How much can I afford to pay for an apartment? If you’re looking for this answer, you’ve come to the right article. You’re looking for an apartment to rent, but don’t want to fall in love with one that is beyond your means. So, before you start searching, it’s best to crunch a few numbers to find out just how much you can afford.
There are some general well-established rules of thumb, such as allocating up to 30 percent of your income to rent. For example, if you make $50,000 a year in salary, you have 30% or $15,000 a year for rent. $15,000 divided by 12 months is $1,250 for rent. Keep in mind, some experts believe you should allocate 30% to your after-tax rather than pre-tax income.
Guidelines such as this can be helpful in determining what you are likely able to afford. Another way to approach this is to back into the answer and make sure you are comfortable with the amount left over, after all line item expenses, for rent. Understand that rent may include other costs such as utilities and non-utility extras like parking, amenity fees, and more. Make sure you understand what all these costs are and how to compare costs.
Now, let’s get started. This means detailing your income, expenses, and savings and investment goals:
- Calculate Your Expenses
Start by estimating your expenses. These include the amount of money you need for items such as phone, transportation, food, car insurance, health insurance, renter’s insurance, student loan payments, utilities, car payments, and any other debt payments, healthcare, insurance, clothes, and entertainment. If you have any other must-haves, such as globe-trotting or health club membership, include those, too.
If you’ve been using software or an app to track your expenses, this budgeting exercise should be relatively easy. If not, you might want to try one out to help in creating a picture of your costs. If you’re setting off on your own for the first time, you may need to make some estimates by getting quotes, for example, on rental insurance (usually no more than $20 to $30 per month in most areas). Consider looking at old statements from banks and credit cards to estimate expenses rather than guessing what you think the expenses will be.
Bonus Tip: Consider putting money aside for the moving process, including moving supplies, movers, furniture for the new apartment, and more which can get costly.
- Determine Your Savings Goals
You don’t want to live on the financial edge if you can avoid it. To avoid being one paycheck away from disaster, perhaps you consider creating a rainy-day fund, which you can dip into in emergency situations. For example, if you lose your job or your car needs an expensive repair, you might need some money to tide you over.
- Invest in the Future
Now let’s think long term. Because they can benefit from the compounded growth of their investments, people who start saving for retirement when they are young are more likely to amass a nest egg, including items like a 401(K) or IRA. Discuss with an expert to learn more on the financial strategies and approach that might be right for you.
- Calculate Your After-Tax Income
Find out your after-tax income.
Use the “What Can I Afford?” Equation
Having gone through the above, you now have the information you need to plug into an equation that tells you how much left over you have for your apartment:
Take-home pay – expenses – savings – investments = what you can “afford” to pay in rent.
Let’s take the same $50,000 a year salary. Let’s say after taxes you make $35,000 and let’s assume you don’t plan on having any investments this year due to cash flow.
$35,000 – $20,000 in expenses – $1,000 savings – $0 investments = $14,000
$14,000 per year is what you have left over for rent. In this case, you have about $1,166 per month left over for rent. If your rent is close to this, it may be tight. Make sure you have enough set aside for all expenses for the apartment and are comfortable with the amount.
Keep in mind this number is an estimate and is only as good as the data you put in the formula (i.e. if you underestimate expenses, then the formula may not be accurate). But when you understand how the money flows and put the amounts on paper, you can get a better handle on rent affordability and perhaps feel more comfortable before you go to sign a lease.
Everyone’s situation, lifestyle, and goals are different. Hopefully you feel a little more prepared to begin the journey.