If you were to do an online search for “how much should I spend on rent, you’ve probably come across a few basic suggestions for balancing your budget.
However, plenty of factors can affect your “ideal” rent amount, so it’s not exactly a black-and-white topic. Truthfully, there is a vast gray area. In this helpful resource, we’re diving into that gray area and discussing different ways to figure out how much you should spend on rent and make sure you’re a budget-savvy tenant.
How Much Should You Spend on Rent? Try the 30% Rule.
Under the 30 percent rule, rent should account for no more than 30 percent of your gross (pre-tax) income. And though that can be a helpful guideline, it might not be the one-size-fits-all advice you think it is – here’s why.
Setting aside 30 percent to spend on rent is a concept that comes from a 1969 U.S. Housing and Development Act, known as the Brooke Amendment. Essentially, the amendment legally capped rent in public housing projects at 25 percent of a tenant’s gross income. In 1981, that cap was increased to 30 percent.
While this can be a helpful guideline for what percent of income should go to rent, many people find their situation is far more complex. For example, let’s say you were planning a move to San Francisco. If you made $50,000 per year, then the 30 percent rule would mean that you should spend no more than $1,250 on monthly rent – but in the Bay Area, that wouldn’t even get you a studio apartment.
All that to say, the 30 percent rule is worth considering when you’re setting up your budget. However, don’t forget to think about other factors that might also come into play. You may find that spending more than 30 percent makes sense, or it might end up that aiming for 20 to 25 percent is ideal.
Is the 30% Rule Always Right?
If you run a cursory search for “how much should I spend on rent,” you will inevitably see dozens of pages suggesting the 30% rule. And for many people, that long-standing guideline works – but is it right for everyone?
To put it plainly, no. There are a number of experts that argue that the 30% rule isn’t actually applicable to most people.
Here are a few criticisms of the 30% rule to help you decide if you might be better off taking a different route:
The 30% Rule is now obsolete.
Originating from 1969 housing policies that initially limited public housing rents to 25% of a renter’s yearly income (raised to 30% in the early ’80s), the 30% rule may no longer be applicable in our modern world.
This threshold was established based on the average household expenditure at the time rather than what they should ideally spend. The major drawback of applying the 30% rule universally is that it needs to pay attention to the vast differences in individual circumstances.
Furthermore, the financial responsibilities of today’s consumers bear little resemblance to those of the 1960s. Back then, financial burdens such as contributions to 401(k) plans or large student loans didn’t exist.
It ignores the big picture of your finances.
Consider a simple scenario: You’re earning $30,000 per year with zero debt. The 30% rule would allow you to spend $750 per month on rent, leaving approximately $1,300 a month for savings and other expenses.
However, once you factor in student loan repayments (often capped at around 8-10% of income) and retirement savings (ideally 10-15%), the disposable income decreases significantly. This does not even take into account the money spent on necessities like food, transportation, entertainment, childcare, other debts, or any additional savings.
The rule doesn’t necessarily work for high earners.
For those on a higher income, say $300,000 per year, the 30% rule might still need to be revised. This would mean spending an extravagant $7,500 a month on rent.
Even high earners may have various financial obligations such as debt payments, supporting children or parents, or other substantial expenses. It’s entirely possible that high-earning individuals would rather spend their money on things like travel, luxury clothing, or investments rather than make massive monthly rent payments.
It doesn’t consider personal preferences and needs.
Finally, the 30% rule needs to consider individual circumstances and requirements. For instance, young professionals living in urban areas with bustling social lives may be content sharing a smaller townhouse in a convenient location. Their budget might be the same as a young family’s, who might prefer a single-family property with more space and proximity to good schools.
The needs and wants of renters vary greatly, and the 30% rule simply doesn’t cater to such diversity.
How to Know How Much to Spend on Rent
No matter what budgeting “rule” you choose, nothing should be a replacement for planning for your specific situation. In other words, the best Rule is to rely on your own needs, lifestyle, and budget to figure out the rent amount that will work for you.
Figure out what you can afford to spend on rent.
You want to use the 50/30/20 rule as a starting point, and we’re sticking with the example of $2,800 in take-home pay. Depending on how much your “needs” cost, you might have more or less to spend on rent.
For example, your rent budget might be pretty tight if your “needs” expenses include:
- A $350 monthly car payment
- A $250 required minimum monthly payment on student loans
- A $150 monthly grocery bill
- $100 a month for internet
- $100 a month for your cell phone service
You’ll be working with just $450 per month for rent – which won’t get you very far in most cities. So you might need to look at homes for rent in smaller, more affordable towns; or find ways to reduce your other expenses.
Factor in other costs
Before you lock in your monthly rent budget, remember that many things affect how much you spend on the basics every month. For example, you might spend less on rent if you live outside the downtown area; however, paying for a car, gas, and car insurance might make that an unwise investment, depending on your lifestyle.
Also, don’t forget that you may save money by choosing a residence with slightly more expensive rent. How would that work? Suppose your community includes a private gym for residents, management-provided landscaping, and similar amenities. In that case, those are costs you can eliminate from your budget – and more money available to spend on wants and needs.
Look for savings.
If you’re committed to living in a specific area but can’t reasonably afford the rent, start searching for ways to cut costs elsewhere. Most people immediately look at their list of “wants” when trying to tighten up their budget, but there are probably “needs” you can trim too.
For example, premium cable and several streaming services fall into the “want” category. And if you want to live in a specific part of town more than you want to watch the latest streaming series, you can prioritize your budget accordingly. Other options are to shop around for car insurance, use budgets and meal planning to minimize your grocery budget, and consider living with a roommate to split rent costs.
Another big savings through Wan Bridge is that our 5-star service covers close to all maintenance costs.
Work rent into your budget with the 50/30/20 Rule.
Another option is to use the 50/30/20 rule to calculate how much to spend on rent. With this method, you split your take-home (after taxes) pay into three categories:
- 50% for “needs”
- 30% for “wants”
- 20% for savings and additional payments on debts (beyond the required minimum)
In practice, here’s what the 50/30/20 rule would look like if you made $2,800 per month after taxes:
- $1,400 could be used for “needs,” including rent, groceries, utilities, insurance, and minimum required debt payments
- $840 would be available for “wants,” such as entertainment, dining out, and shopping
- $560 would go towards your savings and any additional debt payments
Remember to consider your emergency fund.
Determining your rental budget should go beyond simple income percentages to also factor in your emergency fund. This is a vital part of what you can realistically afford.
Your emergency fund should be large enough to cover three to six months of rent and debt payments should your income suddenly end. The size of this fund is adjustable according to your individual circumstances.
If you’re single with low debt and few monthly expenses, three months of savings might be enough. However, a six-month safety net may be more suitable if you carry significant debt or have dependents.
Your emergency fund size directly influences your rent budget. Suppose you have $12,000 in savings and your necessary monthly expenses total $3,000; your savings can cover four months of costs. Consider adjusting your rent if four months feels inadequate to regain financial stability. By reducing your housing costs, your monthly expenses decrease, letting your emergency fund stretch further.
For instance, if you feel more secure with a five-month cushion, then with your monthly expenses reduced to $2,400, your maximum affordable rent should be $500, including utilities.
At Wan Bridge, our comprehensive service covers nearly all maintenance costs, allowing you to extend your emergency fund and budget accordingly. Remember, renting budgeting is not one-size-fits-all; it’s a unique equation that varies based on personal circumstances.
Prioritize Value Without Sacrificing Your Lifestyle: Rent a Wan Bridge Home
Being budget-savvy doesn’t mean you have to live somewhere you don’t love, especially when coming home to a Wan Bridge community. Our homes for rent in Austin, Dallas, and Houston offer an incredible lifestyle in luxurious homes and fabulous, master-planned communities to make the most of your monthly rent.
Check out our build-to-rent home communities and connect with our team for more information today!
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