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30 percent rule Earnest

How Much Should I Spend on Rent? Ignore the ‘30% Rule’

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Hunting for a new apartment (or a first apartment) can be stressful. It’s hard enough to find a good space in the right location at a reasonable price — but it can seem impossible if you’re doing it in a competitive real estate market like San Francisco or New York. Don’t jump into something that doesn’t fit your financial goals. Instead, take a more methodical approach to your apartment search. Start by understanding what you can afford.

What is the 30% Rule?

Ever heard of the 30% Rule? It’s the idea that you should budget a minimum of 30% of your gross monthly income (i.e., your before-tax income) for housing costs, and it’s practically personal finance gospel.

Rent calculators often use the 30% Rule as a default assumption to determine how much house you can afford. Mortgage lenders have adopted it as a qualification ratio when approving you for a loan, and private landlords often require tenants’ annual salaries to be at least three times the monthly rent.

But who exactly is following this rule? And does it make good financial sense to do so?

Do Earnest clients follow the 30% Rule?

To address the first question, Earnest took a look at our dataset of more than 15,000 student loan applicants.1 We found that at salary levels below $30,000, spending above 30% of gross income on housing is the norm. (This is supported by a Harvard report, which found that 45% of households who make $30,000 to $45,000 have rent costs above 30%.)

At incomes above $30,000, however, Earnest applicants increasingly have lower monthly expenses than the benchmark — down to around 10% of their gross incomes for the wealthiest renters. This reflects the economic idea that a person’s marginal propensity to consume generally decreases with increasing income. In other words, if your income doubles, you’ll likely start spending more, but not a full two times more.

Among Earnest’s loan applicants, people making around $30,000 happen to be following the 30% Rule, but generally, most people are paying much more or much less.


Why you shouldn’t blindly follow the 30% Rule

So, should the 30% Rule even be a general rule at all? To answer that question, we turned to experts David Bieri, an associate professor of Urban Affairs at Virginia Tech, and Carrie Friedberg, a San Francisco-based certified money coach.

The short answer: No. Here are four reasons why.

1. The 30% Rule Is Outdated

The 30% Rule has roots in 1969 public housing regulations, which capped public housing rent at 25% of a tenant’s annual income (it inched up to 30% in the early 1980s). Rather than looking at what consumers should be spending on housing, however, the government selected these percentages because that’s what consumers were spending.

“This is what one did on average in the past, and as such [the benchmarks] become absorbed into public policy,” says Bieri, who has written several papers on the subject.

Bieri sees two problems with making 30% the de facto personal finance rule for renters: First, averages, by definition, do not take into account the huge variations in what individuals do. Second, the balance sheet and financial obligations of today’s consumers are vastly different from those of the 1960s on whom this rule is based. Americans back then, for example, didn’t contribute to 401(k) plans or have high student debt.

2. The 30% Rule ignores your full financial picture

Let’s do some back-of-the-napkin calculations. Say you’re making $30,000 per year and have no household debt. According to the 30% Rule, you would be able to spend $750 per month on rent, which would leave roughly $1,300 a month for savings and expenses (or $325 per week, or $46 per day) after taxes.

Sounds great — until you start subtracting student loan payments (income-based repayment plans typically cap them at 8 to 10%) and retirement savings (ideally 10 to 15%). All of this could subtract another 15 to 20% even without accounting for food, entertainment, transportation, child care, additional debt, or other savings.

3. The 30% Rule doesn’t make sense for higher earners, either

And if you’re making $300,000 per year? The 30% Rule would prescribe spending $7,500 a month on rent.

Friedberg says even high earners may have debt, child support, alimony, elder care, or other substantial expenses — like saving for retirement. And in the long run, paying 30% on rent may be an irresponsible practice.

“High-earning individuals with a passion for their job and a commitment to their location might consider making a better investment in [buying] a house, condo or an apartment,” says Friedberg.

4. The 30% Rule doesn’t take your personal situation into account

Last but not least, as Bieri pointed out, all renters’ needs are not alike. Young, city-dwelling professionals with active social lives might not need or want more than a conveniently located small, two- or three-room apartment they can share with roommates. Contrast their budget to that of a young family (who might have the same income as the professional roommates) looking for space for children and willing to pay a premium to be near good schools.

So, how much should I spend on rent?

If the 30% Rule really is outdated and irrelevant, what’s a better rule of thumb? Instead of blindly following the 30% Rule, create a realistic budget that’s specific to your needs, and even consider alternative housing options.

“When you have a thorough picture of your financial life, you can run various scenarios to determine how much you can afford to pay,” says Friedberg. “There is no magic, one-size-fits-all answer.”

Creating a budget may sound daunting, but it can be pretty simple. Here are three tips to follow:

1. Take a close look at all your expenses

To start off, start tracking all your monthly expenses. You can use sites like for free or MoneyMinderOnline for a small monthly or yearly fee. You can also track your spending manually — just be sure to gather data from all the tools and platforms you use to pay for things. That includes:

  • Credit card purchases
  • Recurring, automated payments, including subscriptions
  • Cash and check purchases
  • Debit card purchases and account transfers
  • Automated fees charged by your credit, debit, retirement, or other accounts
  • Venmo, Paypal, and other cash transfer services

Figure out your average monthly spending

Once you’ve gathered a few months of spending data, calculate some averages to figure out how much money you have left over for rent. Say you’re a single working professional and your monthly net income, or take-home pay, is $4,000. In that case, your average monthly budget (not including rent or utilities) might look something like this:

$300 – groceries
$100 – car insurance
$300 – car payment
$400 – student loan payment
$280 – health insurance
$300 – eating out
$200 – gas or transportation expenses
$150 – gym membership
$100 – entertainment and subscription services
$200 – clothes and accessories
$70 – phone bill
$50 – home supplies
$50 – gifts

Your personal expenses might be higher, depending on your city’s cost of living. If you live somewhere like Los Angeles, where commutes are generally longer, you could be racking up $500 or more in monthly gasoline expenses. And if you live somewhere like New York City, where most social activities revolve around nightlife, you could be spending an arm and a leg on dinners and drinks with friends.

Depending on your financial situation, you might have expenses on top of those listed above. Maybe you’re making payments on medical debt or credit card debt in addition to your student loans or car payment. You may also have other living expenses, like renters insurance or costs associated with a pet. Be sure to include all these in your budget calculations.

Calculate how much you have left for rent

Take a look at your monthly budget. Let’s say it resembles the one above, in which case you have $2,500 in total expenditures each month on average. If your take-home pay is $4,000, that leaves you with $1,500 after expenses.

Now say you want to save 10% of your net income to reach your savings goals. That would mean you’re funneling $400 per month into your 401K or other savings accounts. Now you have just $1,100 leftover to spend on rent and utilities. (That doesn’t include other move-in expenses like security deposits, pet fees, broker’s fees, or new furniture.)

Consider other ways to trim your expenses

If that $1,100 — or whatever your leftover budget is — sounds like a meager sum, it’s time to reexamine your expenditures. Millennials commonly overspend on eating out, online shopping, and subscription services.

Take a look at your spending habits to see if there are any under-utilized memberships you can cut. Can you switch to a cheaper yoga studio, or start working out at your local rec center instead of that pricey, all-inclusive gym? Can you commit to cooking two more meals at home each week, or relocating Wine-Down Wednesday to your living room instead of the cocktail bar?

Keep an eye out for trimmable expenses, but be careful not to overdo it. It’s hard to change spending habits overnight. If your optimism leads you to sign a bigger lease than you can actually afford, you’ll be trapped with your Spartan new budget — which could quickly become a source of stress.

Instead, you may have to make peace with paying less in rent. Consider living with roommates, living further from the city center, or living in a smaller place, which will not only have a lower rent price but lower furniture and utility costs, as well.

2. Save an emergency fund

For earners who are able to save, Bieri recommends using a different benchmark altogether to figure out what kind of rent you can afford. That benchmark is your emergency fund.

Look at your cash flow and liquidity, he suggests, to calculate whether you have enough saved to cover three to six months’ worth of rent and debt obligations if you were to lose your income. The math may be trickier, but you’ll have a much clearer sense of how much rent you can comfortably afford.

How many months should my emergency fund cover?

Three to six months’ worth of savings is a pretty big range. What you need in your personal emergency fund will depend on your financial situation. You may only need three months of savings if you’re single, have low debt, work in a high-demand industry, pay relatively few critical monthly expenses, and/or have a family or partner who can help you out in a financial emergency.

If you work in a field where jobs are harder to come by, own a home, have financial dependents, pay high medical expenses, or have significant debt, you may need at least six months of expenses saved up to cover you in case of job loss.

Different people have different comfort thresholds, as well. If the idea of a financial emergency makes you or your family anxious, you may need up to a year of savings for true peace of mind.

How to use emergency funds to calculate your rent affordability threshold

So how does this determine how much you should spend on rent? Let’s say you have $12,000 socked away in a liquid savings account. Now say that all your critical, unavoidable monthly expenditures add up to $3,000. In that case, your $12,000 savings fund will tide you over for four months should you lose your job.

If four months doesn’t feel like enough time to find a new job and get back on your feet in an emergency, you might need to factor that into your rent calculation. Say you move from your one-bedroom place into a shared apartment, cutting your housing costs from $1,100 to $500 each month. Suddenly, your necessary monthly expenses are only $2,400—letting that emergency fund stretch for five full months instead of four.

If you know you need at least five months of savings in case of a layoff or other emergency, then by Bieri’s emergency-fund benchmark, $500 is the max you can afford in rent and utilities.

3. Try the 50/30/20 budget

If you still like having some percentage-based guidelines to help you structure your spending, try the 50/30/20 monthly budget.

First, calculate your net income (again, this is your take-home pay, or your after-tax income). From there, set aside 50% of your take-home pay for rent, utilities, groceries, transportation, insurance, and other living essentials that typically cost the same month to month. Use 30% of your take-home pay on non-essentials, or “wants,” like clothing, dining out, and entertainment.

Lastly, use 20% of your monthly income to save and make extra payments on your debt. (Note that “extra payments” here means anything beyond the minimum payment. For this type of budget, we consider minimum payments “living essentials” since they’re unavoidable.)

To see how this applies to your personal finances, you can either do the math by hand or use a 50/30/20 budget calculator. If your monthly take-home pay is $4,000, for example, you’d divvy it up like this :

  • $2,000 for essential living expenses and minimum debt payments
  • $1,200 for non-essential expenses
  • $800 for savings and other debt payments

Again, like the 30% Rule, a 50/30/20 budget won’t be a perfect fit for everyone. But it’s a good rule of thumb; keeping your essential expenses under 50% will allow your emergency fund to stretch further and help you reign in lifestyle creep. One notable exception is if you want to prioritize paying off debt. In that case, you may want to try the 70/20/10 budget, where 20% of your net income goes toward aggressively paying off debt, 10% goes toward saving for retirement, and 70% goes to everything else.

Find out how much you could save with Earnest

With national student loan debt reaching record highs, many renters struggle to balance their monthly loan payments, rent payments, and savings goals — even when they’re spending responsibly. If you’ve already analyzed your budget and trimmed excessive expenses, you may be able to reduce your monthly expenditures even further via student loan refinancing.

Student loan refinancing is one of the best ways to save money on your student loans2. It can help you reduce your monthly payments, lower your interest rate, and get out of debt faster. Refinancing can also help you free up more cash in your budget for paying rent and for building up your emergency fund.

Earnest offers some of the lowest student loan refinancing rates on the market. Earnest also provides borrower protections like a free skipped payment3 once per year, which could help tide you over in a financial emergency. To find out how much you could save, check your rate today. It’s free, it takes about two minutes, and it won’t impact your credit.

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Disclaimer: Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
1 Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of the loan amount, and school certification.
Before applying for private student loans, it's best to maximize your other sources of financial aid first. It's recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don't have to pay back, like scholarships, grants and work-study opportunities. 2) Next, fill out a FAFSA® form to apply for federal student loans. Federal student loans do not require a credit check or cosigner, and offer various protections if you're struggling with payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.
2 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.
3 Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.
Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.
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