The 30% rule
A few days ago, there was a passionate argument on Nigerian Twitter as to what an ideal salary to live in Lagos Nigeria was. As usual with most of these things, there were thousands of takes from different people all coming from different perspectives, however, I thought it would be a good opportunity to actually have this conversation and ask the question “How much should you be paying for rent ?”
In the midst of this argument, a Twitter user had a hot take;
Which I found really interesting for exposing how people think
TL: DR; It depends.
The average salary in West Africa is $1500 per annum. And while this is incredibly low, this article will focus on middle-income earners because while it’s easy to pontificate about what people should or should not do in a controlled environment, West Africa is as far from that as you can imagine.
What you need to consider:
- How much you earn annually.
- Costs associated with your home. E.g. utility bills, taxes, service charges, etc
- Other ancillary costs based on where you live including transportation costs etc
- Lifestyle maintenance costs.
The recommendation is to spend no more than 30% of your annual income on rent or household-related expenses like a mortgage.
So if you earn $6000 per annum, you shouldn’t be spending more than $1800 on rent or as your annual mortgage payment.
This leaves you with 70% to spend on other important things like;
- Emergency fund
- Relaxation etc.
Drawbacks of the 30% rule
The 30% rule does not take into account unique situations and personal circumstances. For example, people earning so little that 30% is not feasible to find a decent home.
It is most optimised for people who pay rent in regions where the monthly rent is accepted. In West African countries where rent is paid per annum or even biannually, the 30% rule does not take into account the difficulty of putting together annual funds on monthly income, as well as the opportunity cost of paying out such a lump sum.
It also does not take into account intangibles like a desire to live close to work and how, while that might be very expensive, could greatly increase the quality of life and productivity allowing you to potentially earn more.
How to beat the system
If you live in Africa, the rental market is automatically rigged against you and you need to think fast for ways to stay ahead and protect your financial status.
Here are some ways you can support your rent and make accommodation costs less of a burden:
- Setup a side hustle to pay off your rent: This is not easy, but it could save you a lot of stress since you have to pay your rent annually, you can set up a side hustle or investment for the sole purpose of settling rent-related issues
- Get a flatmate: Depending on your status in life, having a flatmate to split rent and bills with would help to put more money back in your pocket at the end of the month.
- Get a mortgage: This is not for everybody but you might want to consider getting a mortgage and then your annual payments will go, not towards a landlord, but towards retrieving equity from your property.
Personal finance decisions are tied to personal circumstances and it is very difficult to prescribe a one-size-fits-all solution that works across the board. That said, make sure that the percentage of your salary you are spending on your home is at least below 50% and is something you can manage without undue financial burden.