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How Much Should I Spend on Rent?

By Jarrod Heil

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Finding a house or apartment you want to rent is much easier than finding one you can afford to rent. When deciding how much should you spend on rent, you need to stick to a restricted budget based on your monthly rent to income ratio if you want to be able to rent — or someday buy — that urban palace, hillside retreat, countryside ranch or a slice of beach paradise.

When determining how much of your income should be rent designated, you’ll need to put a budgeting plan in place and stick to it. The most common rent to income ratio plans to decide how much of your monthly income should go to rent is based on the 30% rule, 43% rule or 50/30/20 rule.

Whether you’re doing a budget for $5,000 monthly income, $2,000 or somewhere in between, you’ll need to stick to your budget each month to wipe your stressful worries away —  no matter how much you want to break the budget.

Let’s take a look at how much should you spend on rent, what percentage of your monthly income should be designated toward rent money and what a healthy rent to income ratio looks like.

How Much Should I Spend on Rent?

Personal finance experts recommend you spend about 30% of your gross monthly income on rent. That means a budget for $5,000 monthly income should spend a maximum of $1,500 per month in rent and those with a $3,000 monthly income should spend a maximum of $900 per month. For people carrying large amounts of debt (like those pesky student loan payments, credit card bills and medical bills), it’s recommended that you spend no more than 43% of your gross monthly income on all debt, which includes rent and utilities.

Rent to Income Ratio: How Much of Your Income Should Rent Be?

In the financial world, your rent to income ratio can be low enough so you can begin putting money toward a nest egg, like buying a house or planning for retirement. That’s why experts recommend spending no more than 30% of your gross monthly income on rent or, if you hold a lot of debt, spending no more than 43% of your gross monthly income on all debts — including rent and utilities.

30% Rule

The 30% rule is the most basic and straightforward rent to income ratio when people are trying to determine how much should I spend on rent. If you take home $5,000 in gross monthly income and decide the 30% rule suits you best, you can afford to spend up to $1,500 on rent and utilities each month ($5,000 x 0.30 = $1,500). It’s always better to spend less than you can financially afford so you can save money for a down payment on a house or save for a rainy day.

43% Rule

The 43% rule comes from the world of mortgage lending. It should be applied to people who carry a large amount of debt, but it often reduces the amount people can afford to spend on rent. For example, if your monthly debts include a $300 car payment, $100 car insurance payment, $250 student loan payment, $100 credit card payment and $50 phone bill, you carry $800 in debt each month.

If you take home $5,000 in gross monthly income, your total spend for debts and rent should not exceed $2,150 ($5,000 x 0.43 = $2,150). If you subtract your $800 monthly debts, you can afford to spend $1,350 on rent and utilities each month. Don’t forget to calculate your monthly renters insurance, too!

If you’re saving up for a down payment on a house and plan to get a mortgage in the future, 43% is a good debt to income ratio that many lenders abide by. Sticking to the 43% rule will allow you to meet your mortgage requirements and give you breathing room to save more money throughout the year.

50/30/20 Rule

Although the 50/30/20 rule is for your overall budgeting plan, it should be used in tandem with the 30% rule or 43% rule to account for how much of your monthly income should go to rent as well. The 50/30/20 budget rule is applied to your gross monthly income and is a great benchmark to reduce debt, save money and live comfortably.

  • 50% goes toward living expenses, debt and essentials
    • This category includes your rent, utilities, groceries, gas, household supplies, car insurance, renters insurance and everything you need to get by.
  • 30% goes toward flexible spending
    • This category is used for things such as entertainment, travel and everything you don’t necessarily need but that makes life more enjoyable.
  • 20% goes toward financial goals
    • This category is extremely important, especially as you get older, and it includes investments, savings account and debt-reduction, such as a credit card payment, car loan or student loan.

When you use the 50/30/20 budget rule in tandem with the 30% rule or 43% rule and you stick to them, you’ll be surprised how quickly your debt reduces and your savings or investment accounts grow.

How Much Should You Spend on Rent in a City With High Housing Costs?

The entire state of California and cities like Boston, Seattle, New York City, Miami, Chicago and Washington, D.C. have some of the highest housing costs in the nation — including monthly rent prices. If you’re looking for an apartment or house to rent in those places, you’ll likely exceed 30% of your gross monthly income.

There are a few things you can do to reduce your rent or other expenses. You could forgo living by yourself and get roommates, which can cut your monthly rent by as much as half. You could settle for a smaller apartment or an apartment that’s in the suburbs instead of the city. You can also cut cable and cut down on fast food, coffee runs and entertainment expenses to reduce your overall expenses.

It’s up to you to determine which expenses you can live without. But your financial security will always be greater when you abide by the previous rules!

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