Paying rent never feels good. But if you’re consistently upset about the amount left in your bank account afterward, you may be wondering: Is this normal? How much should I spend on rent?
Most people probably experience a similar feeling. Studies show that, on average, the three largest expenses are housing, food, and transportation costs. Of the three, housing is often way out in front.
But it’s a thin line to walk. Few expenses can break a budget faster than an inflated monthly rent payment. It’s crucial to your financial trajectory that you get the size of your rent payment right. Here’s what you need to know.
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Should you use the 30% rule?
Common wisdom suggests that people should expect to spend 30% of their monthly income on rent. That might sound reasonable at first glance, but it doesn’t actually make sense for many people.
Here are some examples (after taxes) of how that math works out at various income levels:
- $40,000 a year of income translates to $1,000 a month in rent
- $75,000 a year of income translates to $1,875 a month in rent
- $120,00 a year of income translates to $3,000 a month in rent
People taking home $40,000 a year are earning $3,333 per month. If $1,000 goes to rent, it’s going to be difficult to have enough room for things like food, utilities, entertainment, savings, or transportation.
At the upper end of the spectrum, spending 30% on rent might not be as much of a financial strain, but it tends to border on wasteful. A $3,000 monthly rental payment in Colorado can get someone a five-bedroom, four-bathroom house. That’s usually pretty excessive, even for someone comfortably making six figures.
In somewhere like New York City, where making six figures is more common, a $3,000 monthly rent payment will only get someone a one-bedroom, one-bath apartment. If they have children or plan to have them down the road, the 30% rule wouldn’t work for them either! They’d have to pay a lot more than 30% of their income to have enough space for anyone else.
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Try the 50/30/20 rule instead
The 30% rule might work for some people, but it’s not a useful guideline for the majority of the population. It rarely works for those who are on the upper or lower ends of the income spectrum.
A more modern piece of budgeting wisdom is to use the 50/30/20 rule. Instead of building a budget by line item, it approaches the issue by sorting everything into three buckets:
- Needs: Required expenses like housing and food
- Wants: Desirable expenses like entertainment and travel
- Savings: Paying down debt, building an emergency fund, and contributing to retirement accounts
This approach is more flexible. It also prioritizes the true purpose of a budget: having money left over to put toward saving.
The 50/30/20 budget lets people pay as much as they need toward rent, as long as all needs are under 50%. The only problem is that it quickly becomes difficult to sort expenses into each bucket.
After all, what expenses does a person need? Is rent a requirement? People could always live in a smaller, cheaper place. What about food? People could get away with eating McDonald’s every day. Super Size Me proved it.
It’s probably better to use only two buckets: spend or save. As long as the save bucket is where it should be, everything else is irrelevant.
READ MORE: How to eliminate expenses and boost savings
There are no perfect rules
Keep in mind that there are exceptions to every rule. Neither the 30% rule nor the 50/30/20 budget applies to everyone. It’s okay to use them as guidelines, but they’re not set in stone.
Even the best pieces of generic financial advice fail to cover every situation, and they can be harmful to people who try and force themselves to fit the mold.
For example, imagine someone who has a comfortable income and pays only 15% of it toward rent. One day, their friend tells them that they should be living in a nice place. People can afford to spend 30% on rent, after all.
The more often the person hears that the more likely they are to grow unhappy with their lifestyle. Eventually, they’d probably double their rent expense and lose 15% of their income for nothing.
The truth is, there are no perfect rules or equations. Everyone needs to figure out how much they should spend on rent for themselves.
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Rent is just one piece of the puzzle
Rent expenses are just one part of a much larger picture. It’s a significant part, but people should always consider it in light of their surrounding financial circumstances.
For example, what makes sense for someone in a high cost of living city like San Francisco won’t make sense for someone living in a small town in Minnesota. People should just make sure that their rent payment makes sense in light of their:
- Income levels: People should spend on rent whatever feels comfortable at the amount of income they bring in. It doesn’t have to be 30%, but 60% probably doesn’t make sense either.
- Other expenses: Rent is never the only expense on a person’s budget. If it has to be larger than average, look for ways to save in other places so that the entire expense amount works.
- Savings goals: Most people who ask how much they should spend on rent are looking to save for something. Keep that goal in mind while figuring out the right balance.
Personal finance is about getting on the right financial trajectory. After all, people ask how much they should spend on rent because they want to improve their financial position. The expense doesn’t mean anything on its own.
The best way to determine someone’s trajectory is to look at their savings rate. That determines the length of time it takes them to grow their emergency fund, net worth, and retirement accounts.
When deciding how much to spend on rent, keep in mind that it only matters because it plays a large role in determining a person’s savings rate and financial trajectory. As long people like their trajectory, their rent expense isn’t a problem.
READ MORE: Good debt vs. bad debt
Financial guru Dave Ramsey has some pretty strong thoughts on how much you should be spending on rent. To hear them, check out this video:
What COVID-19 means for rent costs
The COVID-19 pandemic has caused a lot of problems for a lot of people. But it also caused at least one good thing: Employers that would have never let their employees work from home had to do so for health reasons.
There’s a mini-revolution going on now that’s transforming the modern workplace. People have left their offices in droves to work from their couches and home offices. That means there’s no longer a reason for people to live near their offices.
This is leading to unprecedented geographical flexibility. People can earn a high-cost-of-living wage from an employer in Manhattan while paying to live in a small town in New England or the Midwest.
Living with a roommate has always been the best way to keep rent expenses under control, but that’s not always necessary anymore. People can untether themselves from expensive areas and live where they please, earning money from their home office or computer. Not only can this save on housing costs, but it can also decrease automobile costs, gas costs, costs for workplace lunches and car insurance prices if you’re driving significantly less. Some states are even offering to pay people to move there.
There are countless personal finance blogs offering tips about savings opportunities created by remote work, and other current trends.
READ MORE: Best personal finance blogs
The bottom line
Budgets are the best tool for getting expenses under control. The sooner you create one that makes sense for you, the sooner you’ll start to see results.
The problem with most budgets is that they’re simply too inflexible. Every person’s financial needs and preferences are unique, so their spending will be too. There is no one size fits all budget.
With that in mind, there are budget templates that are perfect for customizing. You can find them on this spreadsheet. Make a copy and start organizing your expenses today!
FAQs
That depends on your finances and life goals. If you have enough money socked away for a home down payment (which can range anywhere from 3% to 20% of the home’s purchase price) buying a home will help you build equity, which will help you down the road if you fall on hard times and need a home equity loan. However, homebuying may not be particularly practical if you need to be able to move frequently or if you aren’t sure where you want to settle. Also, homeownership will have additional costs, including home maintenance, insurance and property taxes, all of which will need to be factored into your monthly budget.
Yes. If you spend 50% of your monthly income on rent, it will be virtually impossible for you to have enough money to cover your other expenses, like groceries and utilities. You should try not to spend more than 30% of your monthly income. If that’s not possible, consider a roommate (or two.) Otherwise you’ll risk ending up in a position where you need a second job just to pay your basic expenses.
If you aren’t sure how far your budget will stretch, sit down and figure out your monthly expenses. Then enter the numbers into a calculator to get a concrete estimate of how much you can realistically afford. Be sure to leave some money set aside for unexpected expenses, because you’re certain to encounter some.
