Introduction
Trying to find a new place to live can be stressful and figuring out exactly how much you should be spending on rent can be challenging. How much you can afford to pay for rent depends on many things such as your income, debt payments, other monthly expenses, and your financial goals.
If you already have a place but are struggling to pay rent, consider checking out rent loans to help you out of the tough spot.
Rules of thumb to determine how much you can afford for rent
There are no universal rules to indicate how much of your income should go towards rent but there are some thumb rules that can help you figure out how much should go towards rent depending on your income.
- 30% rule
The 30% rule states that you should spend no more than 30% of your monthly income on rent. So, if your in-hand salary is $5,000 per month, the ideal rent payment would be $1,500 or less.
The idea is that if you’re using 30% or less of your income on rent, you’ll be able to afford your day-to-day expenses and set aside money for savings too. however, this 30% rule isn’t realistic for all budgets; you’ll need to add up your monthly expenses and take your lifestyle into account to figure out whether this number makes sense for your financial situation.
- 50/30/20 rule
Another widely adopted budgeting method is the 50/30/20 rule. With this method, 50% of your gross monthly income goes toward the necessities, including rent, 20% towards debt repayments (including retirement savings), and the remaining 30% goes towards lifestyle-related expenses.
This method usually requires some calculations and tweaks. Start by adding up all of your usual monthly expenses and categorising them. The rent falls under the necessities, hence here’s how you can calculate:
- Figure out what 50% of your gross monthly income is. For example, if your in-hand pay is $5,000, you can set aside $2,500 per month for necessary expenses including rent.
- What percentage of your income are you currently spending on other necessities? Try to estimate monthly expenses, such as utilities. Don’t include rent in this calculation.
- Subtract the total amount you are spending on other necessary expenses(utilities and such) from your 50% amount. The resulting amount is what you can afford to pay monthly rent. So for example, if 50% of your gross monthly income is $2,500, and $700 goes towards bills, you should spend $1,800 or less on rent.
What if the rules of thumb don’t apply?
While thumb rules can provide a helpful starting point, sticking to the math may not make much sense to everyone. In some cases, you will need to take a more holistic approach to budgeting for your new house. This includes:
- Saving for a big financial goal: If you are going to have a major disruption to your budget such as going back to school or a wedding, you may want some more space in your budget. Don’t spend 30% of your budget on rent simply because a rule says so. Reducing your rent to be able to meet other financial goals may be better for you.
- Unsafe house: If you live in a place that’s a security risk or you need to get out of an abusive household, you will want to ignore rules and opt to move to a place that’s safer as quickly as possible, even if temporarily. While you will need to afford the new place, spending a couple thousand more to get out of the place would be more sensible for your situation. Once you have moved out, you can take the time to search for a more affordable house.
Conclusion
How much you spend on rent is only a small part of the whole budgeting process. How much you can afford to spend is the more nuanced question to ask. If you struggle with rent payments for long enough, you might face eviction at some point. We hope this helps you realise the difference between how much you spend vs how much you can afford to spend. If you are still struggling, you may want to reach out to your landlord to see if they will be up for some negotiations or relief.
