The 30% rule has long been a cornerstone of personal finance advice in America, suggesting that no more than 30% of one’s gross monthly income should be devoted to housing expenses. But in today’s economic climate, where housing costs are skyrocketing while wage growth remains sluggish, this once-practical guideline is increasingly out of reach for the average American.
A recent report from CardRates reveals a sobering statistic: nearly 8 in 10 Americans (76%) are blowing past this 30% threshold. The reality is that for many people, adhering to this rule is not just difficult—it’s nearly impossible. As housing prices continue to soar and incomes lag behind, it’s time to ask whether the 30% rule is still relevant or if it’s time to rethink how we manage housing costs.
The Origins and Purpose of the 30% Rule
The 30% rule was designed with a simple goal in mind: to prevent individuals from becoming “house poor,” a situation where a person spends so much on housing that they struggle to cover other essential expenses or save for the future. The concept traces its roots back to 1969 when public housing regulations in the U.S. capped rent at 25% of a resident’s income. By the early 1980s, this cap had been increased to 30%, and the rule became widely adopted as a general standard for housing affordability.
However, what worked in the 20th century doesn’t necessarily hold up in the 21st. The CardRates report shows that 76% of Americans now spend more than 31% of their income on housing, with 53% of them allocating more than half of their monthly earnings to this single expense. For nearly 10% of women surveyed, housing costs consume almost their entire paycheck.
“This is deeply troubling,” says Erica Sandberg, a finance expert at CardRates.com. “The more money people spend on housing, the less they have for essential bills and for enjoying life. Unfortunately, sometimes people put the difference on their credit cards, and then rack up expensive consumer debt.”
Why the 30% Rule is Becoming Unattainable
Several factors contribute to the growing irrelevance of the 30% rule. Housing prices in many parts of the country have surged in recent years, driven by a combination of increased demand, limited inventory, and rising construction costs. Meanwhile, wage growth has not kept pace, creating a widening gap between what people earn and what they need to spend on housing.
In high-cost cities like San Francisco, New York, and Los Angeles, housing costs can easily consume 40% or more of a household’s income. Even in less expensive regions, rising rents and home prices are stretching budgets thin. The disparity between stagnant wages and escalating housing costs is pushing more Americans into financial stress, forcing them to reconsider the conventional wisdom of the 30% rule.
Time to Revisit the 30% Rule?
Given these challenges, some personal finance experts are rethinking the 30% rule. Rachel Cruze, co-host of The Ramsey Show, even suggests capping housing costs at around 25%. But for many Americans, especially those looking to build wealth through homeownership, such conservative advice seems impractical. Real estate has long been touted as a key wealth-building tool, and for those eager to enter the market, spending more than 30% of their income on housing might be the only option.
This has led some to argue that spending up to 40% of income on housing might be more realistic, particularly in high-cost markets. However, this approach comes with its own set of challenges. Allocating such a large portion of income to housing leaves less room for other necessities like transportation, healthcare, groceries, and discretionary spending on dining out or entertainment—not to mention the impact on retirement savings.
A New Approach?
One alternative strategy might involve paying more than 30% of income on housing now, with the expectation of refinancing to a lower rate or shorter term later. This could make sense for buyers who are confident in their future income growth or who anticipate favorable market conditions that would allow them to reduce their housing costs in the future.
For instance, a buyer might decide to purchase a home that requires 35% or 40% of their monthly income, with a plan to refinance later and bring their housing costs closer to the 30% or even 25% mark. But this strategy carries risks. A successful refinance depends on factors like market conditions, interest rates, and the homeowner’s creditworthiness. If interest rates rise, or if the homeowner’s financial situation deteriorates, refinancing may not be an option.
Moreover, banking on future income growth to make housing more affordable is a gamble that could backfire if job security weakens or the economy takes a downturn.
The Bottom Line
The 30% rule, once a reliable guideline for maintaining financial stability, is increasingly out of sync with today’s economic realities. While it remains a useful benchmark, the rule may need to be adjusted—or even rethought entirely—to reflect the challenges of the modern housing market. For now, Americans must navigate a complex landscape where the old rules don’t always apply, and where careful financial planning is more important than ever.
