If you didn’t see our first blog post on value, read that first. It’s not just about comparing value. You should also consider affordability.
How do I know if I can afford this?
It comes down largely to how much you’re earning each year.
Here are two “rules of thumb” that can serve as a guide.
The 30% Rule:
This rule says take 30% of your annual salary and divide by 12.
Let’s say your annual salary is $50,000 a year (pre-tax).
Multiply $50,000 by 30% ($50,000 x .30). The result is $15,000. Divide by 12 (for the 12 months in a year), and the answer is $1,250.
$1,250 is the amount of rent you can afford per month with an annual income of $50,000 under this rule.
Some experts believe you should apply this rule to after-tax income rather than pre-tax income.
The 50/20/30 Rule:
Note: This rule uses your after-tax (or take-home) salary.
This rule says:
50% of your take-home income should be allocated to fixed and essential living expenses.
- This includes 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.
- If you spend $5,000 on all the other fixed and essential expenses, you have $12,500 per year or roughly $1,041 per month to spend on rent.
20% of your take-home income should go to financial expenses and goals.
- These are things like debt payments (loans), savings, and investments.
30% of your take-home income should be used for day-to-day spending.
- These are things like travel, movies, shopping, 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.
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!