Maybe you can’t afford to buy a house just yet. Maybe you prefer renting to buying.
Or maybe you’re just waiting for the right home to come along before you commit to owning.
Whatever your reasons might be for choosing to rent, it’s important to consider how that monthly cost will fit into your budget and overall financial success.
The good news for renters is that renting may cost less than owning a home. In early 2019, CNBC reported that the median cost of renting was cheaper than buying in every state—although costs can vary from city to city and county to county. That’s at least in part because renters avoid some of the big bills homeowners have to cover themselves, including maintenance, insurance, property taxes and HOA fees.
Still, whether you rent or own, according to the Bureau of Labor Statistics, housing is the largest expense the average U.S. consumer must deal with every month. And if you can reduce your payment, you’ll likely have a bit more flexibility in choosing where to allocate your money — whether that’s spending it, paying down debt, or saving for a future goal. Along with reducing small indulgences, cutting your rent can be an effective way to free up more cash in your budget.
So, how much should you be spending on rent?
There’s no single magic formula, and everyone’s situation is different, but there are several theories out there that you can use as a guide.
Here are three to choose from.
Related: Mortgage calculator
The 50/30/20 approach
If you’re a disciplined budgeter, you may already be familiar with this model, which was made popular by Sen. Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.
The 50/30/20 budgeting method suggests dividing your after-tax income into three main categories, putting 50% toward needs (essential costs like housing, transportation, groceries, utilities, etc.), 30% toward wants and 20% toward savings.
Following those guidelines, your rent would qualify as a need. But it remains up to you to decide how much of that 50% you want to — or feel you have to — spend on housing.
If your home is your castle, and your castle is in a major city or tech hub, it could be a lot. Which means you may have to make adjustments to other “essentials” in your budget or perhaps borrow from other categories (so …maybe fewer massages and dinners out).
The 30% rule
Another often-repeated rule of thumb — one that’s been around for decades — puts the ideal housing costs at 30% of your after-tax income, no matter how much you earn.
That rather broad guideline dates back to the Brooke Amendment, which capped public housing rents at 25% in 1969.
Congress raised the cap to 30% in 1981, and eventually, it became the go-to guide for determining “cost burden” — the amount of income a family could spend and still have enough left for other expenses — even those who aren’t in low-income households.
Critics of this model advise using it as a starting point rather than a rule when determining a spending limit. Depending on how much you earn, 30% of your income could be more — or less — than you actually can afford to pay in rent.
Your location could also influence whether or not the 30% rule is realistic for you, since depending on where you live, accessibility may be a factor. (Can a person who makes $40,000 even find a rental for $1,000 a month in most cities?)
And, again, when you’re looking at homes, you’ll likely want to weigh what you’ll get vs. what you’ll give up — not just in money, but in time, safety and happiness. (Is the cool place downtown worth it if you can’t afford to go out and enjoy the nightlife? Is a longer commute or a roommate out of the question?)
Better budgeting strategies
No matter which model you choose, it really all comes back to better budgeting. The question isn’t “How much can I spend on rent?” it’s “How much should I spend on rent?” You can take a look at your income after taxes and other deductions are taken out. Then you might look at what you’re spending now on rent, food, entertainment, transportation, clothes and other costs. What can you afford to pay that will allow you to live more comfortably, do what you like, pay your bills, get rid of any debt and save some money, too?
It’s a lot to figure out — and then to stay on top of once you set your budget and determine how much to spend on rent.
To make things more manageable, you might want to consider opening a cash management account.
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