Rule #1: Keep Housing Costs Around 30% of Your Income

Nice large house.

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Intro

Housing is usually most people's biggest monthly expense. But if it’s eating up too much, it can quietly strangle your ability to save, invest, get out of debts, and live more freely. A simple rule of thumb used by financial planners and lenders is: spend no more than 30% of your income on housing. Here we highlight net income. This is because, regardless of the potential tax benefits, e.g., if you bought your house after Dec. 16th 2017, "you can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home" (Orem, 2025), that only shows up next year at best. Your rent, homeowner's dues, or mortgage (which includes principal, interest, and taxes) leave your bank account monthly. You see and feel the reduction in real time.

This is Rule #1 in our 7 Rules to Live a Wealthy Life series. If you haven’t yet, check out the overview article of all 7 Rules to see how these principles fit together.

1. The Rule Explained

• From The U.S. Census Bureau - "Households are considered cost-burdened when they spend more than 30% of their income on rent, mortgage payments, and other housing costs, according to the U.S. Department of Housing and Urban Development (HUD)" (U.S. Census, 2024).

  • As of Sept. 2024, "Over 21 million renter households spent more than 30% of their income on housing costs in 2023, representing nearly half (49.7%) of the 42.5 million renter households in the United States for whom rent burden is calculated" (U.S. Census, 2024).

• It’s still a benchmark: aim for ~30%, but understand there’s flexibility depending on your income-to-housing costs and goals.

• When you get to 50%, households are considered severely cost-burdened (U.S. Census, 2024).

“Don’t let your house own you. Keep your housing costs low enough that you can still live your life.” — Dave Ramsey, "The Total Money Makeover", 2024.

2. Why around 30% Matters

• Breathing room: If housing eats more than 30%-35% of your net income, you’ll likely cut back on essentials (food, transportation, healthcare) or neglect saving. You don't have much room to breathe.

• Flexibility: Staying below the line leaves space for the habit of 'Pay Yourself First' using the Habit of 10%, saving for trips and even retirement, paying off debt (e.g., 20% to allow you to still live on the 70%), and setting aside fun money.

• Protection: Unexpected costs (medical bills, job changes, repairs) don’t push you over the edge.

• Opportunity cost: Every dollar locked into an oversized mortgage is a dollar that can’t be saved, invested, used for debts, started into a business, or spent creating experiences.

• Stress less: you are much less stressed if you have enough money for other things and areas of your life.

3. When the “Dream House” Becomes a Nightmare

It’s tempting to stretch for the big house—granite counters, extra bedrooms, that picture-perfect yard. But a hefty mortgage can tie you down for decades, and with lots of maintenance! If you are a first-time buyer, is this the house you want, or does it feel like over-stretching? Are you and your partner good to live there for many years? You can use the guideline to consider what works for you.

Think about the word itself: “mortgage” comes from the Old French mort + the Latin gage, meaning “death pledge” (Kane, 2016).  It was literally a contract that lasted until death or fulfillment.

Here’s the kicker: on a typical 30-year mortgage, the payment looks affordable because it’s stretched out and you only pay monthly. But in the first decade, most of your payment goes straight to interest, not principal. You can run mortgage calculations (at USmortgagecalculator.org), for example, where after 10 years on a $320,000 mortgage, with 20% down and 6% interest, you still have about 80% of the loan left to pay. That means you’re effectively renting your house from the bank while paying upkeep, taxes, and repairs yourself.

Let's look at an example from Investopedia. Here are the key assumptions:

• $100k mortgage

• 20% down payment, i.e., $25k down, and borrowing $100k

• 6% interest

• 30 years or 360 monthly payments

• Each monthly payment is $599.55

Investopedia example for the monthly amount paid from month 1 to month 360. Data accurate as of Mar. 2nd 2025. Source - https://www.investopedia.com/mortgage/mortgage-rates/payment-structure/

As seen, in the first month, you would likely pay $500 in interest! That's approximately 83% just for interest, and not equity building.

Do you want your dream home to become a financial nightmare? If the payments swallow 40–50% of your net monthly income, you’ll be forced to sacrifice opportunities, freedom, and peace of mind—all for square footage.

“Wealth is built by controlling your biggest expenses—housing, cars, and lifestyle—so you can invest the difference.” — Morgan Housel, "The Psychology of Money", 2020.

4. The Reality Today

• In many metro areas, rent often takes 40–50% of income for younger households.

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• Lenders generally won’t approve mortgages if your housing debt-to-income (DTI) ratio exceeds ~28–31%.

• When factoring all debts (student loans, car payments, credit cards), most lenders cap the total DTI at ~40% gross income.

“Lenders prefer your housing costs to be no more than 28% of gross income, and your total debt payments no more than 36–40%.” — CFPB (Consumer Financial Protection Bureau)

5. Strategies to Stay Under 30%

• House-hack: Rent out part of your space if allowed e.g., basement, get roommate(s), and Airbnb where allowed.

• Move smart: Consider up-and-coming neighborhoods or suburban options with lower rents.

• Income growth: Sometimes the best housing fix is increasing the top line (more income).

• Be patient: Buying may not be right if it stretches you above 30%. Renting longer while saving can be smarter.

6. Exceptions & Context

• For high-income earners, exceeding 30% isn’t dangerous if all other financial goals are met.

• For lower-income households, even 30% can be tough—programs like Section 8 vouchers are based on the idea that families shouldn’t pay more than 30% of income toward housing.

• The key: stay aware of your housing-to-income ratio and ensure it supports—not sabotages—your long-term wealth.

Personal Note

I’ve lived this rule out myself. Early in my journey, I chose not to spend heavily on housing—I stayed with housemates, rented shared places, and kept my costs low. Even when I moved to Colorado, I bought and lived in a reasonable condo for many years. Only when I was in a long-term committed relationship, now we're married, did we buy a house.

That decision gave me the financial margin to save, invest, and pay debts. It wasn’t glamorous, but it worked. That’s the deeper point here: housing is a choice. It normally doesn't feel that way.

You can live in the city in a really nice flat and pay higher rent, or you can also live further away in a not-so-nice place and have to buy a car to travel in. Up to you. And sometimes, choosing “less” in one area creates space for “more” in the rest of your life.

Conclusion

Housing can feel like an immovable weight, but it’s also the cornerstone of your financial health. Keep it around 30% of income, and avoid crossing the 40% gross DTI line, and you’ll give yourself the freedom to build wealth with the other 60–70%.

👉 This is Rule #1 of the 7 Rules to Live a Wealthy Life series. Start with housing, and you’ll see how the rest of the rules layer on top. Check out the summary article of all 7 Rules to see what’s coming next.

To your success.