Ultimate Budget Series: Part 4 – Housing

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Ultimate Budget Series Part 4 HousingWelcome back to the Ultimate Budget Series. If you haven’t have a chance to check out the rest of the series, here’s what we’ve got so far:

Income Taxes

Today we’re going to talk about (most likely) the biggest expense in your budget!  That’s right, today’s topic is your housing expense. Most people have this expense at the top of their budget. And most make major money decisions having in mind how much this monthly cost is, because no one wants to accidently spend their rent money. And since this is the largest percentage of your budgets, I would recommend doing more research on this topic than any other to ensure you are saving as much as possible. So let’s get to it!

Category Description

For purposes of this article, housing is defined as; “The cost of owning or renting property as a means of shelter and housing for you and your family. This includes Mortgage (or rent), Taxes, and Insurance.”

How Much You Should Budget?

There are many types of advice out there, from taking a certain percentage of your monthly income vs. the mortgage, to multiplying your annual income x 3 or whatever to reveal your maximum purchase price. Let’s take a look at a few examples:

1. No more than x percentage of your monthly income. This is a simple calculation that can help quickly determine what you can and cannot afford in terms of housing. Dave Ramsey says no more than 25% of your take home pay. I say more like 35%, but obviously, the lower the better.

Update: Matt from Mom and Dad Money had some great insight on this point in the comments, and said it better than I could:

I think it’s first important to consider your long-term goals and take those out of your budget, and then see what money you have left over for shelter. Obviously there are considerations like living in a low-crime neighborhood, school system, etc. that will take you beyond simply viewing housing as a budget line item, but it’s dangerous to go the opposite route and simply look at percentages without understanding how it affects your overall goals.

When we bought our house, it was closer to 40% or so, and now it’s even more because Michelle is now at home. I wouldn’t change our situation now, but I think it’s wise to shoot for the least amount possible.

2. Multiply your annual salary x 3. This number is specifically used for the purchase price of your house, and can help determine what you can afford. For example, if you make $50,000 per year, you can afford a $150,000 home. This is a good, conservative rule to live by, and can help keep your mortgage and taxes low. Let’s run some basic numbers to see how this works out monthly.

  • $50,000 – $7,500 in taxes = $42,500/12 = $3,541.67 monthly income.
  • $150,000 house with a 30-year note at 4.5% = $760 + $150 property taxes = $910 monthly mortgage.
  • Divide that $910 into the $3,500 monthly income, and that’s about 26% of your take home pay for housing.

3. Buy whatever the bank says you’re approved for, who cares. Some people take this approach, especially those who think credit cards are free money. They go get pre-approved for $800,000 because their parents cosign the loan, the live in the McMansion for a few years, make a few payments, then walk out on the property, destroying neighborhood home values and move back home to the basement. Obviously, this is the method I recommend. 😉

Common Ways People Blow This Category

Housing is crazy expensive. I might even go as far as to say that the rent is too damn high! But that’s no excuse to be wasting hundreds per month on a place that is overvalued.

It's true!
It’s true!

The most common way people blow this category is not doing their research. Add that, on top of making an overly-emotional decision on where to live, and you will be wasting money each month. And that’s pretty much it.

Best Ways To Reduce Housing Costs

Nowadays, there is absolutely no excuse for overpaying the cost of rent or your mortgage. There are tools like Zillow.com that show EVERYTHING you could ever want to know about house values, rent values, comparable housing values, history, details, pictures and everything else.

For those that are renting, you can compare several places that fits your needs, and even negotiate with the one you want to lease. You can find comparable rents nearby and bring it to them, asking them to lower the cost of the apartment you want. And this is a tactic you can use when renewing your lease as well. If they are raising your rent above the average, bring them some printouts of places you could move to with lower rent. At worst, they could say no, but I know of people who have had this work, and are saving money over what they would have been paying.

And for those buying, your real estate agent has so much information at his fingertips, it’s ridiculous. On top of Zillow, they have worked with hundreds of buyers and appraisers, and can give you a real feel for what a place is worth. And if you have an awesome real estate agent like ours, they can help talk the price down and get you in much cheaper, saving tens of thousands on the purchase!

In general, you can choose to live in a place with lower cost of living and taxes, and save yourself a bundle. You can also choose to live close to wear you work. This won’t save you on housing, but will save a TON on commuting costs.

Whatever Else I Feel Like Writing

Housing is a HUGE expense. You should never jump into it without doing TONS of research, and reading all the fine print. Know exactly what you are getting in to, and the long term financial implications of renting or buying a home. You can really get ahead by keeping this cost as low as possible for as long as possible, allowing you to free up your cash flow, invest and/or pay down your mortgage quicker if you buy.

That being said, where you choose to live and what house you choose to buy IS an emotional decision. Do NOT disconnect your emotions from this one if you plan on making it a home. And for those purchasing, I suggest approaching it as a home first, investment second, but do not neglect either one. I do believe you can have the best of both worlds, but don’t hate yourself if the value drops, and also don’t ignore the facts when making the purchase.

Comments: Do your own or rent currently? How did you ensure you are not wasting money on housing costs? What would you have done differently?

Jacob Wade

Jacob Wade

Jacob Wade has been a nationally-recognized personal finance expert for the past decade. He has written professionally for The Balance, The Spruce, LendingTree, Investing Answers, and other widely-followed sites. 
He’s also been a featured expert on CBS News, MSN Money, Forbes, Nasdaq, Yahoo! Finance, Go Banking Rates, and AOL Finance.

In 2018, Jacob quit his job and his family decided to sell everything (including their home) to take off on an adventure. They traveled the country in an RV for nearly 3 years, visiting over 38 states, 20+ national parks and eventually settling in the sunshine state!

30 thoughts on “Ultimate Budget Series: Part 4 – Housing”

  1. We’re owners, but it was far from a financial decision to be so. Bingo on the emotional side of this deal.

    Now, can you break down, as proficiently as above, whether or not I can afford an appetizer AND dessert when dining out?!

  2. I think the rules of thumb you mention are helpful in terms of helping you think about the maximum amount you should spend, but the rules get people into trouble when they think that as long as they spend that amount, they’re automatically fine. For many people, spending 35% of their income on housing would leave them with very little room to do things like save for retirement, build an emergency fund, etc. I think it’s first important to consider your long-term goals and take those out of your budget, and then see what money you have left over for shelter. Obviously there are considerations like living in a low-crime neighborhood, school system, etc. that will take you beyond simply viewing housing as a budget line item, but it’s dangerous to go the opposite route and simply look at percentages without understanding how it affects your overall goals.

  3. My boyfriend and I currently rent, and how we figured out what our budget would be for that was to take all our normal monthly expenses, add them up, subtract that from our monthly income, and then figure out how much leftover a month we were comfortable with. It was a bit tricky because we also had to add groceries into the budget, which we weren’t accustomed to beforehand (both lived with our parents). We could both afford $600 a month, so we were interested in anything $800-$1200.

    We ended up with $1250 because this was the only place okay with pets, and I didn’t really want to give my cat up. All utilities are included, the location is great/safe, and while it’s in a basement, it’s only a year old so everything is still in good condition. We looked at close to 15-20 apartments before making a decision and by exploring other options, figured out what our likes and dislikes were pretty fast.

    • Great job on doing your research before pulling the trigger. With an expense this big, you want to consider EVERYTHING, because otherwise you could be throwing hundreds out the window each month, and possibly not even be satisfied with where you ended up.

  4. The biggest thing we did to reduce our housing cost expense was pay off our mortgage. That was some time ago, and our rate was 7.5%. Second, when we moved in 2009, we downsized into roughly half the space we were occupying. All else being equal, larger houses cost more than smaller houses, so that saved us a bundle. Third, we bought a house with a self-contained rental apartment built in. We’ve rent it on a temporary basis–one week to two months–to vacationers, relocators, etc. This doesn’t reduce our housing cost, but it does turn our house into a revenue generator, about $7,000 last year. And so far no axe murderers have rented from us. 🙂

    • Kurt, you are awesome. Well done on tackling the the mortgage quickly, and turning your next house into an income generator! I’m planning on no mortgage by 40….got a ways to go!

  5. I’m a renter and our search went something like this: find the smallest place, in the safest area of downtown, for the lowest amount of money. We pay $830 (including utilities) to live downtown in a super walkable area. We chose a studio to keep it cheap and it’s approximately one fourth of our income.

    I’m afraid to own! At least with renting, if we lost some of our income we could easily downgrade.

  6. When we purchased our current house we went about it a little differently. We sold our $150k house and set ourselves a limit of $90k for our next house. That made evaluating the neighborhood MUCH more important, to be sure, but we ended up finding a great house in a solid neighborhood that was a foreclosure. Basically paying $85k for the house including repairs, and now the house is worth $110k less than 2 years later. We’re on our 4th house, and we’ve been more pleased with this method than any of the previous ones.

  7. Every time I have taken out a mortgage, I make sure the monthly payment is equal or less than my weekly wage. It is more conservative than present rules of thumb, but it makes life a lot easier. Then you add property taxes and insurance on top. Generally speaking, I can keep my overall housing expenses a low percentage of my overall budget.

    • That’s a VERY wise move. I tried to tell my little brother when he first got a job to act like he only made 50% of his income, and put the rest away. Then he would get used to it and ALWAYS make decisions based on living off 50% of his income…..Didn’t work tho :\

  8. I’m looking at investing in some energy efficient products to lower my costs. From what I’ve read, The Nest would do nicely in our house as a thermostat, and because of all of our windows, I think I could upgrade and see significantly lower bills.

    • Do it man! Run the ROI of course, but seems like there are some GREAT returns on the initial investment for some of the more inexpensive energy efficient products (LED, smart thermo, etc)

    • We borrowed in the upper end of what we were allowed, but our budget is so paper thin, no way we could have went with the extra $60k they were offering. AND THIS IS AFTER THE CRASH!

  9. We bought a very cheap fixer upper to keep our housing costs low. 13% of our income, now 20% with an equity loan for further repairs. I wanted a mortgage payment that was less than one weeks pay. #3 is scary – when we were younger, banks approved my husband for a $240,000 mortgage and he was only making $12/hr – that was before the housing bubble burst, and obviously a lot of people assumed they could afford it.

    • You do the Rehab loan? I’m always curious to see how those work out in terms of equity after you’re finished. And holy CRAP!, $240k on $12 an hour is INSANE!

  10. Our rent is now 24% of our after-tax combined income and I don’t think we can really find anything cheaper that is as conveniently located. This is before retirement contributions though, so really it is a higher portion of our spendable income. My fiancee is due for a raise soon though for already starting a new position at current job(will get back pay once rate is agreed) so it’ll make retirement contributions easier hopefully.

    • 24% is a good, safe place to land. I do recommend leaving room for retirement, which it looks as though you should still be able to fit in. I contribute 6% to my 401k, and am at like 50% of take home or something! 🙂

  11. I rent in LA, which depending on where you live can be very experience. My rent/income ratio is pretty high (hard to give exactly numbers because my freelance income fluctuates), but it’s around 30-40% each month. I chose to live in the higher rent area I live because it’s safe, very walkable, and just feels very comfortable and like home. I would probably be more open to crappier places and/or roommates if I was younger, but I think as you get older you want that safe haven to rest your head ever night.


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