For most people, rent is one of their largest monthly expenses. But while it’s natural to devote a substantial amount of your money to covering your housing costs, you may be wondering exactly how much should you spend on rent, and when do your rental costs become too high?
The answer is different for everyone, but there is a basic rule-of-thumb to keep in mind. The good news is, if you’re exceeding the recommended amount on rent, there are options to save money if you’re willing to get a little creative.
How much is too much to spend on rent?
Most households should aim to spend 30% of gross income or less on their monthly housing costs. This includes the monthly rental payment you make to your landlord, as well as the amount you devote to utilities each month.
If your rent exceeds 30% of your income, your housing is classified as being both unaffordable and an excessive burden on your finances. Unfortunately, being “house-poor” or devoting too much money to housing can have a profound impact on your ability to accomplish other goals with your money.
Are you paying too much of your income to your landlord?
Once you’ve got a basic answer to the question, how much should you spend on rent, it’s easy to figure out if you’re devoting too much of your personal income to this monthly expense.
Start by calculating your gross income, which is the total pay you receive before any taxes are taken out of your check or other deductions are withdrawn. If your paychecks are $5,000 a month before taxes, 401(k) deductions and deductions for your portion of health insurance, then your gross income would be $5,000 per month — even if you only end up bringing home $3,000 due to all your deductions.
Next, add up the amount you pay for your rent and utilities, including electric, gas, and water. If you pay $1,200 per month in rent and $300 per month for your other costs, you’d have $1,500 per month in housing costs.
Finally, divide your rent by your income. In this example, $1,500 divided by $5,000 would equal 0.3. So you’d be spending exactly 30% of your income on rent. Your housing wouldn’t be classified as unaffordable, but it would be on the border of becoming too expensive if any of your costs increase.
How to save on rent
Sometimes, it’s difficult to make sure your income stays at 30% of gross income or below. This can happen if you live in an expensive city where housing costs are high. It can also occur if you don’t earn a lot of income.
There are a few solutions you can try to save money on your housing expenditures. Some of your options could include:
- Living outside of the city: Rents tend to fall as you move away from the urban center. While you do need to be mindful of how a move affects commuting costs and time, a move to a less central area can provide major savings. With a growing number of people able to work remotely, this could be a possibility for more Americans in the future.
- Look for a roommate: If you’re able to share the burden of rent with someone else, this can substantially reduce your costs. Two bedroom apartments, for example, typically do not come with rental costs that are twice as expensive as one bedroom apartments. You’ll need to find out what your landlord’s requirements are for roommate living situations, though, and will generally want to make sure all of your roommates’ names are on the lease so they share legal responsibility for paying the rent.
- Consider listing your home on AirBNB: If you live in an area that attracts a lot of tourists, this may be an option when you’re traveling or otherwise away from home. Renting out your apartment just a few nights per month could sometimes be enough to bring the cost of rent under the recommended 30% of income. Just be sure you follow your state’s regulations and the landlord’s rules.
- Explore government assistance programs: In some cases, you’ll need a little extra help covering housing costs. The federal government provides some housing help resources that you should explore if that’s your situation.
When you’re determining how to budget for rent, taking these steps to cut your costs could give you the wiggle room you need to afford your housing and other goals.
If you’re unable to reduce housing costs, though, you may need to look into reducing other areas of spending so your money stretches far enough to cover your needs. For example, ELFI can help qualified borrowers refinance their student loans. This can often result in a reduction in monthly payments that gives you the wiggle room you need in your budget.