Whether you’re leaving home for the first time or relocating to a new city, there is always a lot to consider when looking for a new rental. And not least of which is the question of how much of your income should go to rent. It’s a question that’s gotten trickier in recent years, as median income levels have struggled to keep pace with the cost of housing.
So before you consider details like decorating your new apartment, it’s wise to get your financial house in good order.
The 30% Rule
The 30% rule is financial gospel. It refers to the idea that you should spend, at most, 30% of your gross income on housing. It’s been a budgeting standard since 1937 and has proven to be a reliable tool in determining a sustainable amount to spend.
So, suppose you make $30,000 a year before taxes, or $2,500 a month. According to the 30% rule, your maximum housing allowance would be $750 a month. While that doesn’t seem like a lot, there is a rationale to capping your allowance at 30%.
You Don’t Want to Forget About Tangentile Costs
So again, suppose your gross pay is about $2,500 a month. But you’re a sensible sort. Surely you could chip up to half that income towards rent and still live easily enough on the remaining $1,250.
Well lifestyle preferences aside, it’s not quite that simple. For one, it doesn’t take taxes into account. Income taxes, Social Security, and Medicare all need to be paid. So that’s less about 15% of your wages, give or take.
Then you need to factor in utilities, assuming they aren’t included in the cost of renting the apartment, plus necessities like food, transportation, student loan payments, and the like. Lastly, you want to be able to set aside some money every month for savings, should you ever run into an emergency.
So crunch the number and you’ll see how quickly these expenses add up. And that’s before you set aside any personal expenses like entertainment or social activities.
Simply put, the 30% rule was conceived as a maximum cap for a reason. And even then, it’s often prudent to aim below that benchmark whenever possible.
Determining How Much of Your Income Should Go to Rent Is Essential to Being Financially Sound
Seeking out a new apartment can be a daunting experience, especially when it comes to managing your finances. But figuring out how much of your income should go to rent is the first step towards establishing a sustainable future.
You want to put yourself in a situation where you’re not merely scraping by, but are able to comfortably meet your expenses while establishing a healthy savings fund for emergencies and future expenditures. Therefore, it is sometimes necessary for us to rein in our expectations.
But just because you can’t afford the living situation you had in mind doesn’t mean that you should lose heart. It is possible to live comfortably in a variety of living arrangments.
For ideas on how to live large in modest accommodations, check out our tips on learning to love a cozy apartment.