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 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:
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.
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.
Don’t forget the other essential costs that come with housing. These essential expenses include:
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.
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.
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.