Like a home mortgage, monthly rent is a serious financial commitment. Before you get in over your head, know what you can afford. Follow these simple steps to calculate how much rent you can afford before you sign the lease.
What’s coming in
What you make each month will be the biggest factor in what you can afford. As a rule of thumb, you should be paying no more than 28 percent of your income to rent.
What’s going out
These numbers can be harder to keep track of, especially if you don’t yet have a budget to stick with. First get down on paper all of your fixed expenses. Those will include your current rent, deposits and fees or what your target apartment will cost you. Be sure to have on hand all current monthly loan payments, including car loan and credit cards and totals for child care, health insurance (if not deducted from salary) membership dues, phone, internet and cable service. Create a fixed number for things like savings, clothing purchases, charitable donations and money to help other family members.
For variable expenses, gather invoices and receipts of your medical, dental, utility, food, gasoline, car repair and entertainment expenses from the last 12 months. (If you bank online, you can check expenses through your online account.) This will give you an average of your monthly expenditures. You will also need records of annual or semi-annual payments such as car insurance and taxes. Be sure to set aside an estimate of what an emergency car repair, ER visit or last-minute plane ticket might cost you as well. (Read Creating A Budget.)
Balance the numbers
Once you’ve got a total for income and expenses, subtract the latter from the former. Ideally, you want to come out with a 10 percent margin in your favor. If your income and outflow numbers are too close, go through your expenses and figure out where you can cut. Shopping for cheaper utilities, insurance, cable, credit card rates and phone plans is a great place to start. (Read Saving Money on Utilities.)
The right rent fit
Once you have a rent range in mind, start apartment hunting and see what’s out there in terms of neighborhood, space and amenities. Perhaps you’ll discover your wants and your finances are in sync with each other.
If you aren’t coming up with many or any choices, make adjustments either in your apartment expectations or your other monthly expenses. Keep realistically fine-tuning your apartment hopes with the money you have to work with until you have reached a good compromise that (ideally) will leave you some wiggle room each month.
Looking for an apartment can be stressful, especially if it’s your first time. But if you are detailed and accurate in calculating your monthly income and expenses, you can surely find an apartment that you can comfortably afford.