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


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.