What is the 30 Percent Rule and Should You Follow it?

While you want to set an appropriate budget when looking for a place to rent, you don’t need to feel pressured to follow fixed rules. If you’re thinking, “how much rent can I afford?”, then this guide to the 30 percent rule for housing rental will help you figure out how to calculate your rental budget.

What is the 30 percent rule?

If you’re in the market for a place to rent, you might have heard someone suggest going by the “30 percent rule” when searching for an apartment within your budget. This common suggestion simply means that you shouldn’t spend more than 30% of gross (pre-tax) income on your rent.

First established by the government as part of public housing regulations capping public housing rent at 25% in the 1960s and then 30% in the 1980s, this rule has maintained its popularity with renters. The rule’s persistence has a simple explanation: Often, rent is the single biggest expense of any individual or family. If you stick to spending 30% or less on rent, you’ll have money left over for bills, paying down debt, or saving.

30 Percent rule example

Let’s say you’re earning $30,000 annually in your first year out of college. If you plan to follow the 30 percent rule, you can figure out your housing allowance by first multiplying that yearly income by 30 percent. That math gets you $9,000.

Now, divide $9,000 by 12 (number of months in a year). That gives you $750 for monthly rent. According to the 30 percent rule for housing, you shouldn’t spend more than that figure on your rent. Before taxes, you’ll then have $1,750 to use for expenses such as food, utilities, your car, any credit card debt or student loan debt, medical bills, and any other expenses each month.

Does the 30 percent rule make sense today?

Though it provides a useful starting point if you need some rules for yourself in place when you start your apartment search, the 30 percent rule doesn’t work for everyone. For example, people didn’t contribute to 401(k) plans or have high student debt back when the government made this percentage part of public housing guidelines in the 1980s.

The rule also might not work for renters living in expensive markets, like New York or San Francisco. You know you’ll have to shell out some more money for a great place to live if you’re searching in one of the country’s more expensive locations. Coming up with different guidelines as you start the apartment hunt can help you simultaneously stay on budget while taking away the stress of sticking to the 30 percent rule.

When it’s worthwhile to break the rules

No matter where you live, you shouldn’t feel 100% obligated to abide by the 30 percent rule. Sometimes, you’ll even end up saving yourself some money in the long run when you break this particular rule.

For example, you may pay a bit more in rent to live close to your workplace. Doing so can save you a ton on commuting costs if you can walk or bike to work regularly.

You should also consider the perks and amenities of a given apartment if you’re considering splurging on rental costs. Maybe you’ll get a fitness center right in your building that lets you drop your gym membership or a garage that brings down your parking expenses.

Extra upfront costs may even out when you take total savings into account. In some cases, you may ultimately save more money overall than you would have if you’d have stuck to the strict 30 percent rule for rental. Looking at the big picture will let you see when it’s worthwhile to be a rule-breaker in this case.

Alternatives to the 30 percent rule

Of course, you shouldn’t throw budgetary considerations out entirely when you’re searching for your dream apartment! You’ll want to come up with a system that allows you to stay on track with all your necessary expenses, all while getting a place to live that you love.

1. Consider the 50/30/20 rule

The 50/30/20 rule is a popular budgeting guideline that helps individuals allocate their income into different categories to achieve financial balance and stability. While it is commonly used for budgeting in general, it can also be applied to rent payments as part of your overall financial plan. Here’s a breakdown of the 50/30/20 rule for rent payments:

1. 50% for needs:
   • Under this rule, 50% of your total income should be allocated to your “needs.” Needs include essential expenses that you must cover to maintain a basic standard of living. Rent or mortgage payments fall into this category because having a safe and suitable place to live is a fundamental necessity.
2. 30% for wants:
   • The next 30% of your income is allocated to your “wants.” Wants encompass discretionary spending on non-essential items and lifestyle choices. This category includes expenses like dining out, entertainment, vacations, hobbies, and other indulgences. While rent is a necessary expense, this category allows you to enjoy some of the finer things in life without overburdening your budget.
3. 20% for savings and debt repayment:
   • The remaining 20% of your income is dedicated to savings and debt repayment. This portion of your budget is crucial for building an emergency fund, saving for long-term goals (e.g., retirement or a down payment on a home), and paying off debt such as credit card balances or student loans. Allocating a significant portion of your income to this category helps you secure your financial future.

2. Build your own budget

Start by calculating your last three months of spending—discretionary costs included. Calculating your recent spending will help you identify where your money goes each month. You may find that you’re overspending in some discretionary areas (think Ubers or food delivery). Once you know where you can cut down on costs, do so accordingly. That in turn can free up some extra money to put towards rent.

1. Determine your total monthly income:
   • Calculate your total monthly income, including all sources of earnings such as your salary, freelance work, side gigs, and any other sources of income. Make sure you have an accurate understanding of your income before proceeding.
2. List all monthly expenses:
   • Create a comprehensive list of all your monthly expenses. This should include not only rent but also other essential costs such as utilities (electricity, water, gas), insurance (renter’s insurance), groceries, transportation, healthcare, and any other regular bills or payments.
3. Consider location and amenities:
   • Keep in mind the location of the rental property and the amenities it offers. Properties in different areas or with varying features may come with different rental costs. Be realistic about your needs and preferences to find a suitable place that fits your budget.
4. Account for additional housing costs:
   • In addition to the base rent, consider other housing-related expenses such as security deposits, maintenance fees, and parking costs. These can impact your overall housing budget.
5. Review and adjust:
   • Compare your calculated rent budget to the actual rental prices in your area. You may need to adjust your expectations or make compromises to find a rental property that aligns with your budget. It’s essential to be flexible and open to different options.
6. Create a written budget:
   • Create a written budget that outlines your monthly income and all your expenses, including rent. This budget should be a detailed breakdown of where your money goes each month. There are budgeting tools and apps available that can help you with this process.
7. Monitor and track your expenses:
   • Once you have your budget in place, it’s crucial to track your expenses regularly. Use a budgeting app or spreadsheet to record your spending, and compare it to your budget to ensure you are staying within your allocated limits.
8. Adjust as needed:
   • As your financial situation changes or as you encounter unexpected expenses, be prepared to adjust your budget accordingly. Flexibility is key to maintaining financial stability.

3. Focus on your debts

Here’s how you can incorporate debt considerations when determining your rent budget:

1. Calculate your debt obligations: List all your outstanding debts, including the type of debt, the monthly payment amount, and the interest rates. This will give you a clear picture of your debt-related financial obligations.
2. Evaluate your debt-to-income ratio: Calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. Lenders often use this ratio to assess your ability to take on additional debt, like a rent payment. A lower debt-to-income ratio is generally more favorable.
3. Assess your budgetary flexibility: Consider how much of your income is currently allocated to debt payments and how much is left for other expenses, including rent. Ensure that your budget allows you to comfortably cover both rent and debt without straining your finances.
4. Prioritize high-interest debt: If you have multiple debts, prioritize paying off high-interest debt (e.g., credit card debt) more aggressively. This can free up more money in the long run, allowing you to allocate a larger portion of your budget to rent once those debts are paid off.
5. Factor in future financial goals: Think about your long-term financial goals, such as building an emergency fund, saving for retirement, or saving for major life expenses (e.g., buying a home). Allocating a portion of your budget toward these goals is essential for financial stability.
6. Be realistic about your rent budget: While it’s essential to focus on debt, also be realistic about your rent budget. Don’t allocate such a significant portion of your income to rent that you’re left with little room for debt payments, savings, and other essential expenses.

4. Make sure you have a safety net

When determining how much rent you can afford, it’s essential to factor in the presence of an emergency fund. Financial experts often recommend saving three to six months’ worth of living expenses in your emergency fund. Having this safety net ensures that you can comfortably manage rent payments while also being prepared for life’s uncertainties, allowing you to find a balance between affordable rent and financial security.

1. Financial security and stability:
   • An emergency fund acts as a financial safety net. It provides renters with a sense of security and stability, knowing that they have funds set aside to handle unexpected expenses or emergencies, such as medical bills, car repairs, or job loss. This financial cushion reduces the risk of falling into debt or missing rent payments in times of crisis.
2. Rent payment reliability:
   • Having an emergency fund ensures that you can meet your monthly rent obligations even when unexpected financial challenges arise. This reliability is essential to maintain a good relationship with your landlord and avoid late fees or eviction notices.
3. Budget flexibility:
   • Renters who have an emergency fund are in a better position to allocate a reasonable portion of their income to rent because they have accounted for unforeseen expenses. This flexibility allows you to avoid the common mistake of spending all your income on rent, leaving little room for emergencies.
4. Reduced stress:
   • Financial emergencies can be highly stressful. Knowing that you have an emergency fund in place can significantly reduce this stress. When you’re less anxious about your financial situation, you can make better decisions regarding your housing choices, budget, and overall well-being.

30 Percent? It’s up to you!

In the end, any rule is always more of a guideline. Your personal objectives and financial situation should dictate your decisions. If the apartment you want comes with a monthly rent that’s a little more than 30% of your yearly income, maybe there are a few places you can cut back on other costs to free up money for rent.

On the other hand, if you have consistent expenses like student loan debt or car payments, or you’re setting some big goals in terms of savings, you might want to take a closer look at how much you can put towards your rent every month. You can also consider moving in with a significant other or even a roommate to cut back on individual rental costs.

When it comes to finding the right place, the 30 percent rule can offer a first step in figuring out a budget. Keep it in mind while you’re looking for your next apartment on Zumper and you’ll narrow down your search to just the apartments you can afford.