Knowledge Center

Are You Overspending on Rent? Here’s the Rule

By RadPad
Posted February 4, 2016

When you’re looking for a place to live, the most important and probably the most intimidating step is figuring out how much to spend on rent. Here’s a rule of thumb: Thou shalt not commit more than 30 percent of thine income to housing. In other words, do not spend more than 30% of your paycheck on rent.


This seems like a pretty reasonable number to live by, but anyone who has looked for an apartment to rent knows the 30%-of-income benchmark is not realistic and somewhat meaningless.

In large cities like San Francisco and New York City, it’s more like half your pay check goes to rent and that’s not even in an ideal living situation. Things like savings accounts and retirement planning (you know, the “not important right now stuff” …) might be taking a hit. So much so — that Michael Stone, a professor at the University of Massachusetts at Boston who has studied the issue since the 1970s, coined the term “shelter poverty” to describe the condition of people who spend so much on housing that they have to cut back on other necessities, such as food and health care. Ouch!

So if you think you’re overspending and the rent is too damn high, you’re not alone. One in five renting households making $45,000-$75,000 a year are spending more than 30% of their income on rent, according to a report by Harvard University’s Joint Center for Housing Studies.

So how much should you spend?

“Rules of thumb are just that— oversimplifications of a very complex process. It’s a highly personal problem that depends on each individual’s debt, self-discipline, salary, expectations of future income growth, etc.,” says Christopher J. Palmer, a professor of Real Estate at the University of California at Berkeley.

Palmer says people should feel comfortable paying more than 30% if they have sat down and honestly crunched some numbers. There’s really no substitute for a budget in this kind of process. Just like banks now have to “stress test” themselves by asking how they would hold up under bad-luck scenarios, people can do the same to ask what they can handle.

“What sacrifices are they prepared to make so they can live in an expensive area with close access to good jobs and urban amenities?” asks Palmer.

While we can’t give you a hard-and-fast rule for where to put your money, we did come up with a general benchmark to consider if you’re just starting to set up a budget: the 50/20/30 guideline.

No more than 50% goes toward Essential Expenses, which includes just four expenses: housing, transportation, utilities and groceries. For many renters, getting to and from work is the second-largest monthly expense, and directly tied to where they live. So if you think about it, an apartment in a far-out suburb may look cheap, but add in gas for an hour-long commute and the cost rises considerably.

At least 20% goes toward Financial Priorities. These include retirement contributions, savings contributions and debt payments. You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.

Lastly, no more than 30% goes toward your Lifestyle Choices, which are personal, voluntary and fun choices about spending discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants and bars, shopping and other miscellaneous expenses.

When it really comes down to it, the answer is different for everyone. It’s best to make a budget and anticipate what would be an appropriate amount to spend on rent based on your income and expenses. Your specific debt and your payment schedule will influence how much you’re actually able to afford.

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