You wouldn’t rent a condo that’s worth twice your monthly salary. But even if your rent is less than your salary, you may still be overspending and living way beyond your means.
Consider your monthly expenses and, if you have a big enough salary and aren’t living from paycheck to paycheck, your savings and emergency funds. Sure, you could give up a few luxuries, eat out less, and buy cheaper cleaning products for your place, but when you’re overspending on rent, there comes a point where you just can’t juggle things around anymore and you have to sacrifice necessities such as food.
There really is a certain limit to the amount you should spend on rent. It not only depends on what your salary is, but also what you need to spend on. If you find yourself unable to save despite your attempts to, it’s possible that you are spending more on rent that you really should. Here’s how you can determine how much your rent budget should be.
The Transportation Cost Method
This is the method for people who really want to cut down on rent expenses the most. This method may not leave you with a lot of good or fancy options, but if you’re really trying to downsize and cut costs on rent, this is the most practical.
My mom actually recommended this rule to me when I was a fresh graduate starting out on my first full-time job and looking for a place closer to work. The first thing you should do is calculate the monthly transportation expenses you pay to get to work. For me, that cost roughly around $150 a month, so that was the maximum rent I could pay if I wanted to continue saving.
Obviously, it doesn’t leave me a lot of choices. For rent that low, I’d have to kiss privacy goodbye and share an apartment with a lot of roommates. If you’re a fresh graduate with an entry-level salary though, expect that this may be your living situation until you get a raise, assuming you choose this method of estimating your rent budget.
The 30 Percent Method
Plenty of financial advisers online recommend limiting your rent budget to 30 percent of your monthly salary. This is based on the fact that the US government uses this percentage to determine who need financial aid for housing. Citizens who spend over 30 percent of their income are more likely to be burdened by housing costs and will require financial aid to survive.
So, if you don’t want to struggle with maintaining a budget, keep rent at a 30 percent minimum. If your monthly salary is $3,000, find a place that costs no more than $900. This method is much more flexible than the transportation method because the rent budget relies not on your expenses, but the actual money you have. This allows you to set aside enough to pay for your rent without sacrificing the other 70 percent for your other necessities and savings.
This method, however, may not be suitable for all employees. If you live alone and only have yourself to think of, it’s easy to budget out your money based on your own expenses. However, if you have an unemployed partner or a family with more needs, 70 percent of your salary may not be enough for food and other expenses, making you spend much less on rent. Those in debt may also find 30 percent on rent to be impractical.
The 50-30-20 Method
If you’re the type of person who takes luxuries and non-essential expenses into your budget, this method allows you to take these into consideration while still saving and putting aside enough of your salary for rent.
In this case, rent has no category on its own. It falls under the 50 percent, which goes to necessary costs such as rent, utilities, food, and other expenses. The next 30 and 20 are interchangeable, depending on what you prioritize more: one goes to savings or anything that can increase your assets or lower your liabilities such as debt; the other goes to the non-essential items you know you’re going to spend on.
This method is not applicable if your monthly debt payments go way beyond 30 percent. However, what’s good about this method is that it’s very flexible and not always limited to 50-30-20. If you don’t spend that much on non-essential items, you can decrease its budget and make it 50-40-10 or 50-35-15 or whatever fits your spending habits. Be careful with the flexibility, though, as it may tempt you to constantly alter the budget.
Buying vs. Renting
With all this talk about rent, you might want to consider the alternative: buying a place of your own. Granted, it is the more expensive option, and you may need to take out a bank loan, but consider the long-term advantages of buying a home. If you’ve rented out your place for a few years, your past rent payments, accumulated, may have been enough to put a down payment on a place of your own.
In the long run, you may spend hundreds of thousands of dollars for a place that will never be totally yours when you could have already bought a residential property of your own, added your own furniture, and only spend on utilities, monthly dues, and necessary repairs. If we’re talking about practicality, if you’re looking to stay in a place for years to come, buying a place of your own is more practical than just renting.
At the same time, though, buying isn’t for everyone, especially those whose salary is not enough to save or get a loan from the bank. Renting long-term should only be a choice for people who don’t see themselves establishing their home in the area or people who cannot afford to go beyond renting.
These various methods were created to fit different salaries, budgeting factors, and expenses. It is possible you’re overspending on rent, which is hindering you from saving or having enough money for other important necessities. Like any practical and responsible adult, having a strict budget on your expenses keeps you in check with your expenses and prevents you from making poor financial decisions.