How much rent can you afford?

Whether it’s your first job in a new city or you’re moving to a different one for a new role, one of the biggest questions on your mind is what kind of place to look for to stay, or more precisely, how much to spend on rent? This is especially important given the large size of this monthly outgo. So, before you begin your hunt for the next house, it may be useful to have a broad financial guideline about it.

Thumb Rules

Typically, it is said that your rent outgo must not be over 30% of your monthly gross salary. This includes utility costs as well. The figure has been used by the US Federal Housing Administration since 1981. According to the agency, people can spend 29% to 41% of their gross income on housing depending on their debt situation.

Assess your total debt

Your indebtedness will play a big factor in determining the percentage that you can set out for renting. On an overall basis, debt should form about 40% of your monthly gross salary. This includes any personal or auto loans. In case of student debt, you can stretch the percentage to about 45-50% but no more. So, assessing your current debt (without rent) from your monthly salary and subtracting it from 40% of your salary will give you the figure which you can spend on rent.

How to Assess Your Right Rent Amount

But in order to further refine the amount, you can ask yourself the following questions:

  • Are utility costs (electricity, water) included in the rent?
  • How distant is your workplace from the rental property?
  • Are there discretionary costs that you can cut down on (like paying for TV entertainment services or reducing money spent on eating out)?

If utility costs are included and/or your workplace is nearby and/or you can contain your discretionary spending, you can spend more on rent if you’re looking for a property in an upscale neighborhood.

Other Considerations

  • Some other factors to consider are the safety of the neighborhood on which you can’t put a price.
  • You may have to shell out more if you have a family with children and need to seek a safe locality with good schools.
  • Also, if the property that you’re considering fulfils needs like a gymnasium or swimming pool, you can breach the aforementioned rental outgo limits as it saves you cost elsewhere.
  • In mega cities, people tend to go much above the 30% limit for rent as they have no other option even if they live in suburban areas. In such a case, if you’re single, you can decide to share the property with another thereby reducing your rental cost in half.
  • Such an arrangement for a 2-bedroom place may work out to be cheaper than staying alone in a single bedroom apartment. In some places, larger dwellings can make even more sense cost wise.

Another rule of thumb

  • Apart from the 40-45% guideline above, you can consider another popular method to draw out a budget and assess where you stand on rent.
  • The 50/30/20 rule says that your monthly outgo on necessities including rent should be 50% of your income while 30% can be spent on discretionary spending like entertainment and eating out. The remaining 20% should be either saved or used to pay down debt.
  • Ideally, the 50% should include food, utilities, and transportation, apart from rent. But in case this is not possible because of requirement for safety or due to unavailability of such housing at all, then you’d need to cut down on discretionary spending to ensure that some balance is maintained in expenditure while you continue to use a fifth of your income to build savings or reduce debt.

Thus, if you look at the situation analytically, you can obtain tools which can help you arrive at a sensible and sustainable rental outgo while maintaining an acceptable lifestyle.

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