Can I Spend 28% of My Income on Housing?

June 23, 2023

In this highlight, we discuss if it is a good idea to spend 28% of your gross income on housing expenses.

If you want to learn more about our housing guidelines, check out our Home Buying Checklist here.


Can I combine housing and transit spending limits? If I spend 28% on housing but live without a car and spend less than one percent of my income on transit costs, otherwise I have to spend more for a car. Plus, cheaper suburban housing. So he says, “I see the Money Guy rule is 25% on housing, 20/3/8 rule on car buying.” Check out our Car Buying Checklist here.

How much wiggle room, Timothy? I want to give him some credit here. It’s creative. No good, no, because seriously, we… here’s a problem. That, and you see other content creators struggle with this too, is that we have these rules, we give these guidelines or benchmarks for people to follow. We go through these housing crises and other things, and it’s just… It’s like, how in the world are we supposed to do this? We live on the east coast where housing’s so expensive. Timothy might just build a bridge, and we’ll call Timothy the bridge builder, because he is exactly right. Somebody who lives, let’s talk about Boston or New York, where they have public transportation, a good infrastructure. DC, you can do all kinds of places if you don’t have a car and you’re taking your transportation costs into account. I think I would be willing to give some grace into the fact that, ‘Oh, look at you, you keep saying what you’re saying,’ but then I’ll let you throw, though I like this, but no, but it is interesting, because some of those communities that have those infrastructure things have a higher cost of living. But I could see how those things do integrate.

Just like good financial planning is very personalized, very specialized to your situation. I think it is interesting because I love our system, and I’m not taking away from our system, but I like that Timothy is trying to see how does this pertain to his specific situation. And if he’s got public transportation and he’s not spending hardly any money, maybe one percent, then yeah, why shouldn’t he be able to use some of that grace to let him have a little more housing, as long as he’s not neglecting to pay yourself and invest for yourself first and follow the Financial Order of Operations? I’m not gonna make you look silly because I agree with everything you said, but this is the cautionary tale that I would give you, right? We have a bunch of financial associates here who just passed the CFP exam, and one of the things you learn when you study for the Certified Financial Planning exam is these rules of thumb. And one of the rules of thumb is that all of your debt service across all debts should not exceed 35% of your gross income. That’s kind of like the stated financial planning rule of thumb. So you add housing, student loans, credit cards, auto loans, all those things should not exceed 35%. Here’s the one problem, Timothy, I have with your idea of, “Okay, well if I don’t have the auto, can I squeeze that and apply it over to housing?” So you’re not a bridge builder, too, but you’re just not trading the same types of debt. You’re not trading the same commitment. Because remember the 20/3/8, when we talk about that eight percent of your gross income, we’re only planning on you walking away from that for three years. What that means is that after that, that car is paid off, once the 20/3/8 has been satisfied, that eight percent can then be absorbed back into your savings rate. It can be absorbed back in there.

What happens is when you squeeze your car, say, “Alright, you know what they told me? I could do eight percent on car, but I’m only doing one percent. So I’m gonna take that seven percent, seven percent, I’m gonna add it to my 25% on housing. I’m gonna be at 32 percent. You just signed yourself up for 32 percent over the next 30 years. What I’m arguing is that you traded a temporary allowance for consumption spending and you made it pretty long term. That’s not to say you can’t do it, that’s not to even say don’t do it, it’s just to say recognize what you’re trading off. If I’m going to commit that I’m going to spend 32 percent of my income on housing because I don’t have an auto budget, an auto spend, I’m signing up to spend that for a very long period of time. Whereas with the car, it’s going to fall off, it’s going to be temporary. So just make sure you recognize that and are aware of that going into it. You’re a mean one, Mr. Bo, because, I think, look, you’re not wrong, but I’m gonna give Timothy another lifeline here because I want to let him keep the title bridge builder. If your income is going up to where it can overcome, like so because I know in parts of my career, you know, because maybe you’re on a professional track where your earning potential is huge, but you’re just at the beginning of your career and you have to get those 10,000 hours before they actually pay you the dividend of your value, there’s nothing wrong that says you can’t do a hybrid of what Bo and I were talking about. Yes, while you’re in this phase and your income has the potential to go up, you could combine those things because you know in three years you’ll be in a completely different situation. You can go with that, and that way you can hopefully still smile it, crunchy Bo, as well as good time rock and roll, Brian.



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