- Once the standard for rent budgets, the 30 percent rule is going out of style
- A new 50/30/20 is more applicable for today’s renters
- However, how much to spend on rent is up to you, so know your budget well
When determining how much to spend on rent, you may look at using the 30 percent rule. This rule, which says you shouldn't spend more than 30 percent of your gross income on rent, comes from a 1969 amendment to public housing requirements known as the Brooke Amendment.
The 30 percent rule was great at the time, but it's outdated for today's living expenses. Back then, there weren't high levels of student debt or worries about how to save for retirement. There are also more expensive rental markets out there now.
Today's rule of thumb for rent should take these into account. Think about living in San Francisco, where the average monthly rent for a one-bedroom is $4,472.
So, why is it so hard to push past the 30 percent rule? One guess is that it's an antiquated financial benchmark on how much to spend on rent that nobody has felt necessary to challenge. However, it's time to rethink your rental budget so you can work with today's ever-rising rental costs with success.
What is the 30 percent rule?
The 30 percent rule is a simple mathematical equation for calculating how much to spend on rent. You use your annual salary as a base and go from there.
For example, let's say you make $30,000 a year and are looking to rent your first apartment. Plugging in that number to the 30 percent rule, your equation would look like this:
$30,000 x 0.30 = $9,000
That gives you the total amount of money you should spend, on rent, in a year. Divide that number by 12, and you get $750. This is what your monthly rent should be if using this rule of renting. Assuming you're not saving any money, you'll then have $1,750, before taxes, each month to pay all the rest of your expenses.
Why the 30 percent rule isn't always accurate
The reason why this equation doesn't work today is that it doesn't take into account modern expenses that go beyond the basic costs of living. The 30 percent rule does not factor in:
- The need to pay down debt
- The amount of money you're left with after taxes
- Saving for retirement or simply putting away a little each month in general
- The huge variations in what people can do for a living
- The huge variations in where people want to live
If you're young and single and want to live in the center of a city, you're going to pay more for that luxury. The same is true for families who want a home near the best schools in the area.
Simultaneously, your monthly expenses will vary a lot if you have to include childcare among everything else. Even owning a dog changes the game when it comes to your monthly budget, having to factor in pet rent and doggie daycare.
How much to spend on rent has become more personal than when the 30 percent rule came into being, and we need to look at budgets from that perspective. A one-size-fits-all plan is no longer going to work.
5 alternatives to the 30 percent rule
Pushing the 30 percent rule aside, consider some other ways to determine your budget and how much you should spend on rent.
1. Take the 50/30/20 approach
This new approach to budgeting replaces the 30 percent rule because it looks at all your expenses, not just rent. The rule states you should spend:
- 50 percent of your after-tax income on your must-have's and must-do's
- 30 percent on those things you want
- 20 percent on savings and debt repayment
This strategy not only lets you calculate your budget for rent based on all your necessities but also factors in a way to save automatically.
Group things like rent, utilities, groceries and insurance into the must-have section. Put date nights, movies, clothes shopping and vacations into the want category. Then, take that remaining 20 percent and shift some into a savings account, IRA or 401k, leaving enough behind to make a decent payment toward any existing debt.
If, after breaking things up, you notice that you're a little short in any areas, make some adjustments or cuts to get as close to this breakdown as possible. Just make sure you're not sacrificing essential items to go out every weekend or foregoing saving a little something to enable a shopping spree.
2. Build a budget based on past spending
One of the best ways to figure out how much to spend on rent is to understand your current expenses. To do this, track the last three months of spending and add them up. Include both fixed costs (those you'll always pay monthly) and discretionary costs (your one-offs).
This form is a great place to start:
Trackers like this ensure you're spending what you can afford every month, and show areas where it might be easy to cut back should you want to put more money toward something like rent. It also helps you see a complete picture of your expenses, to better understand how much rent you can afford to pay.
3. Put debt first
The issue with putting too much money toward rent is what happens to your other expenses. You may struggle to pay some, while others may cost you more in late fees or interest than you really want to pay.
This is particularly true when it comes to debt. Those interest fees are killer, so instead of hitting the snooze button on your debt to pay a higher rent, prioritize paying off more than the minimum each month.
Target those credit cards with the highest interest rates first since fees add up fast, growing to something like $1,141 each year if you're not careful.
Review your monthly expenses and up your monthly payments, even if it's only by $25. You'll feel like you're spending more in the short run, but will actually generate more usable income, for big expenses like rent, once your debt is gone.
4. Establish a true net worth
Sometimes you just need help figuring out how much you should spend, and on what. It's OK if you don't do this all on your own. There are free online tools out there that can help you establish your net worth based on what you earn and how you spend it.
Both Mint and Personal Capital are great places to start. You can connect all of your financial accounts, such as your checking, savings, credit cards and loans so it's easy to see all at once.
They're both free to sign up, but make sure you're checking in at least once a week to stay conscious of your budget.
5. Put an emergency fund into your budget
Budgets look different for those who are really trying to save. It's never a bad idea to have an emergency fund at the ready, but creating that financial padding can mean making adjustments to how much you have available, temporarily, for rent and other expenses.
For those who want an emergency fund, it's ideal to put between three to six months' worth of expenses into a separate bank account that you don't touch unless things get tight.
Breaking this up into a weekly or monthly transfer is the best way to build up your emergency fund without struggling in any other areas of your budget.
These additional savings can impact what you've got leftover for rent, but it's only for a short time. Try to build your emergency fund up within a single year so you'll free up a little more cash should by the time your lease is up.
Create your own rule of thumb for rent
As you get more familiar with your own budget and expenses it becomes clearer how much to spend on rent. Remembering that this magic number is personal to you is essential, and the only rule you should follow is your own.
Set your own goals, track your finances and when things get a little tight, look for alternative options. You can always find a cheaper place to stay or even get a roommate or two. Above all else, stay vigilant about your spending and saving and you'll do fine, even without that old 30 percent rule.
