If you are like many people, your housing expense is one of the largest expenses that you are required to pay each month. This may be your rent payment or your mortgage payment. Some financial experts recommend that you should live by the 30 percent rule for this expense, but financial expert Dave Ramsey states that it is best to follow 25 percent rule instead. You may be wondering what this rule actually means and what your likelihood is of actually following it.
The 30 percent rule states that you should keep your housing expense at 30 percent or less of your gross, pre-tax income. To calculate it, you simply take your gross monthly take-home pay and multiply that figure by .30. To live by this rule, your monthly housing expense should be equal to or less than the answer. Some financial experts, such as Dave Ramsey, state that this figure is too high, and they recommend that you keep your housing expense at 25 percent or less of your gross take-home income.
Who Can Follow This Rule?
According to a graph published on Mint.com that cites statistics from the Bureau of Labor, some individuals are more likely to follow this rule than others. Renters generally spend about 33.5 percent on housing, but those who own their home typically follow this rule. Those who are in the lowest 60 percent of wage earners, or who bring home less than $46,190 per year, are also less likely to be able to comply with this rule. Furthermore, those who did not graduate high school are also less likely to be able to meet the 30 percent rule.
Applying It To Your Life
While statistics may indicate who is more or less likely to follow the 30 percent rule, it is important to note that most people are able to live beneath their means and find more affordable housing than they have today. Those who truly live in the most affordable housing may not be able to, but almost everyone else can choose to move to a smaller or cheaper house or apartment.
The premise behind the 30 percent rule is that you will take a step toward avoiding living beyond your means when you keep your housing expense under this threshold. If you have run this calculation today and it is over 30 percent, consider what steps you can take to lower it and improve your financial situation.