As prices continue to rise due to inflation, it can be difficult to know how much you should spend on rent. Calculating what you can afford in housing costs depends on many factors and everyone’s financial situation is different. Therefore, before browsing rental listings, it’s important to have a good understanding of what you can reasonably afford given your specific financial situation.
You can use a rental calculator (opens in new tab) as a place to start. You’ll enter your income, expenses and savings, which will allow you to compare rental prices with your monthly budget. Additionally, the following guidelines can also help you determine how much you should spend on rent. While these can serve as good general guidelines, determining what is affordable will be different for everyone.
The 30% rule.
The standard rule of thumb when determining how much rent you can afford is the 30% rule. This rule states that 30% of your gross monthly income must be spent on housing costs. Typically, this rule is used by mortgage lenders to determine loan eligibility, and if you’ve applied for an apartment recently, you’ll know that many landlords require you to earn at least three times the monthly rent. It’s a good threshold to stay under when determining how much you’ll spend on rent.
However, that doesn’t mean spending 30% of your income on rent makes sense for everyone. For example, you may have large student loans to pay off each month, straining your rent budget. On the other hand, you may live in a city where the rent and cost of living are higher than average, pushing you over the 30% threshold. Just make sure your savings goals aren’t negatively impacted by what you decide you can afford.
The 50/30/20 rule
Another way to determine what you should spend on rent is to try the 50/30/20 rule. It’s a way of budgeting that divides your monthly income after taxes into three main categories.
50% of your income will be allocated to needs. These are expenses that cannot be avoided or cut from a budget, including
- Municipal services
- Child Care
30% of your income should be budgeted towards desires. Basically, any non-essential purchase will fall into this category, such as
- Subscription services, such as Hulu or Netflix
- Eating out
- Unnecessary purchase
Finally, the last 20% of your income should go towards savings or paying off debt. This section also includes pension and emergency fund contributions, as well as investments.
Here’s how this budget breaks down.
For example, say you bring home $4,000 a month. $2,000 will go toward necessities, which include rent payments. $1,200 will be budgeted for necessities, leaving you with $800 to pay off debt, invest, or save. From here, you’ll be able to see how much rent you can afford, factoring in other necessary expenses, in order to stay under the $2,000 threshold.
Again, this is a good budgeting guide, but not all individuals will be able to use this exact method. Maybe you have a lot of expenses to pay each month that eat into your budget. In this case, you will need to adjust this plan to work for you.
When determining how much rent you can afford, keep in mind the additional costs that come with renting a new place. You’ll need to have enough to cover entry and exit fees, which can vary depending on where you’re staying. This also includes any security deposits that must be put down before moving in, which usually end up being one month’s rent. Some apartments also have application, pet and parking fees.
Taking into account utility bills is also important, as these will increase your monthly expenses. Services may include electricity, water, garbage collection and online payments.