This is the second post in a three-part series that talks about how to compare apartments and choose the one that is best for you. If you didn’t see our first blog post, it compares the true cost (rental value) of apartments. This post helps you determine what you can afford to pay each month for housing.
When comparing apartments, it’s not just about comparing rental costs. You also need to consider affordability. You might, for example, be asking “How do I know if I can afford this?” or “How much can I afford based on my hourly pay rate?” This post will help you decide. The math for figuring out what you can afford is not as overwhelming or complex as it might sound. It mostly comes down to how much you’re earning each year, regardless of whether it’s an hourly or annual income.
Here are two “rules of thumb” you can use to figure out how much you can afford.
The 30% Rule
The 30% rule says if you take 30% of your annual salary and divide by 12 months, that’s what you can afford on a monthly basis.
Example 1: Annual Salary
If your salary is $50,000 a year.
Multiply $50,000 by 30%. The result is $15,000.
Divide by 12, and the answer is $1,250 per month.
$1,250 is the amount of rent you can afford per month with an annual income of $50,000 under this rule. *
Example 2: Hourly Pay
If you are on hourly pay, you want to annualize your salary.
Let’s say you are making $20 per hour and working a full week of 40 hours a week.
$20 * 40 hours per week = $800 a week.
Multiply that number by the number of weeks in a year (52). $800 * 52 = $41,600 (maximum).
Subtract out for holidays and other days you are not working to get a reasonable amount.Â Look at what you made last year on annual basis.
Take 30% of this ($41,600 * .30) and divide by 12 months. You’ll get $1,040. This is the maximum you should spend on rent under this rule.
The 50/20/30 Rule
Note: This rule uses your after-tax (or take-home) salary.
The rule says: 50% of your take-home income should be allocated to fixed and essential living expenses.
Essential living expenses include items such as rent, utilities, phone bill, insurance (health and auto), food, groceries, and transportation.
- Under this approach, if your after-tax income is $35,000 a year, 50% or $17,500 should be budgeted for these expenses.
- Write down how much you spend on all the essential living expenses (see list above). Whatever is left over, is what is available for rent.
- So, for example, if you spend $5,000 on all fixed and essential expenses with the exception of rent, you have $12,500 per year or roughly $1,041 per month left over to spend on rent.
The rule says that 20% of your take-home income should go to financial expenses and goals. These are things like debt payments (loans), savings, and investments. The remaining 30% of your take-home income should be used for day-to-day spending, things like travel, movies, shopping, and eating out at restaurants.
The 50% for “fixed and essentials”, and 30% for day to day spending are generally considered maximum amounts. In other words, you can spend less and have more to contribute toward financial expenses and goals (i.e. savings).
Keep in mind these are broad rules of thumb meant as guide posts only. Everyone’s situation, financial goals, and lifestyle are different.
Hopefully, you feel armed and ready to knock out the rest of the apartment comparison and begin renting!
Don’t miss out on part III of our blog series, How to Compare Apartments Part III – Location, Lifestyle, and Reputation.
*Some experts believe you should apply this rule to after-tax income rather than pre-tax income.