Limiting housing costs to 25% of income
Is there any flexibility in your rule about not spending more than 25 per cent of your take-home pay on rent or monthly mortgage payments? I live downtown in Washington, DC, and I’m finding it’s pretty hard to do here. I make about $90,000 a year, but I’m spending a little over $2,000 a month in rent. Rent is my largest expense by far, and I don’t spend a lot of other money, so I’m still able to save a little and do other things. Can you give me your opinion about this approach?
True, I advise people to spend no more than 25 per cent of their take-home pay on housing. Maths still works in every city and state in the country. You don’t get a pass on maths just because you live in Washington, DC, even though Congress and a lot of other people there think you do.
But there’s really nothing magical about 25 per cent. The purpose behind it is, I don’t want you to be house poor. If you find yourself still able to save and invest because you keep other financial aspects of your lifestyle so low, then you’re OK.
The problem with most people starts when they’ve got a high cost of housing, and those payments put a real squeeze on their budgets.
It does not leave them enough room to save up to buy the next car, so that car becomes debt. The same thing happens with Christmas and vacations and everything else.
They don’t have enough extra money to save for things because a huge chunk of their income is flying out the door every month wrapped up in rent or a house payment.
Now, you’re telling me your situation works for you because you’ve made room in your budget and live a very frugal lifestyle by choice. That’s cool. I’m not mad at you about that. But here’s the thing: whatever you spend on rent disappears. And the more money you burn, the less you have on hand for other things.
I’m not exactly sure how you adjust that in your situation. Maybe you move outside the city and commute, or perhaps you add a room-mate into the equation.
Or, maybe you’re fine with how things are and that’s the way you want to live. That’s OK, too. But my reasoning behind the 25 per cent figure – which is actually more of a guideline than a rule – is so you don’t become house poor.
I want you to be able to save, invest and give generously. Plus, I want you to own your own home one day.
And you won’t be able to do that if everything you make is going towards big payments!
• Dave Ramsey is an eight-time national bestselling author, personal finance expert and host of “The Ramsey Show.” He has appeared on “Good Morning America,” “CBS This Morning,” “Today,” Fox News, CNN, Fox Business and many more. Since 1992, Dave has helped people regain control of their money, build wealth, and enhance their lives. He also serves as CEO of Ramsey Solutions