How much of my INCOME should I spend for RENT or MORTGAGE payments?
This is an excelent BUDGET and PLANNING question everyone should think about, plan for and implement. Plans always out perform whims!
There are a two reasonable RATIO approaches to consider.
The first ratio or rule of thumb, looking at GROSS INCOME, states that "You should aim for 28-30% of your gross income (before taxes) for housing (rent/mortgage + utilities)"
The second RATIO or rule of thumb is the 50/30/20 rule (50% needs, 30% wants, 20% savings) is a more holistic guide, looking at your NET INCOME, putting rent under 50% of your net income (after taxes) as part of "needs".
Location, other debts, and financial goals heavily influence what's right for you
Common Guidelines
- 30% Rule: Spend no more than 30% of your gross monthly income on rent or mortgage (often including utilities).
- 50/30/20 Rule (Budgeting): Housing falls under "needs," which should be <= 50% of your net (after-tax) income, alongside groceries, insurance, etc..
How to Decide for Yourself
- Calculate Your Needs: Determine your take-home pay (net income) and see if rent/mortgage + utilities fits within 50%.
- Consider Location: High-cost cities may force you to exceed 30%, but this means cutting wants or savings.
- Factor in Other Debts: High student or car loans might mean you need to aim lower on housing to stay under the 36% total debt cap, says.
- Prioritize: If a shorter commute or safer area saves you money/stress, it might be worth paying slightly more for housing, suggests.
Example (Gross Income $60,000/year or $5,000/month)
- 30% Rule: $1,500/month for housing.
- 50/30/20 Rule (Net Income ~$4,000): Housing/needs under $2,000 (rent, groceries, insurance, etc.).
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