How much should I spend on rent?

If you aren’t ready to buy a house, renting can be a good alternative housing option. When mapping out your budget, it’s important to understand how much you can spend on rent payments every month in addition to other living and housing expenses, like car payments, utility bills and groceries.

Before you start creating your rental budget and searching for an apartment, let’s go over a few methods that can help you figure out how much you should pay for rent. We’ll also look at a ballpark estimate for additional rental costs and some tips for making rent more affordable.

How much should you pay for rent?

When figuring out how much rent you can afford, consider your income, monthly expenses and the average cost of rent in your area. Ideally, your rent will equal 30% or less of your gross monthly income. In addition to your monthly rent payment, this 30% should encompass other associated rental costs like your renters insurance, utilities or parking fees.

Let’s dive into three methods you can use to figure out how much to spend on rent every month.

1. The 30% rule

The 30% rule is a method for organizing your finances that can help renters avoid overspending on housing. It stems from guidance given by the Census Bureau and the U.S. Department of Housing and Urban Development (HUD). These organizations consider households that spend more than 30% of their gross income on housing as cost burdened.

Let’s consider an example. Say your monthly income is $4,000. If you’re using the 30% rule to determine how much you should pay in rent, multiply $4,000 by 0.3 (30%). The maximum amount of money you should spend on housing every month is $1,200 according to this budgeting strategy.

Renters or homeowners who pay more than 30% of their income on housing may struggle to get ahead on other financial goals. For renters, the 30% rule means 30% of their pay should cover all of their rental costs, which may include renters insurance and utility bills.

Of course, spending less than 30% of your income on rent is unrealistic in some real estate markets. Sometimes, it’s next to impossible to find an apartment that fits these rent budget parameters. That’s especially true in high-cost-of-living areas and for young renters who are moving out on their own for the first time and are responsible for their personal finances.

2. The 50/30/20 rule

The 50/30/20 rule takes a different approach to budgeting. With this budgeting method, the rule breaks down as follows:

• Budget 50% for needs: Necessities are expenses that you have to pay every month. These monthly costs include rental payments, car payments, groceries, health insurance, utilities and minimum debt payments on accounts like credit cards and student loans.

• Budget 30% for wants: The nonessentials in your budget include items and activities like dining out, streaming services and travel for purposes of leisure. Any purchase that’s optional falls into this category.

• Budget 20% for savings: The remaining 20% of your budget is allocated toward saving or accelerated debt repayment.

Of course, you have the option to rework this budget based on your goals. For example, if you want to eliminate your debt faster, you might skip discretionary purchases and put those funds toward repayment.

As for rent, the other necessities in your life will impact how much you can spend. For example, someone with a significant monthly debt repayment obligation might not be able to spend 30% of their income on rent.

3. The rent-to-income ratio

When determining how much to spend on rent, playing around with the rent-to-income ratio is also helpful. Running the numbers can help you avoid overspending on rent.

Here’s an example to consider. Let’s say you pay the following rental costs:

• Rent payment: $800
• Utilities: $70
• Renters insurance: $30

Your total monthly rental costs add up to $900. To calculate your rent-to-income ratio, divide your total rental costs by your monthly take-home income (also called your net income). Let’s say your take-home income is $3,000 every month.

$900 / $3,000 = 0.3 or 30%

A 30% rent-to-income ratio is a healthy balance for many households. But you’ll need to look at all of your expenses to determine how much you can comfortably afford to pay in rent.

Other rental costs to consider

When finding a new rental place to call home, you’ll need to consider more than just the monthly rent price. Most renters find a list of other expenses when settling into their new rental. Here’s a look at some of the costs you might encounter:

• Security deposit: A security deposit is usually an upfront amount of money the tenant pays to the landlord. It’s refundable, but the landlord may keep it if the tenant fails to uphold the terms of the lease agreement.

• Moving costs: Whether you’re moving across town or across the country, moving costs can add up. Price out your options before deciding how much to spend on moving expenses.

• Utilities: Typically, the tenant is responsible for paying the utilities like water, gas and electricity.

• Application, pet and parking fees: Many landlords charge an application fee to start the rental If you have a pet, you might have to pay a monthly fee to your landlord. Parking fees are another expense to consider for tenants in cities where parking is a hot commodity.

• Move-in fee: Your landlord may charge a fee that covers certain costs associated with a new tenant moving into the rental unit, such as changing the locks and buying new keys.

• Renters insurance: Renters insurance protects your belongings against loss or damage. Although you hope to never need this coverage, it’s a helpful safety net.

How to calculate how much rent you can afford

The 30% rule, the 50/30/20 method and the rent-to-income ratio are all good guidelines to follow when you’re deciding how much to spend on rent payments every month. However, how much rent you can afford ultimately depends on your individual financial situation. That’s why it’s important to budget out all of your living expenses – particularly your fixed costs – to figure out an affordable rent payment.

Whether you’re creating or adjusting your monthly budget, there are several costs you’ll want to consider when calculating how much to spend on rent. Here’s a list of expenses you’ll likely have to pay every month in addition to rent and other rental costs:

• Groceries
• Car insurance
• Auto loan payments
• Student loan payments
• Health insurance
• Cell phone and internet bills
• Credit card debt payments

Add all of these payments up and compare the total to your monthly net income. This simple budgeting technique can give you an idea of how much you can afford for rent every month.

When evaluating your budget, keep in mind other financial or savings goals you’re hoping to achieve. You might have a smaller rental budget if you’re also saving to buy a house, paying down existing debts or setting money aside in an emergency fund.

Tips to make rent costs more affordable

Is rent in your area more than 30% of your gross monthly or annual income? Or are you just looking for ways to pay less in rent? Below, we’ve listed some tips that can help make rent more affordable for you.

• Adjust your spending habits: If you want to set more money aside for rent, you might have to cut down on other areas of your budget. This could mean spending less money on dining out, shopping for clothes or other costs that could fall under “wants” per the 50/30/20 rule.

• Search for a roommate: A roommate could help split the costs of your monthly rent payments that you’d otherwise pay in full.

• Lower your monthly bills: You might be able to negotiate the costs of certain bills, like car insurance or a cell phone plan, to secure lower monthly payments. Reach out to the respective providers to see if you’re able to negotiate your monthly bills.

• Consider moving to a new location: If the area you’re living in is just too expensive, consider moving to a more affordable place. For example, moving farther away from a major city to outlying areas, like the suburbs, can be cheaper than finding rentals downtown.

Rent affordability FAQs

Let’s answer some frequently asked questions about how much you should spend on rent.

How much of my monthly income should go toward rent?

A good guideline to follow is the 30% rule. With the 30% rule, all of your rental costs should be covered by 30% of your take-home pay. This should include any renters insurance and utility bills you’ll have to pay.

What factors affect how much I can spend on rent?

Your personal budget and potential housing costs aren’t the only things to consider when determining how much to spend on rent. Other factors that can play a role in your rental costs include the following:

• The local real estate market
• Whether you live in a city versus a suburb
• Where you work (in an office or remote)
• Potential transportation costs
• Whether you’re looking at old or new apartments
• Whether an apartment has costly amenities, like a gym

Keep these factors in mind when deciding how much you can afford for rent.

What is a good rent-to-income ratio?

A 30% rent-to-income ratio is considered a good ratio for most people. But it’s important to examine all of your monthly expenses to determine how much you can reasonably afford to pay in rent.

Will the amount of rent I pay monthly ever change?

Landlords always have the ability to change how much you owe them in rent each month. If they decide to change your monthly rent, it’ll likely be an increase. However, it’s important to note that landlords need to give you notice before such a change occurs. This is another factor to consider if the rent amount you’re paying now is the highest amount you’d be able to afford. If that amount ever increases, you might find yourself looking for a new place to live.

The bottom line: How much you should spend on rent depends on your financial situation

When finding a rental place, you’ll likely encounter other expenses and fees along the way. While both the 30% rule and the 50/30/20 budget are helpful guides for how much to spend on rent, carefully look over your budget to determine how much you can truly afford before applying for your next apartment.

If your finances are in order and you’re looking to move into a more permanent place you can call home, perhaps you’re ready to buy a house. If you’re ready to begin the home buying process, start your mortgage application with Rocket Mortgage® today.