These numbers can be applied to rent, Bach notes. So if you earn $70,000 a year, you should be able to spend at least $1,692 a month — and up to $2,391 a month — in the form of either rent or mortgage payments.
Another popular guideline people follow is the "28/36 rule," which says that you should spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on total debt, including housing and other debt like student loans or car loans. Mortgage lenders use this rule to assess your borrowing capacity. If your debt-to-income ratio exceeds these limits, you may have to pay a higher interest rate or you might not be able to get a loan at all.
While these guidelines can be helpful, everyone's financial situation is different. If you don't spend much on entertainment or transportation, you may have more room in your budget for housing. And if you're living in a big city, it may be impossible to keep your housing costs at or below 30 percent. In New York City, residents fork out nearly two-thirds of their income on rent, often because they don't have any other choice.
On the flip side, if you're looking to retire early or have other big savings goals, you may choose to downsize and spend well under the 30 percent threshold. That's what one Chicago-based couple did, and by spending less than 15 percent of their income on housing, they managed to bank $50,000 in just one year.
To figure out how much you can afford to spend on housing, keep these guidelines in mind, but also look at your budget and consider your long-term saving goals.
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