If you want to achieve financial independence, you need to get your housing expenses under control. This article will provide a housing expense guideline to help you achieve financial freedom sooner, rather than later.
Financial Samurai began in 2009 and is one of the top independently-owned personal finance sites today with over 1 million visitors a month. Everything is written based off firsthand experience because money is too important to be left up to pontification.
I've been a real estate investor and homeowner since 2003. I also helped kickstart the modern-day FIRE movement so more people could be free.
Renting Long Term Is A Suboptimal Decision
Although I've said that overpaying for a car is the #1 wealth killer for the middle class, paying ever rising rent over the long run could actually be way worse. You don't want to rent forever because then you're at the mercy of inflation forever.
Inflation is an unstoppable juggernaut that will smash your retirement dreams to smithereens if you aren't on the right side. If you can stabilize your housing expenses, you will have a much easier time creating more wealth.
Therefore, as soon as you know you've found a place you want to live in for at least five years, buying a primary residence instead of renting is probably a good idea. The longer you can own your home, the likely greater wealth you will build.
General Housing Expense Guideline For Financial Freedom
There's a general guideline that says renters shouldn't spend more than 30% of their net income on rent. The 30% recommendation comes from the Brooke Amendment passed in 1969 which determined the point where a family living in public housing was considered financially burdened by housing costs.
As for homeowners, few banks will lend beyond a 43% debt-to-gross income ratio (10% too high IMO). For example, if you pay $2,000 a month for your mortgage and another $300 a month for an auto loan and $300 a month for student loans, your monthly debt payments are $2600. If your gross monthly income is $8,000, then your debt-to-income ratio is 33 percent.
In this article, I'd like to layout a housing expense guideline to help folks reach financial independence sooner. I'll go through my own housing expense history to reveal some nuggets of wisdom.
If you can get your housing expense equal to 10% or less of your gross income, you will be well on your way to financial freedom. This is my #1 housing expense guideline to follow if you want to achieve financial freedom.
Housing Expense Guidelines And The Rent Burden
First, let's take a look at this interesting chart that shows the rent burden for younger residents in several major cities. Rising rents are creating rising fortunes for landlords. Therefore, you probably don't want to rent forever once you've identified a place you want to live for at least five years.
The influx of new people over the past two decades has far surpassed existing housing supply due to concentrated job growth in America's major cities.
As a result, rents and housing prices have skyrocketed. We've reached a breaking point, which is why I'm actively investing in the heartland of America instead for the next decade.
I've never worked in Los Angeles, the most rent burdened city surprisingly, but I did start my career in NYC in 1999 and finished my career in San Francisco in 2012. Rent increases will likely last for a while due to high inflation and worsening housing affordability.
Here's a timeline of my housing expense history.
A Timeline Of My Housing Expense History
The #1 housing expense guideline is to keep your living expenses to below 10% of gross income. Don't listen to the general advice that says the limit is 30%. The general population is struggling.
Below is my housing expense history which follows my housing expense guideline. I retired in 2012 at the age of 34, partly because I kept my housing expenses low.
NYC 1999 – 2000 Housing Expenses
NYC felt just as expensive then as it does now. To cut costs and reduce commute time, I decided to share a studio at 45 Wall Street with a buddy of mine from high school. The place was just a eight minute walk to work at 1 New York Plaza. We paid $800 each for the luxury of passing out each night after a 14-hour work day.
My base salary was $40,000 a year or $3,333 a month plus an unknown bonus. Therefore, my rental expense made up 24% of my gross income. My fellow analysts at Goldman Sachs either rented a one bedroom for $1,800+/month or had their parents buy them their own place. There was a ton of Bank of Mom and Dad going around.
I could have joined my colleagues in spending ~50% of my gross income on rent, but I made a conscious decision to save more money because I was maxing out my 401k from the get go. Walking to work in the dark and walking back home in the dark was depressing. I had to save aggressively in order to one day be free!
NYC 2000 – 2001 Housing Expenses
My first roommate moved out because his parents bought him a one bedroom condo on the upper east side for $250,000 that lucky duck. It was a great buy since it's worth ~$750,000 today. Even though his parents helped him out, 17 years later, he still lives in his one bedroom condo with his wife! Talk about living luxuriously and frugally at the same time.
The Street decided to bump up all first year starting analyst salaries to $50,000 from $40,000 in 2000. As a result, my salary went from $40,000 to $55,000 given I was now second turd on the rung. I found a new roommate and rented a studio with an alcove for $1,800 a month. Now we were living large!
I lived in the living room and he lived in the windowless room for $900 a piece. With a new gross monthly salary of $4,583, I was now paying just 19.6% of my salary in rent. Again, I could have very easily decided to get my own one bedroom apartment for $2,000 a month, but work continued to be too painful. Including my bonus, my income was over $100,000.
SF 2001 – 2002 Housing Expenses
The biggest surprise about moving to San Francisco was how much cheaper rent was compared to Manhattan. Still frugal, despite a raise and a promotion, I decided to rent a room in a two bedroom, one bathroom apartment at the edge of Chinatown for $900 a month. Going from living in a living room with no privacy to having my own room and shared common space felt like a luxury! But I knew the place was a dump (see picture).
I joined my new firm as an Associate with a new salary of $80,000. My rent as a percentage of gross income fell to just 13.5%. A couple colleagues made fun of me for not living in a more posh neighborhood. But it just felt stupid to spend up when I didn't know for sure I'd be in SF long term. I was still exploring a new city and wanted to keep living costs to a minimum. Finally, I was starting to feel rich living so modestly. What a contradiction.
SF 2002 – 2003 Housing Expenses
My roommate turned out to be a little unstable, randomly screaming his lungs out in the middle of the night. After my girlfriend stayed with me for several months in this 2/1 apartment at the edge of Chinatown, we decided to get our own one bedroom apartment in Cow Hollow, a nicer neighborhood in SF's north side for $1,600 a month.
I paid $1,000 a month and she paid $600 a month given she was only one year into her career. My salary was now $90,000 (tends to go up $10,000 a year in finance back then), meaning that I was paying 13.3% of my gross salary to rent. However, if you account for my bonus, which can range from 50% – 200% of salary, my rent made up less than 10% of my annual gross salary.
Once I got rent down to under 10% of my annual gross salary, I started feeling like I was making massive financial progress. Rent no longer felt like a burden, even after maxing out my 401k, investing ~30% of my post 401k cash flow every month, and investing 100% of my bonus.
Oh, and the one bedroom was also kind of a dump. It was very dark and right below an alcoholic neighbor who would leave deep bass music on all night long. Drove us nuts! Every week the blue recycle bin was full of beer cans.
Related: The 30/30/3 Home Buying Rule
SF 2003 – 2005 Housing Expenses
With a good amount of cash flow at 25, I started wondering what was the point of working so hard since I was living much lower than my means compared to my peers (quarter life crisis). When you start feeling rich, you want to improve your life! At the same time, I didn't want to pay more than $2,000 a month in rent, which was what was required to get a nicer place.
Instead of renting, I decided to buy a 2/2 condo for $580,500 with 25% down and assume a $2,100 mortgage + $230/month HOA + $500/month property tax instead. Although the total came out to $2,830 in cash outflow, the net cost after deductions was more like $1,900 a month. With a new monthly base salary of $8,333, my housing expense grew to 34% before deductions and 23% after deductions. This was an obvious violation of my housing expense guideline.
The $435,000 mortgage lit a fire under my ass to work harder. I never felt this much financial burden in my life. It was stressful knowing that if I lost my job, I may lose my condo. I'm not sure if I would have continued working in finance after age 26 if it wasn't for debt.
Major Motivation To Pay Down Mortgage Debt
For the next 12 years, the monthly mortgage kept going down with each refinance until I paid the sucker off in 2015. Meanwhile, the median rent for a 2/2 apartment in SF went from $2,100 to $4,600! How nuts is that?
The property is currently a $4,300/month rental. I'm below the median, despite the prime location because it's not remodeled.
While the average renter was getting crushed by inflation, the average homeowner saw his housing payments go down. There is a 40-year declining mortgage rate trend to be aware of. When I first bought my condo, my mortgage rate was 5.25%. Then I refinanced it to 3.375% for a 36% decline.
Check the latest mortgage rates online with no obligations. The more quotes you can get, the lower the mortgage rate you will likely receive.
SF 2005 – 2014 Housing Expenses
After a couple of years in the condo, I actually regretted not buying a nicer place in 2003. The reason why is because property prices continued to grow (greed). As a result, I took on a whopping $1,220,000 mortgage at 28 and bought a $1,520,000 single family house at the end of 2004. It ended up being two bedrooms too large for my eventual wife and me. I let the sellers rent back the place for 3.5 months before we moved in 2005.
My housing expense as a percentage of gross income got as high as 60%! Once again, I was worried about my future. It also felt wasteful to own such a large house with just the two of us. As a result, I rented out the garden room to help defray expenses.
My housing expense eventually fell to 28% of my base salary after earning some raises over the next nine years. If you include my bonus, the lowest my housing expense got was ~8.3% of gross income.
SF 2014 – 2019 Housing Expenses
When I first bought my current primary residence in 2014, my gross housing expense was ~24% of my gross income, or 17% of my gross income after deductions. I purposefully bought an 18% cheaper house than my previous residence because I was earning less and wanted a smaller house. I was able to lock in a 2.5% 5/1 ARM.
Due to further income growth, my housing expense twas only ~8.2% of my average gross income before deductions and ~5.7% of my gross income after deductions. I'm now wondering whether I'm living too frugally again. The idea of buying that dream house in Honolulu one block from the beach in 2020 can't come soon enough!
At the end of 2019, we finally moved into a bigger house down the block we bought for cash in 2019. It took about six months to model as it was also very old.
We bought the new house with cash after selling about $1 million of stock in 2019. This was a fortuitous event because stocks began to correct in 1Q2020 due to the coronavirus pandemic. But of course, now the S&P 500 is at an all-time high in 2024.
Our housing cost is now about 2% of our annual gross income. Paying all cash for a house is one of the key reasons why I felt much better during this bear market compared to the one in 2008 – 2009.
San Francisco Housing Expenses 2024+
Real estate performed well during the pandemic given the record-low mortgage rates and increased desire to live in a nicer home. If you are going to spend more time in your home, you will want to pay more money for a nicer one.
We followed my housing expense guideline and limited our housing expense to between 5% – 10% of our annual gross income. We've built up a lot of wealth over the years and want to live a better life.
Personally, I bought a forever home during the worst of the pandemic in 2020. I'm also bullish on the housing market for the next several years as the economy continues to rebound.
Our overall housing expenses account for less than 10% of our monthly gross income. This is the way it should be as we try and build more passive income to stay away from work. We have two young children and we want to spend as much time with them as possible.
If you want to build wealth, it's hard to beat owning rental property in a strong environment. The ability to benefit from rising rents and rising property values is a powerful combination.
The Housing Expense Guideline To Follow
My #1 housing expense guideline to follow is to keep housing expenses to no more than 10% of your annual gross income.
Although the general rule is to keep housing expenses to no more than 30% of your gross income, you will NOT feel like you're getting ahead at 30%. Instead, you'll feel like you're running in place.
Only after I got my housing costs to below 10% of my gross income did I start making massive financial progress.
For those of you who live in expensive cities, you might think that spending less than 30% is next to impossible. But that's exactly what some people are doing.
They do so by sharing a bedroom, sharing a studio, living with five roommates, or even living in a van like one Google employee is doing. Decide on a housing expense limit and adjust accordingly, not the other way around.
Live As Cheaply As Possible When You Are Young
When you're in your 20s, who cares about living in a nice place? I was making over $100,000 and living in a living room! My guests didn't mind. If you're chilling at home, you're not at work, which is exactly where you should be most of the time.
If you're bullish about your career, only then should you consider buying a property and spending ~30% of your gross income on housing.
Aggressively saving money on housing for 10 years will pay off. Keeping your housing expense to <10% means you can easily save and invest 50%+ of your income each month.
Eventually, you may want to live in a nicer place if you find a partner or start a family. But from ages 18 – 34, living like a pauper is great for financial independence seekers!
A Unique Housing Expense Guideline To Follow For Those Who Like Cars
For those of you who like to buy cars or who have a car, follow my House-To-Car Ratio for financial freedom. The idea is to get your ratio to 50 or higher for financial freedom. You can do so by buying a cheaper car, owning your car for longer, and buying a nicer home.
Cars are guaranteed to depreciate in value over time. Houses, on the other hand, tend to increase in value over time. Therefore, your goal is to invest more in a house and minimize your car expenses.
Loading ...Income And Net Worth Required To Buy A Home
Here's also a chart that highlights the income and net worth required to buy a home at any price point. The Ideal Income and Ideal Net Worth columns correspond well with my housing expense guideline for financial freedom.
Once you've gotten neutral real estate buy owning your primary residence, it's time to finally go long real estate by investing in more real estate.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom. Real estate is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding. I highly recommend investors follow my Buy Utility, Rent Luxury real estate investment strategy.
The Best Real Estate Investing Platforms
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Both platforms are long-term sponsors of Financial Samurai and Financial Samurai is an investor in Fundrise funds.
I've personally invested $954,000 in real estate crowdfunding across 18 projects. It's been great to diversify and earn more passive income from the heartland. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
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Generally I’m the kind of person where profiting from renters doesn’t sit well with my moral values. Is there a way that I can still achieve neutral real estate by *only* planning to own a primary residence? (I might be ok with charging someone a portion of the interest to rent out a room in a 2BR+ place.) I’m already invested into equities and bonds, but I do not own any real estate.
By definition, you are neutral real estate by only owning your primary residence. You are only long real estate if you own your primary residence plus invest in real estate ETFs, private real estate funds, public REITs, or physical rental properties.
I think you’ll enjoy this post on investor virtue signaling given you mentioned moral values in investing. It’s an interesting topic because we live in capitalist America and if you work for a for profit company, then you may already be compromising your morals.
You made a good point that gross income should be directly related to housing expenses. I’m planning to look for student rental houses soon because I’m considering to get a second college degree in year or two. Maybe sharing the house with someone else would help in saving money on rent.
Don’t normally comment but had to say thank you for the great read.
Now this was very detailed article! Thank you for this! :)
I need some advice. I am moving to Charlotte to start my first career job (just finished college, 22 years old). I am living at a nice apartment complex very close to work. I have yet to decide what apartment to get and would love some advice. Apartment A1 (681 sq. ft) has an amazing layout and is very practical.. However, is 45% of my income Apartment A3 (627 sq. ft) is a bad layout and is not very practical at all and is 35% of my income. I really do not know which to do choose as I will be living there for 15 months and having my girlfriend move in the last 3 months of the lease. Any comments would be awesome.
We’re at 15%! I found your site thanks to Simple Money Man. I’m learning so much…this is now my favorite blog!
Great article and discussion! Our problem is that we have no house and a lot of savings… almost $3m. We are stationed overseas and so we don’t need to buy property. My question is- we could make housing 0% of our monthly expenses by paying for it in all in cash. What are the general considerations on whether to use savings to put down more and lower monthly expenses?
If you have $3 million in savings, I would comfortably by our house for cash for $2 million or less and then reinvest the remaining. But I guess it depends on what your expenses are and your cash for generation.
I currently have house buying fever for a house I saw for $800,000 and this would put us at 50% of our take home income. It’s a beautiful home with the potential for increasing in value. What should I do?
We are at 14% on the Peninsula just calculating PITI/Gross Income. Did you include maintenance and utilities in your numbers, Sam? Do gardeners and cleaning services count? Regardless, we’re definitely under 20% total, and our first child is due next month so it looks like we’re in a great place. :)
Not bad! I did not include the secrect gifts provided to the maintenance boys. That’s on your own!
Congratulations on your child. May you have a smooth and joyful delivery!
Good question Sarah as there can be many added costs to the home as I found out when I bought a house with a long drive way and very large yard :)
So the question is what do you count if you have no mortgage? Just the taxes and insurance? So if you are mortgage free, but spending $27,000/year on Taxes + Insurance, but making $300k gross you are in the sweet spot? Other expenses are more “discretionary” I guess although they feel necessary – landscaper, cleaner, maintenance, etc
I live in the NW (Portland) where housing costs show little sign of slowing……and I have that voice in my head that I’m going to get priced out of a larger home as affordability continues to tumble….BUT….. I’m comfortably under the 10% mortgage to gross income though.
So I’m torn between the fear of losing to affordability or investing 20% of my post 401 max out.
PS this quickly became my favorite financial advice site. Well done!
Sam, great to hear your perspective and experience. I have been at both extremes. I was lucky enough when I worked at a bank in NY to sit next to a guy who lived in The Bronx for many years and helped keep me grounded in terms of my lifestyle and spending habits while everyone else was blowing all their money on rent and alcohol.
I started in NY sharing an apartment with a girlfriend in Queens for $1500, split equally (about 16% of my salary). We broke up and I moved closer to the city into a studio for $950 (after a raise, still about 16% of my salary). In my my 2nd year at the bank I became an associate and he convinced me to buy a small studio in the North Bronx for $55,000. The same year I received a significant pay bump as our market started to do well and I was then paying 7% of my salary for housing and 4% of my gross income for housing. In addition, that year Obama had created a housing incentive as part of the stimulus package after the crisis. The deal was you received $8,000 for the purchase of a home or 10% of its value below $80,000. Since I paid 20% down, I received 10% back. So if you include closing costs and my down payment, I paid about $8500 to reduce my housing costs by 50%!
I had never felt so rich in my life! I was aggressively investing 50% of my salary and all of my bonus just as you did. However the party did not last forever.
A few years ago, I got a serious girlfriend and we recently got married and had a child. Work and my commute was getting to me so I rented an outrageous 2 bedroom 2 bath close to work in Midtown to be able to see my family. Now I am back paying about 32% of my salary in rent. However my money did not go to waste. The money I saved went towards buying a commercial rental property in California in 2013 and last year I bought my second one. I am still waiting for the income from the second commercial property to kick in and finally cover my rent but when I do, I can’t wait to get that feeling of saving and investing back again!
As for that Bronx apartment, I currently have it rented out.
I’m at 8.5% ignoring my overtime income since that is not guaranteed. I have 3 roommates, but I can walk to one of my jobs and I’m close to public transportation for the other. The real downside is how long a walk the grocery store is, but this is not my forever home. I’ll hopefully move cities to be with my girlfriend. I’m not sure if we’ll split her current rent in half. If we do, my rent goes up by $250. I imagine it would depend on what sort of job I can get in her city. She’s holding down her place just fine without help. Sugarmomma?
great great article (again) Sam. When I got my first job I bought a townhouse and rented it out to between 2 and 3 room mates. So my housing cost on a net basis was less than 10% and sometimes I was making money on it. This is my recommendation to all singles. Buy a house and rent out rooms. Housing is a COST not an investment. It doesn’t become an investment until much later only when you become a legitimate real estate investor. I enjoyed reading about your experiences.
This is my first time on your website and this is truly a great article – much more in-depth than al to of stuff you see online. This is a very motivating article and it’s made even better by you illustrating your own experiences.
What you’re saying about saving money is true but very hard to do. Most people seem to not be willing to make the sacrifice in the short term to get the long-term reward. They’re continent to spend too much and live too luxuriously even though they are not building any finical base or finical future for themselves.
My wife and I moved into my $1,000 a month rental in NYC. So we are doing well and are saving for a home, hopefully in the next 12-18 months.
Wow what an amazing view from your deck! Absolutely gorgeous! I 100% agree with your idea of what should be spent on housing costs. When speaking with people I work with (working in the public sector I know what they make) and seeing what they are paying for homes is just downright scary. While we are paying somewhere around or just under 10% of our income on housing, some of them are stretching it to amounts even above 1/2! I don’t know who is lending on these ratios but it reminds me a lot of the run up before the last housing bubble. Anyone with good financial sense would keep their housing cost low and use the savings to invest.
We’re at 9.5% in the home we bought 1.5 years ago.
Before that, we were at 2.6% for about 6 years because we had paid off our mortgage. That was sweet and really helped us rocket up our net worth. We were just at 7.3% until we paid it off.
We’ve always economized on homes and cars, which is one major reason why we’re doing so well now.
A lot of people we know have spent a whole lot more on their homes and trucks. Instead, we put the money into our 401Ks and rental property.
We’re planning on retiring next spring. At that time we’ll own 5 properties free and clear and one on a mortgage. We may pay off that mortgage when we finish renovating property #6 and flip it.
We expect to be able to buy one new rental property pretty much every year AFTER we retire.
That’s a good feeling.
One person at work was starting to show some resentment at the number of homes we have. I asked them if they had noticed all the really big, expensive, luxury pickup trucks in the parking lot. He said yes.
I said that our first rental property was the pickup truck I didn’t buy and the 2nd rental property was the pickup truck my wife didn’t buy.
Our 3rd and 4th was the really expensive home we didn’t buy. By way of contrast, we have a bulletin board at work that people post their homes for sale. In 8 years of working there, I’ve only seen 1 home for sale that was less than the COMBINED cost of our first 4 properties plus our two cars!
Choices have consequences.
Amazing! That is so awesome you guys have been so disciplined to build your wealth. It’s all about choices and I do wonder whether people realize this or not. One thing you might want to reconsider is buying so many rental properties in retirement. I’ve been retired for five years now and I don’t want to deal with more tenants and hassles.
It’s also a risk if they don’t have other assets. I remember the Vegas guy talking about how his properties crashed in value and almost ruined him. One should always have diversification, especially when you don’t have a primary income (i.e. income diversification)
Very good point about diversification! I’m completely in favor of totally different types of income streams and resources.
We’re doing rental property, stocks and bonds, farm income, and social security. Plus we’ll probably start another business or two just for fun.
We have a daughter with Down’s Syndrome to provide for. Just because we’re tired of working full time doesn’t mean our responsibility to provide for her goes away.
We’re using a property management company so our need to be involved in daily activities is fairly limited. We intend to keep it that way.
We home school our kids and saved so much money and property taxes by not being limited to only looking in towns or neighborhoods with the best schools. There is a LOT of awesome houses at great value if the local schools are not your primary consideration.
Also, we moved from the northeast to Orlando, FL. The tax relief is huge! No regrets moving.
Agree completely. It’s crucial to keep your housing costs low, and to keep your primary residence as only a small percentage of your net worth.
And wish me luck doing just this. I’m looking to buy an unrealistically cheap studio co-op. I have a friend who wants to room with me, but in order to pass the DTI requirements to buy a “normal” priced 2 bedroom (co-op board requirements), we have to put in a huge down payment which would require liquidating my entire dividend portfolio that I’ve earmarked for (hopefully early) retirement. He’s pressuring me to do that and I’m not comfortable doing so. I found a VERY cheap studio 1bed that I hope I manage to snag (I can easily put down 40% and can qualify based on current income) as long as there are no MAJOR problems with it (such as mold and nightly gang shootings). Hate to leave my friend behind , but one has to do what one had to do.
Sam is on the mark here; one can’t be spending more than 10% of their income on housing if they expect to hit financial freedom. For me, I also need assets working for me and producing income if I don’t want to be a slave to my job forever. He may be comfortable selling off his assets to buy a primary residence, but I’m not. Not unless I absolutely HAVE to.
Another home run, Sam. Housing is one of the biggest expenses out there that keep us slaving away forever. Whether you own or rent, keeping your expenses less than 10% of your income is crucial to being able to build wealth. Sometimes a bigger house isn’t as good as we think.
Sincerely,
ARB–Angry Retail Banker
Good article.
One thought in addition however is that you are only basing this one income.
You can buy a house you cannot afford and stretch the payments out over decades or aggressively move to pay it down so you are free faster.
We will be mortgage free in two years (44) and spend about 10% of gross on the mortgage. With our automatic savings, cash flow is still tight. I have no idea how people manage 20% let alone 30%. Assuming no kids.
In any case, some people could have a higher % of income spent on their mortgage because they are paying it down more aggressively. With the market at the levels they are, getting a guaranteed return of 3% might not be such a bad thing – especially if you are hardwired to avoid debt.
10% sounds like a safe threshold, but how is this possible in hot markets like the Bay Area?
For example in the South Bay, we have a
New graduate engineer who is making 100K in the bay fresh out of college.
500K for a 1b/1b condo in the Santa Clara area purchased with 20% down payment):
* 1,910 P & I
* 300 for HOA (actually on the lower end )
* 500 for Property tax (1% which is low end too)
* 90 for Insurance
Total: $2,800
That’s already 33% of gross.
Probably not possible right off the bat but if you get a roommate or have a significant other living with you then you will already be getting close. Then as your salary rises over time your mortgage will stay the same so in a few years you will get down to 10%.
Salaries don’t really increase dramatically over the years, especially not faster than the hot housing markets, which rise 7-10% YoY. If you’re lucky and perform well, it will increase at inflation rates (~3%). Yes, the mortgage gets better. however the aforementioned scenario already considers 20% down, which suggests a pretty good monthly payment over a 30 year period. Not trying to be grim, but in hot housing markets, you definitely have to push your budget higher. 10% is desired, but not realistic IMHO, unless you have a lot of cash on hand.
As a mid 30 yr Pharmacist, I have a small two bed townhouse in LA and I am at about 35%. I could have bought cheaper one, but due to the safety reason, I picked one in safer area. I couldn’t save much money for down payment due to high student loan, but now that I paid off student loan, my goal is to save and refinance so that I can make my housing expense at or below 20% of my gross income. If I can make it below 10%, it would be awesome!!
I ran the numbers and in the past 16 years and was never more than 19%, 11 years I was at or below 15% and starting this year I’m at 6%. Not quite 10% but likely close enough. At least I think my investments show that it is close enough.
Thanks for sharing your dwelling journey with us, Sam!
I believe that the affordability index is different for those that are super high income earners….but, without missing the entire point of your article I also interpreted your main message as “live frugally as long as possible, even when on paper you can “afford” it “.
For a person such as myself, of course I cannot fathom spending 40% of my monthly gross on housing…nor could I afford it. However if I was a $500K/year income earner, it would be much more realistic perhaps?
Here’s an example of two individuals obtaining housing and how these hard and fast rules can be somewhat misleading:
Individual A has 3000 dollars a month disposable income after all taxes are deducted, which would indicate the ability to pay 900 dollars a month for housing in order not to be considered “housing stressed”. That would leave that individual with 2100 dollars a month for all other required and discretionary purchases. Assuming Individual A can find a nice studio apartment for 900 dollars or less, Individual A is considered not to be “housing stressed” because Individual A is only spending 30% of his or her available income for housing.
Individual B has 10,000 dollars a month disposable income after all taxes are deducted, which would indicate the ability to pay 3000 dollars a month or less for housing as to not be considered “housing stressed”. But individual B likes to live it up, desires to reside in trendy housing in a hip and happening area for 4000 dollars a month. Individual B would be considered “housing stressed” because individual B is applying 40% of his or her income to housing, which is 10% over the guidelines. But individual B has 6000 dollars a month for his or her other expenditures, which is certainly superior to Individual A’s situation.
Good point!
“Based on my research, I’ve found that the ideal mortgage amount and income combo is $1 million and $250,000 a year based on today’s rates.” – Sam
That’s close to 40% before deductions with a 3.250% 5/1 ARM mortgage including taxes and insurance.
Good thing 5/1 ARMs are lower than that. But interest rates have risen since last year for sure. Maybe you’ll have to make $275,000 to reach the ideal income now. But it’s close enough.
$250K MAGI.
The problem. With using numbers instead of percentages is like Sam’s “how to make [x] and still feel broke”. The number you need for FI is directly related to your burn rate. Your burn rate can usually correlate to your house payment. If you’re spending 10% of your income on housing the likelihood that the rest of your spending is 40% of total income is good. And if it’s not, well you’re still more likely saving that 15% that you’re not putting toward your house.
In my experience people with a low %age house payment might spend higher in other categories of their budget, but people with a high %age house payment rarely spend really low in other categories unless they literally need it to make the house payment.
As a single 20-something lady lawyer who lives in a big city, it’s almost impossible for me to live so cheaply because I can’t take the risk of rundown/sketchy living places–Safety is a priority. This translates into me spending about 40% of my income on rent.
I see your point. My wife and I live in Jersey City (by NYC) where we also pay round 30% of our gross income.. I will not move to a cheaper, more shady place just to save money if I don’t have a belief in safety of the cheaper place.