An Age-Old Housing Spending Rule Needs an Urgent Update

It used to be that economists and financial advisors recommended spending no more than 30% of your gross income on housing costs. But this rule may no longer apply in light of the rising cost of living.

Given that interest rates and utility bills keep on climbing, you might need to take a more personalized approach to your budget.

What is the 30% Percent Rule?

On paper, the 30% rule is simple. You should spend no more than 30% of your gross income (your total salary before deductions) on all your housing costs.

Ideally, you should spend even less. Thirty is simply a cap to ensure you don’t overspend on essentials, so you can afford everything else in your life.

A roof over your head isn’t the only cost that falls under the rule. It includes everything that goes into maintaining your home.

  • Condo fees
  • HOA fees
  • Homeowners insurance
  • Property taxes
  • Utility bills

Does Your Household Maintenance Count?

According to some financial advisors, housing costs even include regular maintenance and repairs if you own your home. This upkeep can be challenging to anticipate because most repairs happen unexpectedly. Unlike utilities or rent, they fluctuate greatly from one month to the next. You may not even make any repairs for a year or more.

One way to prepare for an inevitable yet unpredictable repair is by saving 1% of your house’s value when you purchased it. Saving this much equips you with liquid cash you can rely on in a pinch to hire professionals and repair unexpected issues.

Many homeowners strengthen their emergency savings with a line of credit, drawing against it when their funds fall short of urgent, unexpected work. To learn more about how a line of credit might fit into your maintenance, check out a site like Fora. You can scroll through the basics of this financial product as an emergency safety net to determine if Fora Credit is right for you.

Why the 30% Rule is Outdated

The 30% rule has been a major tenet of responsible household budgeting for decades. But a lot can happen in a decade.

Even the past few years have seen a rapid change in costs, including housing. Inflation raises prices of consumer goods, utilities, and repair work. These price hikes trickle down to other fees in your budget, like rent and HOA fees. Meanwhile, the central bank attempts to cool inflation by introducing higher interest rates on mortgages, personal loans, and lines of credit.

Use the 30% Rule as a Guide, But Don’t Be Afraid to Break it

Rules can be helpful because they give you an idea of the right way to spend your money. But they can be harmful if you think they don’t have any give.

Rather than using the 30% rule as a black-and-white target, use it as a starting point. Knowing you should limit housing costs can put your own spending into perspective. Do you spend a realistic amount on your home for today’s standards, or do you spend too much?

Answering these questions will involve sitting down with your budget and assessing your needs, your spending, and the economy at large. It’s not an emergency if you go over 30%, but it does mean you might have less money to spend on discretionary spending. Limit these frills before you broach the idea of moving somewhere cheaper.

Lastly, if you’re still having trouble balancing your budget, reach out to a free credit counselling organization for help.