How Much Should You Spend on Rent
Updated November 3, 2020 . AmFam Team
You want to save money, but you still want that amazing apartment. It’s a common issue that a lot of renters struggle with. Most financial planners recommend that you put aside at least 30 percent of your gross monthly income to pay for rent. But the reality is, individual finances vary — and it may be wise to save some of that cash.
On one hand, you can already picture entertaining your friends in your envy-worthy new digs. But on the other, you’ve got big dreams and you know saving now is how you achieve your goals. This classic dilemma comes down to one question — “What percentage of my income should go to rent?” Let’s dive in and see.
The Outdated 30 Percent Rule
The prevailing advice for how much you should spend on rent was 25-30 percent of your income. However, times have changed since the 60s-80s when these numbers were proposed. These days financial experts recommend following the 50/30/20 rule.
This rule is based on the money you bring home after taxes, or monthly net income. Here’s how it breaks down:
- 50 percent of your net income should go to all essential expenses like rent and utilities
- 20 percent should go to your savings
- 30 percent should be for all miscellaneous “wants” like shopping and entertainment
The 50/30/20 rule is recommended over the 30 percent rule because generally people today have different financial obligations today than they did 40 years ago. For example, more people today contribute to retirement plans and pay monthly student loans than had in years past.
If you’re paying for additional monthly expenses like these, and your income is relatively low, you’d be left with a relatively small amount of money for your other expenses. The 30 percent rule also doesn’t account for different personal situations that impact how you pay for rent, such as roommates all sharing an apartment, either.
How to Budget for Rent
Keeping the 50/30/20 rule in mind, you can determine how to budget for rent by first identifying what your essential expenses are. This 50 percent of your income should amount to necessities you can’t avoid and must pay monthly. Besides rent, two common essential expenses are food and transportation.
There are other essential expenses we’ll cover later, but a good place to start when budgeting for rent is keeping track of how much you spend monthly on food and transportation. For example, calculate the average amount a month you spend on groceries by using the receipts you get each time you’re out shopping.
Other housing expenses to consider when determining how much to spend in rent
Don’t forget the other essential costs that come with housing. These essential expenses include:
- Basic utilities such as water and electric
- Parking fees
- Renters insurance
Essential expenses outside of rent costs
Housing takes up a big chunk of your income, but most of us have other bills, too. This is where you get some flexibility to personalize your rent budget. If you don’t have school loans or a car payment, you can afford to spend more on your rent, if you want. But if you’re wading through debt, you may want to spend a little less on housing now so you can pay down debt and comfortably afford something nicer down the road.
How Much You Spend on Rent Can Affect Your Savings Goals
While weighing how much you should spend on rent, we can’t forget to consider your savings goals.
As we mentioned earlier, in the 50/30/20 rule, 20 percent is the minimum of what you should be putting into savings. However, you may want to save more than 20 percent, or your goal may be to pay off all of your student loans as soon as possible and then save later. Remember, your saving goals are unique and should reflect your dreams —both short- and long-term.
As you decide how much you want to save, and how many fixed expenses you have, take a look at what is left over for rent. There are a lot of different considerations when it comes to choosing how much you want to spend and each situation is unique to your personal circumstances.
Protect Your New Apartment with Renters Insurance
Once you’ve determined how much rent you can afford, it’s time to start apartment shopping! Enjoy the experience and don’t forget to connect with your American Family Insurance agent (Opens in a new tab) to set up your renter’s insurance policy. The cost of renters insurance is more affordable than you think and totally worth the peace of mind.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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After college, life moves fast. You get your first big job, move out of your parents’ house and start a whole new life on your own. For most people, this also means paying off student loan debt from your college tuition. Having this debt may make big milestones like buying a house seem far off, but there are ways to make the leap from renter to homeowner even if you have student loans. So can you get a mortgage while also paying off student debt? Or should you wait to pay it off before you buy a house?
Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
