If you’re struggling to make ends meet each month, looking at your recurring expenses is one of the best ways to save big. And what’s the most expensive recurring cost for millions of people around the world? Their monthly rent payment.
Knowing exactly how much to spend on rent can be tricky. Follow this guide to calculate how much you should be spending on rent, and get ideas to save on housing in the coming months and years.
How much should I spend on rent?
If you were wondering, “How much can I afford to spend on rent?” start by looking at your income. Rent is an important budget line item, and should not be looked at in a vacuum. Consider your overall budget when looking at how much you can afford to spend on rent.
Many personal finance experts offer a vague guideline that you should spend no more than 30 percent of your income on rent. This advice came out of The New Deal in the 1930s, and while it’s still regularly quoted, it’s no longer a useful guideline.
In the decades since the 30 percent rule began, housing and rent prices have skyrocketed, but average income increases have not kept pace. The rule also ignores the additional financial obligations of modern renters. Student loans, renter’s insurance, and retirement accounts weren’t the norm back then.
Lastly, the 30 percent rule doesn’t take into account the variances of housing costs in different areas. People in cities like New York and San Francisco can expect to spend well over 30 percent of their income on rent, while people in rural areas should spend quite a bit less.
Breaking down your income
Rather than choosing an arbitrary percentage, let’s see what you can really afford.
Let’s look at an example to better understand how to budget for your rent. The average 2015 college graduate’s income is a little over $50,000, so we will use that for the example.
If you earn $50,000 per year, your taxes are around $5,725, assuming no extra deductions.
Next, add up your fixed recurring expenses and work deductions, like insurance and retirement account contributions. To make things easy, let’s assume you pay $250 per month for insurance and save 10 percent of your income for retirement. That leaves you with about $36,000 to live on, or $3,000 per month.
Now, we have to take into account other fixed expenses you incur each month. Consider things like groceries, car payments, student loans payments, cell phone, and internet expenses.
These vary widely depending on your living situation (Do you have a roommate? Do you have kids?) and your outstanding debt. Assuming you are single and live alone, let’s use $400 for groceries, $250 for student loans, and $150 for phone and internet each month. After subtracting those expenses, you have $2,200 left.
Next, we have to estimate for utilities and other recurring expenses like a car payment or life insurance. Again, those vary widely by location, the size of your home, and the season. Let’s assume $100 per month for utilities and another $200 for insurance, car payments, and other financial obligations.
Now we are down to $1,900 to cover your rent, fun spending (like restaurants, bars, and entertainment), and additional savings for things like an emergency fund.
If you live somewhere like San Francisco, apartments can easily cost $2,000 per month or more. That would be over 50 percent of your after-tax income! In cheaper cities like Raleigh, the average rent is a little over $1,000 per month. That gives you more flexibility and wiggle room, and only uses up about 30 percent of your take-home pay.
There is no right or wrong answer
Everyone’s finances are different and every living situation is going to be unique. In some cases, spending 30 percent of your income on rent makes a lot of sense, but in others, it is a useless guideline.
Instead of trying to pick a specific percentage, look at your own income, living expenses, and needs. If you’re willing to find a roommate, you can easily slash your monthly living expenses. Living on your own in a big city means you will have less to spend on fun things like shopping, concerts, and tech gadgets.
Ultimately, you should strive to keep your rent payment as low as possible. This will allow you to save more and better prepare for the future.
So now you know how to answer the important question: How much should I spend on rent? The answer depends on how much you can afford, where you live, and how much you want to save for the future.
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