Your Housing Costs Shouldn't Exceed 30% of Your Income -- Unless This One Thing Applies to You

Could you be the exception to the rule?

As a general rule, you're supposed to keep your housing costs to 30% of your income or less. If you rent a home, all you need to do is not take on a monthly rent payment that exceeds that 30% mark. If you own a home, you'll need to make sure your mortgage payments, property taxes, and insurance costs don't exceed 30%.

Going above that threshold could leave you with inadequate funds to cover the rest of your bills. And that could, in turn, result in debt -- the unhealthy kind. Plus, it could lead to a situation where you fall dangerously behind on your housing payments and risk losing your home.

But while sticking to that 30% threshold is a smart move in general, there is one exception. And if it applies to you, you might get a bit more leeway.

When transportation costs aren't a big factor

Many people spend thousands of dollars a year on transportation. That makes sense when you factor in car payments, auto insurance, maintenance, and gas (especially now, with prices being through the roof). 

But if you live in a walkable city and therefore don't own a car, you might spend practically nothing on transportation. And in that case, you may be okay to go above that 30% threshold for housing costs, because you're saving big time on transportation. 

Years back, I was living in New York City -- a place where these days, an apartment the size of a glorified shoebox might cost $3,000 a month. Thankfully, rents were cheaper when I was living there in my 20s, but at one point, I actually ended up spending around 50% of my income on rent.

Clearly, that violates the 30% rule in a very big way. But I also spent pretty much nothing on transportation, and I was able to keep my other costs down by making smart choices, like signing up for the cheapest cable plan and brown-bagging it instead of buying lunch every day.

Now I'm not advocating going out and spending 50% of your income on housing -- especially these days, given how inflation has made practically every essential expense cost more money. But are you free to spend, say, 35% to 40% of your income on housing if you spend little to nothing on transportation? I'd argue yes.

Plus, in some parts of the country where rents and homes are expensive, you may not find reasonable housing that lets you stick to that 30% rule. And if you're tethered to those areas due to a job or family obligations, then you may have to cut back on other expenses to swing the cost of putting a roof over your head. So while the 30% rule is worth following, again, there are exceptions.

Look at the big picture

Ultimately, the amount you choose to spend on housing should account for all of the bills you're responsible for. If you have expensive childcare costs, for example, you may decide you're safer limiting your housing costs to just 20% of your income. But if you don't have to pay for a car and your other bills are low, you may find that spending 40% of your income on a home works for you financially. 

Your goal should really be to make sure you're covering all of your bills without worry and leaving yourself some wiggle room in your budget for savings and unplanned expenses. If you're able to do that while spending more than 30% of your income on housing, you don't necessarily have to flip out if you're a bit above that threshold.