How do you feel about spending money on rent each month? Do you look at paying rent as a means to an end while you are saving for your first home or do you prefer renting over owning?
Depending on where your location renting might even make more sense than owning. Regardless, for the overwhelming majority of people, rent will be your biggest monthly expense and can have a massive impact on your financial life.
If you spend too much you might have to sacrifice in other areas of your life by cutting other expenses or maybe getting roommates.
While you might want to splurge on a nice place after watching an old episode of Cribs, a high rent payment can put a huge strain on your finances. The key is finding balance.
You need to find a balance of not overextending yourself but still finding a place you love to live. If you’re just entering the “real world” post-college or moving somewhere new you might ask yourself what percentage of your income should go toward rent.
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How much should I spend on rent?
The answer depends on where you live, how much you earn, and your financial goals. There isn’t one best answer but I’ll show you the exact steps to figure out how much money you should spend on rent each month.
Determine Your Monthly Income
The first and most important step in figuring how much you spend on rent each month it to determine your monthly net income.
Almost everyone knows their annual income but you can’t budget off of that figure as it is your gross income. You need to figure out your net income as it will be less because of taxes and any other payroll deductions, such as a 401K.
Once you know your take-home pay each month then you can figure out how much to spend on your rent each month.
For example’s sake, let’s say you make $60,000 per year gross income and contribute 5% annually to match your employer-sponsored 401K.
Example: $60,000 Annual Salary
- – $3,000 for 401K contributions
- $57,000 in taxable income
- 22% Tax rate
- $44,446 gross income
- $3,703 monthly or $1,851 bi-weekly after-tax income
$3,073 will be your working number to determine how much you should spend on rent each month. Do this quick calculation and keep reading to figure out what percentage of your income should go to rent.
The 30 Percent Rule
If you don’t know, one of the oldest ways to determine how much you should pay for rent is known as the 30 percent rule. Today, the 30 percent rule is more of a general guideline and does not work for everyone as some locations are much more expensive than others.
For example, the costs of living in Phoenix, Arizona are much cheaper than living in New York City.
With the previous $60,000 example spending 30% of your taxable income on rent would give you $1,100 per month for rent. This would be nearly impossible to do in New York City as the average 2 bedroom apartment was $4,042 (source NY POST) but very doable in Phoenix, Arizona.
Plus, the 30 percent rule doesn’t include other housing costs like utilities.
Don’t Forget Utilities
While your rent will almost always be your biggest expense each month, it’s important to budget your other expenses as well.
With apps like Personal Capital it’s never been easier to track your spending.
It’s easy to not think about your utilities. But they are an important part of budgeting out how much to spend on rent.
Depending on your landlord and location, some utilities might be covered by your rent payment. These might include trash, water, sewer, cable, and even internet. Be sure to know what is covered with your monthly rent payment and then add on the following utilities.
This will typically be your highest utility bill and depending on your location can greatly differ each month. Locations like Chicago will have very different heating costs than San Diego. Check with your local provider to learn more about estimated monthly costs or a plan that allows you to pay the same each month.
Some people might favor a nicer place and drop the $100 plus cable bill while others aren’t ready to cut the cord. Check out the best alternatives to cable TV to start saving thousands each year.
Some apartment complexes will include internet but it typically is a low service plan. If you choose to keep cable and internet with the same company choose to bundle to save more money.
Will your new apartment or house have gas or will everything be included in the electric bill?
While technically not a utility, you need to always include renters insurance in your budget. Almost all landlords will require renters insurance and will be a few hundred extra dollars per year. If you choose to pay yearly, in advance, you will normally get a discount. Don’t skimp on protecting your stuff!
After calculating your net income, adding in your utilities, and renting insurance you can gain a much clearer picture of how much to spend on rent.
Personally, when I was renting I never tried to go above 35% as I was aggressively saving for my first home. Instead of using the outdated 30% tool here is a better idea.
The Solution: 50/30/20 Budget
While the 30% rule has worked in the past it’s not as realistic with rising rent costs and unmatched income. The solution is the 50/30/20 budget. Here’s how the percentages break down:
- 50% of your net income will be dedicated to housing, utilities, transportation, groceries, and other items that don’t vary on a monthly basis.
- 30% of your net income is dedicated to entertainment and yourself. This could include your gym membership, eating out at restaurants, a night at the movies or online shopping.
- The last 20% of your after-tax income will be dedicated to your financial goals. This could include paying off debt, saving for a house down payment or an upcoming vacation.
I personally love the 50/30/20 budget as it allows you have some flexibility with your spending.
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Many people fail at budgeting because it is so strict that it doesn’t allow people to spend any money. Humans are only so disciplined. Eventually, after saving every penny to pay off debt or reach a financial goal, you might lose willpower.
It’s no different than someone who is losing weight and never gets a cheat meal.
Budgeting is all about finding the right balance and figuring out what works with your financial goals.
How the 50/30/20 Rule Breaks Down
From the previous example, here is how a $60,000 per year with 5% 401K deduction would break down:
$60,000 Gross Salary
- $3,000 401K contribution
- $57,000 take-home pay ($3,703 per month)
- 50% = $1,851
- Rent: $1,200
- Utilities: $150
- Car Payment: $174
- Car Insurance/Gas: $140
- Groceries: $185
- 30% = $1,110
- Online Shopping (books, movies, small furniture, personal care, clothes): $380
- Target (house supplies, pet care, etc.): $200
- Restaurants/Entertainment: $280
- Gym Membership: $65
- Haircut: $50
- Netflix: $12
- Leftover: $123
- 20% = $740
- School Loan Payment: $300
- Emergency Fund Contribution: $200
- Roth IRA: $240
Use the 50/30/20 as a guideline for your own finances but don’t be afraid to edit for your personal situation.
30% might be a lot for some to spend on entertainment. If you want to spend less on the 30% for entertainment, contribute more for retirement or splurge for a bigger apartment.
Alternatively, you can also flip-flop the 30% and 20% categories to increase the amount going to your financial goals. If you’re still stretched for rent each month here are some easy ways to lower your rent payment.
How to Lower Your Rent Payment
Check out these three ways to lower your rent payment and make sure you are keeping your housing and other costs under the 50% rule.
Depending on where you are in your life getting roommates might not be an option. If you are married, have kids, or a large family it might not be possible.
But, if roommates are a possibility, they are one of the best ways to lower your rent payment. If you can find a few roommates you can almost always get a bigger apartment or house and decrease the average cost per person.
People in New York go all out for this idea and can have 7 or 8 people living in a two-bedroom apartment.
While living alone is great it also comes with a hefty price tag. If you’ve never lived alone or wanted to in the future remember that you are responsible for everything. That includes rent, utilities, food, and any other household luxuries.
My biggest piece of advice is to live like a college student as long as you can. The less overhead you have the more can go toward paying off debt and setting up your financial future.
Improve Your Credit Score
Yes, improving your credit score can lower your monthly rent payment. Your credit score is a major factor when it comes to how much you spend on rent. A lot of landlords will have different rent payments depending on your credit score. If your score is too low they might not even accept your application.
I always like to think of my credit score as a real-world GPA but much more important. The higher your score the lower your rate and usually quicker approval.
Plus, if you decide to become a homeowner your credit score is a huge factor when it comes to securing your lowest interest rate. Check out how this guy increased his credit score
Think About Moving
Location, location, location is one of the oldest rules about where you choose to live. With rising housing costs in cities like San Francisco, New York, and Austin it’s making it very hard to live comfortably even with a high salary. While uprooting might not be for everyone, moving can have a huge impact on your finances and quality of life.
After college, I chose to move from pricey San Diego to Arizona so I could finally afford to live alone and start the next chapter of my life.
When I was looking at places in San Diego, apartments were around $1,500 – $2,000 per month. This was well above my budget for a post-college grad.
By moving one state over to Arizona, I was able to secure a much nicer apartment for only $700 with tons of amenities. It was literally half the price of the lowest cost ones in San Diego. Not to mention it was a much nicer place and had no roommates. Other than moving costs, relocating can be a great way to save money and start something new.
Ask yourself, “Do you love where you live or are you ready for a change?” Maybe you have the option to work remotely at your job or want a fresh start in a new area.
I recently had a friend relocate from Huntington Beach to Dallas and said he wished he would have done it sooner. It doesn’t hurt to look at the cost of living in other cities. It might be the change to save money and start a new adventure in your life.
So, How Much Should I Spend on Rent?
This will be different for everyone and largely dependent on your income, location, and financial goals. Instead of using the outdated 30% income rule, I recommend swapping for the 50/30/20 budget.
This budget will allow you to be flexible, spend money on yourself, and save for your future or pay down debt. It allows you some wiggle room if you have a month of higher expenses or save more if you have a cheaper month.
The 50/30/20 is a great option but don’t forget to refer to the other ways to lower your rent payment, including roommates and relocation. If you are trying to save money to pay down student loan debt or buy your first home, then you might want to use one of these tips to lower your rent payment.
When you are paying off debt or saving for a goal often times you might have to sacrifice in the short term for the long-term gains. Hopefully this helps you figure out how much to spend on rent each month.
How much do you currently spend on rent? Do you use the 50/30/20 rule or something similar? Let us know in the comments!