Chatting Money

Where you live is kinda essential, and one of the hardest questions is how MUCH should I be spending on where I live? Let’s chat it out.

In the land of personal finance (it’s not as fun as Candyland, but it’s a good place to know), one of the traditional rules of thumb is how much you spend on rent – and the guideline is 30% of your income. So if you earn $50K in salary, then 30% of that is $15K per year, divided monthly, guideline is to spend $1250 on rent. Fun math tip – you can always just divide your annual income by 40 => $50K/40 = $1250, for the rent guideline.

That rule has been somewhat accepted over time, so if you ever do apply for a mortgage, banks look at that ratio of income to monthly spend. And landlords look to make sure a tenant’s gross income is about 3x the rent to decide if they can afford it. But how feasible is this 30%?

Earnest.com did research across all income levels, and it’s not surprising that if you earn less than $30K annually, it’s hard to get housing for just 30% of your income. But if you make over $100K, you could totally spend less than 10%! The picture spells it out:

Now let’s be honest – if you’re making $100K+, and rent in your city is costing you ~10% (that’s $100K/40 = $2500/month on rent), then you should probably be looking at buying a place. You’ll need a down payment, but then monthly costs for buying may still be affordable for you, and a great investment – I’ve talked about that – check out THAT blog post. I’m a believer in real estate investment, but only if it works with your income.

If buying feels too far a stretch right now, and the 30% on rent isn’t getting you enough for your apartment, another way to approach your budget for rent is to follow the 50/30/20 rule. This is where you look at your take home pay (so after taxes are taken out), and 50% goes to essential expenses like rent, car payment, health & everything insurance, electric bills, etc. The 30% is fun spending on what brings you joy, and 20% goes into saving your emergency fund or retirement like a 401k or IRA.

If you use this guideline, then 50% is the “rent + essentials” bucket, so if you’re making $50K, less 20% taken out for taxes is $40K. So 50% means you get $20K annually for essentials, or $1667 monthly. That’s compared to the 30% rent rule of $1250. As long as your other “essentials” fit in the $1667, you could spend $1400 on rent, and have $267 for car, insurance, bills. You’d probably need a used car, or live where you can take public transportation, but you can spend more on rent!

That gives you a sense of what you can spend on rent. If you want to spend more, you can always get a nicer place, and get a roommate for added income, or add a side hustle – I’ve blogged about that – to get some income to live in style the way you want, without busting your budget!! Let us know in the comments how you’re handling rent!