Housing Expense Guideline For Financial Independence

Housing Expense Guideline For Financial Independence

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.

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.

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.

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.

Income To Rent Chart
Good luck fighting the trend! You will get crushed over the long run.

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!

Lived close by work to save time and money. Had to get in by 5:30am!

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.

The white building was my dingy 2/1 apartment at the edge of Chinatown I shared w/ a weird fella. Noisy as hell.

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.

San Francisco historical rent chart for a two bedroom apartment - housing expense guideline
Holy crap!

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 for free. 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!

Live the good life in Golden Gate Heights - housing expense guideline
View from my master bedroom deck.

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.

Our housing cost is now about 2% of our annual gross income. Paying all cash 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 2023+

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.

Housing Expense Guideline For Financial Independence

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!

What percentage of your gross income do you spend on housing?

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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.

Income And Net Worth Required To Buy A Home at any price point

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

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 400,000 investors and manages over $3.5 billion. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They potentially have higher growth as well.

Both platforms are free to sign up.

Housing expense guideline and investing in real estate

I've personally invested $810,000 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. 

About The Author

208 thoughts on “Housing Expense Guideline For Financial Independence”

  1. Your First Million

    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.

  2. 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.

    1. 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.

      1. 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)

        1. 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.

      2. 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.

  3. 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.

  4. 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.

    ARB–Angry Retail Banker

  5. 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.

  6. 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.

    1. 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%.

      1. 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.

  7. 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!!

  8. 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.

  9. 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.

    1. 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.

      1. 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.

    2. 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.

  10. 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.

    1. 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.

  11. We’ve been at about 20% since we bought our house 6 years ago. Currently we’re at 20% of my husband’s gross base salary (because we renovated last year) and in a good year we’re at 16% or 17%. Even at 20% the taxable account has less going into it, whereas the years we’re at 16/17% we’re able to save all of that extra money. I really can’t imagine being higher than 20% and making it work.

  12. Well, we’re the lucky few to inherit 2 apartments from our folks, who went into a mortgage back in the day, when finances were simpler and life easier :D

    We do work on renovating a small rural home, that will get us out of the city for at least 2-3 days/week till daughter grows old enough to move out and then we’ll probably rent the 2 apartments and move out in the nearby village. As long as I have a wi-fi connection, I can still earn my money and enjoy a more peaceful life.

    Right now, with all the re-building and renovation work, we’re spending a big chunk of our money, but in few years it will get back to normal and we’ll have our small house in an inhabitable state

  13. Hi Sam,

    Been a long time reader, first time commenting – thanks for all the insights.

    I am currently at 33% with my two mortgages (all inclusive of taxes and insurances) in NY. Both loans are fixed at 3.5% – one with 15 yrs (2.5 yr old) and the other with 30 yrs (brand new). I’ve been a firm believer that we will most likely not going to get any cheaper debt in the future than now. That being said, I can paid off the 15 yr mortgage relatively quicker (in 3-4 years) if I don’t invest anywhere and strictly force myself to pay extra principal every month. In my opinion, this helps me for a much better cash inflow monthly to allocate my assets through multiple securities later. This also brings the housing expenses down to 18% of our income. In your eyes, what would be an ideal approach? Would you pay off one mortgage so that you have better cashflow month to month (and also keep the mortgage to income ratio down to 18%) or take advantage of the cheap rates and invest in other securities and shoot for higher returns than 3.5% (net of all fees and taxes)? Thanks in advance for your inputs!

      1. Kept the first one as primary and bought the second as rental for now with possibility of moving in later down the road.

      1. Thanks Sam! the FS-DAIR is very helpful. I am currently pretty much a starter on building my current net worth (still in my late 20s) and sometimes, carrying close to a 1mm debt scares me!

    1. Make the additional principal payments, to payoff the loan as soon as possible. Create a mortgage calculator via excel, and calculate how much you will save in interest payments towards the bank….

      However, it is important for you to take into consideration the qualitative cost and risks associated with your plan, not just the quantitative factors. Will the additional payments to principal or lump sum payment lower your quality of life, or place a burden on family. i.e time away from family, increased stress or health problems from over working, no work/life balance…

      Remember, there is no need for an ultimatum, and you can consider a compromise, for example, paying the loan off in 8 years…

      Best of Luck,

  14. The Long Haul Investor

    Well stated through and through. I’ve always felt 15% was an optimal number, and to bad more people don’t aim for it. To many people confuse a completely updated apartment(with sky high rent), or an oversized house with massive driveway as the definition of having made it big. It’s the opposite unless your ratios are inline as you pointed out above.

  15. 18% (16% tax advantaged) for a 3BR/3.5B townhouse in Arlington VA. Not our retirement home (way too many steep stairs) but a good place to live until then (heart of the County on the Orange line).

  16. Great thoughts, Sam. My wife and I spend about $1,800 per month in Los Angeles, which is about the cheapest thing available without getting shot at. That’s a small percentage of our income though, which allows us to save in order for a possible relocation to Dallas in the next year or so. Cap rates are much more favorable there for buying rental properties, and I was happy to see it was one of the more affordable cities on your chart–plenty of room for the rents to grow after we buy a few rental properties!

  17. Hi Sam – long time reader, first time commenter. We currently spend about 9% of our gross income on our mortgage (including taxes & insurance). We are shooting to pay our home off in 4 years (8yrs after origination….woohoo!) and once paid off, we’ll be at 5.8% of current gross income. FI here we come!

  18. Another great Post! Funny, you and I used to work on same building at around the same time frame. I wish I was as lucky as your co-worker and gotten a place to live for $250k! that was a great buy. I instead chose to move to NJ for a nice 1.3 hr commute and great property taxes :-(

    1. Doh. What were you doing at 1 New York Plaza? I worked on the 49th floor in international equities. It was an amazing experience. Even got to have breakfast with Mike Mortara (fat ankles from Liar’s Poker) at the Partner’s private lounge with several first year analysts.

  19. Financial Coach Brad

    Absolutely agree on these points! We speak to a LOT of people who are paying 50%+ toward just housing costs. It’s hard to get ahead when so much of your money is allocated to a fixed expense like that.

    Another thing many people don’t realize, is that there are a lot of costs beyond a mortgage payment. We are 100% debt-free, house and all, but still have almost a thousand dollars per month in housing expenses. Taxes, utilities, maintenance contracts, etc.

    So people who sign on for a mortgage payment that is already pushing them close to the financial edge, sometimes get pushed over that edge by the additional costs added on top.

  20. We live in a really cheap area – a rural suburb of Indianapolis. But we’re also in the richest county in the state – the median household income in my county was 84K last year. The median household income in my immediate area is around 100K.

    Anyway, our house cost us a total of $187,000. The payment on our 15-year loan is a little over $1,000. It’s less than 5 percent of our gross income.

    I really like the security of a low payment compared to our income. Even if this blogging thing goes down the tubes, we could pay our mortgage with nearly any kind of job. It should be paid off this year anyway, but I still like that security. Like you, I dislike debt!

  21. I rent a 2 bedrooms apt in the Valley near LA. Rent comes out at 20.8% of my gross monthly income, and almost 41% of net income. I voted 16-20 because I didn’t count my “3rd paychecks” and bonus (bonus is 7-10% of gross).

    I could do better, slightly. But not enough to justify it. I’m at a point in my life where I just don’t want to sacrifice some level of comfort (having a bedroom and no roommate). Believe it or not, it’s cheaper than the 1-db I had before. I’m still saving 35% of my net income (after maxing out my 401(k)) so I’m not too bad.

    Relocation to a MCOL area is on the radar, and if it happens, then I will be able to save 45-50% of net income.

    I so wish I had your insight when I was in my 20’s and 30’s.

    1. Being able to save 35% of your net income after you max out your 401(k) is great! Keep it up, and keep on inching that savings percentage higher until it hurts. I hear you on reaching a point where you no longer want to live in a dump. Good luck!

  22. Currently spend about 5% of income on a $2.2 million mortgage on a $6 mil home. This tax deduction is a lot sweeter because my wife and I filed for divorce which allows us to each deduct the full 1.1 million max per person, instead of 1.1 million per married couple. Darn marriage penalty, not worth being legally married when it costs over an extra $100k per year in extra taxes. We also split our company’s income across two single returns to eliminate federal income tax marriage penalty and CA’s new “millionaire’s tax” which also has a marriage penalty.

    All combined, home represents a roughly $79k interest tax deduction and $60k property tax deduction. It’s a nice feeling around tax time.

    1. That’s a positive way to put it! Yes, to not allow for a doubling of the mortgage interest texted action once a couple gets married is a relic of sexist days. Is the government saying that to people with homes can no longer benefit? Is the government saying that one partner has to stay at home and take care of a family? What is going on here.

      So who gets the house though? $6 million house must be sweet, even in a place like San Francisco and New York City!

      1. We both have the house and live together happily, we just split ownership 50/50 on paper so we could each deduct the full interest on 1.1m each. Luckily there was a recent court case which determined this is perfectly legal among unmarried partners. Before that the IRS was giving people crap for this. The tax code is just so messed up.

  23. Sam,

    210K income
    18% on 10yr/2.75% mortgage

    We want to purchase a 1br condo (rental property) in a highly desirable area (San Diego), but probably can’t put down enough to breakeven from the rent generated (or avoid PMI). If the interest portion of the mortgage is covered by the rent, would you consider it a sound investment? Would put us at 28% (before the rental deductions) with the purchase of the rental property. Condo would be a 3K mortgage that should generate around 2K in rent. Daughter will also be attending college in area and could live in it with a roommate for 4 years. Do you have a formula you use for rentals? I think I recall reading that you were writing a book on purchasing real estate/rental property.

      1. Makes sense. I left out the part about wanting a vacation home in SD. Trying to figure out a way to eventually make that happen. No desire to vacation in the heartland. ;)

    1. Danielle@wenthere8this.com

      Hi David,

      I am curious where in San Diego you are looking to buy a one bedroom that would result in a $3K mortgage? I own a one bedroom condo that cash flows (15%) right in the city of San Diego (North Park to be exact). And the mortgage is $1,300 (taxes, insurance and HOAs included).

        1. This where we would ultimately like a 2nd/vacation home. Trying to figure out a way to make others pay for it.

  24. Dood, el Farbe

    Current annual mortgage/home costs (I’m including stuff like P&I, taxes, insurance, but not stuff like 1/20th cost of new roof per year, etc.) are around 4% of gross. Will drop to about 0.4% soon once the mortgage is gone…

  25. Great Post Sam! This is so important, many personal finance people focus on the “latte'” issues in personal finance but it is housing, transportation and food that will destroy your fiances. All numbers are % of base salary excluding bonuses and investment income.

    This is still possible – here is mine from graduation.
    2013 – Just outside of Toronto Ontario. 400 per month for a shared house with 2 people 45 minutes from work. 7% of my income.

    2014-2015 Transferred to Calgary Alberta with the same country. Grew my income substantially during this time. Rented a 1 BR Basement apartment below a young family. Extremely noisy but was hard to find a place when i moved there cause oil was still booming. 900/month or 13-16% of my income

    2016: Because of the oil crash Calgary became a tenants market. I negotiated my rent down to 700 per month. Everything is negotiable, know what type of market you are in and get the best deal. Landlords will discount good tenants in a tenants market. 11% of income.

    2017: I had to move out of that basement as I took another promotion and would be working from home. They had another baby too so it was even louder. I moved into a 1 BR + den to use for my home office. It was 950 and i got the lease terms i wanted (still a renters market) 12% of my income.

    1. Great job being disciplined with your housing and negotiating a lower rent! Yes, everything is a negotiation. Be willing to have the conversation folks. Work on your social skills and things will get better for you overtime!

  26. Interesting housing history. As a bachelor, I have always rented out extra space in my home to help with housing costs. I always lived within my means, but didn’t truly wise up until I met my wife. We both had homes, but hers was much more affordable. We chose to give up my large home and move into her small but completely adequate townhouse. Best decision we ever made. Downsizing was truly the biggest contributor to our progress toward financial freedom. We are now mortgage free in a relatively low maintenance home. Can’t escape property taxes and association fees, but they are a very small fraction of our household income. We keep saying we are going to move into something nicer, but that keeps getting put off. Maybe in another few years.

  27. Just under 10% in Dfw area includes mortgage, insurance and property taxes (killer here). It’s probably closer to 12% if you include utilities, landscaping etc. though. I personally think it’s way too much house but the wife disagrees lol

    1. Aw – I know the feeling. We’re upgrading to a bigger, nicer house in June that we don’t need because the wife wants it. Only reason I gave in is I think property values are going to continue to increase where I’m at, the cost of the new place (3k+ sqft, 4bd/4ba,3 car garage) is still cheap < $400k with everything upgraded and total cost is about 8% of income after accounting for bonuses and stock. Property taxes here fortunately are cheap – will be around $2100/yr.

    2. I feel your pain.
      There’s no hard numbers to figure…you just have to decide how much your sanity is worth and then give in if it’s worth more than the cost difference for the house.

  28. We’re at about 22% right now in the Portland metro. Thankfully, we have no car payments or credit cards, but have two student loans with about $20,000 remaining. Our debt ratio is about 24%. Feeling pretty good about that right now, but have a lot of other work to do in other areas. We’ve thrown so much money at debt that our investment accounts are embarrassingly low. I have a pension, but not sure if we should invest more or just pay off those student loans. We could knock both loans out this year for a guaranteed 5% return. Not sure what to do.

  29. Love this post and agree with what you’re saying, Sam. We’re currently renting in SF and at 13.7% of gross OTE (with expected income growth going forward) and looking to buy in the East Bay in the next 12-18 months in the Lamorinda area (need a little more cash to get to the 30/30/3 status first). Rented longer than we would have liked after moving back to CA 2 years ago. We have 4 rental units (TX and South Bay) so I’m on the right side of some of the inflation but not as long on real estate as I want to be long term.

    What are your thoughts on the increasing % of income being spent on rent? Where do you think it can go from here given that percentage is so high already (particularly in the Bay Area)? Rents have slid a bit due to more inventory coming online, so we’ll see. There doesn’t seem to be much room for rents to rise much further (at least in the short term) without incomes continuing to rise (which they may be, but I haven’t seen any income data for SF).

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