If you are currently renting your place or residence or about to start renting, rest assured that you are not alone. 36% of Americans are renting: that means you have more than 40 million people in your shoes.
While there is nothing too scary or complicated about renting, it is important that you do that sensibly. You don’t have to break the bank just to rent a comfortable place to live. This brings us to the question: how much should you spend on renting without ruining your finances? To answer this question properly, we need to touch on several other subjects to make the points clearer.
Why Renting Can Be the Right Decision for You
If you can’t afford to buy a home right away, renting is the best option for you. It also offers you a place of residence without tying you down to a property and shouldering the responsibilities that come with it like homeowner insurance. Other benefits of renting are:
- It offers flexibility
- It allows you to move around a state or the country without thinking of selling and buying new house or flat
- It is a better choice for people who live in some very expensive cities where buying a home is not feasible
- The ‘live where you rent and rent where you live’ is efficient in increasing investment properties and building generational wealth
Factors to Consider When Deciding How Much Rent To Pay
Most people will prefer to pay as little rent as possible, but the reality is that there are many market and personal factors that will influence how much you will have to cough out for rent. Here are the most prominent ones:
- The average rent in the area you plan on living
- Your salary after tax
- Your credit history
- Living situations like the possibility of having a roommate
- Additional rental fees applicable to the property you intend to rent
How Much Should You Spend On Rent?
If you have read till this point, you will understand that it is not proper to quote any particular amount as the right number to pay on rent. The average rent for an apartment in the US was $1,468 in February 2020. You can spend less or more, depending on your situation and the other factors highlighted earlier. There are a couple of rules you can use to estimate what you can comfortably pay as a rent.
The 30% Rule
This is a popular rule that recommends that renters don’t spend more than 30% of their income on paying rent. This means you shouldn’t pay more than $1,500 on monthly rent if you earn $5,000. You can perform the simple calculation with your current salary after tax.
The major advantage of this rule is that it is easy to remember, and the calculation is super easy. The downside is that it is just a rule-of-thumb that may not apply to everyone. You can use it as a guide to avoid spending too much on rent though.
The 50/30/20 Rule
This is another simple, yet popular rule that can guide you with how to spend your earnings judiciously. It stipulates that you spend 50% of your income on needs, 30% on wants, and 20% on savings and paying off debt.
Your rent falls within the category of needs, since you can’t do without accommodation. Other needs include utilities, groceries, and transportation. These are all the expenses you must always make to survive. The rule requires that you don’t spend more than 50% of your income on rent and all these other essential expenses. By controlling the other essential expenses, you can increase what you have to spend on rent, but make sure you don’t spend more than half of your earnings on needs.
Your wants include the expenses that are not considered relevant for your survival, such as entertainment, shopping, and the others. You shouldn’t spend more than 30% of your earnings on them. The last part of your income (20%), according to the rule, should be saved or used for paying off debt and making investments.
This is a good and practical rule that can help you to spend more prudently on all things. It is also simple to calculate, but you need to be able to distinguish between needs and wants. In addition to helping you know how much to pay on rent, it helps you plan your finances better.