Using 25% of income for rent - gross or net?

Question

I always hear the advice that your rent should not be more than 25-30% of your income and I like that advice. But I've never been able to get a clear answer on whether this should be on your gross or net income.

Most of the examples I see out there are based on gross income, like if you make 60K, then your monthly rent should be no more than $1500 a month (60k/12 * 0.3 = 1500). However, that strikes me as a high estimate since taxes are not taken into account at all and 5k in monthly income is significantly lower after that is removed.

So what is the case for using gross income in that calculation? Doesn't using net income provide for better budgeting?

Answer 1

Yes, you really budget from "net." After all deductions on one's paycheck, it's not tough to wind up with 60% left, making the 30% of gross fully half of what you net.

The unasked question is whether this is a good budgeting tool. I think it really isn't. If you can find a place to rent that's a walk from your job, and that rent saves you the full cost of car ownership as well as the hour round trip each day your co-worker commutes, you might justify 50%.

"Rules of thumb", nearly all of them, should be taken with a grain of salt.

Show me your budget, and I'll know what your priorities are. Your budget is what's right for you, but as a PF blogger, I hope there's a line item for retirement savings, and another for fun.

Answer 2

It's just a rule of thumb, and so it's done from gross to make it easy. If you make $3300 a month, and spent $1000 a month on rent, you're at the limit of what you can afford. It's not like if it's 30.0001% you're screwed but if it's 29.999% everything's fine. Some rents won't include things (wifi, cable, utilities) that others do. Some locations will require you to spend more on transportation. So the real "ok" range is quite wide. But if you're at 60% of gross on rent, you literally cannot make that work because after deductions, you won't have any money for food. If you're at 10% of gross on rent, you probably have a lot more money left over than most people.