Where You Live & the 50/30/20 Rule

There’s an old personal finance rule of thumb called the 50/30/20 rule that states you should spend roughly 50% of your income on necessities (housing, transportation, healthcare and other bills), 30% of your income on wants (dining out, travel, entertainment, etc.) and 20% of your income on savings or paying off debt.

Life is never quite so cut and dry as simple rules of thumb, but this probably isn’t a bad starting point. The problem many people face when trying to get their personal finances in order is that they focus on trying to cut back on the 30% category and ignore the importance of the 50% category. The big purchases in your 50% spending category can have a huge impact on your finances because, for the most part, they’re fixed expenses. You have to pay them on a regular basis and they are more or less set in stone. That means getting them right up front can have a huge impact on your bottom line.

For example, the average cost of a new car in the U.S. is around $34,000. Assuming a 5% interest rate on a 60-month loan term, that’s almost $650/month for your car payment and that’s before considering the cost of insurance, registration, gas, maintenance, etc. The total cost could end up being $1,000/month or so all-in. If you can afford it and are safely putting away money for your retirement and your kids’ college savings fund, that’s great. I’m just guessing most people driving around in brand new cars aren’t always in great shape financially.

But the biggest chunk of your spending will typically go towards housing. And how much you spend on housing has as much to do with where you live than anything. Zillow recently released data on a number of different housing markets across the country and calculated what the mortgage burden (% of income spent) on housing looks like depending on the specific city or metropolitan area:


The highest ratio by far was Palo Alto, CA, which makes sense given so many people are trying to move to Silicon Valley for technology jobs. But the average ratio of income spent there on housing is surreal. I don’t understand how anyone — beyond tech millionaires, billionaires, and the Golden State Warriors — can afford to live there. In fact, the majority of the highest mortgage burdens reside in California. I get it. The weather, the ocean and the lifestyle make it a tough place to beat but this can put a huge strain on the family budget.

There are a number of larger cities that see housing costs over 20% of income. On the other end of the spectrum is Detroit, where the average mortgage burden is less than 6%.

The obvious conclusion here is that it’s much more expensive to live in a large metro area. Smaller cities such as St. Louis, Atlanta, Indianapolis and San Antonio are much more affordable than LA, NYC, Seattle or San Francisco. Maybe those places aren’t quite as exciting but life is always a series of trade-offs.

The usual caveats apply here. Everyone’s personal finances are personal. Most of the time where we end up living is based on where we were born, where we would like to work, luck or a bad break. Higher incomes can offset a lot of the higher cost of living in a large city, but that really depends on your line of work. You could also save money living in a big city by cutting down on transportation expenses by not having a car. Also, many people get around the housing issue in big cities by renting or sharing space with roommates.

I’m not trying to judge people on how much they spend on their house and car or where they live. Finances aren’t everything in life but if you’re struggling to get ahead financially it makes sense to consider the cost of living where you decide to put down roots.

Pockets of Affordable Housing Exist Within the Most Expensive Market (Zillow)

Further Reading:
20 Rules of Personal Finance


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  • mikedariano

    In case you hadn’t heard it yet, Ian Cassel gave this advice to O’Shaughnessy, “keep your fixed costs low and your variable costs variable.”

    • Ben

      Haven’t listened yet but I like that one

  • PanamanianStrongman

    San Antonio and Austin are both cheap and wonderfully vibrant cities, each in their own way.

    • Neal Bobba

      Yes, this is my question as well: “What about taxes?”

      • Ben

        Good question. I tend to look at my own savings rate in terms of gross income but I’m not sure how they factored taxes in here. My guess would be gross income here

  • Lmr

    One thing I always wonder with these percentages is if they are given as a percentage of your gross income or net income or take home pay (not including your 401k and Med expenses). Can you provide some guidance?

    • Ben

      I usually think in terms of gross but it really depends on your situation and how you view your finances

  • Matt Downing

    Good insight. I live in Philadelphia and am surprised at the low percentage in the chart. i think people have caught on – because prices have skyrocketed . . . . .

  • I really like the simplicity of it – the ratio I mean. London property prices are high too- if you don’t have a home already, that you can sell – to buy the next one – it is really difficult to gather a deposit. Good idea to keep the big costs (rent/mortgage/car) down to below 50% or less and yet in some cities, this can be tough. Feel quite strongly that housing, education, healthy food and healthcare need to be affordable for all.

    • Ben

      Yeah that’s definitely a problem when those costs are rising every year and certain people have to spend money on those things to stay afloat. Wish i had a good answer here

  • Paul Reimold

    I question the necessity of the average American consumer purchasing a $30,000+ auto and financing it. Sizable car payments and lease payments are standing in the way of many Americans saving adequately. I always counsel people to buy used cars that have been thoroughly vetted and pay cash for them.

    • Flying Robot

      I think that’s a good strategy. I personally like to buy new and treat them well; they last me 15-20 years at well below average the average TCO numbers I see published. Either strategy can work, both have pros and cons.

      For me, the big thing is that houses and cars are a big hit to my net worth; I’ve always tried hard to limit the impact of both.

  • The least costly car I have found is the Nissan Versa at an all-in operating cost of about $0.30 per mile which is substantially lower than the IRS per mile auto deduction.. I don’t own one, but it apparently has the old-style hand crank windows. As far as I know, it doesn’t have the hand crank engine starter!

    Nick de Peyster

  • ImpeachTrump

    Rates are not accurate. For example it’s much higher than 21% in Boston

    • Ben

      these are using median numbers so this is an average not an exact number

  • Sudhanshoo Maroo

    I suspect the average cost of car, and the median cost would be quite different. I see your point though.

    • Ben

      right, higher end cars could be skewing the average here

  • Mark Massey

    Little wonder so many living in California are nuts. You’d have to be to stay there while struggling to pay California’s high cost of living and high taxes.

    • Flying Robot

      There are crazy things happening in the bay area (& elsewhere). You either make a ton of money (and can barely afford a middle-class lifestyle because the housing is so expensive) or your make a regular wage (think police, teacher) and cannot afford a home anywhere within 75 miles or so. I worry that the middle class is simply disappearing, with working class and upper class taking up the slack (there is income data suggesting the middle class has shrunk 20% or so in the past 4 decades). I have heard of people living hours outside of the area, but during the week they work, then go to communally arranged places to crash, only going home on the weekends. Automation & globalization seem to be the key drivers, and I don’t see those going away soon.

  • Flying Robot

    That can be a fun cycle. We’ve refi’d a couple times, cut our payments 25% or so. Then a couple house claims impacting our insurance rates, and some local tax increases, and we’re right back where we started. Luckily, growing your income works too.