How Much Rent Can I Afford?
Finding affordable rent can be hard. Here's how to budget for a great place to call home.
Finding a place to call home can be tough, especially when your budget limits your options. Even so, making sure you can comfortably pay the rent is essential: Spending too much to keep a roof over your head can cause financial and emotional stress. How do you find the ideal situation? Use the following tips to balance your rent with other monthly costs, figure out your percentage of income for rent, and more.
So, how much rent can I afford?
The general rule of thumb is to spend no more than 30 percent of your gross monthly income on rent. For example, say you make $50,000 a year. Your gross monthly income—the money you earn before taxes—would be about $4,167. When you multiply that amount by 0.3 to get your recommended rent budget, you end up with $1,250 per month.
While home hunting, you may find that many landlords require a renter’s gross annual income to be at least 40 times the monthly rent. If that sounds like a lot, don’t panic. It’s the same number as the 30 percent, calculated differently. Using the same example as before, a gross annual income of $50,000 divided by 40 is $1,250 per month.
If you rent a place that costs less than 30 percent of your monthly income, you’ll have a buffer if your rent increases and your salary doesn’t, and more money to spend on other expenses.
What about my other monthly expenses?
While 30 percent is the ideal percentage of income for rent, it doesn’t account for other debts or bills you might have, including student loans and car payments. The higher the burden of your other financial responsibilities, the less you’ll want to spend on rent.
If you carry debt, aim to spend no more than 43 percent of your gross monthly income on your rent and debt payments. Depending on the rental you choose, you may have to factor in other costs such as utilities (water, gas, electricity, internet) and parking or public transit.
You’ll also want renters insurance, which many landlords require you to have. The average renters insurance policy costs only about $17 per month—and it’s totally worth it. Depending on your policy, renters insurance covers your personal property (such as a laptop, a bicycle, musical instruments, or jewelry) if it gets stolen, damaged, or destroyed on the property. Your landlord’s insurance does not cover your possessions.
Using the example above, if you earn $50,000 a year and spend $1,250 per month (30 percent) on rent, you have $162.50 (13 percent) to cover your other recurring bills.
What if I live in an expensive city or state?
Abiding by the 30 percent rule is more difficult in some places than others. For example, in San Francisco, the average cost of a one-bedroom apartment is more than $3,600 per month. That means you’d have to earn about $145,000 a year to comfortably afford the rent.
The good news: Even in expensive cities, there are ways you can reduce your cost of living to meet the ideal percentage of income for rent. Look for housing that includes utilities in the rent or packages them together for a fixed price per month. Consider sharing a space with a roommate (or two) instead of living alone. Try negotiating lower rent in exchange for tending to common areas in the building, or bartering services.
Just remember, if the rent is going to strain your monthly finances, it’s probably better to keep looking than sign a lease.
Once you find the perfect rental for you, be sure to protect your new home with AAA Renters Insurance.
*Average savings as calculated by the J.D. Power “2017-2019 Insurance Shopping Study”. See https://blog.jdpa.com/insurance/states-with-the-most-and-least-affordable-auto-insurance. See also, https://www.jdpower.com/business/press-releases/2019-us-insurance-shopping-study. The study is based on responses from more than 14,400 insurance customers who requested an auto insurance price quote from at least one competitive insurer in the past nine months and includes more than 38,800 unique customer evaluations of insurers. The study was fielded in April, July and October 2018 and January 2019. Products and their features may not be available in all states. All policies are subject to policy terms, underwriting, guidelines and applicable laws. The availability, qualifications, and amounts of coverages, costs and discounts may vary from state to state and there may be coverages and discounts not listed here. In addition, other terms, conditions, and exclusions not described above may apply, and total savings may vary depending on the coverages purchased. For more information regarding your eligibility for certain coverages and savings opportunities, please contact your AAA agent. Insurance products in California offered by AAA Northern California Insurance Agency. License #0175868, in Nevada by AAA Nevada and in Utah by AAA Utah. The provider of AAA Home Insurance is CSAA Insurance Group, a AAA insurer.