Many American Renters Are Cost Burdened: Here’s How To Curb Overspending on Rent

More than 19-million renter households in the United States spends more than 30% of their monthly income on rent or mortgage payments, utilities, and other fees. The Department of Housing and Urban Development classifies families in this situation as experiencing a housing cost burden.

According to new 5-year projections from the American Community Survey (ACS) released in December by the U.S. Census Bureau, more than 40%  of households in the U.S. labored under a housing cost burden during the years 2017-2021.

The United States has a rental affordability issue. Renter income has declined in real-time while rents have continued to rise. According to the United States Bureau of Labor Statistics, the highest cost for most households is housing.

The national median rent increased by 15.57 percent from January 2021 to January 2022. This increased the median rent by over $230, from approximately $1,640 to $1,830. The annual increase of 2.37 percent adds $72 to the median rent in January 2023. With rents at all-time highs, determining how much to spend on housing is becoming increasingly challenging.

The 30% Housing Rule Is Unrealistic

Andrew Latham, a certified financial planner, says that the 30% rule is a popular — and useful — rule of thumb when estimating how much you can afford to pay toward housing expenses. The problem is that it’s not realistic for many people living in high-cost areas.

For example, the median 1-bedroom rent in Marina del Rey is nearly $4,500, which would require an annual income of $180K using the 30% rule. If you stay in an area with particularly high housing costs, it’s unrealistic to find housing that costs 30% or less of your monthly income.

Greg Jankowski, senior wealth advisor at Lourdmurray, agrees that trying to abide by a uniform rule regarding how much to spend on rent is poor guidance. Not only will individual situations vary greatly – for example, some people may have a student loan and/or credit card debt while others may not – but so will the cost of living.

Michael Ashley, Partner, Chief Investment Officer at Running Point Capital Advisors claims that the Brooke Amendment of 1969, which mandated a 30% down payment on public housing, is the genesis of the 30% rule.

It dates back more than half a century when access to healthcare, workplace perks, retirement funds, and government support systems was much more limited. For this reason, it might have made sense to allocate a smaller portion of your salary toward housing out of concern for your safety.

He notes that while everyone’s financial situation is unique and evaluated on its own merits, in the grand scheme of things, improved supplementary benefits could mean that a larger portion of your income is now available for mortgage payments. This is particularly true in households where both partners or spouses are gainfully employed, something that was not an assumption in the 1960s.

Finding Ways to Not Overspend on Housing

Follow The 50/30/20 Rule

Latham suggests the 50/30/20 rule is a more flexible budgeting model that encourages you to divide your spending into three categories: needs, wants, and – cumulatively – saving, investing, or repaying debts. The first 50% is for your immediate needs to live — food, mortgage, car payments, and other necessary monthly bills — 30% is for your wants, and 20% should be saved, invested, or used to make additional payments on debts.

“If you live in an area with expensive housing,” Andrew says, “consider allowing yourself to pay more than 30% of your monthly income toward rent and keeping your needs below 50%. He suggests using a calculator solely for the 50-30-20 rule to know how this would work.

However, Andrew notes that changing budgeting methods won’t be helpful if you deal with a landlord using the 30% rule to screen applicants. In such a case, consider teaming up with a roommate or moving to a lower-cost-of-living area.

Find Ways To Reduce Debt

Greg Jankowski, a senior financial advisor at Lourdmurray, asserts that even if someone spends 25–30% of their salary on housing, they are likely living within their means if they are saving for retirement, have a sufficient emergency fund and can pay all of their debt commitments, including rent.

On the other hand, if one lives from paycheck to paycheck without the opportunity to save money and has some combination of rising debt, a lack of liquidity, or emergency reserves, there’s a need for change.

If you fall into this latter category, Jankowski says that likely housing costs are a financial strain, and you need to reevaluate how to lower any loan payments or raise your disposable income. “I can’t emphasize enough how crucial it is to have a thorough strategy. Like a diet, plans are successful if people stick to them over time and gradually make progress,” Jankowski says.

Find Opportunities To Increase Income

Russ Thornton, Founder of Wealthcare for Women, advises considering opportunities to increase income instead of focusing solely on their expenses. “For example,” he illustrates, “if you earn $60,000 per year and spend $24,000 per year on housing, that’s 40% of your income. But if you were to negotiate a $10,000 raise to an income of $70,000, your housing expense would be less than 35% of your income.”

Although it’s wise to keep a check on your spending, don’t pass up the chance to negotiate with your company or increase your value to them, as this could lead to greater income levels.

This article was produced and syndicated by Wealth of Geeks.

Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like Buttonwood Tree and FinanceBuzz in the past and currently writes for Wealth of Geeks.