What Percentage of Income Should Go to Rent?

Budgeting properly is key to ensuring your financial future. This is particularly true when thinking about housing. One of the largest expenses that many people need to account for is rent. However, the first thing you should consider when looking for a place is exactly what you can afford. Find out some general recommendations and a few myths to avoid.

What Percentage of Income Should Go to Rent?

When trying to figure out exactly what percentage of your income should to rent, you’re sure to find a common piece of personal finance advice: Never go over 30% of your income.

This common financial rule, aptly called the “30% rule,” is regularly used to create online rent calculators. Landlords and property companies will even use it to determine if a tenant can afford the housing they’re applying for.

However, the 30% rule is problematic. Here are just a few of the reasons why:

• It’s old fashioned. This rule was established in a different time. The 30% rule became widely used in 1969, when the government introduced regulations that capped public housing rent at 25% of a tenant’s income. This later inflated to 30% in the 1980s. Yet over 40 years later, we still abide by this rule. The problem is that the typical consumer had different financial obligations and stresses than we do today. For example, a typical consumer in 1969 did not have worries like rising healthcare costs and student debt.
• It doesn’t apply to high earners. If you have a high income, the 30% rule can actually lead to financially irresponsible decisions. For example, it may not make sense for someone making $250,000 a year to spend $7,500 a month on rent. High earners could easily keep rent costs down and use the remaining money to pay off debts faster, save for retirement, or invest in assets that will accrue in value.
• It ignores the financial context. Everyone’s financial situation is different. The 30% rule doesn’t take into account that some people may have an extraordinary student loan payment each month or a goal of paying off credit card debt. These factors will influence how much money you should be allocating to your rent.
• It isn’t personalized. Just like everyone’s financial situation is different, so are everyone’s needs. Someone who spends a lot of time at home may want to invest more into their rent than someone who has an active social life and spends a lot of time out and about. Someone with a family might want to look for an apartment with multiple rooms rather than a one bedroom. There is no “one size fits all” solution that accounts for these factors.