Inevitably, everyone asks this question: How much should I spend on rent? It’s a common personal financial question because the solution depends on many factors, including your income level, where you live, and financial goals.
Most people spend hours on websites like Zillow or Redfin analyzing where to live, the apartment or houses they want, and suffering through the reality of not knowing what they can (and should) afford. The awesome (and addicting) part of these websites is that they open the entire universe of possibilities. Using filtering mechanisms, you can eliminate apartments that are too expensive from your search. But first, you must determine how much you can spend on rent.
Follow the 30% Rule (With A Twist)
There are many financial rules of thumb you can use for spending suggestions. One popular rule of thumb for how much to spend on rent is the 30% rule. The 30% rule says you should spend around 30% of your monthly pre-tax income on monthly rent.
Sounds great, right? While the 30% rule is a great guideline, it is certainly not a one-size-fits-all solution. Here are several issues with the 30% rule of thumb.
After-Tax is A Better Metric: The 30% rule advocates spending 30% of your pre-tax income on rent. At Smart Money, we think that is way too high, especially if you are focused on reaching other financial milestones like saving for a down payment, creating an emergency fund, or investing. Spending 30% of your after-tax income is better.
Geography Matters: Renting markets vary widely according to geography. Average rents are drastically different in New York or San Francisco compared to Dallas or Houston. In some markets, you might have to stretch your paycheck to find a feasible apartment. This means you will have to cut expenses to meet your rent expenses. More on that below.
Don’t Focus on Maximum Spending: Okay, now that you are thinking about spending 30% of your after-tax income on rent, know that whatever number you calculate is the absolute maximum you should spend. Try not to go above this spending ceiling. Aim to secure less than 30% to have room to spend on other essential items in your budget.
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Following the 30% rule is a great starting point, but only if you use 30% of your after-tax monthly take-home pay. Using after-tax numbers will give you a more realistic target. Let’s look at how to calculate that below.
Here’s An Example
Ready to crunch some numbers? Let’s dig into an example of calculating how much you should be spending on rent:
- In this example, you are single (at least as a tax filer).
- Let’s say your salary is $50,000 per year.
- Your after-tax take-home pay for the month will be around $3,400.
- Following the 30% rule, you should spend no more than $1,020 on rent.
Create A Budget
Your budget should act as your financial north star. By following a consistent budgeting strategy, you can tailor your expenses to meet a variety of spending questions, including how much to spend on rent.
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Whether you are new to budgeting or already have one in place, the question of how much to spend on different categories in life – apartment rent, car payments, travel, going out – all comes down to your allocation approach. One method to follow is the 50/30/20 budgeting method. This method advocates spending 50% of your after-tax income on needs, 30% on personal wants, and 20% on saving and investing. Your rent expense (along with a variety of other expenses) is included in the 50% category.
Sticking with the example above, where you are making $50,000 per year and your monthly after-tax income is $3,400, that would mean a monthly spending allocation breakdown of the following:
- Needs (50%) – $1,700 to cover rent, student loans, car payments, utilities, and groceries.
- Personal Spending (30%) – $1020 to cover eating out, shopping, and happy hours.
- Saving (20%) – $680 to cover saving for an emergency fund, down payment, or investing
If you have a lot of expenses that fall under the needs category of your budget, what you can afford to pay in rent might need to decrease. For example, if you have:
- Monthly student loans – $300
- Monthly car note – $200
- Monthly car insurance – $100
- Monthly groceries – $500
What is left over to spend on rent is $600. Not enough? Well, you might need to pull from your personal spending category to increase your rent payment. This means you will not be able to spend as much on going out, buying new clothes, or going to the movies. You can also look for savings elsewhere in your budget.
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Cost Cutting
After playing with the 30% rule, you might wonder how you will ever be able to afford to rent in your city. If you feel that way, don’t worry; you are not alone. If the numbers aren’t adding up, you can cut expenses or earn more money.
Eliminating nonessential items from your budget can free up funds to allocate to your rent. Below are several actions to consider to free up cash for you to live where you want.
Consider Roommates: Studio apartments are much more expensive than splitting an apartment or house with friends or roommates. Dividing up rent, utilities, and other housing costs will add money back into your budget to help you tackle other financial goals, like paying off your student loans or car.
Focus on Groceries: If you aren’t careful, your grocery bill can add up very quickly. An extremely effective way to control your grocery bill is to adopt the habit of meal planning, using coupons, and buying in bulk.
Smart Money -> 5 Ways to Curb Excessive Spending
Factor In the Intangibles
Where you live affects everything about your day. It affects your commute, grocery choices, gym location, driving patterns, and more.
Living outside a major city like New York or San Francisco is usually less expensive than living downtown. However, you are sacrificing potentially hundreds of hours of commuting time, increased transportation costs, and logistical burdens to meet social engagements like dates and dinners out with friends.
Quality of life is a huge factor when building your budget and analyzing how much rent you can afford. When deciding where to rent, take a holistic view of your budget and lifestyle.
Smart Money -> 13 Tips on How to Save for a Down Payment While Renting
Smart Summary
Where you live dictates your day. If you want to enjoy all that your city has to offer, plan your budget accordingly. Find ways to earn more money and cut expenses you don’t need. Combining this strategy with smart money habits will give you the flexibility to rent and live where you want. Then, you can focus on leveling up and start saving for your down payment to buy a condo or house in your location of choice.
