Whether you can’t afford to buy a house right now or you prefer renting to buying, you probably don’t want to spend the majority of your paycheck on rent. Avoiding high rental rates can seem nearly impossible in cities where rent is rising faster than income. But if you live in a more affordable city where you have more options you could be wondering, how much should I spend on rent? Read on as we answer that question and list the factors you should consider before signing a lease.
How Much Rent Can You Afford?
While you’re figuring out how much money you can set aside for rent, it’s important to think about your current financial situation and how much you’re getting paid. So if you’re hunting for a new apartment, it’s a good idea to take a look at your budget to see what you’re already spending on bills, food, entertainment, transportation and insurance. It’s best to find a new spot that will allow you to live comfortably, pay off your debts and save a portion of what you’re bringing home.
Where you want to live also plays a key role in determining how much rent you can afford. If the apartments on your list are located in uber-expensive rental markets, getting a roommate might be something worth considering. Even if you hate sharing, rooming with someone else could save you hundreds (or even thousands) of dollars.
In fact, getting your own place might be completely out of the question. Landlords in places like New York City often want tenants whose annual salaries are at least 40 times the monthly rental rate. That means that in order to land an apartment with a monthly rent of $2,500, you might have to make at least $100,000 before taxes, unless you can find a roommate to split the cost or a guarantor who can pay rent on your behalf if you’re running low on funds.
If you’re planning to crunch some numbers before you begin viewing units, keep in mind that your budget for rent will need to be based on the amount of money you’re actually getting paid after taxes are withheld. If you simply look at your annual salary before meeting with a broker or a landlord, you could be in for a nasty surprise later on. Also, it’s a good idea to make sure you have enough money to pay for moving costs, fees, furniture and any unexpected emergency expenses.
How Much Should I Spend on Rent?: The 30% Threshold
While everyone’s circumstances are unique, many experts say it’s best to spend no more than 30% of your monthly gross income on housing-related expenses, including rent and utilities. Under that rule, it’s best to make sure that the amount you spend on rent is well below 30% of your household income. In other words, if you’re making $3,000 a month, it’s a good idea to pay no more than $900 for rent and other housing costs.
Why 30%? That’s the percentage that the government has used since 1981 to decide who qualified for public housing programs and initiatives. Households that spend more than 30% of their income on housing costs are said to be cost burdened. Those that spend 50% or more of their pay on housing costs are classified as severely cost-burdened households.
In 2015, the Harvard Joint Center for Housing Studies reported that there were 21.3 million cost-burdened renters in 2014, meaning that almost half of all renters were paying too much for rent. Given that those numbers and average rents are significantly higher than they were a decade or two ago, some people have questioned whether the 30% standard is still an accurate measure of housing affordability.
Critics say that the 30% threshold doesn’t account for variations in cost of living or household size. A single person without any dependents might be able to spend 30% (or more) of their income on housing and still have enough money left over to get by. But someone supporting a family of five or six might need to spend less than that on housing expenses. Also, a family might choose to spend more than 30% of their income on housing costs if that means they’ll be closer to better schools or better public transportation systems.
The 50/30/20 Budget
One budgeting model suggests that if renters can’t figure out how much to spend on rent, they can use a 50/30/20 guideline. Under this rule, renters would spend 50% of their take-home pay on transportation, housing, groceries, utilities and other essential costs that usually don’t change from month to month. Individuals would then spend 30% of their after-tax income on entertainment and other non-essentials and use the remaining 20% to save for retirement, pay off loans and meet other financial goals.
The 50/30/20 budget doesn’t work for everyone, of course. For example, if you’re nearing retirement and you barely have any savings, you might need to cut back on spending and allocate more than 20% of your income to your retirement accounts.
How Much Should I Spend on Rent?: The Takeaway
Are you asking yourself, how much should I spend on rent? The short answer is that it depends. There are commonly used models that suggest that you should spend a certain percentage of your income on housing. But at the end of the day, it’s important to look at your personal budget and think about the goals you want to achieve in order to decide how much rent you can afford to pay.
Figuring out how much to spend on rent really depends on your unique financial situation and budget. If you are looking for help with your finances or meeting your financial goals, you might want to work with a financial advisor.
To make it as simple as possible, we created a tool called SmartAdvisor to match you with a financial advisor in your area.
Here’s how it works:
- Take this quick survey about your current financial situation.
- Our SmartAdvisor tool uses your answers to match you with as many as three advisors who can provide expertise based on your profile and goals. You don’t have to spend hours interviewing dozens of people and firms.
- Check out the advisors’ profiles, interview them on the phone or in person and choose who to work with in the future.
Photo credit: ©iStock.com/Halfpoint, ©iStock.com/ewg3D, ©iStock.com/sultancicekgil</em