Rethinking the 28% Rule: Why Less House Can Mean More Wealth 🏡

As financial advisors, one of the most common budgeting guidelines we hear thrown around is the “28% rule” — the recommendation that housing costs should not exceed 28% of your gross monthly income.

This rule of thumb is widely accepted, and for good reason: it helps prevent homeowners from becoming "house poor," freeing up income for saving, investing, and living life with flexibility.

But here's what we’ve noticed in our advisory practice at Wealth|KC: the clients who are building the most wealth and experiencing the greatest financial freedom often spend far less than 28% of their income on housing.

The 28% Rule: A Starting Point, Not a Destination

The 28% housing rule typically includes mortgage or rent payments, property taxes, insurance, and possibly HOA fees. It’s a ceiling designed to help maintain balance — but it’s not optimized for wealth accumulation. It's a guideline that’s especially useful for lenders when qualifying borrowers for a mortgage, but it doesn’t consider the long-term financial impact of carrying large fixed housing expenses.

If your goal is financial independence, early retirement, or maximizing investment growth — simply staying below 28% may not be enough.

What We See in Practice: Wealth Builders Spend Far Less

Among our best clients aged 35 to 40 —Many have between $750,000 and $1 million in liquid assets — we’ve seen a consistent trend:

• Their housing costs represent less than 17% of their gross income.

• In fact, our most financially successful clients — those on a clear path toward early retirement or financial independence — spend less than 6% of their gross income on housing.

These clients have worked incredibly hard to earn high salaries and build strong incomes, often in demanding professional roles. What sets them apart is their restraint — they didn’t immediately increase their housing expenses as their income grew. Instead, they maintained modest housing costs and focused on building liquidity, optionality, and long-term wealth. They did not “lifestyle creep” or increase their spending at the same pace as their earnings increased. 

This isn’t just about frugality. It's about prioritizing flexibility and capital allocation. By keeping fixed housing expenses low, these clients are able to:

• Max out tax-advantaged retirement accounts,

• Build significant taxable investment portfolios,

• Maintain large emergency funds,

• And take advantage of career and lifestyle opportunities that don’t require a high-income treadmill to sustain.

The Power of Free Cash Flow

When housing costs eat up only a small fraction of your income, it creates powerful free cash flow. That cash flow can be redirected toward compounding investments, entrepreneurial ventures, family time, or sabbaticals. It buys you choice — and that’s the real wealth.

Clients with low housing expenses often have the ability to:

• Shift to part-time work or consulting without financial stress,

• Make significant charitable contributions,

• Fund their children’s education without sacrificing retirement goals,

• Weather economic downturns without lifestyle disruption.

Should You Downsize or Reframe?

We’re not suggesting everyone should move into a tiny home — but we are encouraging you to rethink the assumption that you should stretch to the top of your mortgage pre-approval limit. Ask yourself:

• Could I live just as happily in a home that costs 20% less?

• What would I do with an extra $1,000 or $2,000 per month in cash flow?

• What would change in my life if housing costs were no longer a source of financial pressure?

• How can I make more money to reduce the % that my current housing costs take up of my income?

• Do I need to lifestyle creep and upgrade my home simply because my earnings increased, or am I comfortable where I am?

The 28% rule might keep you out of financial trouble — but it won’t necessarily lead you to abundant financial freedom. We believe the true measure of housing affordability isn’t how much the bank says you can borrow — it’s how much you can comfortably spend while still funding your most meaningful goals.

The lower your housing costs as a percentage of income, the more options and flexibility you create for yourself and your family.

If you're interested in discussing how your housing budget aligns with your broader financial goals, let's start a conversation!

Will