Figuring out how much of your hard-earned money should go on rent isn’t something that only fresh-faced 20-somethings struggle with. I know that many people, like myself, who haven’t figured out how to budget by now are at their wits’ end. So, what percentage of income should go to rent?
The answer, of course, depends on many a thing. I found that the area where I live (or I’d like to live) is only one of the factors. Of course, renting a house smack in the middle of New York and a suburban part of Baton Rouge comes at two very different prices.
Then again, it’s not all about the location. I found that my personal financial situation also plays a large part when it comes to deciding what percentage of income should go to rent. But, are those the only factors? Let’s get down to the nitty-gritty of it and answer this question once and for all.
What Percentage of Income Should Go to Rent? 30%?
If I ask any Baby Boomer, they’ll tell me that around 30% of your income should go toward rent or mortgage. That’s what they’ve been taught, so it shouldn’t be any different for anyone else, right?
Not exactly. When it comes to the questions of what percentage of income should go to rent, there is no magic number that people can turn to. And, if there were, it wouldn’t be 30%. Why?
The Rule Is Outdated
There’s a good reason why Baby Boomers would be first to jump to say “30%” if I asked how much I should pay for my rent. Back in the time of Woodstock, public housing regulations suggested that 25% of income should go toward rent. Over the next decade or so, due to inflation, this number rose slightly and settled at 30%.
But things are a bit different today than they were back in the 80s, right? The economy changed. What’s more, the personal finances of an average twenty-something person changed. For example, where was the looming student debt back in the 80s?
There practically was none. Young people also didn’t contribute to their 401ks back then, either. So, it’s safe to say that the 30% rule isn’t as applicable today as it was once upon a time.
Only Makes Sense for Average Earners
The 30% rule sounds great, in theory. Or at least I thought so. It still leaves me with 70% of my earnings to cover everything else. For example, let’s say I’m making $2,000 every month. That would mean that $600 goes toward rent, and the leftover $1,400 should cover everything else.
This didn’t sound that bad. But, I quickly realized that “everything else” includes utilities, groceries, transportation, debt, savings, emergency funds, and so much more. Not a lot of wiggle room, right?
And what would happen if I earned even less? If my earnings were around $1,000 per month, for example? The 30% rule would then be inapplicable.
Similarly, the 30% rule doesn’t take into account high earners, either. Let’s say that instead of the measly $2,000, I’m lucky and I’m making $20,000 per month. The 30% rule would put my monthly rent bill at around $6,000. Paying so much for rent sounds not only unreasonable but also irresponsible.
Can’t Be Applied to Everyone
The biggest issue most people have with the 30% rule is that it doesn’t take their financial situation into account. Not everyone earns the same amount of money per month. What’s more, not everyone wants the same housing opportunities.
I’m a young professional who loves hanging out with friends. So I don’t mind spending a bit less on rent if that leaves me more money for socializing or traveling. Contrarily to that, one of my friends has a kid and would much rather rent a spacious home than have money for overpriced cocktails. It’s all a matter of opinion and lifestyle.
Furthermore, let’s not forget that most people have student debt. Depending on your debt payment plan, you might not be able to afford to set 30% of your earnings aside for rent.
So How Do I Figure It Out?
I mentioned already that there isn’t one magical number or an equation that everyone should follow when it comes to the question of what percentage of income should go to rent. Instead, you need to take a hard look in the mirror and figure out how to tackle your entire financial situation.
Budgeting is a clear answer to every financial question. How much to pay for rent is only one of them.
Tracking Expenses
To see what percentage of income should go to rent, you need to know how much money you’re actually working with. That means that you’ll have to track all your expenses for a couple of months diligently.
How much do you need for food? How much do utilities cost? Does eating out eat up a big chunk of your budget? If so, can you cut some expenses?
These are all valid questions that you need the answers to before you start planning your entire budget.
The Question of Debt
Debt is the biggest issue for many people. Aside from the basics — food, clothing, shelter, and transport — debt is the next big item on the list of financial priorities. So, you’ll have to sit down and calculate all your debt as well as make a payment plan for it.
To do that, you have to know how much money you’re willing and able to set aside each month toward clearing your debt. Knowing how much you need (or want) to spend on debt each month will also help you determine how much money for rent you can afford.
It’s Not All About the Essentials
Everyone is striving toward a brighter financial future. That means not living paycheck to paycheck, and not being financially ruined by one emergency. To avoid that, everyone should have a savings fund as well as a separate emergency fund.
A good emergency fund should have around $1,000 in it, while a savings fund should cover around 3 to 6 month’s worth of expenses. But how much is that? Well, once you have that magic number figured out, you’ll actually know how much you can afford to spend on rent.
Granted, this is some backward mathematics, and it does take more effort. But, once you make these calculations, you’ll not only have the answer to the original question but also a financial plan for the future in case something unexpected happens.
The 50/30/20 Rule
Those who know about the outdated 30% rule probably also know about the 50/30/20 one. If you follow that rule, 50% of your earnings should go toward what you need, 30% toward what you want, and 20% toward savings.
In terms of rent, that means that it should fall comfortably in the 50% along with other necessities like food, transportation, utilities, insurance, debt payments, etc. If you can’t calculate how much you spend on these things, everything that’s leftover (from the 50%) should go on rent.
So, Is That the Perfect Solution?
Yes and no. Before you start splitting hairs and setting aside exactly 50% of your income for necessities, you need to consider your full financial situation. The 50/30/20 rule can work for anyone, but it needs to be adjusted according to your specific needs and wants.
For example, if you don’t mind having six roommates, your rent can be quite low, and you can set more money aside for your wants. In other words, the 50/30/20 rule is more of a salable suggestion than a fixed rule.
Give It To Me In Numbers
Ideally, each expense shouldn’t go over specific percentages. So, if you’re spending 50% of your income on rent, you’re doing something wrong, and you need to move. Young people living in huge expensive cities often find themselves in this situation.
Spending so much on rent might be worth it now when you’re young and stupid. But living in a shoebox apartment on Manhattan that costs an arm and a leg isn’t a viable financial plan for the future. Here’s what is.
Rent 25-35%
Try to choose an apartment or house that doesn’t cost more than 25-35% of your income. This goes for both rent and mortgage.
Utilities 5-10%
Utilities don’t include luxuries such as cable and Netflix (no matter how much of a necessity you see them as). I’m talking about essential utilities here — electricity, gas, and water. If you’re spending more than 10% of your income on these bills, then you need to rethink something (either your hour-long showers or your income).
Groceries 5-15%
Many people struggle with this budgeting category because they often include things they don’t need in it. If you have the habit of spending $30 or more on takeout every week, you’ll quickly find yourself going over the 5-15% mark.
This category (and every other, for that matter) needs to reflect your overall income. If you have humble earnings, then you’ll need to think long and hard when going grocery shopping. Meal prep and making lunch at home rather than eating out will be your go-to solutions then.
Alternatively, if you’re a high earner, it won’t make sense to spend as much as 15% of your earnings on groceries.
Transportation 10-15%
Having a reliable vehicle that always has enough gas to get me from point A to point B, as well as having enough money to maintain said vehicle might be a luxury to someone like me. If that’s the case with you, you might have to rely on the subway, bus, and other means of public transportation. Don’t worry, it’s not that bad, I do it every day!
Either way, the amount of money you spend on transportation shouldn’t exceed 10-15% of your overall income.
A Few Parting Words
It doesn’t really matter which financial rule you use to figure out the best plan for yourself. As long as your expenses don’t go over your earnings, you’ll be able to figure it out.
No matter which approach you chose, make sure to adjust it, so it reflects your real financial situation. When it comes to the question of what percentage of income should go to rent, the answer depends on both your realistic income and your financial plan for the future.
