Whether you’re just starting or looking to relocate, one of the biggest decisions you’ll make in your adult life is where you’ll live.
Housing is typically the largest monthly expense for most Americans, so you’ll want to make sure you’re considering all options carefully.
However, to know what to look for, you’ll need to decide how much of your income you can designate towards rent each month.
How much is too much?
So, how much money should you be paying towards rent?
The traditional rule states that your rent should not exceed 30 percent of your income (before taxes).
However, with costs of living growing at a higher rate than salaries in most areas of the U.S., this is not always practical or realistic.
According to a 2015 report from the U.S. Census Bureau, approximately 38 percent of Americans were paying more than 35 percent of their income towards rent. Like New York City, San Francisco, and Los Angeles, residents of large cities have it even worse—often paying more than half of their income towards rent.
If you’re living within one of the more expensive housing markets in the US, it’s understandable to forgo the old 30 percent rule favoring safety and proximity to your day job (which also saves on transportation costs!).
The 30 percent rule may also be difficult to implement if you face high student loan payments. Instead of debt, financial experts suggest renters use the 43 percent rule.
The 43 percent rule suggests that your monthly rent payment and all other monthly debt payments should not surpass 43 percent of your monthly income.
The 43 percent rule is derived from a mortgage lender principle, which requires borrowers to maintain a 43 percent debt-to-income ratio (or less) to qualify for a mortgage.
This allows the lender to make sure you have the ability to make payments adequately and thus speaks to your ability to make your monthly rent payment.
Another set of guidelines financial experts suggest considering is the 50/30/20 budgeting model. By following this rule, you would designate 50 percent of your after-tax income toward housing, utilities, transportation, groceries, and any other living essentials.
Another 30 percent would go toward non-essential items, like entertainment and dinners out, while the remaining 20 percent would go towards loan payments, retirement savings payments, etc.
However, this rule doesn’t apply seamlessly to all (i.e., for those with cumbersome student loan payments or those nearing retirement). It should therefore be considered carefully and with your own financial situation in mind.
Find your own optimal answer.
Hence, considering how much you should allot towards rent, it’s no surprise there’s no definitive answer. Instead, look into suggested budgeting models and their applicability to your lifestyle.
Money management sites like Mint and mobile banking apps like Chime are also great tools to track your finances and create budgets. This way, you can explore various budgeting models based on your own finances and see what works best in your everyday life.
Real estate and rental marketplace websites, like Zillow and Apartment List, also feature rent calculators upon which you can base your rental budget (and even include your living preferences).
You’ll also want to keep in mind what your living circumstances will look like by asking questions like:
- What are your current spending habits like?
- Will you be moving in with a roommate?
- If so, how many?
- Are utilities included?
- How important is proximity to work or entertainment?
Having the answers to questions like these will let you know how much room to create in your budget for housing.
At the end of the day, how much money you decide to spend on rent depends on where you live and what your budget says you can afford.
Doing your research and analyzing your unique financial situation ahead of time will help you form the basis of your rental budget.
However, if you have any specific questions or want to make sure your plan falls in line with your financial goals, consider employing the help of a professional.
