Whether you’re a first-time renter or a fully independent adult, deciding when to sign a new lease can be a stressful endeavor. Blindly signing into a new lease based on assumptions and desires can become disastrous. Instead, the conscious renter will question how much they can actually afford by looking at the numbers. One of the most important questions that people ask before signing a lease these days is: what percent of income should go to rent?
Lots of people want to live in the best place possible as long as they have a little bit of money left over for other expenses. But this method often leads to being “house poor” which is the illusion of being well-off while drowning in rent payments. Realistically, there are tried-and-true guidelines that everyone should follow to minimize debt and maximize savings. Knowing exactly how much of your income should go to rent is the best way to tackle this issue.
So, what percentage of your income should go to rent?
Since the Housing and Development Act of 1969, financial experts have typically recommended that tenants pay no more than 25% of their income towards rent. This measure of affordability went up to 30% in the 1980s due to inflation. Even today, the most frequent recommendation for rent-to-income ratios has been the 30% rule. As an example, if you make $4,000 a month after taxes, then you should be paying no more than $1,200 a month on rent.
While the 30% rule is still an excellent baseline for gauging how much rent you should be paying, it is a bit outdated. For instance, the 1980s era recommendation of 30% doesn’t take into account modern living costs. These include rising college tuition, child support, retirement savings, and relatively lower entry wages after graduating college.
Furthermore, the 30% rule does not scale appropriately with higher wages. People making $200,000 a year would be able to pay $5,000 a month for rent according to the 30% rule, which isn’t necessarily realistic.
So again, the 30% rule is a good baseline, but what are the more current recommendations for rent-to-income ratios?
Alternatives to the 30% rule
Like mentioned before, the 30% rule is a tad outdated. Nowadays, people live in a much more complex society than back in the ‘60s. Affordability varies greatly from city to city, and housing costs are rarely capped based on a renter’s income, which is what the Housing and Development Act of 1969 was designed to do.
What’s more, modern-day renters must contend with many other factors, such as credit card debt, child support, retirement funds, and all of the additional rising costs of living. Fortunately, there are a few tricks that renters can use to gauge how much rent they can afford in the modern economy.
The 43% Rule
Some experts suggest using the 43% percent rule to determine how much rent to pay, which is based on the debt-to-income ratio that mortgage lenders use. Obtaining this number is a matter of adding up all of your monthly debt payments for the year and dividing that by your gross annual income.
Consider someone who pays $1,000 for rent, has a $300 car payment, and $300 in student loans owed monthly — multiplied by 12 to account for a year — for a total of $19,200 in annual debt. Now assume that they make $50,000 a year after taxes. Divide $19,200 by $50,000 and that’s a debt-to-income ratio of 38%, so that is affordable rent.
Allowing up to 43% of your income to go towards rent opens up more housing options for those living in high-cost cities, assuming their debt is relatively low. High-income earners can also use this rule because it does actually take into account their potential debt, allowing the monthly rent payments to truly scale with their lifestyle.
The 28/36 Rule
Another guideline based on mortgage lending practices is the 28/36 rule. It suggests that a person pays no more than 28% of their gross monthly income on rent. Moreover, no more than 36% of your income should be going towards debt payments.
Similar to the 43% rule, the 28/36 rule can scale with all renters due to the debt factor. Mortgage lenders use this rule to determine loan qualifications, so it’s a good one to adopt in any home leasing situation.
The 50/30/20 Rule
Finally, instead of focusing on the 30% rule, many experts are now recommending the 50/30/20 rule. Aligning with popular budgeting guidelines, the 50/30/20 rule is meant to take into account your full range of living expenses. The 50/30/20 rule can be broken down as follows:
- 50% of income should go to all necessities, including rent, food, and utilities.
- 30% of income should go to lifestyle purchases. Entertainment and vacations would fall into this category.
- 20% of income should go to savings or debt depletion.
The great thing about this rule is that it is an all-encompassing guideline for budgeting your living expenses. You can even incorporate the 43% rule or the 28/36 rule into the housing portion of this guideline under the necessities category.
Despite all of these great guidelines, however, it can still be challenging to fit your lifestyle into these frameworks. Continue reading to learn some of the ways you can reduce the cost of your rent, as well as some other necessities.
Ways to reduce rent
Sometimes, adjusting your budget to match spending recommendations is tough in your current situation. If you find that you’re paying too much for rent, there are many ways to reduce your overall living expenses. Here are a few ways you can reduce your rent and surrounding expenses:
Find a roommate. It almost goes without saying, but if you have an extra room in your home, it is highly recommended to find a roommate. Or, if your current rent lease is about to end, make sure to find a new apartment with one or more roommates. A single roommate will literally cut your rent in half. And the more, the merrier.
Make a deal with the landlord. Oftentimes newer apartment buildings offer move-in bonuses for signing a long lease. Asking the landlord of an older housing complex for the same type of deal is feasible too. Explain your situation to the landlord and maybe offer to sign a longer lease or pay a higher security deposit to lower the monthly payments. Skilled negotiators may even get their pet fees or parking fees waived.
Ditch the car. Popular cities are great places to live in because of public transportation opportunities. But even living on the outskirts of a major city will allow you to take advantage of that too. Limiting the use of a car can save anywhere from a few hundred to a thousand dollars a month, depending on the car payments, insurance, gas usage, and maintenance requirements are. Those living downtown in well-developed cities should look into this.
Budgeting. Understand that the benefits of budgeting cannot be understated. Tracking all of your spendings and reducing expenses in unnecessary categories can go a long way over time. Think about monthly subscription services like music and movie streaming, cable, and other software services. See if you can reduce your internet payments. Download one of the several budgeting apps for your computer and smartphone. Or, manually track your expenses in a spreadsheet program.
Use an online rent calculator. If you’re waiting to pull the trigger on a new rental, make sure to consult one of the many online rent calculators first to see if you can afford it.
Modern-day economic factors are challenging old budgeting rules and requiring people from all walks of life to reassess their living situation. So which of the above guidelines is the absolute best recommendation for how much income to put towards rent? Ultimately, the decision will depend on individual situations, but the 50/30/20 rule seems to cater to all lifestyles. Allocating 50% of your income to necessities allows you to determine better what percent of income should go to rent and how much should go to utilities, food, etc.
Additionally, actively working on a budget and reducing expenses in certain spending categories can further help your monetary growth. Regardless of income, at least one of the tips above for reducing rent should be used to optimize your lifestyle.