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Housing is typically the most significant monthly expense Americans have, but you might be asking yourself, “am I paying too much for rent a month?”, “maybe I could afford something nicer?” You might be a first-time renter planning your budget. Here are some tips that are going to be useful for you:
The 30% Method Is Not Suited For Expensive Areas.
Many experts recommend this method, but this one will usually depend on the city/area you live in. If you live in an expensive city, such as New York, this will probably not work for you.
This rule says that you should spend 30% of your monthly income. Here’s an example:
If your annual income is $40,000, you can afford $12,000 per year in rent. Dividing that by 12 months, we have $1,000 a month in rent.
The same thing is to be done for a $30,000 annual income. After applying the 30% rule and dividing it by 12 months, we see that you can afford $750 in rent monthly.
The 50/30/20 Method - Make a Budget!
This method works with your budget, at least the monthly significant expenses. It divides your budget into three simple categories:
- 50% of your monthly income should go to necessary monthly expenses
- 30% of your monthly income should go to things that are not essential
- 20% of your monthly income should go to savings and debt payments
Start by tracking how you’ve been spending your monthly income and putting each expense in one of those three categories. At first, leave rent-related costs out of your list, including rent, utilities, and other extra fees you might have to pay at your new place. Then, looking at the necessary-expenses category, sum up everything and subtract it from 50%. The result should be how much you can pay in rent each month. Let’s see an example:
If your monthly income is $2000:
- $1000 (50% of $2000) will be for necessities
- Now sum up all of your necessities:
- Phone + Vehicle payment + Fuel + Insurance + Groceries + Internet + (others you might have) = $400
- $1000 – $400 = $600
- $600 is what you can afford to pay in rent each month. This number should be included not just the rent itself but also utilities, pet fees, parking, etc.
The 43% Method Is For Those To Have High Debt.
If you have significant debt, then the previous methods probably won’t work for you. But the 43% rule can help you figure out how much you should be spending on rent, student loans, car payments, credit cards, and other debts.
There’s another formula for it, but it’s also straightforward.
Calculate how much is 43% of your monthly income, and the result should be the maximum amount you can pay for debts + rent combined. Let’s see an example:
Total monthly income: $3000
- 43% of $3000 is $1350
- $1350 will be the total amount you can pay in debts + rent combined.
- Let’s say the total monthly debt payments amount to $450
- $1350 – $450 = $900
- $900 will be the total amount you can pay for rent.
These are just a few basic methods that can help you calculate how much you should be spending on rent each month. Of course, the thumb rule is to separate a percentage (%) of your monthly income and stick to it. It doesn’t make how much it is, and it will all depend on your financial situation.