Don’t Push the Limits on Housing Costs

Planning & Saving, Real Estate
on October 23, 2013

Do you want to live an amazing life? Do you want to travel, dine out frequently, and have a great clothing budget? These aren’t pipe dreams if you make one really hard choice: you must underhouse yourself. Your mortgage or rent payment shouldn’t account for more than 25% of your household take-home pay. But if you really want to enjoy an activity-filled, fruitful life, you’ll need to spend less than this. Here’s the problem—many people spend much more than 25% of take-home pay, based on recommendations from bankers and online mortgage calculators.

For a moment, let’s say that you have a $4,000 net monthly income. According to the 25% rule, you could/should spend no more than $1,000 on your mortgage or rent payment. The further over the $1,000 limit you go, the tighter your discretionary spending gets. If you spend $1,200 on housing, then you’ve allocated 30% of your income to housing. This squeezes your grocery budget, your clothing budget, and certainly your entertainment budget. And if you have any consumer debt, then things get quite stressful and not fun at all.

But what if you spend less than 25% on housing? If you were to limit your housing expenditure to 20%, then you’ve just freed up $2,400 per year to do whatever you want to do. You can take a vacation, you can dine-out more, and you could spend an additional $200 per month on clothing. And what if you were dealing with student loans or other forms of debt? That $200 per month could go towards rescuing the money being held captive by those debts. That $200 used to pay off debts could actually turn into even more discretionary monthly spending.

It seems as though people are naturally inclined to get as much house as they can, without an eye on how it affects their financial future. This is shortsighted and foolish, especially if they value spending freedom. A housing payment of any kind is a gigantic obligation that disallows financial choice on a relatively permanent basis. If you value flexibility or spontaneity, don’t crush your chances by committing so much money to housing.

If you must, decide to spend less than 25% on housing for a particular period of your life. Once you’ve done the things you want to do, purchased the things you want to purchase, and traveled where you’ve wanted to travel, then crank up your housing allowance. What you may find is that you really prefer being underhoused. It might be the best financial decision you’ll ever make.

Peter Dunn, aka Pete the Planner, is an award winning financial mind who has authored 5 books, hosts the popular Pete the Planner radio show, and travels around the country teaching financial education. His signature wit will have you laughing as you learn. You can learn more about him at

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