If you’re looking to get your own place, the first question that may come to mind is often ‘’how much rent can I afford?” Depending on where you live, a few hundred dollar swing in either direction can make a world of difference on your location, amenities, and square footage of your home or apartment.
Understanding how to budget for rent and what monthly amount fits comfortably within your budget can be difficult. We’ll cover important budgeting details below, and help you better understand how to budget for rent.
How Much Should I Spend on Rent?
The amount of money you spend on rent is entirely dependent on how much income you make, and how much you’re able to save once factoring in all your expenses. On a high level, if you earn $125,000 a year, you can likely afford to spend more on rent than someone who earns $60,000 a year.
Although that statement is true in many cases, it’s not true in all. The individual who earns $125,000 a year may only be able to afford a rent payment of $1,200/month when factoring in all of their other expenses. The individual earning $60,000 a year may have zero debt and lives a very modest lifestyle. Therefore, they may be able to spend more on rent despite the lower income.
How to Budget for Rent?
If you’re stressing out about how to budget for rent, please know you are not alone. This is a common financial question and one many people spend a great deal of time thinking about.
The proper way to budget for rent is to look at it in aggregation with all of your other expenses. Isolate how much money you should be saving or investing each month, which is generally recommended to be 20% of your net income.
Once that figure is factored into your equation, you can quickly see how much money you have left over after your other expenses are paid. A portion of that money can be used on rent payments.
Pros & Cons of Renting
Although mortgage interest rates are at historic lows, there are still benefits to renting. Such benefits include:
- As a tenant, you do not need to worry about anything breaking in the house, or any major repair (such as a new roof, driveway, or central air conditioning)
- If you rent your apartment or home, you have a tremendous amount of flexibility. Generally speaking, you’re in a 1-year renters agreement. Once that year has elapsed, you can move if you wish.
- Less maintenance! A homeowner has to cut the grass, fix the leaky faucet, trim trees, paint decks, etc. As a tenant, you do not need to deal with any of that stress.
Even though there are many benefits to renting, there are also disadvantages that need to be taken into consideration. Such considerations include:
- As a tenant, you’ll never build equity on your place
- Tenants typically overpay for their place. Think about it, the landlord is renting to you for a profit, which means their mortgage payment is less than what they are charging you for rent.
- You could have a bad landlord that does a poor job fixing things, or that hasn’t updated the apartment in years.
5 Steps for Determining How Much Rent You Can Afford
Now with some of those details out of the way, let’s dive into the financials. How much can I afford for rent? Let’s help answer this question in 5 easy steps.
What Percentage of Your Salary Should Go to Rent?
First and foremost, you need to figure out what percentage of your salary you’re comfortable allocating to rent. If you’re a high earner, it doesn’t mean you need to allocate a larger percentage of your salary to rent.
In fact, there is a basic financial rule that helps with that allocation strategy – which we’ll dive into below. To make the process a little easier though, try using online resources like Credit Karma to more easily determine how much of your salary should go towards rent.
A tried and true money management strategy is the 50-30-20 budgeting rule. This rule simply states that:
- 50% of your money should be spent on needs (Which includes rent, mortgage payments, bills that are necessities such as grocery, electricity, heat and water)
- 30% of your money can be spent on wants. Wants is a bit more loosely defined, but includes travel, entertainment, clothing, and luxury items such as getting a massage or an expensive gym membership.
- 20% of your money should be spent on saving/investing and/or debt repayment. This is straightforward, but this 20% is often wrongfully forgotten about or neglected.
Making Calculations Based on Net Income Vs. Gross Income
Something to keep in mind when making a budget is the difference between gross income and net income. Gross income is the larger figure on your paycheck, before any tax or insurance deductions.
Net income is what you actually take home. The difference between the two can be quite large, typically 20%+. When you are building a budget, make sure you are building a budget with money you can actually use, which would be the net income amount.
Factor in Utilities
You must factor in utilities into your rent payment. If you run all the numbers and realize you can pay $1,500 on rent a month and still save 20% of your money, that’s great!
However, did you factor in utilities? If not, you’ll need to go back to the drawing board and figure out how much money you can pay in rent once utilities are factored in.
Determine the Total Cost of Moving
Don’t forget to factor in the total cost of moving! Do you need new furniture?
Do you need to pay to move existing furniture? This expense can easily be a few thousand dollars, so you must plan accordingly.
The Numbers Don’t Lie
One of the beautiful things about finance is the fact that it is numbers based, and the numbers never lie. The 50-30-20 rule is a great money management tool which can help you live a financially successful life.
Once you run all of your numbers, determine what percentage of your income is currently going to your needs, what percentage of your income is going to your wants, and what percentage of your income you’re able to save. If the numbers are out of balance, that’s okay.
Work on making them balanced. Holding yourself accountable to the 50-30-20 rule is challenging.
Working with a financial advisor will make it easier. Financial advisors will not only hold you accountable to an agreed-upon plan, they’ll also help you invest your money and achieve healthy yearly returns.
They’ll help answer questions like ‘how much should I spend on rent’ and ‘how much rent can I afford? The right financial advisor will make managing your money significantly less stressful.
Frequently Asked Questions
Rent would fall in the “required expense” bucket on a budget, and that entire bucket should never exceed 50% of your net income.
Following the 50-30-20 rule, if your net income is $48,000 on a $60,000 salary, $24,000 can be spent on required bills. Rent typically makes up 25-35% of that bucket.
If you spend 40% of your income on rent, that leaves you with just 10% of your income for the other required expenses in life – such as grocery, utilities, gas, etc. Generally speaking, 40% of your income being spent on rent is far too much.