Get Real with Rent Money: How Much Can You Actually Afford? (2024)

How Much Rent Can You Afford

Are you ready to move on and move up?

Renting a new home or apartment is an exciting venture that often signals great changes in life, such as a new job, relationship, or city.

However, overspending on rent is one of the easiest and most deadly financial mistakes anyone can make that continues to tax your budget month after month for a year or more.

So, before you sign the lease on that next “perfect” place, it is critical to assess how much money you can actually afford to pay for rent each month. This means first figuring out your abilities and priorities and then doing a bit of old fashioned math.

The “Rules of Thumb” and the Realities of Life

When it comes to responsible budgeting the so-called “fixed” expenses of housing, transportation, and utilities are (or should be) where the largest portion of your monthly income goes. The common wisdom is to spend 50% of your income on fixed expenses and, more specifically, 30% on rent. And while this makes sense from the perspective of averages, a recent study from the Joint Center for Housing Studies at Harvard University found that more than half of all people living in high cost urban areas actually spend more than that foretold 30% and that a quarter of them pay more than 50% of their income for rent alone.

Furthermore, not all of these people are struggling to pay that rent.

The thing is that the “perfect” amount you should spend on rent or even the number you can actually afford is not always cut and dry. Depending on where you live, the reality of renting is more expensive than in other places. Zillow reports that in San Francisco’s urban areas, for example, the average cost of rent rose 14.9% between 2014 and 2015 making it hard for anyone to afford to live there.

The realities of your situation are therefore as important as the rules of thumb for rent. It is important to account for the circ*mstances of your life, from your financial priorities and income, to other obligations and the physical city in which you live.

However, there is still some guidance that financial professionals and good old arithmetic can offer anyone looking to rent a new place. There are a number of common mistakes people make when choosing a place to rent as well as different ways to use basic budgeting and math determine how much rent you can really “afford” from a theoretical standpoint.

Important Considerations Before You Rent

Financial experts and anyone who has made a mistake and rented more than they can afford all attest to the common errors people make when deciding on where or what they want to rent. Among these issues, especially for young professionals and recent college grads, is trying to live in a neighborhood that is “above your pay grade.” There is a reason that the young professional working his way through the ranks and living in a crappy studio apartment is a cliché – it’s actually fiscally “smart.”

Furthermore, it is important to remember that rent is not “fixed” until you fix it. There are a lot of choices that individuals can make to reduce their rental expenses before signing a lease. This includes considering everything from commuting costs (How far is your new home from work/school/etc.?) to physical space and amenities (Does the complex have a free gym for residents? Is heat and hot water included?) to whether or not to take on a roommate or two (Can you share a room for a while?).

For young families, prioritizing not only rental space but school district is important to consider. Smaller spaces in better school districts pay over time in the same way the school loans do. Plus, many young families actually spend very few hours each day “at home” between work, school, and other activities.

Two Ways to Calculate How Much Rent You Can Afford

After considering basic factors that allow for cost savings, there are two main ways that people can calculate how much rent they can afford. First is to use a strict budget-based assessment. Those with more financial flexibility can use the 30% or 40x rule.

Budget-Based Rental Assessments

Spending 30% of your income each month on rent means absolutely nothing if you need 75% of your income to pay other expenses. Those with very tight finances therefore must calculate their rent based on real numbers and their particular budget.

To start, draw up a basic budget without rent in it. Determine how much money you have coming in each month, after withholding, if you are an hourly employee with variable income, average your wages for a period of 2-3 months.

Next, subtract all current costs such as car payments, student loans, credit card payments, food, entertainment, insurance, and SAVINGS.

How much money is left?

This is the maximum you can spend on rent. But don’t spend that much if you can help it. Otherwise you are left with absolutely no wiggle room for an emergency or other luxuries such as new clothes, vacations, and dining out.

Math-Based Rental Assessments

Though they don’t work for ever city or every income, the common ways that financial experts and landlords calculate what rent you can afford is another way for individuals to do the same. This is a better method to use if you do not have a lot of debt and generally live below your means.

The first method is the 30% maximum calculation. In this case, figure out your average monthly income and multiply it by 0.3. So, if you make $2,800 a month after withholding, you can afford $840 per month in rent.

The second method gets the same results (roughly 30% of income) but relies on past earnings. It is what many landlords use and is called the 40x rent rule. This basically says that your monthly rent can be no more than 40 times your yearly income (some municipalities alter this to 35 or 45 times according to cost of living). To figure this one out, use last year’s W2 or income tax return if you have more than one source of income. Find your net income after taxes and divide by 40. Therefore, a family that earned $62,000 in 2014 can afford $1550 per month in rent ($62,000/40= 1,550).

**How much of your income (as a percent) do you spend on rent?**