How Much Should You Spend on Housing?

A common question that I get from my clients is: what is a reasonable amount to spend on housing?  The answer to this question varies depending on to whom you talk.  In today’s post I will provide a few general guidelines and then share my own thoughts on this subject.

What the "Experts" Say

Dave Ramsey, in his Financial Peace University curriculum, recommends spending between 25-35% of take home pay on housing.  He includes mortgage or rent, real estate taxes, repairs, maintenance, and association dues in this number.  He does not include utilities or homeowners or renters insurance.

A common rule of thumb used by mortgage lenders is that monthly mortgage payments should not exceed 28% of gross monthly income and that all monthly debt payments should not exceed 36% of monthly gross income. 

My Thoughts

I think that Dave Ramsey’s and the mortgage lender’s guidelines are helpful as a starting point but it is important to remember that each person or family is in a unique situation.  For example, a student who has little to no earned income will likely spend much more on housing than the guidelines above.  On the other end of the spectrum, someone who has paid off their mortgage is likely to spend a very small percentage of their income on housing expenses.

I would also say that the guidelines above serve as good limits on the upper end but spending less than these guidelines can provide greater flexibility and less stress in budgeting.  For example, if a mortgage lender approves you for a mortgage of $200,000, it may be in your best interest to purchase a home for $180,000 or even less.  If renting, maybe this means renting a place with a couple of roommates in order to lower costs.  In either case, staying below the general guidelines can free up additional funds on a monthly basis to pay down debts, save, give, or spend on other items. 

Closing Questions

What about you?  What percentage of your income do you spend on housing?  How did you decide on that percentage?  Would you adjust the number if you could?

Photo courtesy of Michael Gil