Housing is typically the largest line item in most people's budget. This is especially true for individuals who are living on their own for the first time. Therefore, before signing a rental lease, it is important that you perform some basic calculations and apply a little forward thinking so that you know you know what you can afford, how that aligns with your priorities and goals, and the lifestyle you want to live.
Basic Guidelines
Personal finance experts, for years, have promoted the '30 percent rule' when giving advice about deciding on a budget for living accommodations. This often-advised “rule” means that you take about 30 percent of your monthly income and budget it for rent.
This figure typically includes things like utilities, Internet access, and similar expenses. Anything above 30 percent, according to these financial experts, means that you have an increased risk of having a future budgetary problem and of not being able to afford the lifestyle you want to live.
According to CBS MoneyWatch, you should not exceed three to four percent of your gross income for utilities, leaving around 26 to 27 percent to pay for rent. It is important to factor in renters insurance as well if you have personal property that would represent a significant financial impact in the event of a loss.
Making Tradeoffs
When devising your budget for rent and other living expenses, you will find that you might have to make tradeoffs. For example, you might allow yourself some breathing room in your budget by underspending on your housing. Prioritize your spending on what is most important to you, whether that is your transportation and healthcare needs or allowing for more indulgent expenses, such as entertainment and vacation.
As another budgetary tradeoff, you might consider getting a roommate or living in an area that offers greater budget-friendly rent opportunities. Keep in mind that living in an area inundated with upscale restaurants, pricey bars, and classy coffee shops are a conscious financial decision that will impact your budget substantially. You have to determine if they are really important to you. Where you live and what you spend on rent will ultimately determine how much money you have leftover to spend on supporting your desired lifestyle.
Finding Ways to Economize
Once you determine your priorities and know your budget, it is time to find ways to get the most value for your income. This involves ways to bring in more money or reduce the outflow of money.
Reduce your Spending
The first thing you can do is figure out a way to reduce your spending. This includes considering the choices mentioned above, like getting that roommate or finding a neighborhood that is more affordable. You might be able to have your rent reduced by offering your landlord managerial or maintenance services. Many landlords like this idea as it can save them money.
Increase your Income
Any extra income you can bring in will help your budget. You could consider picking up odd jobs like tutoring, or you can pick up freelance work in your chosen field to add to your overall income.
The Takeaway
When asking the question what you should spend on rent, the answer is that 'it depends.' There are common rules of thumb that suggest a certain percentage of income as a guide for your housing budget, and they are good to consider as a benchmark and guideline.
However, just remember, you are in charge of your budget. If you want to spend more than that 30 percent of income on your rent, you might need to make cuts in other places like your entertainment or travel expenses. If you are a homebody, this might make sense for you. However, if you are a traveling nomad, it might not. The key is to understand your personal goals and priorities and craft a budget that is unique to your lifestyle.