Conventional wisdom has historically limited rent to 25% of your income before taxes. Surveys suggest Americans are paying upwards of 30%, lots of times more. My friends who live in San Francisco often pay at least half their income to a landlord every month. Domu.com’s rent calculator puts “low end” at 20% of income, “middle of the road” at 30%, and “high end” at 40%. But that’s not the whole story.
Income 3 times your monthly rent
Regardless of what you feel you can pay, many landlords will require proof of income 2.5 to 3 times the rent. I recently encountered one that required that my roommate and I each make three times the total rent, because we weren’t a couple (and presumably, one of us could bail and leave the other with the whole bill). Be prepared for this eventuality when scheduling viewings. Just graduated from college/have no money and no credit? Some landlords will allow co-signers; others won’t.
…So what’s a girl to do?
Okay, so that’s what the “experts” or the social norms suggest you should spend on rent. In reality, you should spend what you can afford to spend—but what can you afford? Think Big Picture, but Big Picture for you. Get a good grasp of your own financial situation, and identify a target rent from there:
Do you have debt?
What are your monthly payments? There’s another question that sometimes gets lost in the mix: would you save money over the long term if you paid off your debt faster? Many people have high interest rates on their loans or credit cards, but fail to budget a higher monthly payment in the interest (hah) of saving money over the longer term. If you can afford to pay it down, do.
Do you have savings?
Do you need to save? Ideally, you should be saving something. You at least need a cushion in case of disaster; better yet, some kind of pot for good things in the future, like a house where you wouldn’t have to pay rent. Conversely, if you’re taking an AmeriCorps job for a year, you might find it worth subsidizing your dismal but temporary poverty with some savings, as long as you’re not clearing them out.
Do you save money by living somewhere more expensive?
Usually this would mean you were closer to work, and transportation costs are high enough that a prime location is actually cheaper, or at least not as expensive, when you factor in those costs. Don’t guess—actually do the math.
How much do you care?
For some of us, location really matters. Proximity to friends (read: good bars), hardwood floors, a nice backyard…we all have our poison. If your budget has some flexibility, consider how much that 20/30/40 split would affect your happiness overall.
Don’t forget to factor in:
Also: spending money, emergency money, and utilities. The latter can vary hugely depending on a place, so when you identify what you can “afford,” remember that it should include other costs like water, garbage, electricity, heat, internet, and whatever else you deem essential.
Now spreadsheet it
Put all the numbers you can into one spreadsheet and give yourself some definitive numbers: your ideal rent, the absolute most you could afford without dipping into savings or going into debt, and the low-end that would allow an excellent vacation annually.
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