Why is the 30% housing rule gross instead of net?: How to figure out the true cost of your housing and budget effectively without overextending yourself

Rethinking a general rule of thumb

Home buyers are commonly advised to keep their housing costs to 30% of their gross income or less. For renters, that means rent alone should not exceed 30% of gross pay. For homeowners, that 30% should include not just a mortgage, but also, property taxes, insurance, HOA fees, and any other fixed monthly expense related to being a property owner.

But there are two problems with the 30% rule. The first is that based on home prices today, the typical U.S. wage-earner either can't afford a home, or can't manage to keep their costs to 30% of their pay or less.

The Bureau of Labor Statistics puts median weekly earnings at $1,192 in the fourth quarter of 2024. That amounts to about $61,984 per year (assuming 52 weeks of work), or roughly $5,165 per month.

Meanwhile, the average 30-year mortgage rate today is 6.67%, reports Freddie Mac. If we take the median U.S. home price of $398,400 and apply a 20% down payment along with a 6.67% rate on a 30-year mortgage, we get a monthly mortgage payment of $2,050 for principal and interest.

But with a median monthly income of $5,165, that mortgage payment alone takes up almost 40%. And that doesn’t even include other homeowner expenses like property taxes. So it’s clear that the 30% rule doesn’t work based on median wages and home prices today.

The other issue is that calculating housing costs as a percentage of gross pay does home buyers a disservice. The reality is that everyone is responsible for paying taxes, which whittles down paychecks automatically.

Workers also need to carve out room in their paychecks for non-housing expenses, as well as long-term goals like retirement savings. So a more prudent approach to home buying may be to limit housing expenses to 30% of net pay, not gross pay.

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How to budget for housing expenses

You can use the 30% rule -- either gross or net pay -- to budget for your housing expenses if that works for you. But it's also important to consider your individual circumstances.

In some cases, it may be okay to exceed the 30% mark on housing if your remaining expenses are very low. For example, people who live in cities often don't need a car and have very low transportation costs.

AAA puts the average cost of owning a vehicle at $1,024.71 per month. If you don’t have a vehicle and walk almost everywhere, you may be okay to spend more than 30% of your pay on housing.

On the other hand, let’s say you have young kids. Care.com puts the average cost of daycare at $343 per week for an infant and $315 per week for a toddler.

Even if you only have a single toddler needing full-time care while you work, that could be costing you $1,260 per month. And you could be spending much more if you have multiple children in daycare. So that would be a reason to keep your housing costs to well under 30% of your pay.

Another reason to keep your housing costs lower than 30% of your pay is if you have expensive debt you’re looking to shed. Experian reports that the average credit card balance among U.S. consumers hit $6,730 during the third quarter of 2024. If you have a balance that’s much higher, though, it’s likely monopolizing a lot of your income, leaving you with less money to spend on a home.

It's also important to think about your financial priorities. If putting your kids through college is a big goal of yours, then you may want to spend less on housing so you're able to contribute consistently to an education fund. And if you know your job won't be providing a pension, there's more pressure on you to contribute generously to your IRA or 401(k) plan.

Plus, there may be things you want to do with your time that cost money, like travel. The less you spend on housing, the more room you have for that.

For this reason, it's important to establish a household budget that addresses your needs and priorities, and then see how housing fits in. If you use the 50/30/20 rule for budgeting, it means you're allocating 50% of your income to needs, 30% to wants, and 20% for savings. But that means you may not have enough room to allocate 30% of your income to housing alone.

All told, the 30% rule for housing costs is a good starting point to work with. But think about how well it fits into your budget and plans before following it.