How Much Should You Spend on Rent?
For decades, the general rule has been that you should not spend more than 30 percent of your income on housing. Yet, with increasing expenses and slow growth in wages, this number has become less realistic for a growing number of Americans. Whether you can keep your rent below the 30 percent threshold or not, here are some important numbers to keep in mind when working on your monthly budget.
Rent and Lower Income
Generally speaking, the less money you earn, the bigger the bite that rent will take out of your monthly budget. This has been a growing trend for the past 20 years. On average, high-income earners spend only 17 percent of their pre-tax income on housing, middle-income earners average 25 percent and for low-income earners, housing accounts for about 40 percent of pre-tax income.
Rent and Location
If you live in a city, expect the cost of rent to be higher than if you lived in a rural area. In fact, the cost of housing accounts for 27 percent of the average monthly spending in rural areas, but 33 percent in urban areas.
The rent-to-income ratio also varies from region to region. In Irvine, California, for example, the ratio is only 29 percent, but in Des Moines, Iowa, and Atlanta, Georgia, it is 32 percent. In San Bernardino, California, it is 39 percent and in Detroit, Michigan, 45 percent.
Working With a High Rent Ratio
If you're just starting out in an entry-level job and looking for your first apartment, you may want to budget a higher percentage for rent. As your income grows, the rent-to-income ratio will begin to shrink. Once you are promoted or get a raise, try to resist moving to a more expensive place unless you can have a rent-to-income ratio below 30 percent.
Many young adults choose to share a large apartment or a rented house with others in order to keep down the cost of rent. For example, if the rent on a single-bedroom apartment in your area is $800, and a two-bedroom apartment is $1,200, you would save $200 a month by sharing the second apartment with a roommate.
Working on Your Budget
If your rent is more than the often-recommended 30 percent, you will have less wiggle room in your monthly budget and may need to cut back in other areas. Having a planned budget is essential. That's why financial experts like Kelley Long, Chicago-based CPA/PFS, recommend looking at your actual spending habits when drafting a budget. "Be realistic about discretionary expenses like food and entertainment," Long advises. "Many people underestimate, so look at what you actually spent last month for guidance." When you create a budget using Quicken Starter Edition, it automatically calculates your budget based on your past expenditures.
Long also recommends using an amply funded miscellaneous category to cover irregular expenses, like personal care, pet expenses, gifts and events. "Finally, don't forget to budget for savings, even just $25 per month to start a cash cushion that will help avoid debt down the road," she says.