If you are like most people, your most significant monthly expense is likely your rent. But how much should you spend on rent, and when should you start looking for cheaper options?
Your rent-to-income ratio is the percentage of income you should spend on rent.
While working out what you are comfortable with, think about your current financial circumstances and how much you can afford to spend on your apartment each month.
Doing this will save you heartache later.
What Percentage of Income Should You Spend on Rent?
Many financial experts believe you should spend no more than 30% of your monthly gross income on housing-related expenses, including rent and utilities.
According to them, if you earn $30,000 annually ($2,500 per month), you should use no more than $750 each month on rent and associated costs (e.g., $2,500 x 0.3 = $750).
That’s a significant amount of money for most people, plus there are other factors to consider before signing the dotted line on your new rental agreement.
Write down your current monthly income after taxes and how much you spend on:
- Any other regular expenses
Before you look at apartment rentals, set aside a percentage of your income for rent (30% at most) so you can create a monthly budget — and stick to it.
However, the 30% rule comes with two major caveats:
- It doesn’t account for rising rental prices or flat wage growth. If your income doesn’t keep pace with rental costs, your 30% isn’t going to stretch as far.
- It’s a starting point for financial management but doesn’t account for your obligations. You may have credit card debt or student loan payments, for example.
Can You Afford to Move Into Your Apartment?
Your rental budget doesn’t have to be as high as 30%, but allotting less money to rent may restrict your housing choices depending on where you live.
If you’ve worked out your budget and the math isn’t looking great, you may have to accept that you can’t afford a place on your own.
You may not like sharing your home, but it gives you a much more affordable range of options.
In addition to rent, consider these everyday items you’ll likely have to purchase — whether you’re moving into your first apartment or you’ve rented previously:
- Beds, bedding, and sheets
- Couches and chairs
Hidden Rental Costs
Remember hidden costs: if you’re moving into a house or duplex instead of an apartment, you may have to pay extra for yard maintenance or trash services.
Read your lease agreement carefully, so you’re prepared for any additional expenses.
You should always think before you sign your lease. If you commit yourself to a place you can’t afford, you could receive late rent notices from your landlord.
Outstanding rent payments damage your credit score and make it more difficult to find an apartment in the future.
By planning before you move in, you should be able to find a place that meets your budget and still feels like home.
The 50/30/20 Rule
The 30% rule is the traditional way to determine what percentage of your income to spend on rent, but another rent affordability practice you may have heard of is the 50/30/20 rule.
This concept for how to save money recommends that you spend half your monthly income on “needs.” Examples include housing, utilities, healthcare, groceries, car payments, and insurance.
According to the 50/30/20 rule:
- Your rent and other essential “needs” should come from the first 50% of your income.
- Afterward, you’re free to spend 30% of your income on “wants” — think movie tickets and meals out.
- Use the remaining 20% of your income to pay off debts and invest in savings.
Whether you use the 30% rule or the 50/30/20 rule, you must develop some plan and spend only what you can afford on your rent and housing needs.