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Asking yourself how much rent you can afford is the first step when you plan to find a new home. Answering this question can be the starting point to deciding where you want to live and what kind of place you want to rent.
Key point: this information is for general use purposes. If you are hell-bent on a path to FIRE, you may very well want to be more aggressive than described here. In that case, you shouldn’t be thinking how much rent can I afford, but rather, how little can I spend and be ok with it. Spending as little as possible can set you up for all sorts of freedom… like aiming to one day have a paid off home. Even so, determining the top end of what you can afford gives you a starting point. From there, you can work your way down if you want to keep rent expenses as low as possible.
When looking for apartments, one of the first things you ask yourself is how much rent can I afford? You want to know what percentage of your salary you can spend on rent, and how much money that is.
The process of looking for an apartment can make you feel overwhelmed. There are just so many things to take into account. You need to determine which neighborhood you want to live in, determine if you want to house hack, look at decent apartments, take the time to visit the apartments, apply for them, and finally hear if you are accepted.
It can only take a couple of days before an apartment listed online is rented in popular areas. You want to know how much rent you can afford so that you can visit the right apartments for you and your budget. It will save you time, money, and a lot of hassle.
What Percentage of My Income Should Go to Rent?
When you are thinking about how much rent can I afford, it is simplest to determine what percentage of your monthly net income you should spend on rent. What percentage is ideal for you depends on your financial situation, like your income and perfect living environment.
There are rules of thumb that you can follow to determine how much you should spend on rent. Keep in mind that these are rules of thumb. They don’t work for everyone, and they are suggestions. Think about your ideal situation and what fits your specific needs.
Spend 20% On Rent
If you spend 20% of your income on rent, you have more money left for other things. You could decide to spend more money on non-essentials, invest more for retirement, or surprise your loved ones with a gift.
When you spend 20% of your salary on rent, and you’re earning an average income, you may need to make some concessions. You could look for someone to share the apartment with, especially if you live in a more high cost of living area. If you don’t mind living in a smaller or older apartment, or further away from the city center, this could be another thing to look at.
It is essential to spend money where you value it. If you don’t value a big apartment and don’t mind sharing an apartment to save money on rent, don’t spend most of your money on rent. Just be sure that your standard of living is still up to par, and you’re not settling for a terrible living situation just because you want to save money.
Spend 30% On Rent
Spending 30% of your salary on rent is what most people are going for. You have enough money left to buy other essentials while living in a decent apartment. It is the sweet spot between an affordable apartment and an apartment where you feel at home and comfortable.
When you’re someone who earns a median salary, spending 30% of your income on rent will get you something you are comfortable with and want to live in. Besides paying rent, you can also save for the future and do fun things.
For example, if you have an annual income of $40,000, your maximum monthly rent is $1,000. If you make $60,000, your maximum monthly rent is $1,500 when you spend 30% of your income on rent.
Spend 40% On Rent
Spending 40% of your salary on rent mostly occurs when you don’t set a budget for yourself, and you see a home that you like. The house is perfect for you and a little expensive, but you really want to live there.
While it is okay to spend 40% of your income on rent, make sure you have thought about it. You want to make it a conscious decision. You want to prevent that two months into living there you notice that you don’t have enough money left to keep up with your standard of living.
When you aim to spend 40% of your salary on rent, you will know how much you will spend on other items. It may be wise to start a budget and track your discretionary spending, as you want to make sure you can set aside your rent every month. If you want to spend 40% of your paycheck on rent, you can either check out one of these things to do with no money or earn free gift cards so you can still treat yourself.
Take Into Account Your Local Housing Market
The rental market varies widely from place to place. Where you live makes a big difference in how much rent you pay. If you want to live in popular cities like New York, San Fransisco, or Los Angeles, rent is higher than in other cities or states.
Looking around online and see what rent people ask for in your neighborhood can give you a more realistic image. Before you go apartment hunting, you want to know if your budget can give your enough space and meets your other requirements. Checking a local rent affordability calculator can help with that.
It can be frustrating to want to spend 30% of your income on rent, while the average rents in the area you want to live in can’t accommodate that. Do your research and prevent disappointment.
Additional Costs To Consider
When you have determined how much of your income should go to rent, the challenge can be to factor in additional costs and other expenses. We will discuss a couple of the most important things to take into account here.
Be Realistic About Your Lifestyle
Don’t expect to change your spending habits or your lifestyle to afford rent. It may be tempting to say that you’re going to eat out less and cancel your gym membership so that you can afford a higher rent. This is probably not such a good idea and something you may regret later. Ideally, you want to be able to afford your home with your current spending habits.
You can also try to make extra money and add supplemental income by starting a side hustle. You could start by flipping things for profit, doing remote work, or testing websites. Be aware that this is something that will take up time and effort. Plus, you have to ask yourself whether it is worth it to afford your desired rent.
Consider Additional Savings Or Costs
When you are going to move, your situation will change. You will live further from your work, costing you additional gas money. You need to pay for parking in your new space, adding extra costs. Your apartment could have an on-site gym, saving you $60 per month on a gym membership. Your unit has its own laundry, where you save both time and money.
These a couple of examples of how moving places can add monthly expenses or how moving can save you money each month. If the changes are significant, it would be a good idea to include that in your calculation.
Costs Of Moving
Rent isn’t the only cost when you’re moving. The costs of moving to consider are:
- Security deposit – most landlords, ask for a security deposit. Usually, it will be one month of rent. Know how much they expect you to pay.
- Fees – there may be additional fees that you need to take into account. Examples include a one-time broker’s fee, maintenance fees, or costs of having a pet. Ask your landlord about this to avoid surprises.
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- Overlap in rent between your old and new lease, causing you to pay double rent for a couple of weeks or months.
- Furniture – if your last place was fully furnished, or you want to change things up, you may want to budget for some new to you furniture. Changing up your furniture doesn’t have to be expensive.
Budgeting When You Know How Much to Spend on Rent
When you have the answer to the question, How much rent can I afford? You can start to set up the rest of your monthly budget. Since rent will be one of the most significant living expenses, figuring out the rest of your spending will be easier when you know that number.
A budgeting method that is widely used is the 50-30-20 budgeting method. This budgeting method focuses on paying current bills, saving for the future, and leaves some room for fun. The allocation is as follows:
Spend 50% per month on necessities.
50% of your paycheck should go to necessities, including rent, utilities, insurance, and groceries. It also includes minimum monthly payments on any debt you have, like a student loan, car payments, or credit card debt.
Spend 30% per month on wants.
30% of your income should go to wants, which includes the things you enjoy in life. It can be anything you love or enjoy; going out to eat, giving gifts to others, getting the latest game console, or having subscriptions to your favorite streaming services.
As long as it fits in the 30%, you can do anything you want with it.
Spend 20% on savings and debts.
The remaining 20% of your income should go to saving, investing, and paying off debt. Any minimum debt payments go into the 50% necessity category. The 20% savings and debts category gives you the room to build something for the future.
Frequently Asked Questions – How Much Rent Can I Afford?
Many questions come up regarding how much rent you can afford and are willing to pay. The most frequently asked questions are discussed below.
Do I Use Annual Gross Income or Net Income To Calculate the Rent?
If you want to calculate how much rent you can afford, you take the percentage of your net income. While it is more convenient to calculate your gross monthly income, income taxes aren’t constant in every state or city. Many factors determine your net income, so calculating with take-home pay will give the most reliable result.
How Much Rent Should I Pay Based on My Salary?
The golden standard is that no more than 30% of your after-tax income should go to rent. If you want to focus on rent costs, including utilities, groceries, and other living costs, you would want to stay below 50%. As with many things in personal finances, no one way works for everyone.
If you want to know how much rent you can afford, it is best to make a short overview. You can write down how much you earn every month, how much you want to save, and how much you want to spend on expenses. Keep adjusting the number until you’re satisfied.
Do You Really Have To Make 3 Times The Rent?
While there are a few exceptions, most landlords feel comfortable renting you an apartment or home if you make three times the monthly rent. Landlords ask for proof of income as well. They do this to make sure that you can afford the place and can pay rent.
How Much Rent Can I Afford For My Salary?
With the 30% rule, the rent you can afford on your salary is:
- When you have an annual salary of $30,000 a year, your ideal rent would be $750.
- When you have a net income of $40,000 a year, your ideal rent would be $1000.
- When you have a yearly net income of $50,000 a year, your ideal rent would be $1250.
- When you have a total income of $70,000 a year, your ideal rent would be $1750.
- When you have an annual household income of $100,000 a year, your ideal rent would be $2500.
As you calculate monthly how much rent you can afford, you see it depends highly on your income level. It can be challenging if you are on the low-income side to find a one-bedroom apartment where your fixed expenses are something you can afford based on your monthly salary. While your rent payment ideally should not exceed 30% of your income, it is not always possible. A solution could be to look for a two-bedroom apartment with a roommate or earn other income.
Conclusion on How Much Rent Can I Afford?
When you want to calculate how much rent you can afford, it is best to start with your net income. The rule-of-thumb for renting is that your rent should be around 30% of your income. Calculate rent by taking 30% of your salary and start to check if that rent is realistic in your area. Be sure to include other costs like moving expenses, broker fees, or new to you furniture.
By determining your budget for renting before you start looking for your next apartment, you save yourself a lot of time in the process. You only look for apartments that fit your budget and meet your other requirements.
When you follow the 30% rule, you have already roughly distributed your budget. If you want to further divide your budget, you can do so by looking at the 50-30-20 budgeting rule. This will give you a complete image of how your rent will affect your ability to cover your other expenses.
Ask yourself what lifestyle you want to live, calculate your budget, including your rent, and set financial goals for the future. If you take these steps, you will get a complete and accurate picture of how much rent you can afford.
This article originally appeared on Your Money Geek and has been republished with permission.
Marjolein
Radical FIRE is a personal finance platform that is all about financial independence. At Radical FIRE, you will learn to save money, make more money, and invest to optimize your way to freedom. We want you to reach your financial goals and have fun while doing it!