Whether you own a home or rent one, there's a good chance that housing is your single greatest monthly expense. But how much are you willing to give up to stay in your home? Would you be willing to find side work on the weekends or forgo luxuries like cable and entertainment? If so, you're not alone.
According to a report by the MacArthur Foundation, between 2011 and 2014, an estimated 52% of Americans had to make at least one major sacrifice in order to cover their rent or mortgage payments. And these sacrifices aren't trivial. We're talking about serious measures like taking on a second job, holding off on retirement savings, cutting back on healthcare, and racking up credit-card debt -- moves that can negatively impact quality of life and have serious long-term repercussions.
This begs the question: When it comes to our housing costs, how much is too much?
The 30% rule
In 2015, an estimated 11.8 million households spent more than half of their income on housing, which is way too much. Generally speaking, you shouldn't spend more than 30% of your income on housing, which includes your rent or mortgage payment, homeowners' or renters insurance, and property taxes, if applicable.
Now, if you live in a city or someplace with lower-than-average transportation costs -- meaning you don't need a car, and public transportation is cheap -- then you may be able to get away with exceeding that 30% threshold. Otherwise, spending well above 30% of your income on housing is a dangerous financial decision.
Furthermore, just because it's safe for most people to spend 30% or less of their income on housing doesn't mean it's safe for everyone. If your other living expenses -- for example, medical bills, food, and child care -- are higher than average, then it may be safer to limit your housing costs to 20% of your income or less.
Remember, when you spend too much money on housing, you risk taking on debt just to make those hefty payments. And anytime you resort to using a credit card to cover your living expenses, you basically kick-start a vicious cycle of racking up interest charges that make it even more difficult to pay off your balance.
Don't forget about retirement
Another big danger in spending too much on housing is letting your retirement savings fall by the wayside. Unless your job is one of the few these days that offers a pension, you'll need to save independently if you want a shot at a financially comfortable retirement. But if you allow your housing costs to monopolize too much of your money, you run the risk of falling far behind.
If you start saving $200 a month when you're 30 years old, you can accumulate close to $500,000 by age 67, assuming an average annual return of 8% on your investments. But if you wait until age 40 to start saving that $200 a month, you'll amass just over $200,000 by age 67 -- way less than half what you'd have if you'd started a decade earlier. Neglecting your retirement savings is one of the worst financial mistakes you could make, so if lowering your housing costs is the only way to free up money to save, then it's time to make some changes.
What's your home worth to you?
If you're spending so much money on your home that you're unable to afford things like vacations and entertainment, then you may want to take a step back and contemplate whether the happiness you get from living where you do is worth missing out on other things. Sure, it may be nice to have that extra bedroom, or that unbeatable 16th-floor view. But if staying in your home means depriving yourself of all other luxuries, you may come to find that the sacrifice just isn't worth it.
Housing is just one of your many major expenses, and if you overspend in that category, you risk coming up short in others. Rather than struggle to cover your housing costs, look to find a housing situation that better suits your budget. In the long run, you'll be happy you did.