Key Takeaways:
- The 30% rule for rent, which suggests that renters should not spend more than 30% of their income on rent, may not be realistic for many people, especially those living in high-cost cities or with modest incomes.
- The rule has a complex history, dating back to the late 19th or early 20th century, and was originally intended to ensure that working-class families could afford rent without sacrificing other necessities.
- Experts recommend creating a budget and considering individual circumstances, such as income, expenses, and savings goals, to determine a more realistic and sustainable rent amount.
- Alternative guidelines, such as the 50-30-20 method, can also be helpful in allocating income towards needs, wants, and savings.
- Young people, new college graduates, and those living in high-cost cities may need to make trade-offs and prioritize their career goals over strict adherence to the 30% rule.
Introduction to the 30% Rule
The 30% rule for rent has been a widely accepted guideline for generations, suggesting that renters should not spend more than 30% of their income on rent. However, with housing costs driving inflation and many people struggling to afford rent, it’s worth examining whether this rule is still realistic. According to the Joint Center for Housing Studies at Harvard, nearly two-thirds of working-age renters were cost-burdened in 2023, meaning they spent more than 30% of their income on rent. Experts, including Daryl Fairweather, chief economist at Redfin, and Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies, agree that the rule remains useful for most everyday people, but with some caveats.
The Origins of the 30% Rule
The 30% rule has a complex history, dating back to the late 19th or early 20th century. The original guideline, which suggested that working-class families should spend no more than 20-25% of their income on rent, was based on studies of typical budgets for working-class families. This standard was codified into federal housing assistance programs in the 1960s and remained in place until the early 1980s, when Congress raised the minimum contribution to 30% to cut back on housing program funding. Today, 30% is still the rent apportioning system for public housing and legacy programs, and is also the amount that people who receive housing vouchers pay from their own income.
The Relevance of the 30% Rule in Today’s Housing Market
While the 30% rule may have been useful in the past, it’s not clear whether it’s still realistic for many people, especially those living in high-cost cities or with modest incomes. Herbert notes that for people with modest incomes, around 50% of an area’s median income, the rule "wasn’t bad." However, for very poor or very wealthy people, the rule becomes much less useful. For example, someone like Jeff Bezos, who has a extremely high income, could likely spend 99.9% of their income on housing and still have enough left over for everything else. On the other hand, someone who is very poor and making a very little amount of money may find it difficult to afford rent, food, and other necessities if they spend 30% of their income on housing.
Challenges in Following the 30% Rule
Many people, including young people, new college graduates, and those living in high-cost cities, may find it tough to follow the 30% rule. Fairweather notes that job opportunities are often concentrated in high-cost-of-living cities, meaning that young people may need to make trade-offs between their career goals and their ability to afford rent. Palmer adds that people who live in cities with high average rent costs, such as New York, San Francisco, or Washington, D.C., may also struggle to spend less than a third of their income on housing. In fact, a 2018 report found that in only two of nine scenarios did families’ incomes cover their housing costs after all other bills, highlighting the challenges of following the 30% rule.
Alternative Approaches to Determining Rent
Rather than relying solely on the 30% rule, experts recommend creating a budget and considering individual circumstances, such as income, expenses, and savings goals, to determine a more realistic and sustainable rent amount. Fairweather suggests that people should go through their actual budget and figure out how much they’re currently spending on necessities, and then use the remaining amount to determine how much they can afford to spend on housing. Palmer recommends using the 50-30-20 method, which allocates 50% of income towards needs, 30% towards wants, and 20% towards savings and debt payments. Rent would fit into the "needs" bucket, along with food and transportation.
Conclusion
In conclusion, while the 30% rule for rent may have been a useful guideline in the past, it’s not clear whether it’s still realistic for many people, especially those living in high-cost cities or with modest incomes. By creating a budget and considering individual circumstances, people can determine a more realistic and sustainable rent amount that works for them. Alternative guidelines, such as the 50-30-20 method, can also be helpful in allocating income towards needs, wants, and savings. Ultimately, it’s up to each individual to determine what they can afford to spend on rent, and to make trade-offs and priorities that work for their unique circumstances.
