Renting an apartment for the first time or moving into new digs can be stressful. Not only do you need to move all your belongings, but you also have to evaluate how renting will impact your monthly bills.
In an age where we’re seeing the cost of rent increase by 15 percent across the country, it’s essential to know how paying rent will affect your finances.
This guide explains how to manage your housing costs and still have money left over in your bank account each month.
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How Much Should You Spend on Rent?
It is best to spend no more than 30 percent of your gross monthly income on your rent payment.
Keep in mind that this is not your take-home pay. Instead, it’s what you earn before taxes.
This is known as the 30 percent rule, and it is meant as a general rule of thumb that’s in line with your monthly budget.
Here is how experts like Dave Ramsey suggest you allocate your spending.
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Unfortunately, it poses several problems.
First, every situation is different. You may have a lot of debt you’re paying off and need excess funds to get rid of it.
Additionally, the rental market where you live may have ridiculously high prices.
While the 30 percent rule is a good launching point to help you determine how much rent you can afford, these two scenarios show that it might not be the best guideline for you to follow.
Where Did the 30 Percent Rule Come From?
The 30 percent rule goes back nearly a century. It was created based on the National Housing Act of 1937. One of the key tenets of the Act established public housing for lower-income Americans.
Part of that was to create a cap for monthly rent payments for qualifying families. The amount has increased over the decades, from 20 percent in the beginning to where it stands today.
This 30 percent benchmark is intended to help you remain financially stable.
Most financial experts include it in the needs area of the 50/30/20 budget, where it comprises the majority of your 50 percent of essential expenses.
The rule only applies to rent. If you’re looking to buy a house, most lenders don’t allow your total indebtedness to surpass 43 percent of your monthly income.
Why You May Want to Ignore the Rent Rule of Thumb
Budgeting for rent is a personal situation, and the 30 percent rule fails to truly answer the question of how much rent you can afford.
Specifically, it comes up short in two ways:
- It does not account for inflation
- It is not customized to your situation
The last time the National Housing Act updated its guidance for how much you should spend on rent was 1981.
America has experienced inflation over that time, making the suggestion less viable. For example, $100 in 1981 is worth roughly $320 in 2022.
Additionally, reports indicate that median monthly rent is outpacing the percentage of income the rule suggests.
The lack of personalization also poses problems. It doesn’t take into account things like your salary, credit score, indebtedness, or any other factors of your financial situation.
Furthermore, if the real estate market in your area is hot, it might be difficult to find an apartment you can afford.
The rule of thumb has good intentions, but it should not be blindly followed. Instead, you need to look at your finances holistically to determine how much you can afford to spend on rent.
You may need to spend more, but you might also learn you can spend less and use those resources for other needs.
How to Calculate Your Rent-to-Income Ratio
Before renting an apartment, it’s vital to determine how much of your salary will be consumed by rent.
To calculate your rent-to-income ratio, you must divide your monthly income before taxes by your rent payment.
For example, if you earn $5,000 monthly before taxes and your rent is $1,500, your ratio is 30 percent.
It’s important not to use your take-home pay in the calculation as that will net an incorrect result.
You might live in a city where landlords require tenants to earn a certain amount above the rent, so this simple formula is good to remember.
Ways to Lower Your Monthly Rent
Rent is a significant part of your monthly living expenses. Fortunately, there are some easy ways to reduce spending on housing costs.
Here are some actionable ways to save on rent.
Consider Other Locations
Location can play a significant role in how much your monthly rent costs. For example, my family and I live in Omaha. Rent can vary by at least ten or 15 percent depending on where you live in a city.
If you’re struggling to reduce your expenses, you could consider relocating to a more affordable neighborhood. While this is a good way to save money, you must do your due diligence.
You want to determine how relocating will impact your commute to work. You may also want to see if moving to a new area means giving up certain amenities you enjoy.
If it doesn’t impact either too much, you might be able to net some savings.
Utilities are essential, but you can look for ways to reduce costs. Ask your landlord if they can install a smart thermostat.
If they won’t purchase one, ask if they will allow you to buy one and install it. Use the same idea and install energy-efficient light bulbs to cut costs further.
Finally, if you have cable or satellite, it’s time to cut the cord. The average bill is $200 a month.
You can choose a live TV streaming service and easily get back at least $130 per month.
If you don’t know which service to choose, take our free quiz to get a personalized result.
Save on Groceries
Meals are an essential part of your budget. But, if you need to spend more on rent, it may be time to shave some food costs.
There are countless ways to save money at the grocery store, but here are some of our favorite ideas:
- Cooking more at home
- Doing one big grocery shop every week or two
- Not going to the store hungry
- Making a grocery list
- Keeping staple foods in your house at all times
- Using grocery rebate apps to save money at the store
- Inviting friends over for a potluck
- Taking advantage of your complex’s events and eating their food
- Eating leftovers
Just using a couple of these tips can help you reduce food costs. Find a few you can use that require minimal sacrifice and put the cash towards other needs.
Buy Renters Insurance
Spending is an odd suggestion to save on housing costs, but renters insurance should be a vital part of your financial tool belt.
For example, let’s say that a pricey item in your apartment was stolen. Or, perhaps you’ve experienced water damage or a natural disaster that ruined items in your home.
Those belongings must be replaced. Unless you have an emergency fund, money will need to come from somewhere to replace or repair your belongings.
Renters insurance helps you with that, and it’s typically very affordable. You can often find rates under $10 or $15 a month.
Additionally, many landlords require you to carry coverage just like they require a security deposit.
If you need to purchase coverage, Lemonade is a fantastic option. According to their site, their plans start as low as $5 per month.
Get A Roommate
Living with a roommate is not always fun. However, if you need help paying rent, getting someone to live with you is a guaranteed way to lower your costs.
It’s up to you if you choose someone you already know or try your luck with a stranger. If you don’t know where to start, tell friends, family, and co-workers that you’re looking for a roommate.
Regardless of who you live with, set some expectations before your roommate moves in. Determine how rent will be paid and who will pay for utilities.
If you don’t enjoy living with other people, look for a roommate who travels a lot for work. That way, you will feel like you are still living alone, but your rent and utilities will be cut in half.
What you spend on rent is largely subjective. We all have different goals, financial responsibilities, and locations.
Income varies widely as well. This also impacts how much you should spend on rent each month.
The 30 percent guideline is helpful, but it may cause you to overspend on rent. In turn, this directly impacts your ability to take care of other financial responsibilities.
Ultimately, take the time to evaluate your budget to determine what makes sense for you. This will ensure you aren’t spread too thin and can move towards achieving your financial goals.
What are some ways that you have cut your cost of living while not feeling deprived?
I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.