declines as you grow older.
What is the 50/30/20 Rule?
So then another answer to “how much should I spend on rent?” is to apply the “50/30/20” rule. The rule says that you should spend 50% of your income on needs, 30% on wants, and 20% on savings. Your rent should be included in the 50% and as long as you do that, everything is peachy. Right?!
No. Using the prior example of $70,000 as a starting salary for college graduates, that means you should spend $35k on needs, $21k on wants, and $14k on savings. That’s way too high of a spending. Even with taxes included in the $35k in the needs budget, spending $56k per year is too high of a spending.
When I was earning a $70k base salary, I spent between $20,000 – $22,000 per year on both wants and needs. Taxes probably added another $8 – $12,000. Which means I spent between $28,000 – $34,000 per year on wants and needs. I saw nothing wrong with living like a student for a couple of years out of college.
The 50/30/20 rule may be a general rule of thumb, and the biggest drawbacks with general rule of thumbs is that they are too simplistic. How much should I spend on rent? should not be answered with general rule of thumbs that are too high to start off with. Your savings rate should be much higher than 20%.
Sure, there are years when you will miss the 20% savings rate. However, more often than not, you should save more than 20% of your yearly income. There’s always a way to cut back on expenses. All you have to do is find ways to cut back and watch as your net worth soars to new highs.
How Much Should I Spend on Rent? The 25% or Less Rule
The 30% rule is too high to start off with. Therefore, a better rule is the 25% rule. You might think that a 5% difference is too inconsequential to think there’s a difference. 5% is a HUGE difference. For one thing, it actually anchors you into spending less.
Instead of thinking 25% is a good amount to spend on rent, you start to think 20% is a good amount to spend on rent. The new rule is at a maximum 25% and ideally, it should be in the 15 – 20% range. Currently, I spend 10.4% on rent and I believe that I’m going to get it down even lower this year.
I am following the how much should I spend on rent rule. Below are the maximum yearly rents you should be spending, based on your income. Keep in mind, the 25% is still a general rule of thumb. It doesn’t account for high rents and high income places like in New York.
Even investment bankers are poor in New York, until bonus time comes, due to the high cost of New York. One of my friends spends $30k/year in a tiny apartment in NY.
Keep your rent expenses lower than 25% per year. Rental expenses are maintenance expenses. Meaning, you have to spend money on it to maintain your life. You don’t get long lasting benefits in return, your real life benefits disappear after your rental renewal is up.
Either do a really good job researching rents around the city or learn how to negotiate rent and get the rental rate down. I’m currently living in the best part of town for the cheapest rate I’ve ever seen for the part of town. It’s more than possible.
Other Ways to Save Besides Rent
Besides rent, there are other living expenses you can save on such as utilities, insurance, internet, and cable costs. These are all savings you can realize on your living expenses. When it comes to turning on the heater, I found out I don’t need to turn on the heater as often in the winter.
I normally just wear socks, warm up pants, and a long sleeve shirt and that is more than enough to keep me warm. There’s no need for me to save on utilities because my landlord pays for them anyway, but I like to do so anyway. When it comes to renter’s insurance, make sure to comparison shop around.
Same thing with internet and cable. Make companies fight for your business and use them against each other. They WILL absolutely start a bidding war if you have a competitor who’s willing to offer you lower prices. Instead of just using the 25% rule to answer how much should I spend on rent? think ways to save on other costs.
It’s more than possible. Your living expenses are going to be the most significant line item in your budget. It’s your needs. It’s what’s going to keep you alive and in existence over the next year. Therefore, if you can figure out a way to save on those costs, then it’s a good idea to do so.
There’s a reason why I only spend $20 – $22k per year and still feel like I live a good life. It’s because I know how to find good deals. There’s always a good deal out there somewhere. All you have to do is find it. With the invention of the internet, you have no excuses!
There’s Always a Way to Negotiate Rent, Too
To implement the 25% rule into action to how much you should spend on rent, if you can’t do it by increasing your income, you can do it by lowering your rent. I found out my rent was lowered from $1,175 to $1,125 before I moved in. I would’ve been more than willing to pay $1,175 per month for this place.
It’s the most spacious apartment I’ve ever been in.
And I don’t pay for utilities, parking, garbage, AND cable? Where has this place been my entire life? When it came time for lease renewal in May 2020, I actually asked for a $125 one-time concession from the landlord. The landlord gave it to me because evictions were stalled and so many tenants stopped paying rent.
Unemployment skyrocketed to the double digits, after all! So I capitalized on the opportunity and asked for a concession even though I was happy just renewing at the current rate. Six months later, we all know how that concession went. Real estate has been on a tear since the coronavirus pandemic started.
Rental rates are going through the roof because people have nowhere else to go. And people are paying those inflated prices. When you can’t meet the 25% rule to how much you should spend on rent, negotiate. It may take some time but it can be done. You will be surprised at what the landlord will concede to.
If you don’t ask, you don’t get. There are many creative asks you can ask your landlord that I never thought of. All you have to do is come up with something. It’s more than possible to meet the 25% rule and put it into action in real life.
How Much Should I Spend on Rent? Less Than you Think
Don’t get anchored by a very outdated rental rule that is not going to work for the vast majority of people. There’s not much space you need in order to live a good life. My married friends are living in a 1,100+ sq. ft. house for 2 people. I’m living in a 740 sq. ft. apartment for 1.
The more people that’s in a house, the less space there needs to be. Don’t be the majority of Americans who actually spend 30% of their gross income on rent. They’re not accurately asking how much they should spend on rent before making the plunge. My coworker literally spent $1,550 per month on rent on the same salary as me.
More than twice what I paid at the same income. It’s not like she was in walking distance to the office, either. She also had to drive 7 minutes to get to work, like me. It’s no wonder that I had an easier time saving money compared to her. I know that she will always have to work and I know that work will be option for me at some point.
It’s not like she had any long lasting benefits from spending that much on rent. The money she spent on rent is gone. Poof. Just like that. Gone to thin air. There’s no additional or residual benefits to spending that much on rent. Therefore, it’s a smart idea to keep that expense as low as possible.
Rent is going to be one of the biggest line items in your budget. Ever. And on top of that, it’s a contractual expense. Therefore, if you can contractually lower than expense as much as possible, then you’re on the path to financial success. Don’t follow the herd, pave your own path.
My rent was never over 10% gross income and our house payments were right at 13% at first, which dropped to single digit % in a few years until we paid it off. Controlling housing costs was one way we won with money. We are still in that first house forty years later!
Whoa, 10% gross income is phenomenal. It took me such a long time before I got to a ~15% gross income. I hope to get to 10% some day, real soon.
I lived at home with parents until I was 26, saving every nickel, until I got on their last nerve and the drama was too much. Pro tip: Restraining orders don’t last forever.*
My first living situation involved three roommates that were bartenders, and that might have been the funnest three years of my life. 21% of my gross. Seriously, the opportunity to save, especially when you don’t make a lot (like you Steveark, and you David) should not be overestimated. It also gave me an opportunity to reflect, and I totally would have picked a tougher major that led to higher compensation. I mistakenly just thought that ‘life would work out’ because it had up until then, but I have great respect for people like you two, who put in the labor to get skills, and then apply those skills. Liking this post, because keeping overhead low is part of the equation, too.
LOL that comment was awesome!
I know firsthand just how the mentality of “life would work out” works because I’ve been putting that mindset towards my investments and 2022 was not that forgiving of a market, ha.
I have great respect for you as well. The way you communicate is something that I would definitely love to learn how to do and emulate. Your communication skills are top notch.
* yes, that was a joke!