Renting is a great option for individuals unable to build or purchase a home of their own. Your job could take you places and you’d need convenient and affordable rented accommodation to manage your life.
How much should you spend on rent? Keep in mind that the rent amount varies considerably from one location to the next. So, avoid renting a house that blows a fat chunk out of your monthly paycheck. This is easier said than done, considering how the rent is increasing quicker than incomes in many cities.
However, it’s never too late to bring your finances under control. Never pay too much rent; instead, move into affordable accommodations. Asking the following questions before signing the lease can positively impact your budget:
What amount of home rent can I afford?
Consider your present economic situation as well as your income before settling on the amount to set aside for rent every month.
Thus, when looking for a new place, check your budget to see what expenditures you’re already handling, such as food, insurance and transportation. Pick a location that enables you to reside comfortably, while leaving a sufficient amount left over for paying off loans.
Be aware of the location of the apartment as it will decide the rent you must afford. For example, apartments situated in high-cost rental markets are worth getting a roommate. Even if you are not a big fan of sharing your living space, rooming with another person can save you hundreds, and in some cases, thousands.
In fact, it might not be a wise decision to rent a place on your own. Landlords in certain areas desire tenants whose annual income is minimum 40 times greater than the monthly rental fee. What this means is, to get a $2,500 apartment, you will have to earn at least $100,000 before taxes.
However, having a roommate lets your split the cost while a guarantor can pay the rent on your behalf if you risk defaulting on your payment.
It might be a good idea to crunch numbers prior to viewing potential housing units. After all, your rent budget will depend on the monetary amount you’re paid after deducting taxes. Simply checking your annual salary before meeting a landlord or a broker might land you in hot water later.
Make sure you take moving costs into account, along with furniture-related expenses. A secret stash for emergency situations might also be a good idea.
What is the 30 percent threshold?
Now, it is true that every person has unique social, personal and financial circumstances. Despite all this, don’t exceed 30 percent of your household income when it comes to rent and utilities.
For that reason, rent a house that costs way below 30 percent of your gross monthly income. So, a person earning $3,000 each month, should keep aside no more than $900 when it comes to housing-related expenses.
You might be wondering what’s so special about 30 percent. Well, you’ll be surprised to know that this is the percentage used by the government to decide who is qualified to enjoy public housing initiatives and programs since the year 1981.
Statistically, households spending over 30 percent on housing expenses become cost-burdened. Those shelling out 50 percent or more of their salary on housing costs are deemed severely cost-burdened.
A 2015 report from the Harvard Joint Center for Housing Studies found that 21.3 million cost-burdened renters exist as of 2014. So, nearly half of all these people are exceeding their rent capacity.
However, given that so much time has passed since 30 percent became the standard measure of housing affordability, many question the validity of this number. Critics claim it overlooks the variations in household size and cost of living.
Single individuals without dependents might not have an issue paying 30 percent of their monthly income on housing, but a person supporting a family of four might not have sufficient money to get by.
At the same time, a family might think it is worthwhile to spend the 30 percent on rent costs if it means getting closer to better public transportation or better educational institutions.
Can I go for the 50/30/20 budget?
If you’re undecided on the rent amount, try the 50/30/20 method.
According to this guideline, renters can spend 50 percent of their take-home pay on monthly essentials like utilities, groceries, transportation, and so on.
Then 30 percent of their after-tax money should be used for non-essentials like entertainment. This 30% should also absorb expenses related to important purchases that make your lifestyle better and more fulfilling.
Right from experiential purchases such as a vacation to the Caribbean islands or a wine workshop, to health and beauty products– everything should fit in to this budget. Considering how we’re in a price sensitive economy, this is easily achievable. The trick is to look for specialized retailers that can fulfil your lifestyle product and service requirements at affordable prices.
So, puzzled whether to bring home cool products? Make some space in this 30%.
The remaining 20 percent would then go towards paying off loans, retirement savings and other financial targets. If you can plan the other two portions better and keep on adding to this 20% segment, you’ll be better off by clearing your liabilities sooner than planned.
Of course, the 50/30/20 budget isn’t a one-for-all deal. For example, individuals on the cusp of retirement and without any substantial savings might have to cut back on their spending and spend more than 20 percent of their income on retirement accounts.
The big takeaway
In short: the amount to spend on rent is not set in stone; it is variable.
Of course, the above-mentioned models give you a good idea about the percentage of income you should allot for housing.
But when all’s said and done, you need to take a closer look at the budget in hand and consider the goals who wish to fulfill before taking the final call on the rent amount you can afford.
Renting an apartment is all about knowing what’s best for you and exploring the available options. The housing market is booming in various parts of the world, and you need to pick the opportune moment to secure the best rental amount.
But whatever you do, make sure you do not overspend. After all, whether you’re single or a family man/woman, you have other needs that must be met, and those cost a lot.
So, plan carefully and find a worthwhile apartment that not only costs a reasonable sum each month but gives you a chance to increase your long-term savings.