You must have heard of the 30 percent rule at some point in your adult life. Whether it’s from a parent, or friend, or Youtube video. Chances are the 30 percent rule has come up.
For those unfamiliar with the reference, ’30 percent’ is the general rule of thumb for how much of your salary should be allocated to housing. It is considered a sensible portion to allocate on a fundamental aspect to one’s survival.
I think it’s time that people re-evaluate if the 30 percent rule really is an appropriate yardstick for their lives.
This Shouldn’t be Misconstrued as A Mandate
Let’s say that you live in Perth and you earn $7,000 per month. Applying the 30 percent rule, you would be spending $2,100 a month on housing. That’s roughly $300 higher than the current average monthly rent in Perth (assuming a 4-week month). Why spend the extra money when you can theoretically achieve the same utility from a house that is $300/month cheaper?
Given the average Perth resident salary is around $77,000, current rental figures aren’t too far off from the 30 percent rule. However, this doesn’t mean that your rental portion should be that much. By having roommates, splitting the rent with a spouse or partner, or even sub-letting, it is possible to lower your overall rental burden.
The point is you don’t need to spend up to the suggested 30 percent. The more prudent course is to evaluate your optimal housing needs, while identifying ways to minimise your outgoing as much as possible.
Your Housing Expenses do Not need To increase With your Earnings
When we earn more, we believe that we deserve more. Increased consumption. Excessive spending on luxury items. Most importantly, larger accommodation.
Now there’s nothing wrong with improving your living conditions over time. You don’t have to live on the same dusty futon your entire life. With that being said, earning more should not be an invitation to live in excess.
Earning more opens up more opportunities for you to prepare for the unexpected. Life gets, on average, more challenging as you get older, and certainly more expensive. Therefore, you should ask yourself if you truly need the added extravagance, or if you’re simply finding a way to display your wealth.
The Less You spend on Housing, The More you Have Available for Investing
Minimising one’s fixed outgoings, whether it be housing or food, is always the smart play. The less you spend, the more you have available to invest. This can be in shares, personal ventures, or even… you guessed it… more housing!
Housing as an investment vehicle is completely different to housing that serves as your primary residence. Specifically, investment properties offer you a fixed, ongoing return that you don’t get from your own house.
Now granted, both your personal property and investment property will appreciate over time. However, you’re technically paying for that privilege with your own home. For an investment home, you are effectively offsetting this cost through rental income and favourable tax incentives.
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Relying on the 30 percent rule can be quite useful in managing your monthly budget. However, it should not be misunderstood as the gold standard. Instead, consider it to be a ceiling of which you’re willing to spend, and endeavour to spend less.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.