Home » Housing » How Much Should I Spend on Rent?
Traditional advice suggests renters spend no more than 30% of their gross income(that’s the income before taxes) on rent. But the advice is just that: traditional. It hasn’t kept up with the times, and it needs to modernize.
In 2020, 30%of households were paying more than 30% of their income for housing. In 2022, around 50% of renters breached the 30% rule. That same year, across all fifty states, more than a third of renters used at least 30% of their income for rent.
No rule is one-size-fits-all. As prices skyrocket, renters need more than one tool in their toolbox. The guidelines below can help determine how much of your income rent should be, or what to do if you’re worried you can’t afford it.
Calculating How Much Rent You Can Afford
When it comes to crunching numbers, no uniform method is best for everyone. What works for a recent college graduate may not work for a single parent with two children, so it’s important to account for specific circ*mstances.
Below are a few formulas for estimating how much rent you can afford. Each comes with its own pros and cons, but each can help prepare for the costs of renting.
30% Income Rule
According to this rule, multiply gross monthly income by 0.30 to find the maximum affordable rent.
For example, if gross monthly income is $5,000, maximum rent would be $1,500 (5,000 x 0.30 = 1,500).
However, this popular rule comes from a 1981 amendment to the Fair Housing Act, which has not been adjusted since. It was not meant to help individuals decide what rent they can afford, but it’s become the mainstream approach nonetheless.
Here are some reasons experts consider the 30% rule obsolete:
- The rule is based on gross income alone; it doesn’t consider taxes or withholdings such as child support or 401(k) loans.
- It doesn’t factor in necessary spending, which varies across households.
- It doesn’t account for location, which can have a huge impact on housing quality and commuting expenses.
40x Rent Rule
Landlords sometimes apply the 40x rule, which requires an applicant household’s total annual income to be at least 40 times higher than rent. To find maximum rent using this rule, divide the household’s annual gross income by 40.
For example, a household that earns $80,000 per year can afford a maximum monthly rent of $2,000 (80,000 ÷ 40 = 2,000).
The 40x rule has a few flaws. It doesn’t consider monthly expenses like debt payments or medical costs. Nor does it account for roommates, so it can fail to ensure that every household member can afford his or her individual contribution, despite the formula result saying otherwise.
50/30/20 Guideline
The 50/30/20 rule is a helpful guide for establishing financial stability. It advises reserving 50% of take-home pay for necessities (including rent), 30% for non-necessities, and 20% for savings or financial goals.
Here’s a further breakdown of the rule and its categories:
- Needs (50%):Needs are necessities such as housing, utilities, and food, as well as transportation and medical expenses.
- Wants (30%):The non-necessities you prioritize are up to you, and can comprise dining out, shopping, entertainment, or travel.
- Savings (20%):This portion should automatically go toward financial goals, including emergency savings, retirement, or paying off debt early.
To apply this rule, if you take home $4,000 per month, you would budget $2,000 for necessities, $1,200 for wants, and $800 for savings.
This can be a helpful way to prioritize financial goals while leaving room for doing the things you enjoy.
Factors to Consider When Calculating Rent Affordability
Financial experts and landlords might suggest certain calculations, but you’re the only one who can really calculate what’s affordable.
Keep in mind that most units require a deposit. You may also have to pay first and last month’s rent up-front, plus any moving fees or furnishing costs.
You’ll also have to cover new monthly expenses when you move to a new rental home. Before signing a lease, make sure these items fit in your budget:
- Rent
- Utilities, including internet
- Transportation to and from home
- Parking, if applicable
A great way to prepare for these increased expenses is to try setting aside the money for three months, which gives you a chance to see if such payments are doable and make any necessary adjustments in advance.
Be on the lookout for budgeting opportunities, too. The more traditional rent calculations may not suit the situation, so instead of sticking to flat percentages, be on the lookout for areas to cut costs and save.
Budget to Free Up Money for Rent
Most people dread the idea of creating a budget, but it’s the best way to determine how much rent a person can afford.
Budgeting doesn’t have to be complicated, either. It’s as simple as making a list. Just write down a detailed list monthly expenses, then compare that total to income.
If rent payments and related expenses fit into your budget and you have some cash remaining for emergencies, you can likely afford rent. If not, try the following options.
What to Do If You Can’t Afford Rent
If you can’t afford your rent, try to determine how much extra money you need to come up with each month. Some of the following options might help cover the difference:
- Apply for rental assistance through a government program or nonprofit.
- Find a roommate to save money on rent.
- Consider downsizing, finding a private renter who charges less, or renting an in-law unit.
- Offer labor in exchange for free or reduced rent.
- Ask your utility companies about income-based discounts.
- Look into additional financial help for low-income Americans.
» Learn More: What to do When You Can’t Afford Rent
Find Opportunities to Save
If the option to lower rent or its associated costs isn’t viable, there are other ways to reduce spending and optimize savings.
Here are just a few ways you can reduce your spending in areas outside of housing expenses:
- Cell phone plans: If the cell phone bill seems steep, try comparing your plan to other available options.
- Adjust grocery costs: Try using strategies like couponing or meal planning to save on groceries.
- Car insurance: Shop around for different insurance plans to see if cheaper ones are worthwhile.
- Use your phone: Download budget apps to have your phone do the financial tracking for you.
- Practice using discounts: If you are a senior or a student, see if the places where you’re spending offer discounts based on those statuses.
- Patience pays off: Familiarize yourself with and wait for yearly sales like Black Friday to save on bigger expenses.
Get Professional Help with Budgeting
If the idea of creating a budget on your own makes you cringe, try getting help from a certified credit counselor at a nonprofit credit counseling agency like InCharge Debt Solutions.
An InCharge credit counselor can assist in creating a budget, and can give tips on how to stick to a budget, including strategies for saving money on rent and tools for managing and prioritizing debt.
