Many financial experts recommend renters spend no more than 30% of their monthly income on rent. For example, let’s say you earn $36,000 per year before taxes. That comes out to $3,000 per month, so you wouldn’t want to spend more than $900 per month on rent.
However, this rule of thumb doesn’t consider other factors like monthly debts and living expenses that impact your monthly budget.
Below are three steps to take to help you figure out how much rent you can afford.
3 Steps to Calculate Your Monthly Rental Budget
Review your budget.
Your monthly budget is a tool that helps track your spending so you can reach your financial goals more quickly. It shows how much money you bring in, how much money goes out, and how much money is left to start putting towards your goals.
Most financial advisors recommend following the 50/30/20 rule when setting a budget. This means 50% of your income goes towards needs, 30% towards wants, and 20% towards savings. Here’s a more detailed breakdown of what’s included in each bucket.
- 50% of income goes towards needs or fixed costs like rent, utilities and groceries
- 30% of income goes towards wants like entertainment and eating out
- 20% of income goes towards saving for future goals
Review your monthly budget to get a good idea of how much money you will be able to spend towards rent.
Don’t forget your monthly debt payments.
Many people forget to factor in their monthly debt payments when they calculate how much rent they can afford. Debt payments can derail your monthly budget and impact your credit score. Write down the balance, annual fees, interest rate, and monthly amount due for each of your debts. This includes auto loans, personal loans, student loans, and credit cards. Calculate your total minimum monthly payments for all debts and subtract that from your monthly budget. This will give you a much better understanding of how much money you have for rent.
Factor in living expenses.
Unfortunately, utilities and other living expenses aren’t included in most rental arrangements so you need to be sure to account for them when calculating how much rent you can afford. Typical living expenses include:
- Electricity
- Water
- Trash pickup
- Internet
- Laundry
These expenses are necessary and can add up over time — especially in the beginning with new account creation charges. Be sure to be realistic about the amount of money you expect to spend on them every month. Then, subtract that from your monthly income to get a better understanding of how much money you have for rent.
How much rent you can afford ultimately comes down to how much works for your monthly budget. Aim to spend no more than 30% of your monthly income on rent and consider all of your other expenses to find a price that works for you.
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