How Much of Your Income Should You Spend on Housing?

Looking to cut costs? Why not start at the top?

In the typical American household, nothing takes a bigger bite out of the budget than housing costs. While that’s a burden, it also means that housing expenses are where cost-cutting has the biggest potential to help make ends meet.

Experts say you should spend no more than 25% to 30% of your income on housing—rent or mortgage payments plus utilities—for financial stability. 

If you do that, you’ll have a head start on an affordable lifestyle. 

What Does the 25-30% Rule Mean?

The 25-30% rule means your regular housing expenses shouldn't exceed that percentage of your income. This rule of thumb is based on your gross income—your pay before taxes and other deductions are taken out. 

The US government defines “affordable housing” as housing that costs no more than 30% of your income. This includes rent or mortgage payments, homeowner association fees, and basic utility costs, such as electricity, gas, water, and internet. 

There’s no magic to the 30% number. It’s just a broad rule of thumb, but it makes sense. American households pay an average of about 14% in income taxes. Add in 30% for housing, and that means 44% of your budget taken up by bills you have no choice but to pay.

If you can keep housing costs to 30% or less, you still have over half your budget left over to pay for other things. 

Why Is It Important to Follow the 25-30% Housing Expense Rule?

The 25-30% housing rule is important because it offers financial flexibility. 

Many expenses are unpredictable. You need some wriggle room in your budget to pay for those unexpected expenses. It might be back-to-school clothes one month, a car repair the next month, and a medical bill the month after that.

To leave yourself flexibility, you need to limit the amount of your budget that’s eaten up by fixed expenses. These are costs like rent, mortgages, and taxes that you’re locked into paying.

Those fixed expenses are far from the only essential costs most households have. It’s just that they are typically more predictable than many other expenses.

The following chart shows how much of the average household’s budget these essentials eat up annually:

These essential expenses total just over 80% of the typical household’s income. That doesn’t leave a lot of room for things like entertainment and savings, let alone handling a loss of income or other financial emergency. If you let housing expenses creep up past 30%, it quickly eats into any budget space you have for those other spending categories. 

Does Spending 25-30% of Your Income on Housing Work for Everyone?

No, not everyone can limit housing costs to 25-30%. The practicality of this rule of thumb depends on your lifestyle and financial circumstances.

For example, it’s much tougher for lower-income households to limit housing expenses to 30% of their income. Households making between $40,000 and $49,999 spend an average of 42% on housing. In contrast, households earning over $200,000 spend an average of just 15% on housing.

It also depends on where you live. Some housing markets are much more expensive than others. To some extent, incomes also tend to be higher in those markets, but not for everybody. Some people in costly areas like New York City or San Francisco may have to pay a higher percentage for housing. 

Whatever your lifestyle and financial circumstances, the 25-30% rule is a good guideline. If your situation is such that you have to pay more than 30% for housing, you'll have less money for other things. 

How to Calculate Your Housing Budget Using the 25–30% Rule

Start with the total amount of money you make per year, before taxes and other deductions.

To get your annual total (if you work full-time), take your hourly rate and multiply it by 40. Multiply the result by 52. 

If you earn $25 per hour, your annual income is $52,000.

25 x 40 = 1,000

1,000 x 52 = 52,000

Now multiply that amount by 0.3. The result is a dollar figure that represents 30% of your gross income. 

52,000 X 0.3 = 15,600

In this example, you should try to keep your housing costs under $15,600 per year. 

That works out to $1,300 per month.

If you want to shoot for a tighter housing budget, multiply your income by 0.25 instead. 

Ideally, the resulting amount should cover your rent or mortgage payment, plus your utilities, and if possible, renter’s insurance. Your mortgage payment should already include property taxes, homeowners insurance, and homeowners association dues. If it doesn’t, add them. Research all of these expenses for any property you’re considering buying or renting, and compare them to your income.

What if You Spend More Than 30% of Your Income on Housing?

By choice or necessity, you might spend more than 30% of your income on housing. The more you spend on housing, the less you’ll have to spend on other aspects of your life. 

Everybody has unexpected expenses sometimes. Being locked into paying more than 30% of your income for housing gives you less flexibility to cope with them.  

Spending more than 30% of income on housing is less of a problem in some situations than others. For example, if you’re just starting your career, you might expect your income to rise over time. In that case, the percentage of income you’re spending on housing is likely to come down—as long as your housing costs rise more slowly than your income.

It also matters whether you buy or rent your living space. If you buy a home with a fixed-rate mortgage, you can expect your housing expenses to be fairly stable (the mortgage payment won’t change,  but your utility costs could). In the long run, housing costs should fall sharply when you pay off your mortgage.

If you rent, your rent is likely to go up over time. If you don’t expect your income to rise at the same rate, it’ll be important to keep your housing expenses down. Still, whether you rent or own, 30% is a good maximum to shoot for to make sure your payments remain affordable. 

The lower you keep your housing expenses, the more money you have to pursue other financial goals such as:

• Buying a home, if you don’t already own one

• Paying for children’s education

• Big-ticket purchases such as a new car

• Travel

• Wedding

• Saving for retirement

One benefit of the 25-30% rule is that it reminds people to leave some room in the budget for future goals. 

Is the 25–30% Housing Rule Still a Good Guideline?

Changing economic conditions can affect how easy it is to live by the 25-30% rule. For example, rising home prices can make it more difficult to limit housing costs to 30% of income. 

Fortunately, when home prices rise, wages often adjust to some extent. For example, during the five years preceding the end of 2023, the average American home price rose by around 52%. Over the same five years, average income rose by about 30%. That means that a 30% housing cost five years earlier became a 35% housing cost. Housing is, on average, a little harder to afford, but not impossible.

In any case, the reality is that housing expenses have to fit into a limited budget. The more of that budget you use on housing, the less you have for other things. So doing what you can to keep housing costs low benefits other aspects of your lifestyle. 

One alternative to the 25-30% rule is the 50/30/20 rule. This is a guideline that says you should devote 50% of your budget to needs, 30% to wants, and 20% to savings. 

None of these guidelines is an absolute.

In any budget, if one expense rises, other expenses have to fall, or else you go into debt, and debt can be tough to handle. Since housing is likely to be your biggest budget expense, you’ll find that keeping those costs under control has the potential for the most impact on your overall budget.