Other Factors Regarding the 30% Rule
Don’t forget that a fixed percentage rule doesn’t take into account income which can vary greatly. For example, if you freelance or earn a portion of your income from sales commissions, your monthly income may fluctuate from month to month. This means that the 30% rule is very difficult to calculate.
The 30% rule also starts losing its purpose as your income grows. On the one hand, someone with a low income who uses 30% of their income on a mortgage may not be able to afford anything else. On the other hand, someone who has a very high income may be able to spend 50% on housing costs, while still being able to afford the rest of his expenses easily.
A quick example of the 30% rule
Here’s a quick example of the 30% rule in action. Joe earns $2,100 a month after taxes and spends $700 on a very modest mortgage. This means she has spent 30% on the mortgage payment, so she is left with $1,400 in spending each month.
On the other hand, Jane earns $30,000 per month. She spends $15,000 on her huge mansion. That’s 50%, which blatantly breaks the 30% rule. However, she still has $15,000 a month to spend on everything else. It’s a far cry from Joe’s $1,400. You can probably see the difference between when the 30% rule makes sense – and when it doesn’t.
Who are you comfortable with?
Ultimately, it should be about what you are comfortable with in your finances. Personally, my housing cost is less than 20% of my monthly income. I can live comfortably even at the level of 20% of my housing cost. We were actually close to the 30% mark when I bought our first house. I was not comfortable with it at all. This made it very difficult to budget for everything else.
When deciding what portion of your income should be spent on housing expenses, it’s important to consider your situation. It’s also worth thinking about what would happen if your situation changed. How stable is your job? Are you the sole earner in the household? Or if have to rely on any other income? Do you have multiple sources of income? What would your financial situation be like if you (or your spouse) were laid off?
