What it means
Different sources apply the rule to slightly different things, so it is worth checking the definition being used. The most common version applies to housing costs such as rent or a mortgage, and some budgeting guides extend the idea to split take-home pay into thirds for essentials, savings and spending.
Here the housing meaning is used. The rule exists because housing is usually the largest single expense, and spending too much on it squeezes everything else.
When a third of income goes on housing, there is usually room for food, transport, tax, insurance and saving. When housing takes half or more, a household can be one unexpected bill away from trouble.
Lenders use stricter and more detailed tests. They compare the monthly housing payment and total debt payments with gross income, and they apply limits that vary by country and by lender.
The one-third rule is a simpler version that individuals can apply without a calculator. There are important nuances.
The rule can be measured against gross income (before tax) or net income (after tax), and the result is very different, since a third of gross is a much higher share of take-home pay. It also ignores other debts, family size and local costs, so a household with large student loans may need a lower share.
For business readers, the rule helps in understanding employee wellbeing and in setting salaries in expensive cities. If rents consume far more than a third of typical pay, staff may struggle, and the cost of replacing people can rise.
It also appears in discussions of affordable housing, where a similar share of income is often used as a benchmark.
In practice
Real-world examples.
Example
A young couple earning a combined $7,500 a month before tax sees a flat for $2,200 rent. They divide income by three and find the guide is $2,500, so the flat is within range. They go on to check that their other costs still leave room to save.
Example
A manager sets a relocation allowance for staff moving to a high-cost city. She looks at typical salaries of $72,000 and finds that average rent takes 45% of gross pay. The company adds a monthly housing supplement of $400 to bring costs closer to the guide.
Example
A buyer is offered a mortgage for which the monthly payment is $4,800, while her income is $12,000 a month. The payment is 40% of income, so she decides to look at a cheaper property. She wants to keep a buffer for repairs and rate rises.
Formula
Calculation
Maximum monthly housing cost = gross monthly income / 3
Suppose a household earns $108,000 a year before tax.
Gross monthly income = 108,000 / 12 = $9,000.
Maximum housing cost = 9,000 / 3 = $3,000 a month.
If the household is considering an apartment with rent of $3,600 a month, the share of income is 3,600 / 9,000 = 40%, which is above the one-third guide. The extra cost over the guide is 3,600 - 3,000 = $600 a month, or 600 x 12 = $7,200 a year.Case study
Seen in the real world.
Maple Court Housing is an illustrative, fictional association that rents homes to working families. It adopted the one-third rule to set rents for a new block of 120 flats.
Local households earned about $5,400 a month on average, so the association set a rent ceiling of 5,400 / 3 = $1,800. It found that a rent of $1,800 would not cover its costs, which required $2,100 a month per flat.
The finance director applied for a subsidy covering the gap of $300 a month, or $36,000 a month across the 120 flats. Without it, the project would have had to charge unaffordable rents or not be built. The illustrative lesson is that a simple rule helps frame the funding question, even if it cannot answer it alone.
Watch out
Common mistakes.
- Applying the rule to net income when the guide is based on gross income, or the reverse, which changes the answer significantly.
- Treating the rule as a firm limit, when it is a rough guide that ignores debts and personal circumstances.
- Forgetting extra housing costs such as utilities, insurance, maintenance and local charges.
Questions
People also ask.
What is the one-third rule?
It is a guide that says about a third of income should be spent on housing, leaving the rest for other needs and saving.
Is the one-third rule the same as the 28/36 rule?
No, the 28/36 guide uses two separate limits on housing and total debt, while the one-third rule is a single simple share.
Does it apply in expensive cities?
Many households in high-cost cities spend more than a third, so the rule is a benchmark to compare against and not a promise that housing will be affordable.
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