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.
Dealing with high interest auto loan debt was difficult for me and my wife
Dealing with high interest auto loan debt was difficult for me and my wife. We thought we got a good deal, but it actually was a horrible loan. So, we reached out to United Settlement, and they got to work...
No one really wants to go bankrupt, and neither did my family
No one really wants to go bankrupt, and neither did my family. But fortunately, we did not have to go that route. It was our last resort, but United Settlement helped us figure out a way around bankruptcy...
I had been through about 5 different credit counseling agencies before I found United Settlement
I had been through about 5 different credit counseling agencies before I found United Settlement. I had read through their reviews and made the decision to move forward with them. I also was so impressed...
As a business facing some unwanted financial difficulties
As a business facing some unwanted financial difficulties, we were at a loss for what to do next when our debt started to soar. We took a closer look at our financial situation by contacting United Settlement....
I had no clue how to create a debt management plan
I had no clue how to create a debt management plan and in fact, I didn't even know what a debt management plan was. Fortunately, I reached out to United Settlement before I had too much debt to tackle....
Being burdened by debt is one of the biggest struggles we faced as a family
Being burdened by debt is one of the biggest struggles we faced as a family. But these people at United Settlement were very helpful in deciphering the different debts we had and then coming up with a debt...
Student loan debt was my worst enemy before I ran into United Settlement
Student loan debt was my worst enemy before I ran into United Settlement. I really thought I would just have terrible credit for the rest of my life because I will never get out from underneath it. It was...
I never thought about settling our credit and auto loan debts
I never thought about settling our credit and auto loan debts. I honestly thought the only way out of our situation was to go bankrupt. But that all changed when we reached out to United Settlement. We...
We were dealing with extremely high-interest rates on debt
We were dealing with extremely high-interest rates on debt. That made it difficult to make improvements in what we owed. We were pretty much devastated. By our debt because we really wanted to buy a house...
Auto loans are my family’s biggest problem
Auto loans are my family’s biggest problem. Sure, having them is a necessary evil in our modern era. We spent years trying to pay our auto loans off. But the problem was, we never could make headway....
Bankruptcy was not an option I wanted to use
Bankruptcy was not an option I really wanted to use. I wanted to find an alternative to this process that would enable me to get rid of my debt for good without having a bad mark on my credit history. That...
United Settlement was there for me when I could not be there for myself
United Settlement was there for me when I could not be there for myself. I was not sure how to move forward when I had a massive amount of debt. I could not figure out how to get out from under the seemingly...
I had no idea that I could reorganize my utility builds or residential leases
I had no idea that I could reorganize my utility builds or residential leases. But United Settlement helped me see that I could. They were very friendly in telling us about what our options were as a family...
Everybody knows how ridiculous student loans are
Everybody knows how ridiculous student loans are, and that was not lost on me when I chose to take out hundreds of thousands in student loan debt. Relieving a measure of pressure for my student loans was...
Restructuring business debt is not an easy thing to do
Restructuring business debt is not an easy thing to do. But United Settlement was great at helping me figure that out. Understanding financial situations and goals was what I really wanted, and they did...
I had no clue that I was paying more than 100% APR on my small business loan
When I reached out to United Settlement, I had no clue that I was paying more than 100% APR on my small business loan. I could not believe it! But I was paying that much which meant I could not ever get...
Handling my business debt was not something I looked forward to
Handling my business debt was not something I looked forward to. But United Settlement was so patient with my questions and helped me figure out how to handle my debt as a small business owner. I qualified...
I didn't even know what type of interest rates there were and how those affected my debt overall
When I contacted United Settlement, I didn't even know what type of interest rates there were and how those affected my debt overall. So, when I went to go buy a new house, I was shocked to find out that...
Debt settlement is what we signed up for when we were interested in using United Settlement
Debt settlement is what we signed up for when we were interested in using United Settlement. We needed a company to negotiate on our behalf to help us reduce the total amount of debt we owed, and we were...
I had no idea that I could lower my credit card interest rates. But when I contacted United Settlement, they explained to me that I could negotiate my interest rates down lower along with my payoff balance....