How much one spends on rent can make the difference between a fantastic quality of life versus one that lacks the extra money necessary to make life more enjoyable. Just how much one can afford to spend on rent involves calculations that help the renter whether or not their income can support their desired lifestyle based on daily living expenses.
Evaluating how much one can afford to spend on rent is an excellent opportunity to identify costs that can be cut to attain the lifestyle they desire. Different types of apartments and rental properties can offer differing rates, so it is important to keep these options in mind when settling on a new place to live. While one may find that they can afford a rental rate much higher than calculations, they may decide to spend less to accommodate other priorities in their life.
Renters have three easy approaches to determine how much rent they can afford. Each of the below guidelines will help the renter arrive at an amount that represents a good balance between monthly income and expenses. Renters will find these numbers invaluable in setting a budget that allows them to live a decent lifestyle without overextending themselves financially. Landlords strive to do everything possible to minimize their risk with each tenant. As such, they use one or a combination of these guidelines to pre-qualify renters based on what the believe the renter can afford.
The 30 Percent Rule
With the 30 percent rule, renters should aim to spend more than 30 percent of their pretax earnings on rent. For a renter who makes $50,000 per year, 30 percent of their income is $15,000. Take that number and divide it by 12, and the amount they can afford to spend on rent is $1,250.
Rule of 40
Renters using the rule of 40 should divide their pretax income by 40 to determine how much they can afford to spend on rent. Using the $50,000 pretax salary from above, the maximum amount a renter should pay is $1,250.
Some economists recommend using after-tax earnings to determine the maximum amount one should spend on rent. The guideline recommends renters pay no more than 50 percent of their after-tax income on fixed expenses such as rent. They should spend no more than 30 percent of their daily living expenses such as dining out, entertainment and clothing. Lastly, according to this guideline, renters should spend 20 percent of their take-home pay on paying down debt and saving for retirement.
The upside to each of these approaches is that they offer a straightforward method to come up with a suitable number. The drawback, however, is that the rules oversimplify budgeting and expenses, and this could lead to underestimating or overestimating the real costs. None of them account for other factors that affect affordability.
For example, renters who live in a city where the cost of living is higher than most will often need to spend much more than the guidelines suggest. The calculations also do not address the extra amenities that may be included in the rent such as utilities.
A More Practical Approach
The best approach to determining how much rent one can afford is by evaluating income alongside a detailed breakdown of all living expenses. The first thing renters should do is compile a list of all daily living expenses not including rent. The list should account for transportation costs, which include a car payment, car insurance, maintenance and upkeep and fuel. Incidentals such as groceries, entertainment, clothing, dining out should also be included. Renters should also remember to add contributions to retirement plans and health care insurance. Payments on outstanding debt such as credit cards or student loans also play a factor in the equation. Next, renters should total all expenses on the list to arrive at their monthly expenses. They can use that number to evaluate their income to determine how much they have available for housing expenses. Using this approach, renters may find that they can afford less than what one of the above guidelines suggests. This approach also gives renters a chance to identify areas to cut back to help increase the amount they can spend on rent. Not only that, the list helps them evaluate what is truly important. With that information, renters can adjust their budget to create a lifestyle that more closely reflects their goals in life.
What It All Comes Down to
Ultimately, affordability comes down to determining housing needs. Renters may find that they can afford more than guidelines or calculations suggest, but opting for a lower payment gives them greater freedom in their lifestyle. A lower rental amount may free them up to travel, enjoy more entertainment with friends or to pursue hobbies or goals. Some renters may opt for a lower rental payment to help save for purchasing a home of their own. After doing these calculations and examining all factors, some may find that what they are currently paying for rent covers amenities not offered elsewhere.
Some renters may conclude that based on their income and expenses, they may not be able to afford the apartment they desire. The best course of action in this scenario is to identify specific areas to cut back. Paying off outstanding debt such as credit cards can help free up money in the budget. Switching to alternate means of transportation such as public buses or subways can help with costs. The solution may even be as simple as cutting back on eating out or unnecessary incidentals such as shopping. Another option to consider is finding a roommate to share the costs of the apartment. Negotiating a rent agreement with landlords may help potential tenants cuts costs, if the landlord is willing to make concessions.
Renting an apartment at an affordable amount gives renters the best chance to live the lifestyle they desire. Taking the time to evaluate all expenses before making a decision can help assess priorities and reveal areas to cut back to make that lifestyle a possibility.
By Jennifer Symonds –