When determining how much you should pay for rent, you may have heard about the 30 percent rule. The rule, which says you shouldn't spend more than 30 percent of your gross income, was first established by the government back in the 1960s as part of public housing regulations. It capped public housing rent at 25 percent and eventually up to 30 percent in the 1980s.
In a nutshell, the rule is outdated. People didn't face high student debt or contribute to a 401(k) back then. Also, the 30 percent rule doesn't really make sense for those who live in expensive rental markets like San Francisco, where a one-bedroom costs an average of $3,854.
So, why are experts touting this rule as a “general rule of thumb"? One guess is that it's an antiquated financial benchmark that was never questioned or adjusted to fit the needs of the modern renter. Quite frankly, the rule needs to be reassessed, especially in today's ever-rising rental market.
Let's say a college grad earns $30,000 a year in their first job. According to the rule, you'd need to multiply that amount by 30 percent:
Divide by 12 (months of the year) and according to the rule, this person should spend no more than $750 in monthly rent. This leaves $1,750 (before taxes) to pay for utilities, a car, student loan debt, credit card debt, medical bills, food and other substantial expenses.
If you want to find out how much rent you can reasonably afford, you shouldn't necessarily follow the 30 percent rule to a T. Instead, you should figure out dollar amounts for the following and then, tailor your budget accordingly:
Here are three helpful ways to determine your budget and how much you should spend on rent.
Figure out all of your expenses for the last three months and add them up. These include fixed and discretionary costs.
Adding your expenses helps you identify how much money is going out each month and as a result, shows you which areas you're overspending. Maybe you spent way too much at bars and Ubers last month, for example.
Make it a point to reduce your spending in these areas so you have more wiggle room to focus on something more pressing, such as paying off debt.
Related: How to Create a Budget Worksheet
Instead of hitting snooze on paying off your debt, take control and be intentional. Find out which credit cards have the highest interest and start there. Credit card interest can really add up — about $1,141 each year — if you're not careful.
If you're only making minimum payments on your credit card (and wishing one day it'll magically disappear), you're fooling yourself. Especially when the average credit card debt in 2018 was $5,472, according to TransUnion.
Aim to pay more than the minimum payment each month, even if it's just $20 more.
Use Mint or Personal Capital to keep track of your spending so you can see what your net worth (how much cash you have vs. debt) looks like each month. You can connect all of your financial accounts, such as your checking, savings, credit cards and loans so it's easy to see all at once.
It's free to sign up, but make sure you're checking in at least once a week to stay conscious of your budget.
Once you have a better handle on your finances, you'll be able to gain a clearer picture on how much you should be spending on rent.
The only rule you should follow when determining how much rent to pay is your own. Set your goals (i.e. paying down debt or saving) and keep track of your finances.
If you're ready to move, consider finding a cheaper place to rent. You can find roommates to lessen the cost, but above all, stay vigilant about your spending and saving.