It started with a search.
When I initially Googled how much I should spend on rent, it took less than half a second for the internet to unearth over 64 million search results. This was my first time looking for an apartment, and scanning these results felt like I was reading the same answer over and over without any real explanation as to why.
You may have read about the ol' 30% rule (potentially even from me) that advises renters to spend no more than 30% of their net income on rent each month. For those not following along with today's rent prices, this would require renters in the most expensive cities of the US and Canada to be earning between $65,000 to $130,000+ before taxes. Since the median income of Millennials lies somewhere around $21,000, one might wonder whether or not this is still a reasonable benchmark.
Let's start by figuring out where that 30% even came from.
1937: The first National Housing Act was passed in 1937 to serve families in the “lowest income groups." It started out setting limits on the income a tenant could earn based the cost of his rent at that time.
1940: In 1940, the limit was switched to the rent side, forbidding landlords of public housing to charge a monthly rent higher than 20% of the tenant's income.
1959: The Housing Act of 1959 maintained rent maximums, but gave public landlords more control over what the limits actually were. Due to increasing costs associated with keeping buildings functional, landlords continued to raise rent maximums until they reached a point where their original purpose was wholly defeated.
1969: In 1969, a Massachusetts senator named Edward Brooke passed a law, aptly named the Brooke Amendment, to set the maximum rent for public housing to 25% (it was raised to 30% in the early 1980's). This amendment proved to be quite controversial, but that's a different -- yet fascinating -- story for another time.
To sum it all up...
The 30% recommendation that appears in almost every rental advice column was born from a law that determined this was the point where a family living in public housing was considered financially burdened by housing costs.
This figure quickly made its way into the greater housing market when federal housing agencies like Fannie Mae and Freddie Mac used it to decide which mortgages they were going to purchase. As more lenders adopted this standard, it became the unofficial indicator of whether an applicant (or renter) was able to afford to be a homeowner at all.
If you’re reading this and currently spending half of your income on rent, don’t panic.
Today, the number of households spending more than 30% of their income on rent is at a record high, clocking in at over 21.3 million in 2014. In fact, households that earn over $100,000 annually have been the fastest growing segment of renters over the last three years. These renters are making a conscious choice: “For them, the 30 percent ratio is not an indicator of a true housing affordability problem but rather a lifestyle choice.”
Perhaps as the renter population continues to broaden -- it hit 36.4% in 2015, a record high since the 1960s -- the standard should also evolve. Setting an unrealistic expectation can lead to a scary renting experience, especially for the newest generation of young renters for whom renting (over homeownership) is a part of being able to have the flexibility to pursue their dream job or education.
So, when considering the variety of financial situations across the renting population, my instinct is that the amount of money that you spend on your rent should be a well informed decision based on a combination of factors, including but not limited to a percentage of the money you’re making each year, how many incomes are in your household, existing debt, dependents and personal financial goals. For example, if you’ve set an objective to save a certain amount each month, set that aside along with your budget (loan payments, groceries, wine, bills, Netflix, wine, delivery, wine, etc), and see what’s left.
Whatever you come up with -- and feel comfortable with -- may be the right amount for you.
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