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Money Talk
How Much of My Income Should Go Toward Rent?
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Becoming an adult is hard. In fact, some days it probably seems nearly impossible. Not only are you trying to figure out what you should do with your life (AKA wondering, every other day, “should I get an MBA?,” or “should I go to law school?” ...can I afford that?)...but you’re also probably becoming increasingly financially independent and paying taxes on your own (plus paying off student loan debt) — which can require a whole bunch of learning, effort and determination, even if you’re lucky enough to have pursued one of the top paying majors as an undergrad.

Whether you’re a recent grad applying for your first credit card or you’re a decade (or two) out of college and you feel like a pro navigating the housing market in your city, managing your money, income, taxes, and expenses is never easy. Even if you do find it simple, and you believe you’ve found the best budget worksheets, keeping track of your pay in relation to your costs — which include housing, food, utilities, social activities, student loan debt payments, etc. — requires constant maintenance….not to mention being aware of the sneaky ways we spend more than we mean to.

How Much of My Income Should Go to Rent?

One of the questions you might ask yourself most frequently as you transition into adulthood is: “How much of my income should go to rent?” If you find yourself constantly trying to figure out how much you make per month and what percent of that you can afford to spend on monthly rent or your overall housing expenses, you’re not alone.

Yet it’s tough to come up with a general rule on how much of your income should go to rent, because your answer will depend on so many different factors: what your pay is (and it’s important to consider your annual income in terms of both your pre-tax income and your after-tax income or take-home pay); what the real estate market is like where you live; and how much money you aim to put toward savings or to set aside for leisure activities and travel).

How Much of My Income Should Go to Rent and Utilities?

Of course, when we talk about budgeting for rent, we also need to account for utilities. The amount of money you spend on electricity, gas, cable, and other necessities that you use on a daily basis can add up. When considering how much of your income should go to rent, you should also include an estimation of the cost of utilities for the space you are renting. In general, you can't control the cost of utilities, except by performing small measures like keeping an eye on air conditioner usage. Estimate your average household utilities cost and factor that into your total cost of living expenses.

Gross Income vs. Net Income

Before you begin trying to figure out what percentage of income should go to rent, you need to understand gross versus net income. Not sure what gross income means — or what net income is? It’s important to know the difference between net and gross income, and for these purposes, more specifically, your monthly gross income and monthly net income. The definition of gross income and the definition of net income can vary depending on the context, but for your purposes — as a wage owner — gross income means the amount of salary or wages you receive from an employer excluding any deductions like taxes. 

To calculate gross income, you merely need to understand how much you are being paid by any person or entity for whom you work. 

The net income definition may seem slightly more complicated, but all you need to remember is that net income equals the amount of money you have after all deductions have been taken from your gross income (your net income after taxes is what you’re earning after taxes and have been taken out of your paycheck). 

Monthly Income

What is your total monthly income? When you’re calculating how much of your income should go to rent and how much should be used for other expenses, you’ll want to have a clear understanding of not just your gross v. net income in general, but your gross monthly income and net monthly income (AKA your monthly income after tax / other deductions have been taken out). This will give you an idea of how much money you have to work with each month so (you may want to use a monthly income expense worksheet to plot out your various sources of income and all of your monthly expenses, including rent).

So...what percentage of income should go to rent?

While there’s certainly not one rule of thumb for figuring out what percentage of income should go to rent, there are some general guidelines that might help you figure out what kind of apartment you can afford based on your monthly income and other expenses. For example, The New York Times’ Ronda Kaysen writes that “the size of your rent check could mean the difference between a tight budget and an unsustainable one. A household that pays more than 30 percent of its gross income on rent and utilities is considered rent-burdened, according to federal guidelines. If you pay more than half of your income on rent, you are considered extremely rent burdened.”

Kaysen explains her theory would look like if you’re living on an annual salary of $60,000 in New York City. “If your annual salary is $60,000,” she says, “you should pay no more than $1,500 a month in rent.” She adds that in New York City, landlords are actually required to make sure applicants for housing earn 40 times the monthly rent. “As an alternative, your landlord may allow someone (usually a well-off relative) to co-sign the lease as a guarantor,” Kaysen says.

Anyone who lives in New York City knows that it would be pretty tough to live alone on this budget; you’d likely have a hard time finding a one-bedroom apartment or even a studio for less than $1,500 per month. Real estate in the New York City area can quickly drain your wallet, not to mention that finding an apartment to rent or buy is super competitive, and you’ll often face additional costs like a broker fee (what’s a broker fee, you ask? Just another payment you’ll often have to make as a prospective tenant if you work with a real estate broker who helps you find an apartment).

Renting Across the United States

Kaysen says that SmartAsset, a fintech company, has calculated what your annual income would need to be if you wanted to afford a two-bedroom apartment in various cities in the U.S. (in 2016). To comfortably afford a two-bedroom rental apartment in San Francisco, you’d need to make $216,129 per year, and in New York City you’d need $158,229. Ouch.

But if you can find another tenant (or two or three..or, hey, seven!) to go in on a lease with you for a two-bedroom apartment or an even bigger space with more rooms, that tends to decrease the rental costs per person (if you’re set on saving up for a one-bedroom apartment, good luck).

Debating the 30 Percent Rule

But before you give up on your savings and go into severe debt, take solace in the fact that some experts — even economists and financial advisers who know a thing or two about managing money — assert that the 30 percent rule of thumb that Kaysen refers to doesn’t make much sense. Bloomberg’s Karen Weise writes that “if the 30 percent rule ever made sense—which economists contest—it’s almost meaningless now when almost 41 million U.S. households spend more. Income growth has been tepid, yet home prices are rising and rents have soared, threatening to make cities from Austin to New York unaffordable for average earners.”

Where did this rent payment rule come from in the first place? It’s actually been around for quite some time. According to Weise, the ratio originated in 1969 when Edward Brooke (R-Mass.) got a law passed to help poor people afford shelter. The law, known as the Brooke Amendment, “capped rent in public housing at 25 percent of residents’ income,” Weise says. Years later in 1981, there was a budget crunch, so Congress raised that rent ceiling to 30 percent, where it’s stayed ever since.

Why has the 30 percent rule stuck around even when so many debate its validity? Perhaps because it’s simple to remember and to follow, and it gives anyone wondering what percentage of income should go to rent a precise amount to strive for.

What About Other Expenses?

Whether or not you think the 30 percent rule is outdated, that leaves you with 70 percent of your budget to use in other areas of your life. This includes food, transportation, living expenses, savings and leisure activities.

A good budget rule is the 50/20/30 rule of budgeting. In this budget, your income is broken down into three categories so you can come up with an idea as to where your money should be going throughout the month.

Essentials

50 percent of your income should be going towards essentials. This includes rent and utilities. It also includes necessary transportation and food costs (that you generally couldn’t live without otherwise). It also includes bills and loans that need to be paid for each and every month.

Savings

20 percent of your income should be going towards savings. This means that 20 percent of each paycheck, or 20 percent earned each month, should be going towards some kind of savings account or plan. This includes retirement plans, your 401K, or a general saving account to keep you afloat if anything were to happen.

Recreation

Thirty percent of your income should go towards yourself. This is where you can splurge a little bit. This category includes your nights out with friends, that movie you want to see, your Netflix subscription and so on. They are the things you don’t need to spend money on — though in our modern society, it’s important you allow yourself the room to spend.

Budgeting for Rent: The Bottom Line

Whether you ultimately try to stick to this rule or you cut yourself some more slack, rest assured that while you’re not necessarily in total control of your salary or whether you’re getting paid fairly, you are in the driver’s seat when it comes to deciding what to spend on — and when.

So in order to afford the apartment you want, you may have to make some compromises (try to cook more and spend less at restaurants, or maybe skip purchasing that pair of shoes you’ve been eyeing).

If personal budgeting has never been your thing, we get it — but it’s really not so bad once you get started.

With a budget worksheet to inform your planning, you’ll have a good sense of how much of your income you should be (and/or are willing to) spend on rent.

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