by Kathryn Bergeron June 2, 2016
It’s never too late to get a firm grip on your finances. If you think you’re paying too much for rent, moving to more affordable accommodations can make a significant difference in your budget. Do some calculations before you commit to a new lease so you know what you can reasonably afford.
Percentage of Income
According to CBS MoneyWatch, some landlords require that you spend no more than a quarter of your pre-tax income on rent — rent being the operative word. Forget utilities and other associated expenses for the moment. “Rent generally should not be more than 25 percent of your gross monthly salary,” says Andy Solari, Realtor Associate at Re/Max Carrier Realtors in Brigantine, New Jersey. “If an individual’s income is $4,000 a month, then the rent should be no higher than $1,000.”
Additional Housing Expenses
You’re not going to want to live in the dark or shiver through the winters, nor give up television, telephone and Internet service, so 25 percent is typically just the beginning of what you’ll spend on housing. Fox Business suggests that when you add in things such as utilities, the total should come out to no more than 33 percent of your earnings. Some estimates for these additional housing costs are more conservative. CBS MoneyWatch recommends not exceeding 3 to 4 percent of your gross income for utilities. Most people spend between 30 and 35 percent overall on rent and utilities. Don’t forget renter’s insurance if you own any personal property that would be difficult to replace on a budget.
Other Equations
Budgets lend themselves to tweaking and adjustments so you can get where you need — or want — to be. If 30 to 35 percent of your income won’t provide for suitable accommodations, you can try moving money from one category to another. The 25-percent figure for rent is predicated on the assumption that you’re going to spend another big chunk of money on things such as car payments and groceries. If you don’t have an auto loan because your car is paid for,you might be able to spend more on rent. Fox Business says that when added all together, housing, food and transportation should take up no more than 55 to 60 percent of your budget. If you can cram down groceries and transportation to 20 percent, you could possibly increase the money that’s available for rent to 40 percent.
People living in cities where rents are steep might dedicate as much as 50 percent to rent payments, but they must typically give up something else in order to do so. The 50/30/20 budget suggests that you should give 50 percent of your income to necessities, 30 percent to discretionary spending (the fun things), and 20 percent to savings or paying down debts. In theory, this toocan increase what you can comfortably spend on rent if you move some of that discretionary 30 percent over to the necessities column.
Explore Your Options
The more wage-earners you put in a rental, the nicer and more spacious that rental is bound to be. “If two people are on the lease and they gross a combined income of $8,000 a month, their rent can go as high as $2,000,” says Solari. Rent on a three- or four-bedroom dwelling sometimes comes out to less per person than a single individual would have to pay for a one-bedroom place. If sharing your living space seems uncomfortable, consider some other creative options. You might offer to perform maintenance or managerial services for your landlord in exchange for a break on the rent. If you don’t find the process of moving all that appalling, consider subletting a place — renting from an existing tenant who is no longer living there for one reason or another. You’ll need approval from the landlord and you may have to pack up and leave when and if the original tenant wants to come home, but these situations are often more affordable than signing your own lease. If nothing else, it might buy you time to get your financial ducks in a row so you can afford a little more toward your own place somewhere down the line.
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FAQs
How much should you spend on rent? It depends. One popular guideline is the 30% rent rule, which says to spend around 30% of your gross income on rent. So if you earn $3,200 per month before taxes, you could spend about $960 per month on rent.
How much percent of your income should you spend on rent? ›
It is recommended that you spend 30% of your monthly income on rent at maximum, and to consider all the factors involved in your budget, including additional rental costs like renters insurance or your initial security deposit.
What is the 50 20 30 rule? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much should you make to afford $1200 rent? ›
The 30% Rule
Let's consider an example. Say your monthly income is $4,000. If you're using the 30% rule to determine how much you should pay in rent, multiply $4,000 by 0.3 (30%). The maximum amount of money you should spend on housing every month is $1,200 according to this budgeting strategy.
Is the 30 rule outdated? ›
The 30% Rule Is Outdated
To start, averages, by definition, do not take into account the huge variations in what individuals do. Second, the financial obligations of today are vastly different than they were when the 30% rule was created.
How much should I spend on rent if I make 40k? ›
If you make $40,000 a year, you can afford to spend $1,000 a month on rent. If you make $50,000 a year, you can afford to spend $1,250 a month on rent. If you make $75,000 a year, you can afford to spend $1,875 a month on rent. If you make $100,000 a year, you can afford to spend $2,500 a month on rent.
Is 40% of my income too much for rent? ›
Spending around 30% of your income on rent is the golden rule when you're trying to figure out how much you can afford to pay.
Is 50% of your income too much for rent? ›
Spending more than 50% of your income on rent isn't recommended, as you'll be living paycheck to paycheck. You won't be able to save or invest money for the future. If you're currently overspending on rent, solutions include raising your income, finding more affordable housing, or getting a place with a roommate.
Is the 1% rent rule realistic? ›
Is the 1% rule realistic? The 1% rule in real estate investing is a useful guideline but not always realistic in every market. It states that the monthly rent of a rental property should be at least 1% of the property's purchase price.
How much disposable income should I have? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What is the 40 40 20 budget rule? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
How much should I make to afford $1500 rent? ›
The traditional rule of thumb is that you should try to spend no more than 30% of your gross income on rent. According to this rule, you should be making $5,000/month to afford a $1,500 apartment. With a 40-hour workweek, this works out to $28.85/hour.
What is the rule of thumb for rent? ›
The 30% rule states that you should try to spend no more than 30% of your gross monthly income on rent.
How much should I spend on rent if I make $3,000 a month? ›
For example, if a person earns $3,000 per month before taxes, they should not pay more than $900 in rent. This rule is based on the idea that housing expenses, including rent and utilities, should not take up more than a third of a person's income.
What percent of your budget of $2500 would your rent be if you pay $650 in rent? ›
Final answer:
To find the percentage of your budget that your rent would be, divide the amount of rent you pay by your total budget and multiply by 100. In this case, the rent would be 26% of the total budget.
How much money should you have left over after bills? ›
As a result, it's recommended to have at least 20 percent of your income left after paying bills, which will allow you to save for a comfortable retirement. If your employer offers matching 401(k) contributions, take advantage so you can maximize your investment dollars.
How much of your net income should you spend on housing? ›
For housing costs to be considered affordable, these total costs should not exceed 30 percent of household income, according to the US Department of Housing and Urban Development.
How much should you really spend on a house? ›
Figure out 25% of your take-home pay.
To calculate how much house you can afford, use the 25% rule we talked about earlier: Never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. That includes your mortgage principal, interest, property taxes, home insurance, PMI and HOA fees.
