What Percentage of Income Should Go to Rent?
You want to save money, but you still want that amazing apartment. It’s a common conundrum. On one hand, you can already picture entertaining your friends in your envy-worthy new digs. On the other hand, you’ve got big dreams and you know saving now gets you to them faster. This classic dilemma comes down to one question — “What percentage of my income should go to rent?” Let’s dive in and see.
Your gross income. Your gross income is what you make before taxes. This is typically the number that’s used to determine how much you can afford to pay toward housing. Financial experts vary a little, but the consensus is somewhere between 25% and 30%. This means that if you make $4,000 a month, before taxes, you can afford a monthly rent payment of $1,000 to $1,200.
Other housing expenses. Don’t forget the other costs that come with housing, such as utilities, water, parking fees and renter’s insurance. These costs go above and beyond the 25-30% you’re spending on rent, but the savvy shopper will want to keep all housing expenses around 35% or less.
Expenses outside of housing. 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 housing, 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.
Location. As they say in real estate, “location, location, location.” This applies to renters, too. The cost of living in the area can play a big part in your budget and may require a little wiggle room in your numbers.
Your savings goals. While weighing how much you should spend on housing, we can’t forget to consider your savings goals. Budgeting generally follows a 50/30/20 rule. This means 50% of your income should go to all expenses, 20% should go to your savings and 30% should be for all those miscellaneous extras you simply must have or must do. But you may want to save more than 20%, or your goal may be to pay off all of your student loans as soon as possible and then save later. Your saving goals are unique and should reflect your dreams, both short- and long-term.
Now that 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 to set up your renter’s insurance policy. The cost of renter’s insurance is more affordable than you think and totally worth the peace of mind.