What is the 5/20/30/40 rule?
A simple explanation of a budgeting concept often mentioned in housing and financial planning conversations.
What is the 5/20/30/40 rule? This question often comes up when people look for a clear framework to balance housing costs, savings, and everyday spending.
Answer
The 5/20/30/40 rule is a budgeting framework sometimes applied to housing and long term financial planning. While interpretations vary, one common version suggests limiting housing to about 30%–40% of income, keeping at least 20% available for savings and debt repayment, and reserving the remaining share for lifestyle expenses and flexibility. Another usage appears in investment and retirement planning where milestones are targeted 5, 20, and 30 years out. Because the phrase is not a standardized lending regulation, lenders will not underwrite a mortgage directly against this rule. Instead, treat it as a personal planning guideline: test different mortgage payments in a calculator and ensure they leave room for saving and emergencies.
Use a mortgage calculator to see how different payments fit within your income.
Visit the main mortgage FAQ page to explore other common rules and guidelines.