Overspending on housing can have dire consequences. If you're unable to keep up with your mortgage payments, you'll risk losing your home to foreclosure. And if high housing expenses cause you to fall behind on other bills, you'll risk landing in unhealthy credit card debt and destroying your credit score in the process.
That's why, as a general rule, you should aim to keep your housing costs to 30% of your income or less. That 30% figure should include your:
To play it even safer, you can lob estimated utilities and predictable home maintenance into that 30% limit, too -- though many financial experts will tell you it's not necessary, as long as that 30% encompasses the aforementioned three items.
But in some cases, you may be okay to spend a bit extra on housing without having to worry about it hurting your finances. Here are three scenarios where exceeding that 30% threshold may not hurt you.
1. You're buying a home you can use as an income property, too
When you buy a home to solely live in yourself, you can't turn it into an income stream. But if you go the owner-occupied property route, where you buy a multifamily home and live under the same roof as your tenants, then you can easily justify the added spending. Even if you don't buy a multifamily home, if you purchase a more expensive home with a finished basement to rent out, you'll have a means of offsetting your higher mortgage costs.
2. You're buying in a city where housing is by far your largest expense
When you live in the suburbs or a smaller city, you often need a car to get from place to place, and that can be a huge expense. But if you buy a home in a major city where public transportation is not only ample but also cheap, you can get away with spending more on a home if that's really your only large recurring bill.
AAA estimates that it costs $773.50 a month, on average, to own a vehicle. Meanwhile, a monthly unlimited public transit pass in New York City costs just $127. As such, if you're spending substantially less than the average person to get around town, you can spend a little more on a home (and you may have to if you're living in a major city where housing prices are inflated).
3. You have a lot of money in savings and investments
As a general rule, it's not a great idea to rely on your savings account or investment portfolio to cover your housing expenses. You need a certain level of emergency savings to protect yourself from unplanned bills, and dipping in will put you at risk of coming up short later on. Regularly falling back on an investment account to cover your housing costs isn't the best move anyway because it may leave you having to sell off investments at a loss to pay your immediate expenses.
That said, if you're pushing that 30% limit a little on the housing front, and you truly have a lot of money socked away in the bank and investments, then spending a bit more on housing isn't so terrible. Imagine your take-home pay is $6,000 a month. Typically, you'd be advised to limit your housing costs to $1,800 on a monthly basis. But what if buying your dream home means committing yourself to $2,000 a month instead? If you have a healthy load of savings, and an investment portfolio that consistently generates income, then going over that 30% limit ever so slightly isn't awful -- especially if buying that nicer home offers you a chance to sell it for top dollar at a later point in time.
Let's be clear: Most of the time, overspending on housing isn't wise. But if any of the above scenarios apply to you, you may get a little more wiggle room -- within reason, of course.