Budgeting for rent is one of the most important steps to accomplish before you begin searching for the right rental or apartment to call home. To help determine your rental budget, you’ll need to consider your gross monthly income, factor in additional costs, and any monthly expenses you expect to pay. We’ll outline the common strategies to help you estimate your maximum rental payments and what to do if these strategies don’t match your budget. Read on to find out how much rent you can afford and ways to lower your housing costs so you can find the perfect place that stays within your budget.
How much should you spend on rent?
Before starting your apartment or rental home search, you should anticipate spending about 30 percent of your income on rent. Depending on several factors, you may spend more or less on your rent budget. These factors can include your location and cost of living, any debt payments, and your future financial goals.
Budgeting for your location
Choosing where you live can greatly impact your potential rental budget. Compared to mid-size cities or suburban areas, most large cities have higher rent prices and a higher cost of living. If you plan to live in a more expensive area, you’ll likely spend a greater share of your income on rent than you would elsewhere. Depending on your budget and goals, that may be the right choice.
You can’t always choose where you live based on average rents or the cost of living. For example, you may have chosen your city for career reasons or the proximity to nature. Note that there are many ways to balance higher costs of living against other factors, such as a location’s:
- Career opportunities
- School district
- Proximity to friends or relatives
- Healthcare facilities
- Climate
- Commute time
- Public transportation options
- Food and nightlife options
- Proximity to airports and travel hubs
Each person or household is going to have a different list of priorities. However, it’s always a good idea to keep an open mind about where you choose to live. While there are many ways to budget for rent that make even the most expensive cities affordable, you may not want to sacrifice all other factors to make it happen.
Calculate how much rent you can afford
To calculate how much money you should spend on rent, you’ll need to start with your monthly income after taxes, or “net income.” Your net income is what you’ll be using to pay your bills. Once you know what you can expect to take home each month, then consider your financial obligations and financial goals.
Financial obligations are the things you must pay. That includes insurance, credit card debt payments, groceries, and other expenses. Financial goals are financial milestones you’re working toward, such as retirement and mortgage down payment. Once you have a basic idea of these two financial factors plus your expected or net pay, you can work backward to determine a realistic budget.
There are two quick ways to do this: use the 30% rule or the 50/30/20 rule. Whichever method you choose, check your work against your financial goals. For example, if you find you can spend a maximum of $2,800 on rent, but you have the financial goal to retire early, you may want to set your rent budget much lower.
What is the 30% rule?
The 30% rule says that you should spend no more than 30% of your gross monthly income - income before taxes - on rent. While this can be a great rule of thumb, it fails to account for other factors that may influence whether you can spend more or less on rent. Consider the following scenarios.
Scenario 1: High annual income in an inexpensive area
If you move to an area with a low cost of living but your income is high, you may find yourself with the option to pay less than 30% on rent. This can be a great advantage, especially if you have another financial situation like student loan payments. Don’t force yourself to rent a new apartment at a higher cost or 30% of your income just because you can. Always be sure that the tradeoff is worth it.
Scenario 2: Low annual income in an expensive area
If your career brings you to an expensive city or region, you may not make enough money to meet the 30% rule. That doesn’t mean you shouldn’t move to a more expensive city. Maybe you’ve just accepted your dream job, and this is the best location for you right now. You may need to allow for a greater amount of your income to go toward rent and reduce spending in other categories in your budget.
Consider the 50/30/20 rule when budgeting for rent
An alternative to the 30% rule is the 50/30/20 rule, which some financial advisors find to be a more accurate method for determining a rent budget. This rule divides your budget into needs, wants, and savings. Here’s how it’s broken down:
- 50% of net income goes toward needs like rent, auto and renter's insurance, groceries, retirement savings, and minimum debt payments.
- 30% of net income goes toward wants like clothing, take-out, and travel.
- 20% of net income goes toward savings to include cash reserves, non-retirement investments, and additional debt payments.
The 50/30/20 rule is a more nuanced way to determine your monthly rent budget. It accounts for other non-negotiable factors, like your insurance payments, while ensuring you can build savings into your budget. And it leaves you more freedom to spend money on things that make life more enjoyable.
How to create a monthly rental and living expense budget
Budgeting for rent properly can give you peace of mind, help you meet financial goals, and prepare for unexpected costs. It all starts with outlining your monthly payments and their estimated costs. From there, you can determine the rent payment you can afford for your new apartment or rental home.
Creating a budget is mostly hypothetical if you’re moving into your first apartment. Don’t be surprised when you find your actual costs are different from what you initially planned. Budgets are always a work in progress, so make sure to revisit them regularly.
Creating a rental budget
To begin the budgeting process, you need to know how much money you have to spend. That means your monthly take-home pay or average pay if your income is variable. People with variable incomes might be paid hourly or have part of their compensation provided through tips or commissions.
Once you know how much you can expect to earn, you should determine how much you expect to spend on other needs. That means your phone bill, credit card payments, insurance, utilities, etc. Some costs like utilities can vary from month to month, so you’ll need to estimate these costs. Make sure to add a budgeting buffer as well.
Finally, be sure to record these with a spreadsheet tool to make totaling your costs easy. The outline may look something like this:
| Expense | Cost |
|---|---|
| Phone | $80 |
| Utilities (gas, electric, water, heat) | $140 |
| Minimum debt payment (student loan, car loan, credit cards) | $245 |
| Transportation (public transit, fuel) | $85 |
| Groceries | $180 |
| Insurance (renters, pet) | $100 |
| Internet and cable or streaming | $75 |
| Buffer | $150 |
| Total | $965 |
Once calculated, you’ll need to divide your monthly income in half and subtract the estimated cost of your non-rental-payment needs.
Monthly income / 2
Half your monthly income - estimated living costs = maximum monthly rent
The money left over represents your maximum rental allowance. Let’s say your take-home pay is $3,750. Using the above information, your calculation will look like this:
$3,750 / 2 = $1,875
$1,820 - $965 = $910
Now you know you should look for a rental where the monthly rent payment is $910 or less. But that’s not all. You should also consider how your needs and goals might push your rent allowance higher or lower:
- How much you have in your emergency fund: Your emergency fund should equal roughly three months of rent. If you don’t have three months of rent, look for ways to lower your rental payment so you can focus on building your savings account.
- Big financial goals: If you have plans to retire early, start a business, or make large investments, you may want to look for ways to reduce rent costs.
- Cost of living: Some cities come with a bigger price tag to begin with. If living in a more expensive city is the right move for you, look for other places in your budget where you can lower your expenses.
Setting aside savings and debt payments at the beginning of your budget can be a better way to keep your finances on track. If you face a higher rent price, consider making cuts to your “wants” first.
Common additional costs when renting
It’s important to know what living expenses and upfront fees you can expect to pay as a renter. Some rentals and apartments come with a lot of expenses included, while others have small additional fees tacked to your bill each month. Here are a few to consider:
- Utilities like gas, water, and electricity
- Internet and cable
- Renter's Insurance
- Pet rent
- Parking
- Administrative fees
- Laundry (if not included in the unit)
Some items are more likely to be picked up by a landlord than others. When apartment hunting, don’t just look at the rent price. You should also look at what the landlord covers and doesn’t cover. If the landlord covers some part of your living expenses, be sure to factor that into your rental budget. For example, if a potential landlord plans to pay your internet, heating, and water bills, you may be able to spend more on rent.
Finally, you should also consider the additional costs associated with moving into your rental home or apartment. That includes moving costs, plus things like your security deposit, pet deposit, and application fees. Unlike other monthly payments, these costs are one time upfront costs.
Money saving tips when budgeting for rent
For many, getting an apartment or rental home on your own may make it nearly impossible to fit the 50/30/20 rule. That’s especially true for first-time renters and renters in large cities. So what can you do to reduce your rental costs? The good news is that you have a lot of options.
Find a roommate
Living with roommates can be a wonderful way to share your life and the cost of living. Of course, finding the perfect roommate is no easy task. But with a little effort, you can find someone worth sharing your living space with.
Search for small apartments
A studio apartment typically costs less than a one-bedroom apartment. Similarly, a smaller apartment often costs less than larger ones with the same number of beds and baths. Though giving up some space may seem difficult, there are plenty of ways to make living with limited space comfortable.
Live further away from the city center
Often, cheaper rents mean living farther away from the city center. However, this can be a good choice if you’re looking to save money. Just remember that the more you commute, this can mean higher transportation costs.
Live in a cheaper city
While living in the city's center may seem like the place to be, for many people it’s just a preferred location. Before choosing an expensive city, consider nearby cheaper alternatives. Many close suburbs come with excellent amenities. If you can find one with everything you want and lower rental costs, you’ll relieve some of the budgeting stress before you even begin your search.
Negotiate your rent
Admittedly, this won’t work everywhere. But for those willing to make a deal, negotiating rent can be a huge win. Don’t just push for a reduction, look for opportunities to trade. For example, performing maintenance duties could be an advantage your landlord is willing to pay for. Be creative and look for a win-win.
Be smart about utilities
Having your landlord cover the cost of utilities is a great way to keep your housing expenses fixed. But oftentimes that isn’t possible, so consider your electricity usage, thermostat setting, and water consumption. These are easy steps to keep costs low. And figure out if you can skip out on optional utilities like cable in favor of one or two streaming services.
Maintain a good credit score
Having good credit is an important way to keep rent costs low. Most landlords want to rent to people who are responsible, so people with good credit generally have more options than people who have credit problems. Although, there are many ways you can find an apartment even if you’re renting with bad credit.
Lower your monthly debt payment
Paying off credit cards and maintaining zero balances frees up more of your monthly budget and saves you money spent on interest.
Takeaways when budgeting for rent
Budgeting for rent can seem like a tedious and complicated process, but it doesn’t have to be. Establishing how much rent you can afford before looking for apartments can make the process that much easier. While your budget won’t stay exactly the same month-to-month, you’ll have a better idea of what you can anticipate spending each month to stay on track with your rent payments and other monthly costs.
Redfin does not provide legal, tax, or financial advice. This article is for informational purposes only and is not a substitute for professional advice from a licensed attorney, tax professional, or financial advisor.
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