You think you’ve found the perfect apartment, but when you see the cost of rent, you may be unsure of if it’s in your price range.
What percentage of income should go to rent to keep you out of financial trouble? If you don’t regularly track and understand your spending habits, you may inadvertently take on an expensive rent payment that you can’t maintain.
A common suggestion is to spend no more than 30 percent of your gross income on rent. This is a popular guideline for a reason: Rent is often a person or family's biggest expense. Keeping it low leaves room for saving and paying down debt and other bills.
How much you spend on rent is a major budget factor (or budget buster!). Unfortunately, this 30 percent rule doesn’t account for rising rental prices or the cost of living increases in cities across the country.
A recent study from Harvard University found that median housing prices have risen while median renter incomes have dropped. This means the number of “cost-burdened renters” — those who spend more than 30 percent of their income on housing — remains high. Over 90 percent of the 100 largest cities in America have seen rents go up in the last year.
So what percent of income should go to rent using the 30% rule? Let’s say you make a gross income of $55,000 per year. If you wanted to use the 30% rule, you would multiply 30 percent by $55,00 to get a total of $16,500 that you could spend on rent each year. This means you’d be looking for an apartment with a budget of $1,375 in monthly rent.
An alternate option to the 30% rule that does account for the increase in rental prices and inflation is the 50/20/30 rule. The 50/30/20 rule suggests spending 50 percent of earnings on necessities like rent and food, 30 percent on wants such as hobbies and shopping and 20 percent on building up savings or paying down debt.
If you wanted to apply this rule to a gross income of $55,000 per year you would budget $27,500 on yearly necessities, $16,500 on yearly wants and $11,000 paying down debts or investing. Using this rule won’t tell you exactly what percentage of your income should go to rent, but it will give you guidelines for building a budget.
When it comes down to it, however, these rules are more like guidelines. What you spend on rent — and everything else — depends on your personal financial situation and objectives. If the rent for your desired apartment amounts to more than 30 percent of your annual income, you may still be able to take on that expense if you can cut back in other areas of your budget.
Alternatively, you might spend less on rent if you choose to move in with a roommate or significant other. If you have a car payment, student loan debt or big savings goals, you’ll want to take another look at what percent of income should go to rent.
In some cases, spending a little bit more on rent means you actually get a lot of bang for your buck. If you pay a premium to live close to work, you may save the equivalent amount or more on your commuting costs. If a higher rent allows you to access a safer neighborhood or better schools, you’re buying peace of mind.
The complex you’re splurging on may have a fitness center, allowing you to drop your club membership. In other cases, you could pay more for an apartment with a garage which lets you spend less on car insurance. Sometimes the extra cost upfront can even out or save you in the long run.
Before you sign a lease, get a grasp on your financial fitness. If you don’t have an emergency fund to cover the rent on your desired apartment and other living expenses in the event of job loss, begin saving toward that goal. Look into other ways to cut back on recurring costs like cell phone plans, insurance payments and grocery bills. Start by aiming for spending 30 percent on rent and then factor in your goals and other responsibilities accordingly. Try out a rent calculator to determine your budget and look for available places you can afford.