Sometimes finances can seem like magic. Or, at the very least, a mystery. Especially when it comes to figuring out how much rent you can afford.
This is where budgeting comes in. Creating a monthly budget can help you understand how rental rates fit into your financial life.
Use these tips and resources to get a handle on your budget, understand how rental rates are determined, and figure out just how much you can comfortably afford to spend each month on rent.
Think of your budget not as a restrictive punishment that forces you to cut back, but as a document that allows you the freedom to spend what you need to spend and still meet your financial goals.
Your budget plan starts with knowing how much you make. Once you know how much income you have coming in each month, you can look at how much you have going out in expenses. Comparing those two basic figures is how you make a budget. Remember to be realistic and calculate not just your salary but your take home pay after all expenses are factored in.
It’s easiest to record your spending behavior and get everything straight when you use a budget worksheet. There are several online resources you might check out. Bankrate offers an online app where you can identify and input your expenses; Freddie Mac suggests tracking your income for two months using this PDF budget worksheet.
Rental rates are set according to what the market can bear. To set rates, property managers will consider what comparable apartment units rent for in the area. The price will go up if their units feature bonuses like convenient amenities, a prime location or recent renovations.
But how much should you spend on rent? While it’s common for financial experts to recommend spending around 25 to 35 percent of your income on rent, that figure may not be feasible. In some of the largest and most competitive rental markets — New York City, for example — you may have to spend more. Renters should be flexible and consider what other costs they may be willing to cut in order to get the right rental in the right place.
It would be nice if rent prices were the only expenses impacting a renter's monthly budget. But in the real world, your monthly rent is just the first of several other obligations. Beyond the obvious bills such as utilities, cable and Internet, renting often includes hidden costs that can pop up and bite your finances if you aren't prepared.
Before you even move in, you'll want to factor in costs such as application fees, moving costs and security and pet deposits. You'll also need to account for moving expenses and acquisition costs for new furniture or other household necessities.
But the trickiest expenses are the ones that don't show up until after you've moved in. Did you get a parking ticket because the rental didn't come with paid parking? What will it cost to use a laundromat if you have no in-unit washer and dryer (plus, how will you lug your dirty laundry back and forth)? Think hard and ask tough questions about what new costs your apartment may bring.
Here’s the most important part: find a way to afford rent and cost of living, while keeping some spare change for your own happiness. Ideally, you want to allot enough funds for each of your fixed expenses, while also saving a little something for the future. To determine a rental rate you can afford means that rate has to fit within these guidelines. Your budget plan will help you figure out how all these expenses balance the spreadsheet of your financial life.
If you can make the numbers work in your city, allocating the ideal 25 to 35 percent of your budget to rental expenses will help you live within your means. The idea is that you’ll have money left over for other expenses, afterward — even some fun ones like vacations and the occasional adult beverage.