Kevin O'Leary: Follow this rule to figure out how much you should spend on housing (2024)

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Kevin O'Leary: Follow this rule to figure out how much you should spend on housing? ›

O'Leary's advice is similar to the general rule that dictates you should spend no more than 30% of your gross monthly income on housing.

One popular guideline is the 30% rent rule, which says to spend around 30% of your gross income on rent. So if you earn $3,200 per month before taxes, you could spend about $960 per month on rent.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

35% / 45% rule

With this rule, your housing payment should be no more than 35% of your gross monthly income (no more than $2,800) but also no more than 45% of your post-tax monthly income (no more than $2,925).

The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.

As a rule of thumb, personal finance experts often recommend adhering to the 28/36 rule, which suggests spending no more than 28% of your gross household income on housing. For someone earning $70,000 a year, or about $5,800 a month, this means a housing expense of up to $1,624.

The 30% Rule Is Outdated

To start, averages, by definition, do not take into account the huge variations in what individuals do. Second, the financial obligations of today are vastly different than they were when the 30% rule was created.

For that reason, he says to be conservative. “Being conservative means you save up for a 20 percent down payment, being conservative means you take a straightforward 15 or 30-year loan, and it means that you calculate these basic numbers and know that you're under the 28/36 rule very comfortably,” Sethi says.

Downsides to the 28/36 rule

Broad guidelines like the 28/36 rule do not account for your specific personal circ*mstances. Unfortunately, many homebuyers today do have to spend more than 28 percent of their gross monthly income on housing.

The 33/38 rule is a guideline used in mortgage lending that recommends a maximum housing expense-to-income ratio (front-end ratio) of 33% and a maximum total debt-to-income ratio (back-end ratio) of 38%.

What is the rule of thumb for housing? ›

The 30% Rule of Thumb

The general rule of thumb is that housing costs should be no more than 30% of your gross income. This includes rent or mortgage payments; homeowner association fees; and utilities like gas, electricity, water, and internet.

Using this calculation, a person making $100k annually could purchase a home between $3-$400k purchase price. The 28/36 rule: Most lenders want a borrower's total debt load to be below 36% of their pre-tax income. Factoring in other debts, most recommend a housing payment be no more than 28% of their pre-tax income.

It's generally advisable to keep your housing costs to 30% of your income or less. Spending 50% of your income on housing could cause you to fall behind on mortgage payments or other bills. If your non-housing expenses are notably low, then it may be OK to spend half of your pay on housing.

In general, under the rule: 50% of your income should be set aside for Essentials. 30% of your income is for Personal spending. 20% of your income goes straight into Savings.

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money. Cutting down on housing costs by sharing living spaces or finding affordable options is crucial.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.

A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service.

A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."

Income: You can use your income as a starting point when calculating how much you want to spend on a house. Debt: Your debt and monthly expenses factor into how much you can spend on bills each month. Cash reserves: You'll need cash on-hand to pay for your down payment and closing costs.