The 1/4th Rule for Housing Everyone Should Know

townhome with garage
July 10, 2020

Living expenses typically take the absolute largest chunk of our monthly expenses. Find out how the 1/4th rule can help you save more each month.

Have you heard of the 1/4th rule?

This is the rule that will ultimately change your life forever?

When it comes to living expenses, a rent or mortgage almost always takes the top spot as most expensive. Ask yourself right now how much you think you’ve spent on housing in the past year? If the thought makes you shudder, you’re not alone.

The average American spends over a third of their budget on housing, 37% to be exact! Business Insider says that this is the case for most people.

Simply put, the 1/4th rule is that you only spend 25% of your monthly take-home pay on rent or mortgage.

For example, if you bring home $2500 a month after taxes, then you should pay $625 or less a month on housing. Does this sound impossible? It definitely isn’t easy, but it’s possible.

And I promise it can be done.     

Why You Shouldn’t Pay More than 25% of Monthly Take Home Pay on a House

Have you heard of the term house poor before? If you pay more on housing than you can comfortably afford, then you are house poor. Being house poor prevents you from fulfilling other financial priorities in your life like retirement savings or even an emergency fund.

Paying more than 25% on housing is unnecessary. Denying yourself fancy living now will allow you fancy living in the future.

Would you rather live in a cush place for 5 years and then have to downsize for decades or sacrifice now to live in a nice place later in life?

There is an awful condition that many of us have. It’s called “Keeping Up with the Joneses” syndrome. And the majority of Americans have it.

You have friends who have fancy cars or who live in a mansion. Either they are rich or they are in a lot of debt. Those are the only two options. People envy what others have and then they go and buy a bigger house or a nicer car.

They go into excessive debt and try to live a lifestyle which can’t be maintained. Don’t go into debt and ruin your life just to try and keep up with the Joneses.

For example, we see fancy cars and houses everywhere we look - social media, tv, the internet, and everywhere we go. We must say to ourselves, “That’s a freakin’ nice car and I would like to have one eventually, but today is not the day. I have other priorities I need to take care of first.” Say it. Repeat it. Believe it.

It will change your life and your family’s life.

What to Do if You’re Paying More than 25% on Housing Expenses

If you are paying more than 25% of your monthly take-home pay on rent or a mortgage, don’t worry because there’s still hope to follow this rule. Try the following 4 tips if you’re paying more than 25% on housing:

1) Consider downsizing to something smaller that still meets your needs. Do some research and find out if you can refinance your mortgage for a lower monthly payment. If you rent, research cheaper options that will still work for you and your family. Remember, nothing is forever. Sacrificing now will pay off big time in the future.

2) If you do own a house, then you may need to think about selling it in order to downsize. Having a huge house bill each month can cause quite a bit of stress. If you’re feeling this stress in your life, then it’s affecting you and your family. Relieve the constant stress of living paycheck to paycheck buy selling your home and getting a smaller one. The tiny house movement is all the rage nowadays anyway;)

3) Another option to get down to the 25% rule is to make more. This might seem obvious, but have you thought of side hustles you can do to make more? I love side hustles. Currently, I’m working on turning just through flipping random things. A great place to find extra side hustles you can do can be found here at Budgets are Sexy (one of my favorite finance blogs).   

4) If you do have a mortgage and are also paying private mortgage insurance, then consider taking the steps to get rid of PMI. PMI is taken off after you have paid down the mortgage to 80% of the original appraised value of the house. You can possibly pay extra towards the principal or remodel parts of the house and get another appraisal. Paying an extra couple hundred dollars every month will take years and tens of thousands off of your interest. You can find out just how much you can save by using the Extra Payment Mortgage Calculator.

Everyone’s situation is different. Talk with your family and assess what you can do to get down to the 25% rule. While it isn’t easy to decrease your quality of living, it’s a sacrifice that will pay off in the long run.

Living the 1/4th rule will allow you to reach financial independence years earlier. It might seem “weird” to others if it’s something you actually follow, but you will change your life forever because of it.

Have you heard of this rule before? Is it something you already follow or are working towards? Let us know what you think in the comments below!