Question: How much should I be spending on housing? 

Advice from the Lab: 30% housing; 20% savings or debt reduction; 40% other bills and groceries; 10% discretionary

While there are some exceptions that can make follow this rule pretty difficult (we are looking at you San Francisco and New York), this ratio is a good one to live by. Of course, the “other” category can be broken down further, but trying to stay under 30% of your income when choosing a place to live is a good rule of thumb. You can be as disciplined about how much coffee you drink or how often you eat out, but if housing is eating up 50% of your budget, those small cuts won't make much difference. 

Here is an example: 

  • Annual After Tax Salary: $50,000 

  • 30% for Monthly Rent: $1250

  • 20% for Monthly Savings or Debt: $830

  • 40% for Monthly Bills and Groceries: $1,600

  • 10% for Monthly Discretionary Spending: $400

People who stay in apartments that are too expensive often experience sunk cost bias. The sunk cost effect describes our tendency to persist with something simply because we’ve invested a lot of money, time, or energy into it. 

To overcome sunk cost, leverage other big life changes, like getting a job or moving in with a partner, to overcome the sunk cost bias. These changes force us to think in new ways and develop new habits. It is also a great time to audit your finances, break bad habits, and set up new good ones. You’ll have to change a lot anyway: new addresses for bills, new rent or mortgage payments, maybe even new banks. You can put this rule of thumb in action easily by setting up automatic rent payment, bill payment, and savings. That’s 90% of your money headaches taken care of automatically!

Pro tip: Talk to your landlord about using Pinch. With Pinch, you can both automatically pay your rent and use those payments to build your credit.