What Percentage of Annual Income Should Go to Rent?
You think you found the perfect apartment, but when you see how much it will cost you each month, you’re not sure 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.
Common Rule of Thumb
Spending no more than 30% of your gross income is a common rule of thumb. 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!), especially as cost of living increases in cities across the country. A recent study from Harvard University found that median housing prices have risen, as median renter incomes have dropped, which means the number of “cost-burdened renters” — those who spend more than 30% their income on housing — remains high. Over 90% of the 100 largest cities in America have seen rents go up in the last year.
The 50/30/20 Rule
If you want to put yourself in a great financial position, you can follow what’s called the 50/30/20 rule, which suggests spending 50% of earnings on necessities like rent and food; 30% on “fun” things you want, but don’t necessarily need; and 20% on building up savings or paying down debt.
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% 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, or 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 think twice about whether you should spend more on rent.
Do the Math on Amenities & Features
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.
If the complex you’re splurging on has a fitness center, allowing you to drop your club membership or having a garage lets you spend less on car insurance, you can make up some of the increase with cuts in other areas. Ditto if utilities are included in your rent.
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. Aim for the 30%, and factor in your goals and other responsibilities accordingly.