I Want To Spend Half My Paycheck On Rent. Will I Regret It?

Dear rent-or-roommate-burdened,

From a purely financial perspective, spending more than half your paycheck on rent is not recommended. I can only think of a couple of circumstances where that ratio wouldn’t put you in a financially precarious situation. One of those circumstances is living with someone who pays for your other essentials in exchange for you forking over the equivalent of half your paycheck for rent. Another circumstance where it may be justifiable is if it was for a temporary, finite, short-term period. 

I understand, however, that many folks in America simply do not have a choice — their income relative to the cost of rent forces them between a rock and a hard place. One of the most significant issues modern society faces is affordable housing. I’m constantly baffled that we haven’t solved a problem as fundamental as shelter for all humans. But, sure, let’s use our brain trust to build the metaverse instead. 

Whenever you’re faced with a financial decision, there will always be factors outside of your control. The cost of rent and the supply of rentals available are not things we can personally control. My advice, then, is to try to find your agency in every situation and focus on what you can control. 

You mentioned the advice you’ve heard about spending under a third of your paycheck on rent. While this is a bit more reasonable than half of your paycheck, it doesn’t necessarily apply to every person’s situation. Let’s unpack the “one-third” rule of thumb, also known as the 30% rule.

Without knowing your entire financial picture, it’s hard to definitively say whether or not you can afford to pay more than a third of your income towards rent. For example, if you have inherited wealth, you have no debt, and your prospects for future earnings look bright, then it might not be all that risky to be rent-burdened. But if you have hefty student loan balances, high-interest credit card debt, and your earning potential is less likely to increase significantly, then being rent-burdened would undoubtedly make your financial situation precarious. 

This highlights one problem with the 30% rule: It doesn’t take into account your financial situation outside of your income and the cost of rent. And it doesn’t reflect current financial norms like student loans. The rule has its roots in a 1969 amendment to public housing requirements called the Brooke Amendment. The benchmark comes from average rent, and not affordability. It might continue to be popular today because of its use as a benchmark for lenders to determine affordability for home buyers.

If you like using benchmarks and guidelines, the 50/30/20 monthly budget may be a useful alternative. This method breaks down your monthly expenses as follows: 50% of your monthly take-home (after-tax) pay goes toward housing, utilities, groceries, transportation, and other essentials. 30% gets spent on non-essential wants like entertainment and dining out. And the remaining 20% of your monthly take-home pay is allocated towards saving, investing, and/or paying down debt. 

If you don’t want to use the 50/30/20 budget, I suggest putting together a budget or a spending plan of some kind, so you can lay out how to allocate your monthly expenses with the potential rent increase. 

Guidelines are helpful benchmarks that make us feel like we’re making sound financial decisions, but when we go outside of the recommendation, it might make us feel shitty. So it’s also wise to keep in mind the things we can’t easily quantify, like feeling financially fragile.

Financial fragility is vulnerability to a financial shock. Shocks happen all the time, without warning, and they come in all shapes and sizes. When a shock occurs to someone in a financially fragile state, that person will lack options and is vulnerable to financial stress and uncertainty. For example, getting laid off would put one in danger of not being able to afford their basic living expenses. If an unexpected expense like traveling to visit a sick relative pops up, not having the money means a higher chance of sliding into debt. If you’re already financially fragile, any little bumps create more pressure and stress. Fragile things, when under pressure and stress, break instead of bending.

Some folks are financially fragile because their circumstances are not something they can overcome. This is unfortunate. Sometimes folks make financial decisions (with imperfect information) that contribute to the risk of being financially fragile. This is also unfortunate. Please reflect on your decision with this in mind. Will living alone put you in a financially fragile state? And if so, would that tradeoff be worth it to you? Do you think you’d be exchanging one stressor — roommates — for another? Please consider the second- and third-order consequences of your decision.

While there isn’t a nice, clean formula to help you understand whether or not you’re financially fragile, there are some things you can do that will help prepare you for inevitable financial shocks.

An emergency fund, for instance, is one of the best ways to hedge against unpredictability, random unexpected expenses, and short-term layoffs. The textbook definition of an emergency fund is having three to six months’ worth of expenses saved in cash. Since the shock of the pandemic, some financial experts have revised this recommendation to a year. But you know what feels right for you and your risk tolerance.

Also try to avoid taking on high-interest debt like it’s cheugy and out of style. This is, of course, easier said than done, and only useful if you haven’t already taken on debt. If you have a lot of debt, you’ll need to develop a game plan to attack it. Treat debt like a trashcan fire in your bedroom. Move swiftly but calmly and snuff that shit out.

Finally, invest your money. Investing is a way to protect you against inflation. As we’re seeing at this very moment, prices are going up. When you invest your money, it grows, and in theory, you’ll be able to keep up with rising prices and then some.

Before you move out on your own, here is something you can do to get used to the pinch of paying more while also working against financial fragility: Take the extra rent you would be paying and start saving or investing it, or both. You’re forcing yourself to work with less money each month, but you’ll also be putting it to good use. Over a few months (or many months), this exercise will show you what it would be like to have to pay more. If you’re constantly dipping into your savings, it probably means you need more time, more income, or both before you move. But if you can manage the pinch and you’re feeling far from financial fragility, it might be time to take the plunge. 

Your favorite finance friend,

Paco 

(she/her)