Moving to a new apartment or renting a house can be an exciting time. Not only is it a change in your environment, but it can also give you the feeling of a fresh start.
However, it’s important to do this responsibly. According to the site Value Penguin, “housing” ranks as the number-one largest expense in the average U.S. household budget (ahead of all other categories like transportation, taxes, utilities, and food).
Just like when you buy your home, rent should only make up a certain percentage of your overall budget. With so many other expenses to worry about, such as groceries and other essentials, you certainly don’t want to stretch yourself thin just to have a cool place to live.
So what’s a good number to go with? In this post, we’ll explore how much you should spend on rent every month and offer a few popular guidelines you’ll want to consider.
How Much Should You Spend On Rent: The 30 Percent Gross Income Rule
Whether you’re looking to rent or buy a home, one of the most widely used recommendations for determining how much rent you should pay is the 30 percent rule. This states that how much money your monthly rent costs you should not be beyond 30 percent of your gross monthly income.
For example, if you earn $60,000 as your gross income before taxes, that means you make $5,000 per month. Therefore, according to this rule of thumb, you should not spend any more than $5,000 x 0.3 = $1,500 per month on rent.
Why 30 percent? It’s a recommendation that comes from a 1981 U.S. census publication where they determined that those people who spend 30 percent or more of their income on housing should be considered to be “cost-burdened”. If you use a rent calculator you most likely would have also come across this recommendation too.
Today, this rule of thumb has become widely adopted by many mortgage lenders as one of their qualification requirements. By the same token, many landlords have also assumed a similar rent to income ratio requiring that tenants earn at least 3 times their monthly rent (which works out to 33 percent or less).
Does Everyone Follow The 30 Percent Rule?
If the 30 percent general rule has become so universally accepted, does this mean that it is a hard and fast requirement that you have to meet or you won’t be able to sign a lease?
No, not at all!
For one thing, location is certainly going to play a big key in how much your rent might cost. It’s no secret that an apartment in New York City overlooking beautiful Central Park is going to cost you a lot more than one from a rural town in the mid-west. The same thing will also be true for other popular places such as Boston, San Francisco, Washington D.C., and California.
Just like home values, the amount of rent a landlord can ask for will be relative to the city they’re in and proximity to other desirable landmarks. Most of them know this and will likely consider that when you’re applying.
If you’re a student, then there’s a really good chance you’re earning little to no income because you’re focused on your studies. Many have student loans to grapple with. Research shows that the average student spends as much as $9410 on student loan payments. This is in addition to the personal expenses and financial obligations that some students have to fulfill even while completing their studies. Maybe you’re a college student with a side hustle, but living expenses often suck up the net income you make. In that case, you might still qualify to rent an apartment or house if you can get another adult who does meet the income requirements (like your parents) to co-sign on the lease.
Alternatively, if you’ve got significant financial assets but are working less (such as someone who is at or near retirement), then you might also qualify to rent. This is because the landlord knows you can always withdraw from your retirement savings to cover the monthly payments.
Spending On Rent: The 50/30/20 Rule
Suppose you find an apartment to rent that happens to be 30 percent of your income. Just because you meet the 30 percent rule, does that necessarily mean it’s a good idea?
Your housing costs have to work in conjunction with the rest of your necessities. After all, who wants to live in a nice apartment but can’t afford to eat or run the heat?
That’s why when you’re looking at your budget as a whole. For example, if you have car payments, health insurance, car insurance, and credit card debt to worry about in any given month, you should create a monthly budget that considers this. A budget plan that factors all of these is the 50/30/20 rule.
Popularized by Senator Elizabeth Warren in her 2005 book “All Your Worth: The Ultimate Lifetime Money Plan,” the 50/30/20 rule suggests that you should divide your after-tax income into the following buckets:
- 50 percent for “needs,” the essential expenses you have to have to live (housing, public transportation, insurance, groceries, minimum debt payments, etc.)
- 30 percent for “wants”, the things you could live without (TV, cell phone, eating out, entertainment, shopping, vacations, etc.)
- 20 percent for savings and investments, such as your IRA, emergency fund, or additional debt payments.
Note that this rule uses after-tax income (not gross). That means your numbers could be slightly lower than what you calculated using the 30 percent rule.
Let’s go back to our earlier example. If you earn $60,000 per year before taxes, then you probably only take home $51,480 in disposable income (assuming an average effective tax rate of 14.2%). Using the 50/30/20 rule, that means only $25,740 per year or $2,145 per month should go towards your needs.
Depending on how many “needs” you have, that could mean you have less money to devote to rent. Let’s say that you look at your budget and can only devote 50 percent of your “needs” bucket to rent. In that situation, you should only allow yourself to spend $1,073 per month on rent.
Making Rent Work With Your Budget and Monthly Income
One of the nice things about budgeting is that there’s always room for improvement. If you’re looking for creative ways to still be able to rent a nice place that’s within your means, then try any of the following.
Reduce Your Other “Needs”
To have a realistic budget and have more money to devote to rent, you’re going to want to minimize your other “needs” as much as possible.
For example, you could try to lower your transportation costs. Pick someplace to live that doesn’t require a car and is within walking or biking distance to the places you need to go. Not having a car can quickly free up approximately $500 in your budget and help you meet your financial goals faster since you wouldn’t have to worry about loan payments, gas, insurance, maintenance, and parking.
Or another option would be to pay off your miscellaneous debts first. You can use some personal finance tools to help manage your debts. Without any obligations, you will have more money to spend on rent. Beyond that, eliminating your debts also improves your credit score. You will be surprised at how much difference paying off your student loan debt can make for you. An impressive credit score is something you should always strive towards.
Sacrifice Your “Wants”
When all else fails, if you’ve got your heart set on renting a place that is outside of your budget, then you’re going to have to make some sacrifices. The best place to do this is to take a hard look at your discretionary spending and start making some cuts. The first things to go should be the non-essentials. Of course, these would not include money you should have ready in case of a medical emergency or to pay for child support.
Could you eat out less? Cut out going to sporting events or concerts? Make a few fewer trips to the mall?
The truth is that if you examine your spending habits, you will definitely find something to take out.
Get a One-bedroom Apartment
If you want to conserve your take-home pay and save money on rent simultaneously, then you should consider getting a one-bedroom apartment. This is especially the case if you live alone. A one-bedroom apartment will fit more with your income range if you are starting out. You would not have to spend all of your income on rent. At the same time, you will have some money left for other essential needs.
Get A Roommate
There’s no easier way to cut the cost of your apartment or house in half than to share it with someone else. Find a friend you wouldn’t mind living with and see if they’re interested in getting a place with you.
You could also post an ad and interview potential roommates. Just be sure to do a thorough background check so that the person you’re about to live with is safe.