How Much Should I Spend on Rent?

related category image

Point of Interest

How much you should spend on rent depends on the local rental prices, your incomings and outgoings, and your financial goals — it requires more work than applying a fixed percentage.

It’s no secret that a growing number of millennials prefer renting to dealing with hidden costs of homeownership. Closing costs alone are about 2% to 5% of the home purchase price. Additionally, there are property taxes, homeowner’s insurance, and unexpected repairs to budget for. That’s why renting just seems easier and more affordable. But many millennials are now asking: How much should I spend on rent?

The 30% rule — a very rough guideline

A widely accepted guideline is the 30% rule, which suggests you should spend no more than 30% of your gross income on rent. Your gross income is what you earn before tax. If we assume your monthly pay is $4,000 before tax — a figure roughly in line with what college graduates can expect to earn in their first five years of work — then you should pay no more than $1,200 on rent each month.

Before you start applying the 30% rule to your rental search, let’s pause and reflect on whether this popular rule of thumb could work for you.

For starters, the figure of 30% is somewhat arbitrary, particularly as it disregards inflation and rising rental prices. Since wages won’t necessarily fluctuate in line with inflation and rental costs, using the same benchmark based on your earnings may not make sense from year to year.

The other consideration is that the 30% rule isn’t tailored to your situation. Continuing with the previous scenario, if you’re looking for a rental in an expensive area, a budget of $1,200 may not be realistic. Or perhaps you live in an affordable city and you can find a decent apartment for just $600 a month. Clearly, where you live, how much you earn, your monthly expenses, and your long-term financial goals all impact how much of your income should go towards rent.

Everyone’s situation is different

Our point is this: The right amount to spend on rent differs from one person to the next.

To figure out the amount you should spend, develop a budget. Start with your financial goals — are you trying to save for emergencies? Perhaps you need to pay down debt? Or maybe you just want to be on top of bills?

Next, identify how much money you have coming in. At the same time, track your spending over a week or month so you have a clear picture of where your money goes.

Once you know your income and expenses, you’re ready to set down a budget on paper or in a spreadsheet. Monthly budgets are a good place to start, but you can adjust based on the frequency of your bills and pay.

Next, use the top section of your budget sheet to record the money coming in. Then categorize your expenses into needs and wants. Needs may include expenses like utilities, transport, groceries, and debt payments. Wants would cover shopping, socializing, and a gym membership or cable subscription. Record how much you’d like to have leftover for savings or extra debt payments, too.

Once you’ve done this, you should have a better idea of how much you can afford to pay on rent while also meeting your financial goals.

Tip: Try to account for a small buffer, especially during your first few months while you’re still fine-tuning your budget, to help with any unexpected costs. 

Renter tips

What happens if your rental budget isn’t big enough for your ideal rental property? Or what if you want to save a bit more money? Here are some tips for cutting costs while you’re renting.

  • A great solution to make ends meet is to get a roommate. Apart from sharing rent and utilities, you might save on food bills, Internet, or cable subscriptions too. This is especially important if you live in a city with a high cost of living.
  • Another tip is to be strategic about the location of where you live. Being closer to the center of town will likely cost you more, but if you’re moving out further, make sure you’ll have access to good transport links. Of course, living close to work so you can walk or cycle will be even more budget-friendly.
  • The rental price of a property is also affected by its age, size, and condition. Properties that are smaller, older, or less fancy will cost you less. Be prepared to make reasonable compromises, and you’ll be rewarded with money back in your pocket.
  • Negotiating your lease with the landlord is worth a try. For example, you could propose a longer lease in return for a lower rental price.
  • Finally, remember that some expenses are wants rather than needs. You might have to wait until your finances are stronger before subscribing to expensive cable and high-speed Internet plans.

The final word

“How much should I spend on rent?” is a common question for college graduates and those new to the workforce, but there isn’t a one-size-fits-all answer. What’s appropriate for you depends on your individual circumstances. While there are popular guidelines like the 30% rule, it’s better to look at your incomings and outgoings as well as local rental prices to make the best decision.

FAQ

1. What is the 50/30/20 budget rule?

The 50/30/20 budget rule is a percentage-based budgeting concept to help you divide up your take-home pay so you can meet different kinds of costs and financial goals. It can be useful for deciding how much you can afford to spend on rent. According to this rule, you should allocate:

  • 50% to necessary costs, such as a roof over your head, food, utilities, transport to and from work, and debt repayments.
  • 30% to wants — these are the “nice-to-haves” like nights out with friends, entertainment, and occasional getaways.
  • 20% to financial goals, which may include saving for something special or emergencies or debt reduction.

2. What percentage of my income should go to rent?

The percentage of income allocated for rent varies from person to person. While there are popular guidelines like the 30% rule and the 50/30/20 budget rule, it’s best to figure out the percentage based on your actual income, expenses, and financial goals.