Housing is most people’s biggest expense.  That’s why, of all of the expenses we each have, it’s essential to get our housing costs right.  It’s one of the most important keys to being able to be generous, save and invest adequately, and live with financial margin and peace of mind.

Here’s how to follow the 10th of my 11 principles for simple, meaningful success: Spend Smart on Housing.

How Much of a Down Payment Should I Make?

It used to be normal for people to make a down payment of at least 20 percent.  That became anything but normal during the run-up to the housing bubble.  Now, it’s coming back into vogue, and I think that’s a good thing.

Putting 20 percent down demonstrates the discipline to save.  Plus, it prevents you from having to pay private mortgage insurance.

How Much Can I Afford to Pay Each Month?

Lenders typically tell people they can afford to devote 28 percent of their monthly gross income to the combination of their mortgage, property taxes, and homeowner’s insurance.  When you include other debts, such as credit card balances, student loans, and vehicles loans, they want all of those monthly payments plus housing to total no more than 36 to 40 percent of your monthly gross income, depending on the lender.

I believe it’s best to spend less.  As I developed Recommended Spending Guidelines and Recommended Housing Guidelines (found at the same link) for households across nine different incomes and four different household sizes, I found that the ideal is to spend no more than 25 percent of your monthly gross income on housing (mortgage, taxes, and insurance), and have no other debt.

In some especially high-cost parts of the country, you may need to stretch that to 30 percent, but that means you’ll have to spend less than my recommended amounts in other categories.

Should I Base the Payment on One Income or Two?

Here’s the kicker.  It’s best to stay within that 25 percent guideline on one income.

What?  That’s impossible, right?  Well, as I like to say in workshops, the common approach to money in our culture is to save too little, carry too much debt, live with too much financial stress, and fight about money too often with the people we love.  Do what’s uncommon and you’ll be able to enjoy uncommon financial success and peace of mind.

Basing housing costs on one income is especially important for young two-income couples that want to have kids one day.  If you want the freedom to have one person step out of the paid workforce while raising those kids, it’s essential.

But it’s important for others as well.  Buying a house that requires two incomes is risky. What happens if one person loses their job?

What If I’m Spending Too Much on Housing?

Please don’t shoot the messenger, but if you’re spending much more than my recommended amounts on housing, your finances are probably going to be a challenge.  It’s going to seem impossible to be generous or to find the money to save or invest.  In that case, you should consider something radical, like moving to a more affordable house.

I know – it sounds crazy, completely unrealistic.  Selling a house, especially in this economy, can be tough.  The whole process of moving is time consuming and disruptive.  But I’ve met people who have done exactly that.  They were living in houses they realized they could not afford and they moved.

One couple put their house up for sale at a time when other homes in their community were sitting on the market for over a year, and yet theirs sold within 30 days and for nearly the full asking price.  The other sold their home and then lived in the basement of the home of some friends.  They stayed there for three years as they saved up enough money for a healthy down payment on a house they could truly afford.