Imagine this: Every extra $200 you spend on monthly rent is like forfeiting an international vacation each year, a choice that many might not even realize they are making.
Finding suitable accommodation in the ideal location for a reasonable price can seem like an impossible task, especially if you’re hunting for an apartment in a competitive real estate market like New York or San Francisco. But apart from a glitzy lifestyle, you need to take a methodical, practical approach when you’re looking for a place to rent. And it all starts with understanding what you can afford.
28% of the urban population lives in rented homes, so determining how much of their salary to allocate to rent is a common challenge. There are many ways to figure this out, but ultimately it comes down to your personal expenses, lifestyle, and needs. Plus, there are numerous options for rental rates, so it can be hard to understand how much you can afford to spend on rent.
A common rule of thumb is not to pay more than 30% of your salary on rent. This guideline is based on the U.S. Department of Housing and Urban Development’s (HUD) affordability research, which suggests that spending more than this amount can limit your ability to comfortably cover other expenses. This means your rent should be less than 1/3 of your monthly income. So if you earn $6,000 a month, your rent should not exceed $2,000.
Then again, a few other factors also come into play. When selecting a home for rent, it’s not just about looking into the budget; you need to consider the locality, convenience, commuting to your workplace, and so on.
For example, if you have found a house with a good monthly rent but it takes you longer to get to your workplace, it may be practical to increase your budget so the house is closer to your workplace. Daily commuting expenses and exhaustion could end up costing more than what you save on rent!
The Percentage Of Income To Allocate For Rent
The US Department of Housing and Urban Development recommends budgeting no more than 30% of your monthly income for rent. Spending more than that will limit you in other areas of spending and prevent you from putting money into savings. Generally, landlords prefer tenants with a monthly income at least three times the rent, so they can be confident payments will arrive on time. However, this is not always the case: in cities like San Diego, where living costs are high, tenants often spend over 30% of their income on rent.
However, there is no hard-and-fast rule about the specific percentage of your earnings to allocate to rent. While the 30% golden rule helps maintain a healthy balance between affordability and comfort, there are other options to consider.
For example, if you are spending 20% of your salary on rent per month, you have more leeway to spend on non-essential items or allocate more to savings. On the other hand, if you have a more-than-average income, you might decide to allocate up to 40% of your salary to living in an ideal location. However, it’s important to consider the opportunity cost of this choice, including the potential for slower wealth building. Balancing these factors can help you make a more informed and personalized decision.
50/30/20 Rule
When it comes to budgeting, the 50/30/20 rule is a solid way to round it out. According to this rule, 50% of your income is allocated to essentials, 30% to non-essential personal expenses (e.g., memberships and clothing), and the remaining 20% to debt, investments, or savings. Rent falls under the “essentials” category, along with other necessary expenses such as food, healthcare, utilities, and transportation.
Let’s break it down to get a better understanding: If you make $4,000 per month, here is how your budget might look at a glance: Essentials: $2,000, Fun: $1,200, Future: $800. If you find it difficult to manage your rent with 50% of other essentials, then you can figure out ways to stretch your monthly budget by cutting down on costs elsewhere.
- Swap your light bulbs for eco-friendly, energy-efficient models to reduce your electricity bills. For instance, by replacing traditional bulbs with LED bulbs, you could recoup the initial cost in about 6 months through energy bill savings. If you want to cut your utilities even further, you can disconnect mobile or TV services that don’t serve your budget anymore.
- You can get a roommate to split the cost of your rental.
- Rather than paying monthly renters’ insurance, you can get a discount by settling your annual premium in full. If you have a roommate, you may also ask to share a policy.
- Opt for a long-term lease because short-term leases are prone to frequent rent increases. When you commit to a longer lease, these frequent price hikes can be avoided.
Final Thoughts
Remember, budgets are flexible blueprints, not strict policies to adhere to at all costs. At the end of the day, your situation, needs, condition, and lifestyle can be unique, in which case you need to figure out a budgeting system for yourself.
Rent cuts down a huge chunk of your monthly salary, but there are ways you can be smart about it. Review your spending habits and identify any unnecessary expenses you can replace with more cost-effective alternatives. For example, rather than working out in that all-inclusive gym, you can opt for your local rec center.
There are many ways you can trim your expenses, but these habits don’t materialize overnight. So be smart and practical about how you budget for your rent. Imagine the freedom of breathing easier on the first of each month, knowing that your rent comfortably fits within your budget. This peace of mind allows you to focus on what truly matters, empowering you to plan for a future free of financial stress.
