How Much Should I Pay for Rent?
Without question, housing – whether it be in the form of a mortgage payment or rent – is one of the largest expenses that independent adults must pay each and every month.
However, adults obviously span different ages and different incomes – a recent college graduate is at a different stage of life and career than an established professional in their forties who is married and raising a family.
Since housing needs and incomes vary widely, the question of how much an individual should pay in rent is situational dependent – through there are some rules of thumb that can be applied (or dismissed) in determining what the appropriate amount of monthly rent should be in a given situation. Let’s take a closer look.
The 30% Rule
The 30% Rule dictates that an individual should spend a maximum of 30% of their pre-tax income on rent. It’s a useful rule of thumb for some – but for individuals earning less than $30,000 a year, it won’t really hold – the percentage will likely be higher.
Even for those earning up to $45,000 per year, almost half can not restrict their rent payment to 30% of gross income. However, for an older person making a more substantial income, it is completely possible to stay within 30%, and often considerably less than that.
However, the 30% rule does not take into account the possibility of student loan debt for recent graduates, or high debt burdens for individuals in general. That brings us to our next rule the 43% Rule, which is often recommended for individuals who are in the process of paying down debt.
The 43% Rule
That brings us to our next rule – The 43% Rule – which is often recommended for individuals who are in the process of paying down debt. The 43% Rule originated within the mortgage lending industry and stipulates that a monthly housing payment and all monthly debt payments should not exceed 43% of monthly pre-tax income.
For a recent college graduate with high student loan bills, the 43% rule makes better sense, though even here, depending on income and where a person is living, refinancing student loans for a longer term and lower monthly payment may become necessary to stay within this threshold. Similarly, for the individual burdened with high interest rate credit card debt, refinancing via low interest rate promotional APRs and other methods should be explored.
Drawbacks to the 30% and 43% Rules
Attempting to make one-size-fits-all rules for determining how much to pay in rent isn’t completely realistic or even current. In fact, the 30% rule dates from 1969, when public housing rents were capped at 25% of a tenant’s income, and this gradually increased to 30% over time.
However, financial obligations have evolved over the decades, with the cost of higher education and retirement increasing significantly. Even taking into account debt payments with the 43% rule, nothing is set aside for retirement in that rule. Meantime, high-earning individuals making several hundred thousand dollars per year are not likely to allocate anything close to 30% on rent.
How to Save on Housing Expenses
Cost of living obviously varies throughout the United States, with housing prohibitively expensive in areas such as New York City, Washington D.C., and much of California. In these areas, it is not uncommon to pursue a roommate or housemates to save on rent, as a one-bedroom apartment will almost always be more expensive than a larger living space that is shared.
If you’re living in an urban area, look for housing with convenient public transportation that will save you the expense associated with driving a car. Always consider utility expenses and look for a housing situation that may include some or all of gas, electricity, internet and cable. Once again, a shared living space will help save money.
Finally, think in terms of writing out a budget of all monthly expenses – not just rent – and all sources of cash flow. Consult other articles on this website for guidance in developing a written monthly budget. A good monthly budget – including one that incorporates the 50/30/20 rule (50% of disposable income allocates to necessities; 30% to “wants”; 20% to savings and paying off debt) – will go a long way toward helping you achieve financial peace of mind while enjoying the comforts of your living space.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.
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