Budgeting for your first apartment may not be the most exciting part about finally getting a place (bye, mom and dad!), but it’s a crucial step if you want to keep your finances in good shape. Still, the question remains: How much should you spend on rent?
Well, that answer depends on a few factors, not the least of which is making sure you don’t spend so much that you have to eat cup ramen every day, or you can never afford to go to the movies or a happy hour again.
If you’re not sure what your sweet spot should be, here are a few things to keep in mind when trying to determine how much you should spend on that new pad.
TRY TO LIMIT YOUR RENT TO 30 PERCENT OF YOUR INCOME
You may have heard the general rule of thumb that you should keep your housing costs to 30 percent of your paycheck. With a rental, there is logic to that, and here’s why: That’s the rent-to-income ratio landlords typically look for when they review your rental application (you may have heard it phrased as wanting a tenant who makes at least 40 times the monthly rent). So if you earn $5,000 per month, that means you should pay no more than $1,500 a month in rent.
Granted, finding a place with rent that’s less than a third of your income may not be feasible if you live in a pricey city like San Francisco or New York. If you can’t meet that rent-to-income ratio, you’ll likely need to get a co-signer or find a roommate.
In America’s biggest rental markets, a renter can save, on average, 13 percent of his or her income by getting a roommate, a recent Trulia study found. The caveat is that you might run into issues with your housemate over, say, how much each person should pay for rent (if the rooms are different sizes), or something as trivial as who ate the rest of the peanut butter.
KEEP YOUR OTHER LIVING EXPENSES IN MIND
Remember that rent isn’t the only housing-related cost you’ll have. You’ll want to account for other expenses like electricity, gas, water, cable and internet, if they aren’t included — and the bigger the place, the bigger your utility bills are likely to be. (Note: You may be able to negotiate with your landlord to include some of these costs in your rent.) Plus, you’ll want to look into renter’s insurance to protect your valuables. The average cost of renter’s insurance is $187 per year in the U.S., according to ValuePenguin, but rates vary depending on where you live.
Also, keep in mind that the neighborhood you live in could impact how much you spend on everything from groceries to going out to commuting. Live in an area with tons of restaurants and organic food markets on every corner? Then you may be tempted to spend more on food each month. Got an expensive gym across the street? You’ll likely opt for that over the cheaper one that’s across town. Would you have to drive instead of take public transit? You’ll shell out more for gas and parking. Incorporating these kinds of costs into your monthly spending can help you decide if your new neighborhood would bust your budget on a regular basis.
The other big cost you’ll have to account for: new furniture. If you don’t intend on bringing over mom and dad’s floral couch (not that there’s anything wrong with it!), you’ll have to figure out how much you can realistically spend to furnish your new pad. A new mattress, sofa and kitchen table may be one-time expenses, but the costs can add up.
CONSIDER YOUR FINANCIAL GOALS
Naturally, you don’t want to blow too much of your hard-earned money on rent if you’ve got other big goals to meet, like building an emergency fund, paying off a giant student loan, saving for retirement — or socking away cash for your forever home.
Bear in mind it could take a while for you to save enough money for a down payment on a house. With the national median home price hovering around $309,000 in April, a 20 percent down payment could cost you a whopping $61,800. Even if you don’t plan on buying a new home any time soon, you may have other things you want to save for that can be met faster if you’re not devoting half your paycheck to rent. So your best approach? Don’t overspend on rent now so you can meet your bigger goals later.
In America’s biggest rental markets, a renter can save, on average, 13 percent of his or her income by getting a roommate.